From REDD to the Carbon Bubble

If you would think that the money-for-nothing scheme called REDD is an academic-originated exercise in ecofinancial fakery, then you must not be familar with the bizarre envelope-pushing inventiveness of …’forestry bonds’.

Now bonds are not a new financial tool but what is sought to be done here, very much is. Under this scheme, bonds will be raised against the ‘value’ of forests, a portion of the proceeds of which wil be used to ‘sustainably manage’ the same forests (in human language, simply called logging), and another portion invested in the carbon markets generated by REDD (!).

Writes the BBC, about this variant tried out by Bank of America (BoA):

[…] a portion of the funds raised to be used to provide some kind of investment protection, with the balance used to invest in either carbon credits or other potentially revenue-generating services derived from forests, such as flood protection or genetic resources for drug development.

The BBC provides access helpful commentary about forest bonds as well (highlights mine):

“The financial sector can raise money very quickly – the sub-prime mortgage market proved this,” says Chris Knight, assistant director of forestry and ecosystems at PricewaterhouseCoopers.

“Forest-backed bonds are not completely dissimilar to sub-prime vehicles [that rolled up US mortgages into investment funds and which helped trigger the global financial crisis when they unravelled]. It might be a way to raise funds, but is it sustainable?”

He also points out that “one bank has a vested interest in securitisation [pooling assets to create investments]”.

While Chris Knight no doubt hits the ‘nail on the head’ w.r.t the true nature of such ideas as ‘forest bonds’, one cannot but help wonder, even if briefly, about the very helpful square-bracketed details inserted by the BBC.

PriceWaterhouseCoopers (PWC) is no slouch when it comes to sinking money into forests and carbon credits. ‘We need to protect forests’, declares a PWC forest carbon trading pamphlet in blandly embarassing self-oblivious fashion as only eco-corporatism can. Inside we learn, that PWC is a “leader in climate change and carbon markets services, with over 400 experts worldwide” with “strong relationships with policymakers”, and is a ‘member of the Forestry Working Group of the Carbon Markets Investors Association, the Land Use Working Group of the International Emissions Trading Association, the Conservations Finance Alliance’, and so forth.

We also learn that PriceWaterhouseCoopers has “good links with the scientific community and institutions with access to data of relevance”. and its clients include “many of the world’s leading conservation groups” such as the “WWF, World Land Trust, Royal Society for Protection of Birds”and “many more”.

PWC is not alone though. The US-headquartered investment firm Deloitte for example, has a rainforest frog named after it – Nectophrynoides deloittei. What did Deloitte do? It was the “founder of the United Bank of Carbon, a UK registered charity brokering partnerships between individual businesses and specific rainforest conservation projects run by established NGOs”.

Nectophrynoides deloittei - A frog named after an investment consultancy firm

If forestry bonds sounds like a ‘take-money-from-nothing’ and then invest it in a ‘money-for-nothing-scheme’ type of an idea, it is not surprising that in one instance it got carried to its logical end. In a hilarious story John Hempton recounts how the Carlyle Group (the famous investment group GW Bush was once a part of) lost hundreds of millions of dollars sinking its money into Chinese forestry bonds.

The company in question was an aptly named Chinese Forestry, now under investigation by the Hong Kong Securities and Futures Commission. Writes Hempton (emphasis mine):

China Forestry had a business model which consisted of fast-growth forestry to extract greenhouse gas credits – a business model that barely made sense to some analyst guys that looked at it. However it was a business model that made sense if the company had enough Guanxi – enough connections to extract a really bad (ie nonsensical) deal from the Chinese government. And the holders of China Forestry to some degree believed just that. They believed in the Chinese Guanxi. And implicitly they believed the deals were being bought to them by the Guanxi of their staff.

Now China Forestry remains suspended. No reasonable questions are being answered – so I am going to reveal to you the Analyst gossip: the bulk of the forests do not exist. Sure they had some “front” – plantations they would take potential investors to. But the vast bulk of the business was a fiction and “accounting irregularities” is code for “fiction”.

The Financial Times provided other interesting details as the story broke in February this year:

Li Han Chun, China Forestry’s chief executive, was arrested on the Chinese mainland in February for the alleged embezzlement of $4.6m.

Several members of the company’s accounting and finance team have gone missing.

Incidentally, the concept of ‘eco-securitization’ was popularized by a pilot study (140-page pdf) funded by the UK DFID.

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