By Georg Schäfer
The climate conference in Belém ended in disappointment regarding the phase-out of fossil fuels. In that context, the Tropical Forest Forever Facility, which was launched there, appears to be a bright spot. Some even consider it a game-changer for tropical forest protection. Is this optimistic assessment justified?
The Tropical Forest Forever Facility (TFFF), launched in Belém at the end of last year, is a Brazilian initiative that was celebrated as a milestone for the preservation of the tropical rainforest. Brazilian President Lula da Silva described it as “an unprecedented initiative. For the first time in history, countries of the Global South will take a leading role in a forest agenda.” German Development Minister Alabali Radovan emphasised the high level of private sector engagement underpinning this innovative financing mechanism. German Environment Minister Schneider expressed his conviction that the Fund represents a good investment that is using the market to protect forests. Thirteen non‑governmental organisations, including Germanwatch, Deutsche Umwelthilfe, Welthungerhilfe and World Wildlife Fund, addressed an open letter to the German Federal Chancellor asserting that the Facility opens a new chapter in sustainable financing. They argue that public contributions will mobilise private capital and thereby secure long‑term, results‑oriented protection of the rainforests. At the same time, critical voices from civil society – among them the Global Forest Coalition – have warned against the initiative, characterising it variously as a false solution, a trap, the commodification of tropical forests as economic assets, and a continuation of colonial practices.
How will the funds be mobilised?
A central component of the Facility is the Tropical Forest Investment Fund (TFIF). The Fund will raise capital on international capital markets, and the returns generated will be disbursed to finance tropical forest conservation. Donor countries and philanthropic foundations are expected to contribute USD 25 billion, while private investors – primarily pension funds and asset managers – are to provide USD 100 billion. The combined USD 125 billion is intended for investment in sovereign and corporate bonds issued by emerging-market and developing countries. The Fund’s initiators anticipate a surplus because interest payments to private investors will be lower than the interest income earned on bonds from middle- and low-income countries as they pay comparatively high risk premiums in international capital markets. Private investors (the senior tranche) will receive market-rate returns, since the risk of default is borne by donor countries (the junior tranche). Donor countries, in turn, are to be offered repayment of their contributions after ten years, spread over a 30‑year period. The surplus available for disbursement to tropical forest countries is estimated at up to USD 3.4 billion per year.
Ultimately, it is the middle- and low-income countries indebted in international capital markets that end up paying through higher risk premiums for tropical forest protection, which is far from sharing the burden fairly. This fundamental design flaw has received little attention in public debate so far (see the Third World Network and Pearce as notable exceptions). Surprisingly, it is under discussion at the Organisation for Economic Co‑operation and Development (OECD) to count the Fund’s investments or the payments to tropical forest countries as Official Development Assistance (ODA). Depending on how far the respective bonds meet climate‑protection and sustainability criteria, that portion might even be classified as climate finance. In this way the idea of leveraging private funds for development purposes is turned on its head.
However, there is a reason why emerging-market and developing countries pay higher interest rates on their bonds: These bonds do, in fact, carry a higher probability of default with respect to interest payments and principal repayments. Should any of these bonds become distressed, the surplus of the Fund will be reduced; greater losses are initially borne by donor countries, while private investors are affected only as a last resort. Civil society has criticised this preferential treatment of private investors. Nevertheless, it is a necessary feature of the Fund’s design. Without this shielding of private investors, the Fund could not generate an interest margin. If turbulence occurs on international capital markets – and given the current geopolitical situation, who could rule that out – a continuous stream of payments for tropical forest protection can no longer be guaranteed. This constitutes another design flaw of the Fund.
Moreover, when the Fund invests in corporate bonds, care must be taken to ensure that the companies in question are not involved in the destruction of tropical forests through resource extraction or agricultural clearing.
How will the funds be allocated?
The Facility will use the Fund’s surplus to pay eligible countries an annual fixed amount per hectare of tropical forest conserved or restored. At present there are 74 countries with a combined tropical forest area of 1.1–1.3 billion hectares and an annual deforestation rate of 3.6–7.7 million hectares (depending on the data source). Eligible countries are those with an annual deforestation rate below 0.5%. Tropical forest areas with a canopy cover of at least 20–30% are taken into account. A payment of USD 4 per hectare per year is envisaged. Substantial deductions will be applied to areas that were deforested or fire‑degraded in the preceding year. Under the current baseline, this yields an annual total payment of USD 2.8 billion to the tropical forest countries.
