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Making voluntary carbon markets work better for the poor: the case of forestry offsets

Publication date:
L. Peskett
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This paper discusses concerns about forest-based mitigation projects and their benefit to the small producer and the host country. It assesses the two different kinds of carbon market mechanisms: the clean development mechanism (CDM) developed under the Kyoto Protocol; and the ‘voluntary’ mechanisms, developed separately and not bound by the CDM regulations. As carbon forestry has fewer needs for physical infrastructure to access markets, there are fewer of the traditional barriers that arise when involving small producers in investment opportunities. However, there are two main barriers that still do prevent access to this potential market:

a lack of certainty and predictability over the benefit flows 
a potential for high transaction costs.

The issue of minimising producer risk is very prevalent when involving small producers. One of the main issues is how and when producers are paid. Under the CDM producers are paid only when reductions have been generated and verified, whereas the voluntary mechanisms use an up-front payment scheme, thus helping to cover start-up costs. This reduces the burden on small producers but increases the risk to the investor in terms of guaranteed carbon emission reductions. At present there has been uneven development, with a concentration in Central and South America and Asia and therefore poorer countries are facing the problem of how to attract carbon offset investment. With relation to national development, a major concern of producer country governments is whether benefits are spread to wider societies, beyond the immediate producer. For development impacts to be maximised and guaranteed, the host government needs to take on enabling roles that give particular attention to national concerns. The following policy conclusions are drawn for how carbon markets can maximise their potential for improving the livelihoods of the poor:

more consideration needs to be given to developing incentives for voluntary markets to contribute to national and local development goals. This requires a shift away from prioritising the concerns of investors and producers to focusing on wider development interests of the host country
ensuring ‘value addition’ at the developing country level might include requirements for nationally based project implementation bodies or a country level brokerage service to help develop national expertise in carbon finance
there is a need for the host government to pay more attention to harmonising standard-setting with local and national government structures
clarity over the legal rights of all parties and effective redress and dispute mechanisms should be established for all projects
careful consideration must be given to contract length, timing of payments and the types of activities allowed, to ensure that the concerns of small producers are prioritised and that contracts are not biased towards the concerns of investors
standards should include more guidance on procedures for evaluating social impacts, not just provide checklists fro project developers