Deforestation rates have hardly budged globally since 2021, despite more than 100 countries signing a pledge that year to halt and reverse deforestation and land degradation within the decade. The world lost more than 8 million hectares of forest to deforestation last year, causing the release of more than 4 billion metric tons of carbon dioxide into the atmosphere — nearly as much as the entire U.S. energy sector.
First proposed by the Brazilian government in Dubai at COP28, the TFFF was devised to deliver a more consistent source of funding to countries in the global south for forest conservation that would not depend on foreign aid budgets or be vulnerable to the ups and downs of the carbon market.
The plan involves setting up a fund with money borrowed from wealthier countries and private investors at low interest rates and invested in publicly traded bonds from emerging markets and developing economies that command higher interest rates. After paying back investors, the revenue generated by the spread — roughly a 3% return, if all goes to plan — would be paid out in annual lump sums to developing countries that have managed to keep deforestation at bay. Participating countries would have the right to spend the proceeds as they choose, so long as the money goes to support forests. At least 20% of the funds would also have to be set aside for indigenous peoples.
Brazil lined up substantial support for the idea ahead of this year’s launch. Six potential investor countries — France, Germany, Norway, the United Arab Emirates, the United Kingdom, and the United States — as well as five potential beneficiaries — Colombia, the Democratic Republic of Congo, Ghana, Indonesia, and Malaysia — joined a steering committee to help shape the development of the fund. The Brazilian government ultimately proposed a fundraising target of $25 billion from the sponsor countries, with the idea to attract about $100 billion from private investors, for a total of $125 billion to get the fund off the ground.
Once the fund started generating revenue, private investors would be paid out first, sponsor countries second, and forested countries last, with the $25 billion serving as insurance to the private investors should the emerging market bond issuers default on their payments. The fund itself would be managed by the World Bank, while a separate entity would govern payments made to forested countries.
While many in the international environmental community were enthusiastic about the plan — especially as a shift away from controversial carbon markets — some raised alarms.
Max Alexander Matthey, a German economics PhD student studying international finance, first saw a presentation on TFFF at COP29 and was baffled by its simplicity. “If it was that easy to make this 3% on borrowed money, why wouldn’t everyone else be doing it?” he recalled thinking at the time. After digging into the Brazilian government’s financial analysis and doing some of his own, Matthey came to believe that the fund’s proponents had underestimated the risk inherent to the investment strategy, as well as the cost of managing the $125 billion fund, he told me.
The whole reason these emerging market bonds command a higher interest rate, Matthey explained, is because they are riskier. If and when countries default on their debts, whether due to global financial shocks like pandemics or wars, or simple mismanagement, the “free money” available for forests will dry up. “These 3% are not up for grabs,” he told me. “They compensate for actual risk and defaults that will happen over time.”
The TFFF was designed to create an incentive for countries with tropical forests to invest in policies and programs to protect forests — to hire rangers to prevent illegal deforestation, to pay farmers not to raze their forests, to implement fire prevention strategies. “They have to heavily invest,” Matthey told me. “If we as the Global North say, Well, thanks for investing large shares of your budget into rainforest protection, but you won’t get any money from our side because financial markets turned the wrong way, that’s just not how you build trust.”
Matthey outlined his analysis in a Substack post in September with University of Calgary economist Aidan Hollis. They found that the JP Morgan EMBI index, which tracks emerging market sovereign bonds, has seen regular downturns of between 18 and 32 percentage points over the past two decades. In the case of the TFFF, a single 20-point loss would wipe out the $25 billion in sponsor debt “and halt rainforest flows, possibly before they even begin,” they wrote.
The energy research firm BloombergNEF seems to agree. In a report published last week outlining the state of international biodiversity finance ahead of COP30, BNEF forecast there would be “little progress” on the TFFF. “The 3% spread is not a money faucet, but a risk premium; studies on the TFFF appear not to have properly conducted risk analyses,” the report said, warning that in effect, the scheme would eat up development finance just to absorb private investor losses.
Just prior to that report’s release, confidence in the TFFF appeared to dip. Brazil’s finance minister lowered his fundraising ambition for the facility to $10 billion by 2026. A few days later, on the eve of the launch, Bloomberg News reported that the United Kingdom would not be contributing to the fund after the country’s treasury department warned it could not afford the investment, despite its significant involvement in the fund’s design.
Following the launch, Indonesia and Portugal each committed $1 billion, while Norway pledged $3 billion, although only if the fund successfully secures at least $10 billion. France also promised €500 million, or just over half a billion dollars, while Germany said it would contribute “significantly,” although it hasn’t said how much yet. All in all, countries committed just $5.5 billion above Brazil’s own initial $1 billion commitment — with at least $3 billion of that contingent on further fundraising.
Andrew Deutz, the managing director for global policy and partnerships at the World Wildlife Fund, which has also been heavily involved in developing the TFFF, assured me this was not the disappointment it appeared to be.
"I look at what just happened last week as validation that the model can work and that countries have confidence in it,” Deutz said. He pointed to the fact that 53 countries, including 19 potential investors, have endorsed the scheme. “A bunch of sponsor countries who haven’t been that engaged said, We like this idea, and I think that creates the opportunity and the momentum that we can get one or two more rounds of capitalization at least.” Deutz was bullish that Germany would come to the table with a pledge between $1 billion and $3 billion, and that the UK would “get guilted in” shortly. He expects to see additional pledges at the World Bank’s Spring Meetings next April, and a few more at the UN General Assembly next September.
As for criticisms of the fund’s investment strategy, he brushed them off, arguing that the risk was "quantifiable and manageable.” He has faith in the TFFF’s modeling showing that the fund’s managers will be able to earn high enough returns to pay back investors and still generate enough funds to pay tropical forest countries.
Charles Barber, the director of natural resources governance and policy at the World Resources Institute was more cautious on both fronts. “We’re glad it’s got as far as it has, but there’s a whole lot of questions that will need to be answered to really get it up,” he told me. Barber saw arguments both for and against the risky investment strategy, but he was skeptical that a starting point of $10 billion would be enough to attract sufficient private investment or give tropical forest countries enough of an incentive to participate.
Matthey has called the idea of a scaled-down TFFF a “worst-case scenario for everyone involved,” due to the high fixed costs of managing the fund, monitoring deforestation, administering the proceeds, etc. The potential payouts to forested countries would be so diminished as to amount to a “rounding error” rather than a true incentive, he wrote.
Deutz told me the TFFF’s architects always expected there to be a three- to four-year ramp-up period. If the fund gets one or two more rounds of capitalization, “we’ll see if it works — and then, assuming it works, you can keep adding to it,” he said. “This is something new and different, so it might take us a little while to prove it out and for people to get comfortable.”
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A chart from the analysis showing change in emissions from energy sources. Carbon Brief