The basis for payments to tropical forest countries is satellite-based remote sensing. Recipient countries must demonstrate adequate public financial management and policies for tropical forest protection, and guarantee that they will not scale back their own efforts. In addition, they have to allocate at least 20% of the payments received to Indigenous Peoples and Local Communities (IPLC). Otherwise, payments from the Fund are results‑based, i.e., made on the basis of the documented areas. No itemised proof of expenditure is required. Therefore, it cannot be ruled out that the funds might be used not for tropical forest protection but, for example, to fill budget gaps.
The payments constitute compensation for the ecosystem services provided by existing tropical forests – not only carbon storage but also global cooling, the maintenance of rainfall cycles, and the preservation of biodiversity, among others. They are intended to create an incentive against deforestation and degradation. Given the short‑term economic returns from expanding agricultural land, commercial logging, mineral extraction, and infrastructure projects, it is doubtful that USD 4 per hectare will be sufficient unless recipient countries adopt legislative and regulatory measures to tackle these structural drivers of deforestation. Importing countries of timber, beef, soy, and mineral resources must also be held to account.
The Facility’s inadequate monitoring of deforestation and degradation is another design flaw. Areas are only classified as deforested once canopy cover falls below 20–30%. Only fire damage is recorded as degradation; other forms of degradation are ignored. The Facility does not reduce payments when natural forests are degraded by selective logging, provided the defined minimum canopy cover has not yet been breached. This perverse incentive, which effectively opens especially valuable natural forest to all kinds of commercial exploitation, must be urgently eliminated.
What are the institutional arrangements of the new initiative?
The Facility is intended to triple international financing for tropical forest protection. It is surprising that an additional USD 2.8–3.4 billion per year is considered sufficient to secure forest protection in 74 countries. If that were true, traditional development cooperation mechanisms (ODA in 2025: USD 174 billion) and international climate finance commitments (USD 300 billion per year by 2035) should provide ample scope to mobilise this sum without a complex fund structure. Even more so, as the proposed Facility would sit alongside the long‑standing Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism. Under REDD+, tropical forest countries receive payments for reforestation, sustainable forest management, and the associated carbon sequestration. Private companies from the Global North can also finance such projects, thereby acquiring carbon credits to offset their emissions.
Because there have been several cases in which the promised carbon storage did not materialise, REDD+, however, is facing a crisis of confidence. It is telling of the dynamics of international cooperation that launching a new initiative is politically more attractive than the arduous task of fixing the problems in the older one. As a result, the international funding landscape will become even more fragmented and complex.
How much of the payments earmarked for IPLC actually reaches them depends on how representative and reliable their intermediary organisations are. Perhaps more important, however, is protecting the populations that traditionally live in the forest from encroachment by cattle ranchers and gold miners.
The Facility (TFFF) and the Fund (TFIF) have complex governance structures with two boards of directors. The Facility’s secretariat will initially be hosted by the World Bank. Specialised consulting firms will be contracted to manage the Fund’s investments. This creates a separate funding bureaucracy with extensive administrative requirements instead of relying on established development and climate‑finance structures and procedures. That approach generates high transaction costs and can quickly produce frictions that block the mechanism.
What are the prospects for success of the new initiative?
It is still unclear when the Fund will be established at the planned scale and begin operations. In Belém, donors pledged USD 6.7 billion in total, including USD 1 billion each from Brazil and Indonesia, USD 3 billion from Norway, EUR 1 billion from Germany, and EUR 0.5 billion from France. Both Norway and Germany have announced that their contributions will be disbursed in tranches over ten years. No further significant pledges have been made since Belém. It therefore remains uncertain whether the targeted USD 25 billion in donor funding can be mobilised and how long that will take. If the Fund’s final size remains as currently pledged, private financing and the Fund’s annual surplus will be correspondingly smaller.
Because of the TFFF’s design flaws on both the financing and expenditure sides, and the inadequate donor commitments, it is doubtful that the Facility will deliver the hoped‑for quantum leap in tropical forest protection. In a few years’ time, the TFFF could join REDD+ as another once‑promising initiative that has fallen into distress. As long as annual amounts mobilised remain in the single‑digit billions, there is insufficient justification for a complex fund structure. Given the overall scale of global development and climate finance, this should be achievable through direct transfers from donor to tropical forest countries. In addition to financing, legal obligations for tropical forest protection at national and international levels are required. Both should receive greater attention rather than tying up political and administrative energy in a financial mechanism with questionable prospects for success.
Georg Schäfer is an expert in sustainable economic development, employment promotion, and poverty reduction. He worked in German development cooperation for many years.
Image: Mirna Wabi-Sabi on Unsplash
Note: This article gives the views of the author, not the position of the EADI Debating Development Blog or the European Association of Development Research and Training Institutes