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" "REDUCING DEFORESTATIONAND FORESTDEGRADATION CANMITIGATE CLIMATECHANGE LESS EXPENSIVELYTHAN MANY OTHERTECHNOLOGY-BASED ABATEMENT OPTIONS FINANCE & INVESTMENT083he lack of a clear price signal to useforests in a more sustainable way is thekey reason why deforestation and forestdegradation continue unabated. Changesin financial incentives are needed to both tacklecommercial activities, taxes and subsidies that lead toforest loss (the "downside") as well as stimulateactivities and initiatives that promote the protectionand sustainable use of forests (the "upside"). Forest carbon markets are one way, but not the onlyway, to stimulate the upside while counterbalancingthe downside. Markets for forest carbon, however, willnot succeed unless the drivers of deforestation areconfronted and given greater prominence. The conservation and sustainable management offorests, especially in the tropics and sub-tropics, areessential parts of the international effort to reduceglobal greenhouse gas (GHG) emissions and stabilisethe global climate system. It is necessary to state upfront, though, that forests are not only about greenhousegas (GHG) emissions and climate change. They providea host of ecosystem services such as soil stability, waterregulation and habitat for biodiversity -services thatspecifically underpin the climate, food, energy, waterand health security on which more than a billion peopledepend on a daily basis. Given the opportunity todevelop a global system to reduce emissions fromdeforestation and forest degradation (REDD+) throughthe UNFCCC negotiations, however, this report logicallyfocuses on the ecosystem service of car sequestrationand -stocks in forest biomass and soils.The protection and enhancement of forests, especiallyin the tropics and sub-tropics, is an essential part ofthe international effort to reduce global greenhousegas (GHG) emissions and stabilise the global climatesystem. Previous research suggests that a 50 per centreduction in deforestation is needed by 2030 if theforestry sector is to effectively support global effortsaimed at holding global temperature rise at below 2degrees Celsius (UNFCCC, 2010). During the pastdecade, 13 million hectares of tropical forests havedisappeared annually on average (FAO, 2010). This isequivalent to about six billion tonnes of carbon dioxidebeing released into the atmosphere - about 17 percent of global man-made GHG emissions. Thepotential of forests to mitigate climate change is vast:stopping tropical deforestation and forest degradationand planting new forests could represent theequivalent of doubling current global nuclear energycapacity, or the construction of two million new windturbines (Pacala and Socolow, 2004).However, considerable investment is needed for thispotential to be realised, estimated at a minimum ofUS$17-33 billion per year to halve emissions from theforestry sector by 2030 (Eliasch, 2008). UNEP'sGreen Economy Initiative comes to the conclusion thatannual investment in the order of US$40 billion isneeded to both halve global deforestation by 2030 aswell as to increase reforestation and afforestation by140 per cent by 2050 relative to business as usual.Reducing deforestation and forest degradation canmitigate climate change less expensively than manyother technology-based abatement options and withimmense potential co-benefits such as biodiversityconservation and watershed protection - "free"services with an estimated annual value of up toUS$45 billion by 2050 (TEEB, 2010). These services are central to human well-being andeconomic progress in the medium to long term:estimates show that on a business-as usual path, thedeforestation-related impacts of climate change on theFINANCING FOREST-BASEDCLIMATECHANGEMITIGATIONTHE UNITED NATIONS ENVIRONMENT PROGRAMME FINANCE INITIATIVE (UNEP FI)T

world economy could reach US$1 trillion per year by2100 (Eliasch, 2008)II. UNEP's Green Economy Reportconcludes that, on average, the global climateregulation benefits of reducing deforestation by 50 percent exceed the costs by a factor of three (UNEP, 2011).Investment on the scale of USD 17-33 billion per year ishighly unlikely to come from governments alone,especially in light of current budgetary constraints ofmost donor countries, and thus active participation ofprivate sector investors, including financial institutions(FIs), will be imperative for the implementation of forest-based mitigation activities at the needed scale and pace.This in turn depends on making the protection andenhancement of natural forests, and the planting of newforests, a competitive investment opportunity.There are many reasons why forest-based mitigationshould be interesting to the private sector generallyand financial institutions specifically. However, inorder to mobilise this private sector capital at therequired scale, it is paramount that policymakers:(i) offer avenues and formats for the private sector toinvest and engage in the protection, rehabilitation andcreation of forests; (ii) increase the financial competitiveness andattractiveness of forest-based climate mitigationinvestments and; (iii) reduce the investment risks involved. While a global framework for forest protection,conservation and enhancement is now a top priority inthe international climate change negotiations, there isno consensus yet that a framework agreed upon at thispolitical level will: (i) aim to involve and (ii) be effective in involving the private sector at scaleand unlock the required volumes of investment andfinance.It is therefore essential that:(i)Financial institutions fully understand the nature ofthe commercial opportunities, and potentialinvestment avenues in the area of forest-based climatechange mitigation; as well as the public mechanismsand risk-mitigation instruments available for suchinvestments.(ii) Policymakers, including in particular UNFCCCnegotiators, understand the needs, priorities and viewsof private sector investors, lenders and insurers inrelation to the specific characteristics of forest-basedmitigation opportunities, so as to facilitate theirinvolvement. Without such involvement, it seemslikely, for reasons outlined in this report, that theeffective implementation of forest-based climatechange mitigation at the needed scale seriously risksremaining an idea rather than becoming a reality. nII. Please note that this is an estimate of the forestry-relatedimpacts of climate change, additional to the climate changeimpacts of other industrial emissions of greenhouse gases.084FINANCE & INVESTMENTPhoto: UN Photo/Eskinder DebebeAbove: Processed timberstacks from legaldeforestation in Brazil