Carbon Offsets Are Failing. Can a New Plan Save the Rainforests?

The TFFF’s backers see the fund as a potential jewel in the crown of green capitalism, with bond markets coming to the rescue of the rainforests. Brazilian environment minister Marina Silva told a London Climate Week audience in June: “It will mobilize large-scale capital with sustained financial flows to conserve our biodiversity.” For Zac Goldsmith, British senior fellow at the Bezos Earth Fund, a potential funder, “the TFFF is the only game in town for forest finance… We will not have this opportunity again.”

The World Bank will now become the administrative headquarters of the facility, as well as eventually overseeing transference of its anticipated profits to tropical countries. “With this foundation in place, the TFFF is now ready for countries to follow Brazil’s lead by making their own pledges,” said Brazil’s finance minister Fernando Haddad.

But there are concerns. Forest ecologists warn that the plan’s rulebook is so loose that it could allow payouts for forests even as they are being logged. Rights activists warn that Indigenous peoples could lose control of their forests. Meanwhile, some economists argue that the project’s proposed financial architecture is both risky and inherently unfair. Much of the money for forest protection would come from the high interest rates charged on volatile loans to the very countries whose forests it promises to benefit. Without those hefty payments, says Max Alexander Matthey of the University of Witten/Herdecke in Germany, “there is no money for the forests.” 

Under the TFFF, countries would be paid initially according to satellite measurements of the extent of their standing tropical and subtropical moist broadleaf forests, at an annual rate of $1.60 per acre. In subsequent years, every acre deforested would result in a reduction in payments equivalent to at least 100 acres. Countries with an annual deforestation rate above 0.5 percent — which currently includes major forested nations such as Indonesia and the Democratic Republic of the Congo — would be barred from receiving any funds. 

It could potentially be a “game-changer” for forest conservation, says Robert Nasi, director general of the Indonesia-based Center for International Forestry Research. If successful, it “could become a blueprint for other… critical ecosystems like peatlands and mangroves,” he says.

Nobody doubts the need for new impetus to save tropical forests from continued invasions by farmers, loggers, and miners and the spread of wildfires. Last month, a new assessment found an upsurge in deforestation rates in the tropics, reaching a record 16.5 million acres last year and leaving the world far off track to meet the promise of governments to end deforestation this decade.  (The only good news was from the Brazilian Amazon where a sharp decline achieved the lowest rate of forest loss since 2015.)

Meanwhile, foreign aid budgets that have funded much forest conservation in recent years are in freefall, both in the United States and Europe. And market-based systems of forest protection and restoration based on trading in carbon offsets are floundering. A global analysis published in October found that less than a fifth of such projects met their emissions targets.

So, for governments and forests alike, the investment-led TFFF — with just a fifth of the fund intended to come from governments and philanthropic sponsors, and the remainder from private investors — seems like a lifeline. 

It has strong backing from major environmental groups such as the WWF and Conservation International. But there are concerns among forest ecologists that the small print defining what counts as standing forest worthy of rewarding could create perverse incentives for further destruction. 

Most intact moist tropical forests have canopy cover greater than 80 percent. Much less usually indicates they are badly degraded, for instance by loggers, says environmental scientist Brendan Mackey of Griffith University in Queensland, Australia. Yet the TFFF’s criteria for full payment currently require only 20 percent cover. “This is not scientifically credible” he says.

The most recent Brazilian briefing on the project argues that this loose definition recognizes the value of all standing tropical forests, “not only those classified as intact, high integrity, or primary.” Mackey agrees that such degraded forests are worth protecting and restoring, but believes that there should be a premium for forests with “high ecosystem integrity.” Otherwise, as presently drafted, says Kate Dooley, an expert on forest governance at the University of Melbourne, the TFFF “would allow payments even where industrial logging is occurring in primary forests.” 

The fund’s rulebook does impose some penalties for forest degradation, but only in the case of forest fires, which it describes as a “proxy” for wider disturbance. This is a mistake, says Dooley. “A fire in a moist tropical forest is an indication that the forest has already been severely degraded for some time.” Satellites, aided by A.I. analysis, can now identify other forms of forest degradation, such as logging, roads, and mining with increasing accuracy, says Bill Laurance, an environmental scientist at James Cook University in Australia. So, critics say, the definition of degradation warranting penalties should be extended.

There is a similar debate among forest Indigenous peoples and NGOs that represent them. After lobbying from rights groups, the TFFF rulebook now stipulates that while the funds it disperses will go initially to national governments, at least a fifth of the money should ultimately be devoted, directly or indirectly, to Indigenous and forest communities, who are the custodians of the majority of the world’s intact rainforests. 

