There is growing momentum around carbon markets—both voluntary and compliance-based—as a means to support global decarbonization and channel climate finance to developing countries. Many of these credits are derived from forests, through regrowth or avoided deforestation. However, the integrity of project-based forest carbon credits, especially those focused on avoiding deforestation, has come under scrutiny. The environmental and social effectiveness of these credits depends crucially on the property rights regime and governance systems in place.
Unintended Consequences: Green Land Grabbing and Carbon Leakage
When carbon credits are introduced in places where land ownership is unclear, the increased value of land can incentivize “green land grabbing.” Private interests may seize public or indigenous land, threatening the rights of local and indigenous people, undermining the rule of law, and weakening governance systems for natural resources. This not only leads to more land disputes but also undermines the validity and effectiveness of forest carbon credits. Protecting one area of forest may simply shift deforestation elsewhere, a phenomenon known as the displacement of deforestation or carbon leakage, reducing the net climate benefit. This means that one credit does not avoid 1 tonne of CO2e, but less.
How much less? Displacement of deforestation and emissions in Brazil
We estimated the displacement of deforestation and emissions using OMEGA Brazil – a multi-sector macroeconomic model, which we recently used in the Green Public Finance Review for Brazil. We considered a scenario based on estimates that project the annual supply of Brazilian forest carbon credits to gradually increase from 30 mtCO2 in 2021 to around 220 mtCO2 by 2030.
In response to this demand shock, the price of forest carbon credits is projected to reach US$70 (constant 2015 USD) after 10 years. This price is higher than demand-side projections but lower than estimates from supply-side analyses of the Brazilian reforestation potential.
Figure 1 shows the projections for reforestation and deforestation. To accommodate the global demand for carbon credits, reforestation increases and, after 10 years, reaches an annual rate of 1.6 million hectares, as intended.
On the flipside, however, the increased demand for land use raises the market value of frontier land by 90% above baseline over the course of 10 years because we assume that reforestation of that magnitude happens in land with a competing use such as agriculture.
When property rights are weak, incentives for land-grabbing become stronger. As shown in Figure 1, we project deforestation to increase by up to 0.3 million hectares per year relative to the baseline. This amounts to 18% of the induced reforestation and counteracts the gains from increased reforestation which, of course, is unintended.
