Carbon markets in 2014 emerged for the first time as the biggest source of funding for projects to cut GHG emissions from deforestation and forest degradation, according to a report released Tuesday.

Companies and governments spent some $705 million last year in efforts to cut emissions from deforestation, Ecosystem Marketplace said in its “Converging at the Crossroads: State of Forest Carbon Finance in 2015”, taking the total global investments over the past decade to $5.1 billion.

Of the 2014 spending, $257 million was in the form of market-based payments for emission reductions, the report said. A further $229m was government funding for REDD+ readiness, and $219m was non-market based payments for carbon cuts, primarily from Germany and Norway to fund projects in Brazil and Guyana.

“Last year marked the first time that market-based payments for verified emissions reductions – a record-high $257 million for 34.4 million tonnes of offset greenhouse gases – exceeded the $229 million in new ‘readiness’ payments intended to help tropical forest countries build capacity to halt deforestation,” Ecosystem Marketplace said in a statement.

FOREST CARBON MARKETS

The main reason for the 69% jump in market-based forest carbon investments was a 200% increase in demand for forest offsets for compliance use in Australia and California, the report said.

California emitters bought 6.1 million US forest-based offsets at an average price of $8.90 each for use in the state’s cap-and-trade scheme.

Demand from the California market is expected to grow, as state regulators are considering allowing REDD+ credits to be used in the system from 2018.

Meanwhile, Australian emitters covered by the nation’s carbon tax took advantage of their right to use offsets to cover 5% of their emissions, buying 4 million tonnes in emissions cuts from forests at an average price of $17.70 per tonne.

Australia has repealed its carbon tax, but the government will continue buying forest-based offsets through its Emissions Reduction Fund (ERF), where forest projects were the big winners in the first auction in April.

While mandatory markets were the bigger sources of financing in 2014, voluntary buying still represents the biggest driver of absolute emission cuts, the report said.

Voluntary buyers picked up 23.1 million forest offsets last year at an average price of $5.40.

To date, voluntary buyers have bought 156.1 million tonnes of CO2e cuts from forest projects, compared to 37.3 million for compliance markets.

REDD+ READINESS

Funds for capacity-building have traditionally been the biggest source of forest carbon finance, with more than half of all historical funding spent on readiness.

But last year, the share of readiness funding fell to around a third of the total.

“New commitments to finance country readiness … dipped to an all-time low in 2014 as donors shifted efforts towards disbursing the finance from previous commitments,” the report said.

So far 29 developing nations have indicated in their INDCs that they want to use REDD+ to achieve their post-2020 emissions reduction targets, but it remains to be seen whether developed nations will want to spend more cash on capacity-building.

“The shift indicates that the previous focus on capacity building is giving way to an emphasis on implementation, with at least $1.2 billion in new results-based finance ‘on the table’ for tropic forest countries in the near future,” said Ecosystem Marketplace.

The direct government spending on forestry-related carbon cuts in 2014, amounting to $219 million, came from Germany and Norway and was used to halt deforestation in Brazil and Guyana.

The Norwegian government said last week it would cut such spending by 13%, or $44.7 million, in 2016 as part of a revised government budget to account for a record increase in refugees.

By Stian Reklev – stian@carbon-pulse.com

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