Mobilizing Conservation Finance

Sean Penrith, Peter Weisberg and Elizabeth Hardee, The Climate Trust
May 20, 2015

Conservation finance has to reach a scale of $400 billion a year to realize the carbon reduction needed to limit catastrophic climate change impacts. The forestry and agricultural sectors in the United States offer tremendous opportunity to mitigate carbon emissions but finance is needed to develop and construct projects. Traditional investors are reluctant to finance projects that depend upon emerging and nascent environmental markets. Public efforts must be made to mitigate the risks associated with emerging environmental markets and create a favorable investment environment.

Executive Summary

The United States Department of Agriculture (USDA) and its Conservation Innovation Grant (CIG) program has fostered the development of the basic infrastructure that is needed to account for the greenhouse gas reductions of conservation projects and generate carbon offsets. Alone, however, this framework for the market is insufficient to catalyze the private investment into conservation agriculture and forestry projects. Policy creates and controls carbon markets—both supply (what projects qualify to generate credits) and demand (how many credits polluters need to purchase). Given the potential for this policy to change, carbon markets are perceived by financiers to be risky. In practice, this means lenders do not value potential revenues from carbon markets and require projects to be profitable in their absence. This means carbon markets do not currently change what projects get developed or built—and cannot properly incentivize the implementation of agricultural and forestry projects.

Financiers are needed to manage the risks associated with emerging carbon markets and make upfront investments based upon the revenues that those projects will generate from selling offsets. The USDA has an opportunity to incentivize private lenders and investors to do so by mitigating and managing the risks associated with nascent environmental markets by providing demand enhancements and credit enhancements.

Demand Enhancement: Creating demand beyond existing compliance and voluntary carbon markets to increase the certainty of investors that offsets generated by upfront investments will have real value.

• Key recommendation: Modify the 2012 CEQ Guidance on Federal Greenhouse Gas (GHG) Accounting and Reporting to allow carbon offsets to be applied as an adjustment against a Federal agency’s emissions. This will allow offsets to be used in part to meet the Executive Order 13693 requirement that Federal agencies reduce greenhouse gas emissions 40% below 2008 levels by 2025. The Climate Trust estimates this modification could grow the voluntary market for offsets by 15%.

Credit Enhancement: The proceeds from the sale of a climate bond are an ideal source of low-cost, patient capital finance greenhouse gas offset projects. Given uncertainty about the future of North American carbon markets, however, offset sales have been viewed as too risky to be the source of repayment for a bond.

• Key recommendation: Provide a credit enhancement to a climate bond whose proceeds are used to finance greenhouse gas offset projects. To do so, the USDA could issue bonds themselves, or guarantee the principal and interest repayment associated with third-party issued bonds. With the balance sheet of a large public entity standing behind the repayment of a bond, the risk to institutional investors purchasing bonds is significantly reduced. Through this credit enhancement, proceeds from the bond can give greenhouse gas impact opportunities access to low cost capital— with public entities assuming some of the risks associated with the investments. Meanwhile, institutional investors can continue to purchase a product they are very familiar with incorporating into their portfolios—government-backed bonds.

Read on for the full report findings.