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Across Southeast Asia, companies are hunting for access to carbon credits -- whether to meet their own climate change pledges, redeem themselves in the eyes of their customers, or preempt the regulations that many believe are inevitable. (Photo by Peter Guest)
The Big Story

COP25: A new carbon market offers hope for Asia's forests

From Mitsui to Shell, companies are investing in emissions offsets

PETER GUEST, Nikkei staff writer | Myanmar, Cambodia, Laos

TOKYO/PREY LANG, Cambodia -- A rough trail leads from the village of Toal, on the edge of the vast Prey Lang nature reserve in northeastern Cambodia, to the ranger station at Spong in its interior. Traversing the road -- a slalom of shifting white silt, punctuated by slippery riverbeds veined with tree roots -- takes an organ-jarring two hours on the rangers' Honda motorbikes, first through broken forest and farmland, then into denser woodland.

Torch Vichet, the head ranger, rides pillion on the lead bike with a rifle balanced on one hip. Just under halfway to the station, he calls for a halt: A few paces from the track, a dipterocarp tree, nearly a meter in diameter, has been felled. Its base is sheared cleanly, the upper reaches half-buried in the undergrowth. The midsection has been cut into rings and dragged away.

As the patrol stops to examine the scene, Torch Vichet is visibly shocked. Most of the station's rangers had been out of the forest the previous night, attending a colleague's wedding in the provincial capital of Stung Treng. In the few hours they were away, loggers had entered the protected area with chain saws and brazenly harvested the tree.

Rangers patrol Prey Lang Forest, one of Southeast Asia's last remaining evergreen woodlands. (Photo by Peter Guest)

One of Southeast Asia's last remaining evergreen woodlands, Prey Lang's 430,000 hectares sprawl across four Cambodian provinces. The ecosystem has been under threat for decades, but the country's economic lurch forward has accelerated the destruction, as roads reached deeper into the reserve and foreign markets -- mainly China and Vietnam -- opened up, hungry for cash crops and timber.

"People just think this is an economic opportunity, and if you're far from the rangers, the land is cheap," says Naven Hon, a researcher with the U.S. environment organization Conservation International who has worked for years in Prey Lang.

Huge areas of land have been illegally claimed. The rangers tasked with stopping the encroachment often lack equipment, training, transportation -- and, with wages as low as $50 per month, motivation.

But for the rangers at Spong and elsewhere in Stung Treng Province, that is finally changing. Since 2018, their wages have shot up ninefold. They have motorbikes and the fuel to power them, training, GPS devices and new outposts. They can measure the success of their efforts by the moldering piles of confiscated chain saws, snares, nets and rifles that fill the storerooms of their stations and the environment ministry. "It is happening slowly," Torch Vichet says. "But we are winning."

Charred and felled trees along the Mekong River in Cambodia: Should Prey Lang's rangers succeed in slowing its destruction, it will generate carbon credits, which Mitsui will then be able to sell on the Japanese market. (Photo by Peter Guest)

Remarkably, the rangers' equipment upgrades and their jump in pay have mostly been bankrolled by a private company, the giant Japanese trading house Mitsui & Co. The three-year project, overseen by Conservation International, is not philanthropic. It is an investment. If it succeeds in slowing the destruction of Prey Lang, it will generate carbon credits, which Mitsui will then be able to sell on the Japanese market.

Mitsui's funding is the tip of an iceberg. Billions of dollars are poised to flow into carbon offset over the next few years, as growing recognition of a global failure to rein in greenhouse gas emissions, despite the threat of catastrophic climate change, drives a renaissance in the market.

All across Southeast Asia, the Nikkei Asian Review spoke to conservation organizations that have been offered funding from companies ranging from oil majors to automakers, tech companies to theme park operators. All are looking to gain access to carbon credits, whether to meet their own climate change pledges, to absolve themselves in the eyes of their customers, or to get ahead of the emissions regulations that many believe are inevitable.

And forests are the best way to generate credits, fast. "Forest carbon is where the volume is," says Jim Procanik, co-founder of InfiniteEarth, which operates the Rimba Raya Biodiversity Reserve in Indonesia. "If market-based conservation is proven to work, the amount of money that could be unleashed into the market is huge. ... We're seeing people coming to the market looking to lock up millions and millions of tons."


