Before others, Merrill Lynch & Co. saw the forest for
the trees. In 2008 the US bank agreed to purchase
carbon credits, under an option agreement, in what was
billed the worlds first commercially financed
avoided-deforestation project. This effort
focused on preserving nearly 3,000 square miles of the Ulu
Masen rain forest on the Indonesian island of Sumatra, which
was losing 135 square miles annually to logging and clearing.
Behind the project were nongovernmental organization Fauna
& Flora International, carbon brokerage Carbon Conservation
and the government of the province of Aceh.
For its contribution, which was paid over four years and
helped reduce deforestation in the area, Merrill (now Bank of
America Merrill Lynch) won the right to buy future carbon
credits at $4 per ton of avoided emissions. Fauna & Flora
says the project is expected to prevent 100 million tons
of carbon emissions in the next three decades.
We approached it from the perspective of a typical
carbon market deal, says Abyd Karmali, global head of
carbon markets at BofA Merrill in London. But the deal
wasnt typical. Merrill was one of the first big financial
firms to invest in projects seeking to avoid deforestation,
partly so it could play a role in developing the emerging
forest carbon sector.
Experts champion this space as an immediate and
cost-effective way to forestall the release of carbon and other
greenhouse gases into the atmosphere. REDD (reducing emissions
from deforestation and forest degradation) is shorthand for
forest conservation activities, while REDD+ covers
reforestation and sustainable forest management as well. But so
far, the market hasnt done much to encourage private
investment in either.
With little public money to spare, the need for that
investment is urgent. Forests play a crucial role in
sequestering carbon and release vast amounts of it when they
vanish. Deforestation accounts for 17.4 percent of annual
global greenhouse-gas emissions more than the entire
transportation sector according to a 2008 independent
report commissioned by the U.K. government. In a 2004 Science
magazine article, Princeton University scientists Stephen
Pacala and Robert Socolow wrote that halting tropical
deforestation and planting new forests could do as much to slow
global warming as doubling the worlds nuclear energy
capacity or building 2 million new wind turbines.
But on official, regulated carbon markets, only credits
derived from the creation of new forests are tradable. This
relegates those earned through conservation and better
management to voluntary, over-the-counter exchanges. In the OTC
world, however, REDD and REDD+ credits have thrived. They
jumped from less than 2 percent of the voluntary forest carbon
market in 2006 to 71 percent in 2010. The expectation has
been that the REDD+ segment would represent the next phase of
the carbon market, says BofA Merrills Karmali.