IFF Advanced commitment to payment 05
An interim strategic
intervention for REDD+:
advance commitments to
payment for results
Overview
This brieing note sets out a strategic payment-forperformance approach to stimulate private sector investment
in REDD+. The approach presented is a form of “put option
contract” issued by a purchasing facility, using public funds. This
contract gives the seller the right, but not the obligation, to sell
REDD+ emissions reductions veriied to an agreed standard
at an established price, at a given point in the future. Two key
features of this approach are (i) it directly creates demand, and
(ii) that uncertainty over variables such as price and demand
for carbon is reduced. This approach has been successfully
used to rapidly scale up activities in a number of geographies
and sectors outside the ield of REDD+. The ability to select
from a wide range of geographical and methodological criteria
and stipulate these within the put options contract means
this approach can be focused on improving the incentives
speciically for initiatives that meet robust environmental
and social standards, and can also be targeted to speciic
geographic areas or types of activity.
In the absence of large-scale, long-term demand and price
signals for REDD+ emissions reductions, implementation of
REDD+ has been signiicantly below what is required to avoid
dangerous climate change. This is in part due to the absence
of a clear economic incentive for either forest countries or the
private sector to shift from business as usual activities to land
use policies that have REDD+ at their core. In this context,
a “put option” reduces uncertainty and makes more REDD+
activities commercially viable by offering a guaranteed buyer
for a certain value or volume of emissions reductions. The
visibility over future revenues that this incentive structure
creates is a precondition for unlocking the vast pools of
private capital managed by large, responsible money managers.
Securing a guaranteed price in advance will help scale up
REDD+ activities, as inancing available from investors and
lenders can be more easily accessed and secured on more
favourable terms.
The value of the “put options” contracts is in using public funds
to provide a credible assurance of future sales, which creates
the incentive for activities to go ahead and can help leverage
associated investment, rather than simply using public funds
to purchase emissions reductions. Even a modest amount of
public money could send a powerful signal of the long-term
credibility of REDD+ and so can be expected to have a much
wider impact on investment in the sector.
Fundamental principles, risks and safeguards
Put options contracts are relatively simple and widely
used. Irrespective of what they are being applied to, robust
conditions or safeguards are an integral part of the contract.
The private sector has for a number of years expressed broad
support for this type of intervention.
It is envisaged that a “facility” is established within an existing
fund, bank or organisation, which would be capable of selling
put options contracts. If the options were ‘exercised’, or used,
by the owners, emissions reductions would be bought by the
facility and retired. The facility would be quick to establish, and
offers a high degree of lexibility.
Key advantages of put options contracts include:
• Funds are only used to pay for results (emissions reductions)
rather than upfront. This is aligned with a core principle of
REDD+.
• This approach creates the conditions required for private
sector investment: being of suficient timeframe to allow
effective planning (“Long”); a clear commitment that will
directly affect the bottom-line of investments (“Loud”); a
legally binding and enforceable contract (“Legal”) and still
simple to understand and engage with (“Light”). By providing
an assured revenue stream for REDD+ emission reductions,
the private sector will have an incentive to invest in and
operationalise REDD+ initiatives.
• Cost effectiveness – using existing institutions keeps costs
low, and technical features of the product will allow multiples
of private sector capital to be mobilised per dollar of public
funding.
• ‘Proof of concept’ is developed along with an investment
track record which is of great importance to the private
sector and in scaling up REDD+.
• Creating the mechanism will send strong political signals
about the commitment to REDD+ in the post 2020
framework.
Options and examples
How will recipients be determined? The speciic criteria for
emissions reductions to be purchased would be determined
by national circumstances. The process might involve features
such as an open tender with clear eligibility criteria and a due
diligence process for applicants.
How will price be determined? There are a range of
well-established techniques for ensuring value for money and
price discovery. A common process is the reverse auction
which can be employed in a variety of different forms to suit
a range of requirements. A reverse auction is a process by
which the purchaser announces the highest offer price they are
willing to accept and then the sellers underbid each other for
the right to sell, driving the inal clearing price down below the
original offer. This approach has been widely used when setting
renewable energy tariffs and found to be eficient and effective.