The carbon market has had a false dawn before. In the toppy pre-financial crisis years of 2007 and 2008, markets and industry became convinced that cap-and-trade rules on carbon emissions were imminent. Analysts -- experts in a market that, until that point, had barely existed -- breathlessly predicted surging prices and hundreds of billions of dollars worth of credits changing hands. Hedge funds and other speculators bought in. Projects, some legitimate, some less so, proliferated.

"There was some bacchanalia stuff going on back then. Cargill was setting up a trading desk. Shell was forming their trading desk. Deutsche Bank had a trading desk. It was going huge," says Gabriel Eickhoff, CEO of Lestari Capital, a Singapore-based company that links companies to conservation projects. "You could buy carbon credits from anybody off the street, it seemed like. No matter who you ran into in a hotel lobby, someone was doing carbon credits."

It didn't last. The market was new, poorly understood, poorly regulated and lacked the proper frameworks to validate, price and trade offsets. Negotiators at the 2009 Copenhagen climate summit could not reach a new agreement on carbon markets. The credit crisis, and subsequent global recession -- incidentally, the only time this century that greenhouse gas emissions have actually fallen year on year -- put an end to the fervor.

As negotiators meet this week for the United Nations' climate conference in Madrid, many of those problems have still not been solved. The Paris Agreement, the landmark 2015 treaty that committed countries to cutting their emissions and keeping global heating to less than 2 C above preindustrial levels, does include a pledge -- Article 6 -- to establish an international carbon market. Four years on, however, the actual mechanism has not been negotiated, and there is still very little consensus on how it should work.

On a broader scale, though, what has changed is that nothing has changed. Continued inaction on carbon emissions is pushing the planet ever closer to crisis, say multiple high-level organizations, and has made mitigating the worst effects of climate change considerably more costly. The planet is already halfway to the 2 C threshold -- anything above which scientists predict catastrophic impacts -- while emissions have continued to rise at an average of 1.5% per year this decade.

To prevent 2 C of heating, the U.N. Intergovernmental Panel on Climate Change says that global net carbon emissions have to fall to 80% of 2010 levels by 2035, and all the way to zero by 2075. At current levels, the U.N. says, global emissions now need to be reduced by 7.6% per year from now until 2030.

"The lack of progress on climate change 10 years ago now means that we need to act twice as fast, and cut emissions twice as fast," says Leo Roberts, senior research officer at London-based think tank Overseas Development Institute.

Fires tore through the Amazon rainforest this year, drawing international outcry over the effects of climate change.   © Reuters

Faced with rising public anger about this failure to act, several countries, including G-20 nations France, Germany, Italy and the U.K., have passed, or are in the process of passing, laws mandating that they must achieve net-zero carbon emissions by 2050. Japan has committed to an 80% reduction by 2050 and carbon neutrality at the "earliest opportunity" thereafter. And although the U.S. is withdrawing from the Paris Agreement, six states and territories, including California, its wealthiest state, are aiming for net-zero by 2050.

Carbon pricing and carbon markets are included in most national strategies as a way to compel companies to act. Forty-six countries now have pricing or trading schemes in operation or scheduled to begin, covering around 20% of global emissions.

Companies -- even entire industries -- are setting their own targets. In September, We Mean Business, a group of major international companies with a combined market capitalization of more than $2.3 trillion, including Nestle, L'Oreal, Danone, Ikea and Nokia, committed to reaching net-zero emissions no later than 2050.

In 2016, the International Civil Aviation Organization, the U.N. agency for civil aviation, agreed to cap the sector's net emissions at 2020 levels. The scheme, Carbon Offsetting and Reduction Scheme for International Aviation, or Corsia, means that all future growth in the industry -- whose passenger numbers are expected to almost double to 8.2 billion by 2037 -- will need to happen without generating any additional net greenhouse gases. Commercial air travel is responsible for 2% of all global carbon emissions.

Reaching net-zero through emissions cuts would mean fundamental shifts in business models and technology for many businesses, particularly in heavy industry, transportation and energy. As the emissions data shows, those transitions have barely begun, meaning that, to achieve net-zero, companies need to focus on the other side of the carbon equation: offsets.

The scale of this could be staggering. Analysts estimate that Corsia alone will require offsets equivalent to 2.6 billion tons of carbon between 2021 and 2035. In 2016, the total amount of carbon traded on voluntary markets worldwide was less than 65 million tons, according to Ecosystem Marketplace.

