Merrill Lynch throws weight behind avoided deforestation credits

Paying people not to do something may conjure up images of dubious protection rackets, but according to growing numbers of experts it could also prove one of the most cost effective means of curbing global carbon emissions.

That is certainly the view of investment banking giant Merrill Lynch, which this week became the latest firm to underline its interest in carbon credits from avoided deforestation projects, inking a deal with Australian firm Carbon Conservation that will see it buy a minimum of $9m of carbon credits from an avoided deforestation scheme in Aceh Indonesia.

Under the terms of the agreement, Carbon Conservation and its NGO partner Fauna and Flora International will commit to delivering a huge reduction in deforestation across 750,000 hectares of tropical forest in Aceh's Ulu Masen region, although a small amount of deforestation will be allowed to continue to provide local communities with timber. The project will then be awarded carbon credits that will be sold on an exclusive basis to Merrill Lynch.

The bank has agreed to buy a minimum of $9m worth of credits, has an option to buy further credits from the scheme and has committed to sharing profits with the project if it can sell the credits at a premium.

Critics of avoided deforestation schemes have argued that it is extremely difficult to accurately verify that carbon emission reductions have been achieved, but Abyd Karmali, global head of Carbon Emissions at Merrill Lynch insisted that the criteria governing the Aceh project are extremely robust.

"Carbon Conservation and Fauna and Flora have been working in the region for a long time so there is substantial base line data on which to base carbon calculations," he said. "The calculations are also in line with the Climate Community and Biodiversity Alliance, which take an extremely conservative view on how many carbon credits can be issued [as a result of avoided deforestation projects]."

Karmali said that the company was expecting to see strong demand from customers for the new credits, which he argued delivered a number of benefits beyond mere carbon emission reductions.

"Merrill Lynch's thesis on the carbon market is that the days of vanilla credits [that simply deliver emission reductions] are nearing an end," he said. "Companies will be looking for credits that deliver more benefits and the Aceh project is a prime example of this approach – there are five endangered species in this region that will benefit from biodiversity protection while the income will also aid development in an area badly affected by the 2004 tsunami."

Financial mechanisms for curbing deforestation are currently the subject of intense debate at the UN where proposals have been put forward to include avoided deforestation credits in the UN's carbon trading schemes. Advocates of the plans argue they would provide governments with a clear financial incentive for protecting forest regions.

Karmali said that the value of credits from the Aceh project could be expected to increase significantly if these proposals are included as part of a post Kyoto agreement. However, he insisted the project would be able to "stand on its own two feet" even if it has to continue to issue voluntary credits.

However, some negotiators, most notably from the US, have argued that avoided deforestation schemes should not be granted official UN approval on the grounds that it would mean people are effectively being paid not to do something that is already illegal.

Karmali countered that such arguments ignored the reality of illegal logging, adding that it was essential that a means is found that allows countries to realise the financial value of their forestry assets without recourse to felling. "According to the IPCC avoided deforestation would cut emissions by up to 25 per cent, while almost every economic analysis of climate change shows it is one of the most important actions we can take," he said. "We need to find a means to incentivise countries such as Indonesia to reduce deforestation."