Chapter Two: Moving to a Market Mechanism for Forest Climate Services

Abstract

In 2021, at the Glasgow Conference of the Parties (COP26) of the UNFCCC, Guyana will join with other forest countries and the international community to pursue the enshrinement of a workable market mechanism within the UNFCCC.

Guyana will approach carbon market integration in the period 2021 to 2030 in two phases:

  • Phase One (to 2025): Guyana will generate credits to be traded on voluntary carbon marketplaces, with independent verification of the quality of those credits and their adherence to the rules of the marketplaces. Credits will adhere to UNFCCC guidance on REDD+, pending the launch of a full REDD+ mechanism.
  • Phase Two (from 2025): Guyana will enhance the quality of its credits further through establishing a national carbon registry, integrated with international markets and with any future REDD+ mechanism under the UNFCCC. This will be done in accordance with the rules of all relevant international agreements on markets and carbon trading. It will be underpinned by domestic regulation and/or legislation as necessary for market integration and UNFCCC compliance.

Introduction    

The 2009 LCDS outlined how Guyana intended to start building a mechanism for the sale of forest climate services, initially through a bilateral agreement with a partner which shared Guyana’s vision before moving to a market mechanism.

This was in line with Guyana’s policy position that:

  • The world needs to value a wide variety of nature-based solutions and eco-system services if global climate, health and other challenges are to be met.
  • The long-term future for eco-system services should include market-based mechanisms, while also recognising that other forest countries may choose a different policy position.
  • The most realistic entry point for building an eco-system services economy is based on carbon through integration of Guyana’s forest climate services into global carbon markets.

As a result, Guyana entered into the Guyana-Norway Partnership in 2009 and – among other successes – built a world-class Monitoring, Reporting and Verification System (MRVS) which now enables Guyana to move to the second phase for selling forest climate services through the voluntary markets.

The Guyana-Norway partnership is summarised below with more detail provided in Appendix Two.

The Guyana-Norway Partnership

In the absence of a UNFCCC REDD+ mechanism, Guyana and Norway sought to create a globally-replicable model for a likely REDD+ mechanism. When it was agreed, the Guyana-Norway partnership was the second-largest Interim REDD+ arrangement in the world and for performance in the period 2009 to 2015.

During the period 2010 to 2015, Guyana earned US$212.6 million dollars in payments from Norway having met the performance requirements which included keeping deforestation rates below an agreed threshold and meeting forest governance indicators, which included transparency and accountability, stakeholder involvement in the LCDS/ REDD+ processes and in particular the involvement of Indigenous Peoples. These funds were to be spent on projects identified in the LCDS and intermediated through partner entities (international organisations operating in Guyana would bring the model best practices and internationally accepted fiduciary, social and environmental safeguards). However, this period 2010-2015 also saw major cuts to the National Budget by the National Assembly which was controlled by the then Opposition which targeted projects identified under the LCDS, in particular in the areas of renewable energy (the Amaila Falls Hydropower Project) and Amerindian development (Amerindian Development Fund) among others. As a result, while Guyana earned US$212.56 million by 2015, and US$52.4 million had been allocated to be spent on LCDS Projects, US$15.5 million had been expended.

The period 2015 to 2019 saw no earnings under the Guyana-Norway partnership since the agreement was not renewed. Of the US$150 million that was available in 2015 to the new Government, US$1.5 million was reprogrammed under the Green State Development Strategy. By 2021, a total of US$46 million remained in unallocated money.

Moving to a Market Mechanism for Carbon

The long-term future of forest carbon markets is expected to be underpinned through the UNFCCC’s rules and corresponding international agreements. Towards this end, progress on REDD+ was made at, and since, the Paris Climate Agreement, which was finalised in 2015. In 2021, at the Glasgow Conference of the Parties (COP26) of the UNFCCC, Guyana will join with other forest countries and the international community to pursue the enshrinement of a workable market mechanism within the UNFCCC. As a bridge to a long-term mechanism, Guyana may seek to access market-based mechanisms for forest carbon through integration with (i) existing or new compliance markets; (ii) high-quality voluntary markets. Specifically, Guyana’s significant progress on building a world-leading MRVS, coupled with the recent emergence of a large voluntary market with demand supported by sovereign governments, means that from early 2022, there is a strong possibility that Guyana’s sale of forest climate services can be structured around high-quality voluntary markets that include private, as well as international public sector financing. Whether Guyana pursues such initiatives will be done in accordance with all UNFCCC safeguards. No binding agreements will be entered into until all safeguard-related requirements have been met. This is outlined further in Chapter Four.

