Economist: Growing on trees - A profitable rainforest

The Economist:

A MOST unusual document landed on your correspondent’s desk recently: a financial report from a rainforest. Iwokrama, a 370,000-hectare rainforest in central Guyana, announced that it was in profit. It added, more intriguingly, that rainforests had entered the “global economy”.

Iwokrama is part of the largest expanse of undisturbed rainforest in the world, which overlies the Guiana Shield. It has a unique history. In 1989 the president of Guyana had the foresight to give the forest as a gift to the Commonwealth for research into global warming. Today it is administered by an international board of trustees, who have devolved the day-to-day management to the Iwokrama International Centre. It is this centre that has been working to exploit the forest sustainably.

Edward Glover, one of Iwokrama’s board of trustees, says that it became clear more than a decade ago that the forest could not rely on donor funding to survive, so it had to look elsewhere for finance. The centre’s first job was to identify the forest’s assets and to exploit them. It seems to have perfected its art. Today the centre makes money in areas such as ecotourism, timber-extraction, forest-products such as honey and oils, bio-prospecting and forestry research. Its results for 2008 reveal that it made a surplus for the first time that year, with revenues of $2.4m and a profit of $800,000. The previous year it had lost $200,000. Revenues from timber were up by 44%, ecotourism by 26% and training by 22%.

There should be more money to come. Eighteen months ago, it sold a licence for the measurement and valuation of the forest’s “ecosystem services”. This is not to say that the forest has actually sold these rights, but that an investment company, Canopy Capital, based in London, has bought the rights to create a financial deal for the forest’s services.

Ecosystem services are what a forest provides merely by existing. A standing forest can generate rainfall, prevent flooding, regulate the soil, provide biodiversity and store carbon. These benefits are received by everyone in society, but no one pays for them. Such environmental services are often termed “externalities” because they are not included in the price of the forest. When forests are traded in a traditional way, their price usually depends only on the value of the timber and the land on which it grows. No account is taken of the broader services to society. The result is that forests are being cut down because an incorrect price is put on them.

When forests vanish, people suffer. That is why many believe that there is an urgent need to bring forests onto the global financial balance sheet. Last year Pavan Sukhdev, an economist at Deutsche Bank, reported that the world was losing natural capital worth between $2 trillion and $5 trillion every year as a result of deforestation alone. If money could be made by selling these ecosystem services, then the financial equation for forests would change.

At the moment, nobody wants to give too much detail about what an eventual deal for Iwokrama’s ecosystem services might look like, as it is currently being negotiated. Mr Glover says they want to create a new class of asset management, one that includes all of Iwokrama’s services. It is not just about carbon emissions trading, he says, “we want something different and imaginative and forward-looking”. Rather unusually for a clever financial deal, Hylton Murray-Philipson of Canopy Capital says that when it is completed, they will reveal how they did it so that other people can copy it.

Looking at the value of the carbon sequestration alone, there is a deal to be done. Mr Murray-Philipson asks “why pay BP $100 a tonne to take carbon dioxide out of the atmosphere and bury it when you can do the same with a rainforest for a fraction of a dollar?”. He adds that the science of forest carbon sequestration is “definitive” and that standing forests are responding to higher carbon dioxide levels by “bulking up”, and are sequestering between one and four tonnes of the gas per hectare per year. Even taking the lower figure, with one billion hectares of forest in the world, if the rights to the sequestration of carbon dioxide are sold for just $10 a tonne—that would generate $10 billion a year.

Iwokrama is making money now, before it has even sold its ecosystem services. It is already part of the global economy. But with sustainable forestry and ecosystem services, the lesson of Iwokrama is that rainforests present an opportunity. For a few bright sparks out there, financial innovation and engineering combined with science will let them generate wealth in a whole new way. There is money in the forest. It is growing on trees.