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Sustainable trade

A global rainforest deal is more complicated than you think

Published 31 January 2023

A pact between Brazil, Indonesia, and the Democratic Republic of Congo to preserve rainforests could evolve into the Global South’s answer in the race for control over the world’s supply of carbon credits. What are some challenges to coalition? What do they reflect about the complexities of the global carbon market? Hinrich Foundation contributor Henry Storey discusses climate geopolitics with the Association of Foreign Press Correspondents.

In November 2022, Brazil, Indonesia, and the Democratic Republic of Congo—three countries that are home to more than half of the globe’s tropical rainforests—signed a pact to establish a “funding mechanism” that could help preserve rainforests. Rainforests act as a carbon sink by absorbing carbon dioxide, a greenhouse gas that absorbs and radiates heat, and preserving them has become increasingly important as the consequences of anthropogenic climate change become increasingly apparent.

The Association of Foreign Press Correspondents (AFPC-USA) spoke with Henry Storey, a senior analyst at Dragoman, a Melbourne-based political risk consultancy, to learn more about the potential impacts of what he and co-writer Chuin Wei Yap, the program director for international trade research at the Hinrich Foundation, recently referred to as a “rainforest OPEC” that “could evolve into the Global South’s answer in the race for control over the world’s supply of carbon credits.”

According to Storey, one of the biggest questions about the landmark agreement is “whether Brazil, Indonesia and the Congo can work together and operate effectively as a cartel.” The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of 13 Arab states that “are relatively close politically.” In comparison, the existence of a rainforest cartel “acting in perfect synergy is unlikely to ever capture the Western political imagination in the same way that OPEC traditionally has” and “will need creativity and considerable political nous to be effective.”

“The harsh reality is that farmers, landowners and other relevant stakeholders need to be meaningfully and adequately incentivised to prevent deforestation,” he says later, noting there are a slew of different factors that could hinder the pact’s success. A “complementary approach” that incorporates both private investment and public funds would need to be assessed. Along the way, Story speaks at length about the challenges of navigating the international carbon market, which has only continued to evolve as the Global South jockeys for position in the global conversation about climate finance that has historically been dominated by more developed countries that bear much of the responsibility for global emissions that have produced runaway climate change.

What factors have made the finalization of the rulebook for an international carbon market so difficult?

The genius of the Paris Agreement was that it provided a broad, overarching framework which was theoretically politically palatable to almost all countries. Exact specifics could be ironed out later. So it’s been—and to an even greater degree than other contentious elements of the agreement—with Article 6. A common theme underlying the key sticking points is a North-South divide which can crudely be described as revolving around emissions reduction ambition and responsibility.

Brazil, for example, has traditionally advocated for the ability to count deforestation related emissions cuts towards both its national targets and those of the country that these credits are eventually sold to. The EU and other wealthier countries have pushed back vehemently against what they claim would amount to double counting. A different but interrelated issue is whether countries like India and Brazil should be able to sell under the Article 6 framework, unsold, surplus credits generated under Article 6’s predecessor, the Kyoto Protocol’s Clean Development Mechanism. Then, there are questions over whether Article 6 should contribute to an overall reduction in global emissions, or whether it should merely function as an abatement mechanism whereby 100% of the carbon reduction credits generated are traded to offset emissions increases elsewhere.

How has the war in Ukraine impacted governments’ ability to commit “long-term changes to their territorial concessions” in regard to carbon pricing?

The war in Ukraine has obviously injected a level of volatility into global energy markets which has not been seen in decades. Although the correlation is not always so clear cut, demand for carbon credits and hence, pricing, tends to trend downwards when energy prices are high as has been the case for most of the last 12 months.

The energy market disruption wrought by the invasion and corresponding sanctions has also in effect acted as a giant carbon tax, generating its own momentum towards decarbonization. Now, however, gas prices in Europe are lower than they were before the invasion and inventories are nearing capacity.

Huge unknowns still loom including how quickly Chinese demand will come back online, how cold the next European winter will be, the practical effects of the EU price cap on Russian oil production when prices exceed US$60 a barrel, the speed of the reinvigorated European renewables build-out and, of course, the global macroeconomic situation. Given this extreme uncertainty, I think it is only naturally and probably prudent that the relevant governments are adopting something of a wait and see approach.