Guyana will approach carbon market integration in the period 2021 to 2030 in two phases:

  • Phase One (to 2025): Guyana will generate credits to be traded on voluntary carbon marketplaces, with independent verification of the quality of those credits and their adherence to the rules of the marketplaces. Credits will adhere to UNFCCC guidance on REDD+, pending the launch of a full REDD+ mechanism.
  • Phase Two (from 2025): Guyana will enhance the quality of its credits further through establishing a national carbon registry, integrated with international markets and with any future REDD+ mechanism under the UNFCCC. This will be done in accordance with the rules of all relevant international agreements on markets and carbon trading. It will be underpinned by domestic regulation and/or legislation as necessary for market integration and UNFCCC compliance.

Creating a Comprehensive Global Carbon Market Mechanism

While Phase Two will be influenced by both the UNFCCC and market development between now and 2025, Guyana anticipates that the post-2025 mechanism will incentivise all elements of REDD+, as this is the only way to provide the full suite of incentives for all the world’s tropical forest countries.

Therefore, Guyana’s proposed forest carbon mechanism has four modules:

  1. Reduce – to incentivise reducing deforestation
  2. Restore – to incentivise restoring forests where deforestation has already taken place;
  3. Conserve – to recognise the value that standing forests provide to the world by storing carbon sequestered over hundreds of years, in Guyana’s case 19.5Gt of stored carbon;
  4. Remove – to recognise the value that standing forests continue to provide by removing carbon dioxide from the atmosphere.

Together, these modules capture all elements of REDD+ – to provide incentives for all forest countries to move towards global reductions in deforestation and enhanced maintenance of standing forests.

Because of progress since 2009, Guyana can evolve the model to the next stage.

Strengthening Amerindian Participation in REDD+ and implementing the Opt-In Mechanism

REDD+ and ART-TREES implementation has the potential to reduce Indigenous Peoples and local communities’ vulnerability to climate change. Improving the sustainability of extractive economic activities and identifying alternative economic activities has the potential to result in additional employment opportunities and improving Indigenous People’s livelihoods.

The LCDS is committed to strengthening support for Indigenous communities as they continue the stewardship of their lands and, inter alia, the benefits that accrue from any REDD+ activities from these lands. If they choose to, communities will be supported to better manage their transition to more market-based means of providing for their social and cultural well-being in ways that continue the tradition of wise use. In accordance with Guyana’s Constitution, the rights of Indigenous Peoples and other Guyanese to participation, engagement, and decision making are guaranteed, regarding matters that affect their wellbeing. Such rights will be respected and protected throughout Guyana’s REDD+ and LCDS’s efforts.

Within the framework of the LCDS and the Guyana-Norway Agreement, the ‘Opt-In’ has been identified as another mechanism to enable the participation of Indigenous Peoples and other local forest communities in the planning and implementation of Guyana’s REDD+ Programme as it regards benefits for forest carbon services.

Free Prior and Informed Consent (FPIC)

Free Prior and Informed Consent will be a guiding principle of the LCDS as it relates to Indigenous villages and communities. Guyana’s policy is to enable Indigenous communities to choose whether and how to opt into the REDD+/LCDS process only when communities wish to do so, in accordance with Guyana’s policy of respecting the free, prior and informed consent of these communities. This also applies to processes related to REDD+, such as potential carbon markets as outlined in Chapter Two.

In alignment with the principles of free, prior and informed consent, Amerindian communities will not be required to participate in REDD+ unless they choose to do so, and no deadline will be set for whether and how that participation can be conducted.