Design features. There are many ways to structure the
contract; the preferred option will ultimately also be a function
of national circumstances. Options contracts have been used
for many years and the permutations and trade-offs are well
understood. Features that can vary include the ability to trade
the permit (‘fungibility’), the price or premium paid for the
contract, the length of the contract and the conditions under
which it can be used (or ‘exercised’).
Proposed steps
A range of organisations could administer the scheme, including
multilateral/regional development bank or even a public-private
partnership. Establishing the terms of the scheme could be
done most effectively through a multi-stakeholder process,
drawing on expertise from similar arrangements in renewable
energy, health care or climate change sectors. Key factors to
consider include:
a) The scale of funds available.
b) The duration of the commitment and sequencing of the
transactions. It is recommended that the mechanism has
a minimum term of ive years, based on clear private
sector feedback that medium to long term signals are most
needed, as well as the timeframe for new REDD+ initiatives
to start producing emissions reductions veriied to speciic
standards.
c) The criteria for emissions reductions that will be purchased.
It is recommended to focus on credits certiied by VCS
+ CCBA, linked to sub-national or jurisdictional-level
frameworks. Geographic scope should also be determined,
focusing on countries with a well-developed national
REDD+ strategy, and also responding areas of interest for
the private sector on REDD+ (i.e. ease of doing business
considerations).
The Interim Forest Finance (IFF) project is a collaborative
initiative of the Global Canopy Programme (GCP), the
Amazon Environmental Research Institute (IPAM), Fauna &
Flora International (FFI), the UNEP Finance Initiative (UNEP
FI), and the United Nations Ofice for REDD+ Coordination
in Indonesia (UNORCID).
The IFF project advocates a strategic intervention by donor
country and tropical forest country governments, and public
inancial institutions, to scale up public and private sector
demand for REDD+ emission reductions, in the interim
period between 2015 and 2020. To read more about the IFF
project, please visit http://www.globalcanopy.org/projects/
interim-forest-inance. To contact the IFF management
team, please write to iffmanagement@globalcanopy.org.
intervention for REDD+:
advance commitments to
payment for results
Overview
This brieing note sets out a strategic payment-forperformance approach to stimulate private sector investment
in REDD+. The approach presented is a form of “put option
contract” issued by a purchasing facility, using public funds. This
contract gives the seller the right, but not the obligation, to sell
REDD+ emissions reductions veriied to an agreed standard
at an established price, at a given point in the future. Two key
features of this approach are (i) it directly creates demand, and
(ii) that uncertainty over variables such as price and demand
for carbon is reduced. This approach has been successfully
used to rapidly scale up activities in a number of geographies
and sectors outside the ield of REDD+. The ability to select
from a wide range of geographical and methodological criteria
and stipulate these within the put options contract means
this approach can be focused on improving the incentives
speciically for initiatives that meet robust environmental
and social standards, and can also be targeted to speciic
geographic areas or types of activity.
In the absence of large-scale, long-term demand and price
signals for REDD+ emissions reductions, implementation of
REDD+ has been signiicantly below what is required to avoid
dangerous climate change. This is in part due to the absence
of a clear economic incentive for either forest countries or the
private sector to shift from business as usual activities to land
use policies that have REDD+ at their core. In this context,
a “put option” reduces uncertainty and makes more REDD+
activities commercially viable by offering a guaranteed buyer
for a certain value or volume of emissions reductions. The
visibility over future revenues that this incentive structure
creates is a precondition for unlocking the vast pools of
private capital managed by large, responsible money managers.
Securing a guaranteed price in advance will help scale up
REDD+ activities, as inancing available from investors and
lenders can be more easily accessed and secured on more
favourable terms.
The value of the “put options” contracts is in using public funds
to provide a credible assurance of future sales, which creates
the incentive for activities to go ahead and can help leverage
associated investment, rather than simply using public funds
to purchase emissions reductions. Even a modest amount of
public money could send a powerful signal of the long-term
credibility of REDD+ and so can be expected to have a much
wider impact on investment in the sector.
