Innovative Financial Instruments and Their Role in the Development of Jurisdictional REDD+

Achieving global net zero carbon emissions requires stopping deforestation and making full use of tropical forests as carbon sinks. Market instruments for the sale and purchase of emission outcomes coming from Reducing Emissions from Deforestation and Forest Degradation framework programs could play a very significant role in achieving this goal. The development of these markets has been insufficient so far: their scale as of today is much lower than what would be required to generate meaningful resources for the countries that host tropical forests, and the quality of existing instruments is generally insufficient to allow a scaling up in demand. However, efforts to improve the transparency and integrity of these instruments are accelerating, particularly around jurisdictional Reducing Emissions from Deforestation and Forest Degradation framework programs. In parallel with these efforts, innovations in financial instruments suited for the framework’s carbon markets are also taking place, but their scale is limited so far. This paper looks beyond the current state of the framework’s carbon markets to consider a set of innovative financial instruments that would allow completing the infrastructure of emissions trading, enhancing its utility for both issuers and buyers of carbon credits in the framework’s jurisdictional programs. The paper shows how a combination of forest carbon bonds, where countries sell forward (or commit) their emission reduction outcomes, as well as call and put options can be used to de-risk and encourage early investment in jurisdictional Reducing Emissions from Deforestation and Forest Degradation framework programs. To quantify the value of these innovations, the paper evaluates the potential scale of these instruments for the case of Brazil. The estimates suggest that the amounts that could be mobilized would represent a critical contribution to effective forest conservation. The proposed instruments and methods can be used by other tropical nations that are prepared to implement a large-scale jurisdictional program. Although the paper acknowledges that the current state of carbon markets would still not allow their deployment in the short term, the conclusion is that these instruments have significant potential, and their future development could be an impor tant contribution to the establishment of successful markets for the conservation of tropical forests.