The Gabonese experience on the future of climate finance

Today, at a time when climate change has become unmistakably apparent, more businesses and governments are committing to become carbon neutral, net zero and carbon positive. The African Conservation Development Group (ACDG) is one of the companies working to preserve and market the Gabonese rainforest. With their current 50-year logging concession, ACDG believes it can generate the flow of carbon credits – permits that offset emissions – that companies, governments and foreign investors need to reduce their environmental impact. ACDG has been involved in negotiations to secure contracts with companies that would offset 3 million tonnes of greenhouse gas emissions per year for over 10 years. Each tonne would cost a minimum of $ 10 and the ACDG would consolidate the income stream into a bond with a small premium over Gabon’s sovereign debt. This product is a bond whose underlying asset is this forest, not valued on wood, but its capacity to absorb carbon.

By securing the ecosystem value of its tropical forest, Gabon has created a radically new financial product based on the idea of ​​natural capital.

By securing the ecosystem value of its tropical forest, Gabon has created a radically new financial product based on the idea of ​​natural capital. Natural capital refers to a new economic principle that takes into account the role of natural resources in the economy by putting a price on “ecosystem services”, such as carbon absorption and climate regulation carried out by the Gabonese forest. . Of course, in finance anything that can be valued has to be traded, so the next question is how to do it.

Carbon markets are governed by a cap and trade system, whereby governments set a limit, or cap, on the amount of carbon dioxide that can be emitted by a certain industry and allocate a set number of carbon allowances. to businesses. If a company cannot cover its carbon emissions with its allowances, then it must purchase additional ones from a company with reserves. Lately, carbon prices in the EU have increased, showing that companies are increasingly in a hurry to find alternatives to offset emissions. Natural capital markets could provide the solution. Logically, the price of a financial security, the value of which is linked to the ecosystem services of a resource, would increase if the value of the underlying services also increased. The only way to increase natural capital would be to regenerate the ecosystem. This would translate into more carbon offsets, for the benefit of companies that need it, while preserving the terrestrial biosphere.

While natural capital markets can revolutionize carbon offsetting, similar systems like cap and trade have failed in the past. More often than not, countries and companies fall behind on their emissions targets and their net zero targets. Even international climate agreements, like the Kyoto Protocol and the Paris Agreement, have struggled to meet their carbon targets, delaying the transition to a sustainable future. This represents a potential hurdle for the ACDG obligation, which may not become popular until countries and businesses are more serious about climate change. This, unfortunately, can happen too late.

Even international climate agreements, like the Kyoto Protocol and the Paris Agreement, have struggled to meet their carbon targets, delaying the transition to a sustainable future.

The question of how to use a country’s natural resources as an engine of economic development without destroying them is a familiar question in the developing world. Countries like Brazil, DRC and Indonesia have shown appalling rates of deforestation over the past 20 years. In Brazil alone, massive deforestation has turned the Amazon, the world’s largest rainforest, into a net emitter of carbon. However, if ACDG’s bond issuance is successful, it would set an important precedent for countries like these and others with large ecosystems to issue a similar type of bond and sustainably market the bond. value of their natural resources.

Gabon is also giving rise to reflections on a forward-looking evolution of the economic discipline. The basic idea in economics – that humans should achieve infinite growth with limited resources – is in itself paradoxical. However, Gabon’s call for natural capital shows that natural resources have a value beyond the materials they produce, which helps anchor the discipline to a more palpable version of reality. Projecting beyond Gabon’s borders, this idea could potentially become the framework for climate change policy around the world in the near future.

Gabon’s preservation efforts are already bearing fruit, making it an even brighter northern star for developing countries to follow. This year, the country received $ 17 million from the Central African Forest Initiative (Cafi), a UN-backed fund, to reduce deforestation and increase conservation efforts in its tropical forests. It was the first payment of a $ 150 million contract. Through Cafi, the UN also validated Gabonese systems for monitoring deforestation and carbon emissions, which, according to the Gabonese Minister of Forests, could open a new source of income by charging countries with high carbon emissions for the management of their resources.

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