"I haven't seen the level of interest and engagement in the carbon space since 2008. But it's more sober now," Lestari's Eickhoff says. Much of that excitement is directed at forests. "When you look at the cost of abatement curve, the cheapest, highest-impact [offsets] come from the forestry sector in tropical areas."

Keeping forests standing, restoring and replanting them is the most effective way to sequester carbon at scale. Forests and other natural landscapes sequester -- draw down from the atmosphere -- more than 11 gigatons of CO2 per year, nearly twice the total carbon emissions of the U.S.

"Forests and other natural landscapes sequester more than 11 gigatons of CO2 per year, nearly twice the total carbon emissions of the U.S."

Projects like Prey Lang can generate credits under a U.N. mechanism called "reducing emissions from deforestation and forest degradation," or REDD+. The amount of credits is calculated using the differential between the national rate of deforestation and the rate in the conservation area. The more the project beats the spread, the more credits it generates.

Private sector interest in REDD+ projects is spiking. InfiniteEarth's Rimba Raya Biodiversity Reserve, spanning some 65,000 hectares of peatland rainforest in Central Kalimantan, has sold carbon credits to Microsoft, insurance giants Allianz and Zurich, and to State Street Bank and Trust. Since this summer, demand has spiked "fourfold," according to Procanik.

U.S. technology company has bought "blue carbon" from Worldview International Foundation's mangrove restoration projects in Myanmar; in Cambodia, the Wildlife Conservation Society has sold credits generated from a project in the Keo Seima Wildlife Sanctuary to multinational companies. Lestari, which runs a platform that allows palm oil companies to buy into reforestation projects, is now working on a similar one to aggregate demand for carbon, with interest from the oil and gas industry.

And the market's long slump means that demand far outstrips supply. Currently, only around $100 million per year goes into "nature-based" carbon projects via the voluntary markets. Just one company, the oil major Shell, has said that it will invest $300 million into forest carbon in the next three years.

Keeping forests standing, restoring and replanting them is the most effective way to sequester carbon at scale. (Photo by Peter Guest)

It was this desire for scale that drew Mitsui -- whose core business revolves around trading in energy and minerals -- to Prey Lang. Daiki Sato, general manager of Mitsui's NexGen Energy department, which made the investment, told Nikkei that the "co-benefits" -- the social and biodiversity outcomes from the project -- and the opportunity to buy carbon at volume outweighed its relatively complex economics.

"There could be more moving parts than in a typical project, but right now, the amount of carbon offsets that could potentially be generated from what we are doing in Prey Lang is fairly sizable," he says. Mitsui is looking for other, similar projects, in the knowledge that Japanese companies may well struggle to meet their emissions ambitions and will have to turn to offsets.

"When you go near 2030 or maybe mid-2020s, there could be some limitations in reducing more greenhouse gases," Sato says. "And Mitsui would like to be one of the solution providers in those situations."

Devil's bargain

Saving forests is not just a question of money, but money helps.

On the trunk roads running south from Stung Treng toward Cambodia's capital of Phnom Penh, sawn timber is hauled on trucks and on trailers hooked to motorbikes. Tipper trucks are piled with cassava. Wherever the roads touch the forest, cash crops have sprung up, with ordered lines of cashew, mango and rubber trees replacing the natural chaos. Here, the boundaries between legal and illegal trade are murky. Timber taken from protected areas is laundered into international supply chains; mining companies have been granted exploration licenses within the nature reserve. The temptation to take quick and easy money is everywhere.

"I think the biggest challenge is having a long-term viewpoint. What we're trying to do takes a long time," says Srabani Roy, Conservation International's regional director for the Greater Mekong. "It's not like mining or infrastructure development, where you sign a contract and you get an immediate payout right there."

Illegally harvested timber by the Mekong river in Vuth Kith, Cambodia. (Photo by Peter Guest)

Many within the conservation movement acknowledge the irony of allowing market forces, which have often driven deforestation, to fund the fightback, and of relying on the budding altruism of some of the world's largest polluters. There is also the question of whether a market structure, which could be volatile and driven by speculation, can really provide the kind of funding that complex and sensitive conservation projects need.

"From a conceptual, theoretical, academic point of view? No, they can't," says Peter Kanowski, professor of forestry at the Australian National University's Fenner School of Environment and Society. "But I guess that's not the world we're living in."