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Western leaders have long criticized OPEC's power to raise oil prices and its continued influence over the global market even as nations have increased oil production and alternative forms of energy have been introduced. What issues could we see play out with the rise of a “rainforest OPEC”?

Firstly, I think the biggest question here is whether Brazil, Indonesia and the Congo can work together and operate effectively as a cartel. OPEC itself is obviously composed of a heterogenous, diverse array of states. Still, the core of OPEC is made up of Arab states (namely Saudi Arabia, the UAE, Iraq and Kuwait) who are relatively close politically. Aside from being biodiversity hotspots, large commodity exporters and members of the Global South, the members of the rainforest cartel really have precious little in common. The early signs aren’t great. At the COP15 Biodiversity Summit at the end of 2022, the DRC was a hold-out to the deal eventually agreed to by Brazil, Indonesia and the majority of participating nations.

Yet, if they can find a way to work together, the numbers will speak for themselves. Combined, the three countries are home to over 50% of the world’s remaining virgin rainforest, and thus a huge chunk of potential carbon credits. By dint of their sheer weight, the trio have the potential to shape accounting methodologies, the eventual composition of Article 6 and most importantly, carbon credit prices. Nations who will end up purchasing a lot of these credits like Japan, certain European countries, the US and maybe China will have to take the cartel seriously.

Despite this, carbon credits are somewhat esoteric relative to the hip-pocket issue of petrol prices. A rainforest cartel acting in perfect synergy is unlikely to ever capture the Western political imagination in the same way that OPEC traditionally has. This rainforest cartel will need creativity and considerable political nous to be effective.

Is relying on private investment in exchange for assurances against deforestation enough? Would public funds be necessary to sustain the long-term success of this agreement?

I definitely think that government intervention and public funding will be required. The harsh reality is that farmers, landowners and other relevant stakeholders need to be meaningfully and adequately incentivised to prevent deforestation. If carbon prices fall below a certain number, e.g., in a global recession, conservation efforts (which are already challenging enough in countries with limited governance capacity) will simply not succeed.

The private sector is a huge source of demand for carbon credits, which is already being tapped. However, relying on the market alone won't always be enough. At the same time, government initiatives so far have been wanting (discussed more below), so a complementary approach is needed.

Why have international agreements to protect rainforests failed to curb deforestation worldwide?

Generally speaking, I think it comes down to a lack of funding mechanisms. A lot of the smorgasbord of agreements to date have not been legally binding, but even if they were it is unclear whether this would have made a fundamental difference. For a myriad of political, historic and elemental economic reasons, it makes little sense to ask developing countries to forgo the economic benefits of natural resource exploitation that developed countries enjoyed. By the same token, developed countries need to have confidence that deforestation hotspot countries are willing and able to conserve forests. Because of the way that deforestation is tied up in the political economy of many of these countries, this is a tall order.

This is true even in developed states like my own country Australia, which finds itself in the unique and ignominious position of being the only developed country to be classed as a global deforestation hotspot. This is due to a combination of ineffectual environmental laws (which the current government is in the process of strengthening) and the political influence of the agricultural sector.

The EU’s recent efforts to ban imports of any commodities linked to deforestation is evidence of the sheer frustration at how entrenched deforestation is in certain economies. However, it is an open question as to whether the EU has really ever offered sufficient compensation to catalyse the requisite structural change.

On the subject of similar, smaller-scale financial mechanisms to preserve the rainforest in place right now: How have intergovernmental efforts like the Rainforest Coalition succeeded or failed?

The Coalition of Rainforest nations has focused more on capacity building amongst rainforest states, and on that count I think you could say it has had some success.

A good example of the pitfalls of these smaller scale mechanisms is Norway’s offering of financial support to countries like Indonesia to reduce deforestation. These initiatives, worth in the order of a couple of hundred million dollars, have been bogged down for years in arguments over compliance, verification and payment deadlines, among other issues. The Amazon Fund, rendered irrelevant under the former Brazilian President Jair Bolsonaro, now has a new lease on life under current President Lula. Concerns remain over how the existing funding will be spent and its relatively paltry size, currently around US$1 billion. This is not to say that there haven't been individual success stories, but the overall picture remains chequered.


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Henry Storey is a senior analyst at Dragoman, a Melbourne-based political risk consultancy. He is also a regular contributor of The Interpreter published by The Lowy Institute.

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