Terra Global: Protecting Cambodian forests
Sector: Reducing Emissions from Deforestation and Forest Degradation (REDD)
Challenge: Protect investor in a REDD project from unforeseen political changes that could put investment at risk.
Solution: A new OPIC insurance product will protect investors in a REDD project from political risks such as changes in regulations, political violence and improper government interference.
Impact: The REDD project is expected to protect 64,318 hectares of forest, while sequestering CO2 emissions in one of Cambodia’s poorest provinces.
Offset credits sold to preserve forest
Deforestation is the second-leading contributor of carbon emissions worldwide, after the burning of fossil fuels, and it actually accounts for more carbon emissions than the global transportation sector. In addition to the environmental benefits of protecting forests, there are also important economic benefits. The World Bank estimates that forests contribute to the livelihood of more than 90 percent of the 1.2 billion people living in extreme poverty around the world, and help nourish the agriculture and food supplies of nearly half the population of developing countries.
One of the newer tools for combating deforestation is REDD, Reducing Emissions from Deforestation and Forest Degradation, which uses market incentives to promote sustainable forest management. OPIC recently developed a new insurance product that will protect investors against political risk in REDD projects and in 2011 it entered its first contract for this insurance. The deal will provide $900,000 in political risk insurance to Terra Global Capital, an investor in a project that will protect large swaths of forest in Cambodia through the sale of offset credits in international carbon markets.
The project is expected to generate a 30-year income stream to help the government of Cambodia and local community groups fund activities – such as community forest patrols and water resource development projects – that reduce deforestation. As a result, it will protect 64,318 hectares (158,865 acres) of forest, sequester CO2 emissions, conserve endangered biodiversity and help local communities create jobs.
Insuring against "nesting regulations"
Terra Global said it purchased the political risk insurance in order to reduce its exposure to future changes in national and local governments and laws over the life of the project. It also said it expects that insurance against political risk in REDD projects will encourage more private-sector investment in this emerging sector.
OPIC’s political risk insurance protects investors against several unforeseen political developments that may impact an ongoing project in a developing country. Some of these risks include improper host government interference or confiscation, changes in taxation or other critical regulations, and property damage or loss of business income resulting from war, unrest or terrorism.
One particular concern among investors in REDD projects is the possibility that additional regulations, known as “nesting regulations,” will be imposed on the future, changing the way that REDD targets are measured and preventing existing projects from earning carbon credits. Changes in regulations or the addition of new regulations can cause considerable risk in projects even in highly developed countries; in regions that are less politically stable the risk can be much greater.
Community groups benefit
The Terra Global project brings together a group of NGOs and 13 community forest groups comprised of 58 villages in Cambodia’s northwestern Oddar Meanchey province, which sits on the border with Thailand and is one of the least developed regions of the country. The province has experienced steady deforestation since the fall of the Khmer Rouge-controlled central government in 1979. Currently, forest cover in the province is being lost at an average annual rate of 2.1%, the highest in the country.
Terra Global will manage the carbon credit registration process and the sale of all carbon credits generated from the project, but under the terms of the deal, at least 50% of the net income generated from carbon credit sales will go to local community forest groups in Cambodia. These community forest groups will invest the profits in resource management and job creation related to sustainable resource management.
This project was profiled in 2012