Fundamental principles, risks and safeguards
Put options contracts are relatively simple and widely
used. Irrespective of what they are being applied to, robust
conditions or safeguards are an integral part of the contract.
The private sector has for a number of years expressed broad
support for this type of intervention.
It is envisaged that a “facility” is established within an existing
fund, bank or organisation, which would be capable of selling
put options contracts. If the options were ‘exercised’, or used,
by the owners, emissions reductions would be bought by the
facility and retired. The facility would be quick to establish, and
offers a high degree of lexibility.
Key advantages of put options contracts include:
• Funds are only used to pay for results (emissions reductions)
rather than upfront. This is aligned with a core principle of
REDD+.
• This approach creates the conditions required for private
sector investment: being of suficient timeframe to allow
effective planning (“Long”); a clear commitment that will
directly affect the bottom-line of investments (“Loud”); a
legally binding and enforceable contract (“Legal”) and still
simple to understand and engage with (“Light”). By providing
an assured revenue stream for REDD+ emission reductions,
the private sector will have an incentive to invest in and
operationalise REDD+ initiatives.
• Cost effectiveness – using existing institutions keeps costs
low, and technical features of the product will allow multiples
of private sector capital to be mobilised per dollar of public
funding.
• ‘Proof of concept’ is developed along with an investment
track record which is of great importance to the private
sector and in scaling up REDD+.
• Creating the mechanism will send strong political signals
about the commitment to REDD+ in the post 2020
framework.
Options and examples
How will recipients be determined? The speciic criteria for
emissions reductions to be purchased would be determined
by national circumstances. The process might involve features
such as an open tender with clear eligibility criteria and a due
diligence process for applicants.
How will price be determined? There are a range of
well-established techniques for ensuring value for money and
price discovery. A common process is the reverse auction
which can be employed in a variety of different forms to suit
a range of requirements. A reverse auction is a process by
which the purchaser announces the highest offer price they are
willing to accept and then the sellers underbid each other for
the right to sell, driving the inal clearing price down below the
original offer. This approach has been widely used when setting
renewable energy tariffs and found to be eficient and effective.
Design features. There are many ways to structure the
contract; the preferred option will ultimately also be a function
of national circumstances. Options contracts have been used
for many years and the permutations and trade-offs are well
understood. Features that can vary include the ability to trade
the permit (‘fungibility’), the price or premium paid for the
contract, the length of the contract and the conditions under
which it can be used (or ‘exercised’).
Proposed steps
A range of organisations could administer the scheme, including
multilateral/regional development bank or even a public-private
partnership. Establishing the terms of the scheme could be
done most effectively through a multi-stakeholder process,
drawing on expertise from similar arrangements in renewable
energy, health care or climate change sectors. Key factors to
consider include:
a) The scale of funds available.
b) The duration of the commitment and sequencing of the
transactions. It is recommended that the mechanism has
a minimum term of ive years, based on clear private
sector feedback that medium to long term signals are most
needed, as well as the timeframe for new REDD+ initiatives
to start producing emissions reductions veriied to speciic
standards.
c) The criteria for emissions reductions that will be purchased.
It is recommended to focus on credits certiied by VCS
+ CCBA, linked to sub-national or jurisdictional-level
frameworks. Geographic scope should also be determined,
focusing on countries with a well-developed national
REDD+ strategy, and also responding areas of interest for
the private sector on REDD+ (i.e. ease of doing business
considerations).
The Interim Forest Finance (IFF) project is a collaborative
initiative of the Global Canopy Programme (GCP), the
Amazon Environmental Research Institute (IPAM), Fauna &
Flora International (FFI), the UNEP Finance Initiative (UNEP
FI), and the United Nations Ofice for REDD+ Coordination
in Indonesia (UNORCID).
The IFF project advocates a strategic intervention by donor
country and tropical forest country governments, and public
inancial institutions, to scale up public and private sector
demand for REDD+ emission reductions, in the interim
period between 2015 and 2020. To read more about the IFF
project, please visit http://www.globalcanopy.org/projects/
interim-forest-inance. To contact the IFF management
team, please write to iffmanagement@globalcanopy.org.