Earning Payments

Earning payments as Guyana moves towards a market mechanism will involve: (i) integrating with the market standard; (ii) generating credits in accordance with that standard; (iii) marketing Guyana’s credits to potential buyers.

Market Standard: ART-TREES

ART is a voluntary international initiative that seeks to reward countries for the seven elements of REDD+. By enhancing transparency and credibility, ART aims to help unlock new, large-scale financing to facilitate global sustainable land-use and, in turn, protect forests. The mechanism under ART that outlines the Standard for Accreditation is called The REDD+ Environmental Excellence Standard (TREES).

Generating Credits

Appendices 1 and 2 describe the methodology for calculating credits, but in sum, Guyana will receive credits for (i) any reductions in deforestation against the previous five-year average (starting with 2016-2020 as the reference period); (ii) restoration of deforested or degraded forest; (iii) the long-term storage of carbon in Guyana’s standing forest, providing that Guyana’s deforestation rate does not increase significantly above historic averages. To generate these credits:

  • Guyana will submit an annual report from its MRVS, which will then be independently verified and certified to ART-TREES standard.
  • At the same time, Guyana has submitted a Safeguards Information Report (SOI) highlighting continued adherence to agreed social and environmental safeguards. Reporting on progress/adherence to safeguards on an annual basis will be a part of ART Monitoring Reports.
  • Once the credits are certified, the ART-TREES Secretariat will record them on the publicly accessible ART Registry, from which point they will be available for purchase.

Marketing Credits

Once the credits are available for sale, these can be sold on the market, either directly by Guyana or through brokers. The agreements, which will set out the terms under which credits are sold, are known as Emission Reductions Purchase Agreements (ERPAs), which will be published on a Government of Guyana website, and independently audited.

Credits can be purchased by buyers who recognise the ART-TREES Standard – and sales will take place in line with a process established by ART-TREES to ensure environmental integrity, in accordance with the UNFCCC rules on carbon standards.

Buyers of credits could be sovereign governments (for example, the Government of Norway) or private companies with voluntary commitments to support the maintenance of the world’s forests or to take action on climate.

As announced at the Climate Summit convened by the President of the United States, some of the world’s major companies (led by Amazon.com), along with leading sovereigns such as Norway, the US, the UK, anticipate adopting ART-TREES as a standard by which they will meet some of their climate pledges. They will pay for these credits through several channels, including the LEAF Coalition.

Administration of Forest Climate Financing (including at Project Level)

REDD+ under the UNFCCC is designed as a national system, which means that Emissions Reductions (ERs) will be accounted under a national reference level (RL). This is also the case for the ART-TREES methodology. National systems have the premier level of environmental integrity, unlike project-scale systems where action in the project area could potentially displace deforestation or biodiversity loss to another area within the same jurisdiction.

The Government of Guyana will record ERs and manage these through a centralised system. This centralised system will be a single account system, where the national government is the sole administrator of inputs and transactions.

However, the Government is seeking to include opportunities for private sector-led projects (for example, for restoration of mined-out areas) and these will be considered within the context of the national-scale system. This is known as “nesting” under REDD+ and ART-TREES, and Guyana will explore nesting of forest carbon projects that will be accompanied by rules that define the modalities under which nesting is possible and allowed. Such rules include the adoption of harmonised definitions, rules for baseline setting, MRV standards, and approval requirements. Such rules will be a prerequisite to ensure that nesting creates incentives for private investments while protecting the environmental integrity of the national REDD+ system.

When Guyana’s Carbon Registry is operational, such projects may be registered under a voluntary standard or regulated standard and may include project-level activities under the mechanism to contribute to GHG emissions mitigation and support sustainable development (i.e., under Art. 6.4 of the Paris Agreement of the UNFCCC).

Investing Payments

Revenues from market-based payments will finance LCDS activities identified within the LCDS or activities related to the principles of the LCDS and its themes – and approved by the National Assembly via the National Budget process.

The designated allocation of 15% of all earnings for Indigenous villages and forest-based communities, earned under a forest carbon financing mechanism, will be administered through a separate mechanism under the management of the Ministry of Finance and advice of the MSSC.

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