Valuing co-benefits to drive investment in carbon projects

by Neil Salisbury

The recent 2013 World Bank report on carbon finance indicates that global climate finance reached approximately US$364 billion in 2011*, with the private sector contributing a large proportion of this investment. Carbon prices are at an all time low and the international carbon markets are likely to remain uncertain for several years due to the current economic climate, the reduction in demand and unchanged supply of credits, plus the relative in-action by the international governments at Doha (COP 18). While there are a number of initiatives and domestic schemes around the world that have commenced or are proposed to commence, it’s unlikely that we will have any new international emission targets or mechanisms before 2015, making any implementation impossible before 2020.

This uncertainty and the Eurozone debt crisis has resulted in a reduction in public and private sector finance for carbon projects. While public sector finance acts as a catalyst for private investment, private sector involvement is crucial in driving investment in carbon projects. Therefore, there is an urgent need to find alternatives to drive the required scale of green investment and find new approaches to drive action.

One such approach that will ensure the long-term viability of offset/mitigation projects both here in Australia and in the international arena, is to recognise, quantify and financially reward co-benefits associated with a project. The process of valuing, or attempting to value certain co-benefits go back several decades** however the debate around putting an economic value on co-benefits has been controversial to say the least. Some argue that putting a value on co-benefits may adversely influence public policy decisions and risk a progressive privatisation and commodification of co-benefits; others argue that we already put a value on some co-benefits (Dailey, 1997) and that we cannot avoid doing so.

We acknowledge that there are a number of uncertainties associated with putting a value on co-benefits, such as the scientific uncertainty associated with monitoring and verification and more importantly the uncertainty associated with the relative value of these co-benefits. However, there are a number of examples where an economic value is placed on a co-benefit. Biodiversity offsets are a case in point, and they effectively place an economic value on biodiversity, thus discouraging its destruction.

In Australia, offsets projects under the Carbon Farming Initiative (CFI) have the potential and capacity to deliver co-benefits, but the debate around measuring and monitoring co-benefits (let alone valuing them) is in its infancy.

So while these often overlooked co-benefits can help to offset the financial cost of CFI projects, we will need to develop institutional arrangements and incentive structures that reward co-benefits, which could reduce the initial cost barriers and draw investors into co-benefit projects, providing much needed stability and financial certainty on carbon projects.

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References

* Carbon finance at the World Bank, Mapping Carbon Price Initiatives, Developments and Prospects, May 2013

** Ecological Economics, Measuring the total economic value of restoring ecosystem services in an impaired river basin: results from a contingent valuation survey, John Loomis a,*, Paula Kent, Liz Strange, Kurt Fausch , Alan Covich 

Neil Salisbury is a Director of Net Balance (neil@netbalance.com), 
one of the world’s leading sustainability advisory firms.
Neil is based in Melbourne.

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