A century of extraction of short-term economic value has pushed global forests into a sustained crisis. The World Resources Institute, which tracks forest loss, estimates that 30% of the world's forest cover has now been completely cleared, and a further 20% degraded. Of the remaining half, most is fragmented and vulnerable; just 15% is functionally intact. In 2018, 12 million hectares of tropical forests were lost; in 2019 the figure could be higher, after devastating fires across the Amazon and the Indonesian archipelago.

A 2014 report prepared by McKinsey & Co., Credit Suisse and the World Wildlife Fund estimated that between $300 billion and $400 billion is needed to fund conservation and ecosystem restoration each year, but that only $52 billion in funding is available. Just 2% of all climate finance goes to forest conservation and rehabilitation.

That deficiency is replicated at a national level. In Cambodia, the Ministry of Environment struggles to manage 40% of the country's land area with under 0.5% of the national budget. Cambodia lost 2.2 million hectares of forest between 2001 and 2018, a quarter of its tree cover, according to WRI. More than 90% of deforestation was "commodity-driven," WRI found.

Conservation projects have to either compete economically with farmers and other groups who covet the land, or fight a constant -- and probably doomed -- rearguard action against destruction.

At Vuth Kith station, on the banks of the Mekong River, an eight-strong squad of rangers patrol a huge area by small boat, on foot and on the ubiquitous Honda bikes. Here and there, areas of trees have been chopped or burned down. In one patch, cleared a year before, mango seedlings have recently been planted.

The biggest obstacle to the rangers' work is, in fact, the opposition they face from local communities. Locals monitor the squad's movements and inform on them, so that perpetrators can avoid the patrols. Once, when the rangers confiscated a tractor used to illegally clear land, villagers set up a roadblock and demanded its return. On the patrol routes, signs warning of the penalty for illegal clearance or harvesting have been defaced or obscured.

"We need the communities on our side 100%," CI's Hon says. "But they understand the short term better than the long term. ... They have to pay for education, for medical expenses. They owe money to loan sharks."

Conservation International has invested in a program that helps villagers grow higher-value organic rice, aimed at increasing incomes without requiring additional land, but it is limited to around 200 households. When the proceeds from Mitsui's carbon sales come through, CI hopes they will have more money to spread around, though the organization is yet to decide exactly how to divide the pot. Similar projects, such as InfiniteEarth's Rimba Raya project, have used their capital as a kind of venture fund to invest in small businesses and services. Others have experimented with direct cash payments.

Confiscated chainsaws are piled at the regional Ministry of Environment building in Stung Treng. (Photo by Peter Guest)

The eventual shape of the Prey Lang program -- and its success -- rests on whether there will be enough money coming back down to the ground to make the case for conservation. "And that all depends on the market in Japan, basically," Roy says.

The price of carbon currently varies wildly around the world, from a floor of $3 in Tokyo to $17 in New Zealand and $25 in the European Union. However, most markets do not yet admit credits generated overseas. The Tokyo market does, but only via certain bilateral agreements between the Japanese government and developing nations.

"The truth of it is that all of us have been in the wilderness on pricing since Copenhagen failed," says Todd Stevens, executive director for the Wildlife Conservation Society's Conservation Science and Solutions program.

Stevens says that bulk buyers in the market are currently paying $1-$3 per ton, while "more enlightened" companies are offering $4-$8. Echoing other project developers, he judges that $10 a ton would be "the type of money where you would begin to overcome the opportunity costs at scale" -- in other words, that the income would be competitive with clearing the land for agriculture.

Indonesian students walk through pollution-induced haze in Jambi Province.   © Reuters

The International Monetary Fund estimates that the price of carbon needs to be within the range of $40-$80 per ton by 2020, rising to $50-$100 per ton by 2030, for market-based mechanisms to deliver the emissions reductions necessary to prevent global heating of 2 C.

Even a few dollars extra per ton could drive real change on the ground. CI's Roy, who used to work in the development sector, compares the challenge to the long struggle to try to convince Afghan opium farmers to give up their crops.

"Nobody could figure out what would be more profitable for the farmers than producing opium," she says. "It's kind of similar. What is the price point at which this is going to be economically viable, that you're not going to do other things, not going to chop down the tree? Because, sadly, now the climate argument alone is not winning."

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