Many cheer this latter requirement. The Global Alliance of Territorial Communities, which represents 35 million forest people in 24 countries, sees it as “a key political opportunity… to ensure fairer and more direct access to climate finance.” 

“For all its flaws,” says Matthew Owen, director of Cool Earth, a U.K.-based NGO that supports Indigenous community conservation work, “TFFF signals that forest protection is finally being treated as a global public good worthy of ambitious financial commitment. It is the best chance we have to fund a halt to tropical deforestation.”  

But other activists for Indigenous communities are wary. The Global Forest Coalition, which has more than a hundred affiliated groups in 71 countries, fears that governments will not hand over money directly, but will instead give it to government agencies and private companies working with Indigenous people. And it contends the incentives for wider forest protection could become a pretext for criminalizing traditional forest uses such as shifting cultivation.  

Faced with such concerns, many forest activists want to help improve the rulebook and hope that flaws can be fixed. They have already achieved agreement on a ban on investments by TFFF in fossil fuels, mandatory payouts directed to the interests of Indigenous peoples, and a scientific advisory panel to refine monitoring and reporting on the state of funded forests, says Tyala Ifwanga of the European forest-policy NGO Fern. “It is far from ideal, but we are trying to make sure it can be as effective as possible.”

A new version of the plan is due for release next month in Belém. Mackey is among the critics of TFFF who are optimistic. “I remain supportive of the Brazil government’s efforts and look forward to working with them to help with strengthening the next iteration,” he says. 

One big concern that may be hard to resolve, however, is the financial architecture devised to deliver revenue for investors, sponsoring governments, and the rainforest alike. It is, critics say, both inherently risky and designed to benefit investors first, rather than forests and the countries that host them. 

The fund is likely to work like this. Money put into the fund by private investors, such as bankers and hedge fund managers, will mostly buy assets in developing countries that pay high interest rates. These will include fixed-interest sovereign bonds sold by governments that typically yield a return of around 8 percent. But the private investors will only be paid a return of around 5 percent. The 3 percent difference — amounting to around $4 billion per year, if the project is fully funded — would be enough to pay for conservation of 2.5 billion acres of forest, roughly equivalent to all the world’s natural tropical rainforests. 

An obvious question, notes economist Matthey, is why the investors don’t buy those bonds themselves and pocket the extra cash. The answer is that the high-interest bonds are regarded by traders as risky, with a high chance of the borrowers defaulting. That is why developing countries have to offer the higher rate to entice lenders. That makes the 3 percent “leftovers” intended for forests a “risk premium, compensating for the danger of holding volatile assets,” says Matthey. 

Far from being the stable source of funding claimed by its promoters, he says, forest funding from the TFFF could easily unravel if economic conditions change. Nasi agrees: “A major market crash… could decimate the investment fund’s value, forcing a prolonged suspension of payments and threatening the entire model.” 

TFFF’s architects dismiss such fears. They acknowledge there could be “market fluctuations,” during which forest payments would be the first to lose out. But catch-up payments could be made later. “Over the long run, the risk is minimal,” according to João Paulo de Resende, a senior official at Brazil’s Ministry of Finance.

But even if the funding model proves financially sustainable, some critics argue that it is exploiting an unethical financial system to the detriment of developing countries. “It is developing countries’ onerous debt servicing that is paying for this scheme,” says Chien Yen Goh, a legal advisor to the Malaysia-based nonprofit Third World Network.  They are being required to “underwrite forest protection that benefits the entire planet.” 

Whatever its potential drawbacks, backers say the TFFF could transform the finance available for protecting the world’s tropical rainforests. So, will it get the funding that the Brazilians are asking for? 

The first requirement is for national governments to put up the $25 billion that will kick-start the fund and draw in private investors to provide the remaining $100 billion. Potential sponsors who have publicly backed the initiative include China, the United Arab Emirates, Germany, Norway, France, and the U.K., though not the U.S. But so far only Brazil has committed funds: Lula pledged $1 billion at the U.N. General Assembly in September. And in the run-up to Belém, there have been reports of other potential sponsoring governments shying away from cash commitments. 

Britain, for instance, has worked closely with Brazil in devising the TFFF. Speaking at the London Climate Week, British climate change secretary Ed Miliband called it “bold, inspiring and incredibly promising.”  But officials spoken to for this article say that, with budgets tight, there is little chance of British funding being announced in Belém.

That said, the World Bank taking the reins will encourage wavering governments that the project is viable.  Whether it is a boon for tropical forests or another false dawn may take longer to establish.