CENTERFORGLOBALDEVELOPMENTForest-Based Carbon MarketsPitfalls and OpportunitiesMAURICIO CARDENAS JUAN JOSE GUZMAN AYALAAbstractForest-based carbon markets could become an important source ofincome for countries inAfrica,Latin America and Asia-Pacific.Estimates indicate that under a high carbon pricesscenario,the value of the forest-based carbon credit market could increase from US$1.3billion in 2021to US$25 billion per year by 2030.Apart fromthe climate and monetarybenefits,forest based carbon markets also have pitfalls that must be avoided.Without theright institutions in place,at the nationalandlocal level,forest projects can generatenegative externalities,suchas population displacement,increases in food prices,andbiodiversity degradation.The value chain in carbon credits involves a number of highvalue-added upstream anddownstream activities thattend to take place outside the countries where the projects arelocated.Industrial policies are required for host countries to receive a higher share oftherevenue stream,including in areas such as structuring,monitoring,verification,andsurveillance.Countries needto promote actions in labor training,research anddevelopment,and access to long-term capital.The paper proposes the creation NationalCarbon Federations as institutions to resolve severalmarket failures,while preventingconflict,ensuring adequate savings of the additional income,and strengthen democraticgovernance.These organizations can also provide key public goods,so that localcommunities benefit from the development of carbon credits from tropicalforests.POLICY PAPER 313.NOVEMBER 2023Forest-Based Carbon Markets:Pitfalls and OpportunitiesMauricio CardenasColumbia University (SIPA and CGEP)and Center for Global DevelopmentColumbia University,Center on Global Energy Policy (CGEP)The authors want to thank Martin Perez,Julian Andrade,and Frances Seymour.Finally,the authors are alsoparticularly grateful to the Center forGlobal Development publicationsteam for their editorial work.This paper was developed with funding and support from Columbia University's CenteronGlobal Energy Policy(CGEP).Thisreport represents the research and views ofthe authors.It does not necessarily represent the views ofthe Center on Global Energy Policy.We wouldlike to thank the excellent comments made by Frances Seymour andananonymous reviewer on an earlier draft.Allerrors remain entirely ours.Mauricio Cardenas and Juan Jose Guzman Ayala 2023.Forest-Based Carbon Markets:Pitfalls and Opportunities."CGD Policy Paper 313.Washington,DC:Center for Global Development.https://www.cgdev.org/publication/forest-based-carbon-markets-pitfalls-and-opportunitiesCENTER FOR GLOBAL DEVELOPMENTThe Center for Global Development works to reduce global2055 L Street,NW Fifth Floorpoverty and improve lives through innovative economicWashington,DC 20036research that drives better policy and practice by the world'stop decision makers.Use and dissemination of this Policy Paper1 Abbey Gardensis encouraged;however,reproduced copies may not be usedGreat College Streetfor commercial purposes.Further usage is permitted under theLondonterms of the Creative Commons Attribution-NonCommercial 4.0SW1P 3SEInternational License.www.cgdev.orgThe views expressed in CGD Policy Papers are those of theauthors and should not be attributed to the board of directors,Center for Global Development.2023.funders of the Center for Global Development,or the authors'respective organizations.