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Merrill Lynch: Turning Trees into Money

The Journal’s Tom Wright reports from Indonesia:

Merrill Lynch is the first Wall Street bank to put money in to protecting forests – a new front in global efforts to stem climate change.

Over the weekend, Merrill struck a deal to invest $9 million over four years to finance a project to protect 750,000 hectares of forest in Indonesia’s Aceh province. Because trees store CO2 and release the gas when burnt, global policymakers increasingly see their protection as an important way to reduce emissions.


Save this, sell credits? (Wikipedia)

Although small, the deal is notable because it’s the first time a U.S. bank has signaled that it sees money in trees. In the 1990s, U.S. investors in forest conservation were largely big polluters like American Electric Power Co. that wanted to offset their own CO2 emissions.

But those deals dried up when Kyoto’s framers a decade ago decided not to allow companies to balance their emissions with carbon credits generated from forest protection.

Since the U.N.’s Bali meeting in December last year the situation has changed. Forest destruction, largely to make way for agriculture, accounts for 20% of global CO2 emissions; the meeting signaled it would allow companies to use forestry-based carbon credits to offset polluting activities elsewhere after Kyoto runs out in 2012.

Merrill is betting that money it puts in to the Aceh project now will be a source of cheap credits that will become more valuable if forestry becomes part of the post-Kyoto landscape.

The deal is brokered by Carbon Conservation, an Australian company. Some of the money from Merrill will go to local communities to encourage them not to log illegally. By protecting the area, the organizers estimate they can stop 3.4 million tons of CO2 being emitted annually and generate $432 million in carbon financing over the next 30 years.

The success of the deal could also influence how much more money Merrill puts in to forestry. The bank is debating internally about raising a fund of up to $3 billion to protect global forests. A war chest like that could start to make a real impact on deforestation rates.

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    • how much money does it take to turn part of a tree into one sheet of paper

    • Skeptical,
      Each year, deforestation contributes over 20% of the CO2 related to climate change. Unfortunately, it's the developing countries who deforest at the highest rates, because with the market as it is, tropical rainforest land is worth more burnt or chopped down than it is preserved. (Some parts of Indonesia have lost 60% of virgin tree cover in the past ten years alone!) What Merrill Lynch is doing is reorienting the market so that the value of protected forests represents its real value to the world- in terms of offset carbon release, pollution mitigated, soil un-eroded, and a number of other repercussions of deforestation prevented by these new "carbon financing" efforts. Let's not complain about a creative new way to attack climate change with the same tools that started it. Those tools might just be the ones to turn the tide.


    • Throwing money doesn't make good policy and doesn't equal a market solution. A market solution requires a commodity. Making forests into carbon credits requires that we guarantee they won't be cut. In other words, it requires guaranteeing them as a commodity.

      There have to be punishments and there have to be some sort of way to guard the forests. The idea that people will just accept money and not cut the forests has been disproven many times. Especially since the local black market prices for timber rise in light of cutting bans.

      Throwing money into corrupt political systems that may relapse into conflict and do not have any clear mechanisms of how they will guarantee the security of the commodity (i.e. not cutting the forest down) is not good business.

      This is a green wet dream that has not been thought through. It was not approved in the Kyoto Protocol, and it should not now be approved because we imagine some carbon credit markets might be effective.

      Interested in climate change? Invest in REC.
      Interested in saving tropical forests? Come up with better building materials and enforce the forestry certification process.

      How about that for market-based principles?

    • "Making paper generates a lot more CO2, so it won’t be very profitable, especially as younger generations are much more comfortable with electronic storage"

      I guess you can dream, but i wouldn't bet money on the demise of the paper industry. Making paper may become less profitable in developed countries with strong environmental regulations. But as long as paper mills in developing countries provide jobs, the flow of paper across international boundaries will continue.

      I've been reading about the coming paperless revolution for four decades. Yet the North American and world demand for paper products has continued to grow.

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