GCF results-based payments: Stepping stone to unlock private finance at scale
In 2017, the Green Climate Fund was the world’s first source of REDD+ results-based payments for jurisdictional REDD+. Five years later, this leap of faith has acted as a key enabler for carbon markets.
When the Green Climate Fund (GCF) adopted the REDD+ results-based payment pilot programme, REDD+¹ had already existed in climate change negotiations for over a decade. First floated in 2005, the concept – whereby developing countries are financially rewarded for reducing emissions by improving forest management – immediately garnered support from developed and developing countries alike.
In the years that followed, the idea developed into a three-stage process wherein developing countries would build national² capacities to attract the financial reward envisioned by the negotiators. The approach was as follows:
- Readiness: create an enabling environment for improving forest management and measuring such progress;
- Implementation: implementing activities to reduce emissions from forests; and
- Payment for results: receive payments for the demonstrated emission reductions they have achieved.
The United Nations and the World Bank, among others, created programmes to bring this phased approach into reality. They help developing countries build national capacities and align their forestry and climate change policies and strategies. Along with private sector developers, they also piloted implementation activities, but the policy environment continued to move slowly. While the rules governing REDD+ were finally agreed in 2013, finance for its implementation remained elusive. By the time negotiators adopted the Paris Agreement in 2015, trust that results-based payments would eventually flow had begun to wane, and it continued to do so at a steady clip thereafter.
When GCF announced its results-based pilot programme in 2017, the response from developing countries was swift. Within just three years, the entire USD 500 million envelope was exhausted, with eight countries securing all the funding for some 2.5 billion tCO2eq in emissions reductions achieved between 2014 and 2018. This prompted GCF to initiate current discussions on a possible second phase of the programme, building on lessons learned from the pilot.
Lessons learned and implications for REDD+ and beyond
The speed at which GCF’s results-based payments were exhausted is an indicator that international public finance, let alone GCF, will not be able to finance all eligible emissions reductions. Mobilisation of private finance at scale, including through carbon markets, will be essential to closing the gap.
In recent years, carbon markets have evolved at tremendous speed. Voluntary carbon markets ballooned in 2021, doubling to more than USD 1 billion in less than a year. Payments for REDD+ carbon credits, which act de facto as results-based payments, exploded by 280 per cent in 2021 alone, capturing the lion’s share of carbon market growth.
At COP26 in Glasgow, the UNFCCC further developed key elements of Article 6 of the Paris Agreement, establishing terms under which public and private entities could more easily trade carbon credits. Together, voluntary carbon markets and Article 6 have sent a clear signal of the strong potential of carbon credits to crowd-in private finance at scale.
In parallel, new results-based payments initiatives were set up in the wake of GCF’s pilot programme, including those by the Lowering Emissions by Accelerating Forest Finance (LEAF) Coalition. As a coalition of both governments and over 20 large corporations, LEAF facilitates the infusion of private finance into the market for REDD+ by offering developing countries a mix of public and private results-based finance.
However, the carbon market standard set for securing these payments, known as ART-TREES, is considerably more ambitious than that set by UNFCCC and GCF. As such, LEAF payments will remain out of reach for countries that lack the necessary institutional and technical capacity. Other standards required by the private sector in voluntary carbon markets beyond LEAF are similarly rigorous, resulting in abundant demand for high quality emissions reductions that many developing countries are unable to produce.
Outcomes of GCF’s pilot programme: Ecuador and Costa Rica case studies
Back in 2017, GCF’s pilot programme was instrumental in providing new momentum to REDD+. It gave developing countries hope that rewards could one day be reaped, thereby encouraging them to pursue REDD+ readiness. In so doing, it improved the enabling environment for GCF investments, and helped countries and jurisdictions pave the way to achieving standards such as ART TREES that are required to access carbon finance from private sources.
REDD+ Readiness has had a positive spillover effect well beyond the world of REDD+. Improving forest data collection systems and implementing safeguards such as the full and effective participation of relevant stakeholders, in particular indigenous peoples and local communities, significantly enhances forest governance and lays the groundwork for the effective implementation of GCF-funded projects and programmes across forests, land use, and ecosystems and ecosystem services.
Countries that secured GCF results-based payments have further developed their capacity to achieve the standards required to access private finance through carbon markets – thanks to a specific requirement of GCF’s pilot programme. Unlike most carbon market finance, GCF requires a description of how the results-based payments will be spent: this is known as the “use of proceeds.”
Ecuador and Costa Rica, which received USD 18.6 million and USD 54.1 million from GCF’s pilot programme respectively, have taken full advantage of this innovation to reinvest into building elements that are set to enable them to unlock carbon credits.
The Government of Ecuador, in partnership with UNDP and key private stakeholders, is reinvesting part of the proceeds of the GCF RBP into deforestation-free agreement frameworks, including with operators of the coffee, cocoa, and palm oil supply chain.
One of the main objectives is to position Ecuador as a world pioneer in the jurisdictional certification of sustainable palm oil, which consists in adopting environmentally and socially friendly practices to help eradicate deforestation in the palm oil production value chain.
The Ecuadorian government also used GCF results-based payments to co-finance a project in collaboration with Italian coffee company Lavazza to source deforestation-free goods from federations of coffee growers. In 2022, the first 17 metric tonnes of “deforestation-free” coffee were exported to Italy.
The Government of Costa Rica has taken the logic one step further by reinvesting some of the GCF’s proceeds into setting up a system to document the transfer of rights to the revenue from carbon transactions from forest landowners to the state – an important step in accessing private finance for emissions reductions while recognising the right of individual and indigenous landowners. This system will maintain the database of beneficiaries under the different standards, including ART-TREES, to ensure that carbon transactions conducted by the government with LEAF, for instance, fully benefit the landowners, of which close to a fifth are indigenous communities.
Many countries still face obstacles on the long road to unlocking private finance for forest emissions reductions. GCF’s results-based payments can act as critical stepping stones to close the gap between a soaring demand from the private sector and a supply of high-quality carbon credits from developing countries. This in turn will help ensure a sustainable flow of private finance to meet the needs of achieving a deforestation-free, resilient, and carbon neutral world.
By Benjamin Singer, Senior Forest and Land Use Specialist, Green Climate Fund and Moon Herrick, Independent Consultant
¹ REDD+ stands for reducing emissions from deforestation and forest degradation in developing countries, and the role of conservation, sustainable management of forests, and enhancement of forest carbon stocks in developing countries.
² Negotiators agreed to encourage national and subnational (as an interim step) level implementation of jurisdictional REDD+. Here, “national” is used for brevity.