State of Forest Finance

Global and local demand for crops, cattle, and minerals incentivise deforestation. Although the impactful ecosystem services of tropical forests represent global public goods, their preservation needs to be eco­nomically viable for actors who manage the forests on the ground to avoid continued deforestation. While deforestation has de­creased in recent years, the global target of halting and reversing deforestation by 2030, as set in the 2021 Glasgow Leaders’ Dec­laration on Forests and Land Use, will be missed if today’s trends continue. Public funding from international forest initiatives more than tripled between 2021 and 2024 but engagement has since levelled off. On average, public and private forest finance amounts to just a quarter of the estimated annual investments that would be required in 2030 to reach the targets set out in the Glasgow Leaders’ Declaration. Additionally, harmful agricultural subsidies and private financial flows to companies involved in activities with high deforestation-risk far exceed international forest finance. This also applies to the European Union (EU), where parts of the Common Agricultural Policy and other trade policies have, at times, created false incentives.

The TFFF is expected to create synergies and additional funds, but not to reverse the trend. It sets the goal to complement and enhance existing payments for ecosystem services, particularly “Reducing Emissions from Deforestation and Forest Degradation” (REDD+). Both project-based REDD+ schemes and the broader Jurisdictional REDD+ (JREDD+) programmes, designed at national and subnational levels, exhibit several short­comings. In particular, significant flaws in monitoring rigour and methodologies, in­cluding the additionality of carbon offset projects, remain central weaknesses and have harmed trust in forest projects overall.

A New Financing Mechanism for Conserving and Restoring Tropical Forests

The TFFF aims to provide countries with tropical rainforest coverage with “long-term, results-based financial support” for forest conservation and restoration. It oper­ates as an innovative blended financing mechanism. “Sponsor countries” and phil­anthropic organisations are supposed to provide USD 25 billion in long-term loans and guarantees with an interest rate of about 5 per cent. On this basis, the fund envisages the mobilisation of an additional USD 100 billion from private investors. The capital will be invested in emerging mar­kets and bonds to generate returns for annual payments to countries with tropical moist forests. Provided the deforestation rate of a given country stays below 0.5 per cent, the fund pays per hectare of standing forest, verified by satellite imagery. This payment is estimated to award up to USD 4 per hectare of forest in 74 eligible developing countries, if the expected investment sums above can be obtained. For each hec­tare of deforestation, penalties of USD 400 or USD 800 are deducted.

Implications for a Comprehensive Forest Finance Framework

Article 5 of the Paris Agreement and global pledges, such as the Glasgow Declaration on Forests and Land Use, highlight the impor­tance of conserving and enhancing carbon sinks in natural ecosystems, with an ex­plicit focus on forests. Article 5(2) of the Paris Agreement encourages Parties to sup­port and implement REDD+, which was established in 2013 and is a key mechanism in forest finance.

REDD+ can, in theory, offer results-based payments for reduced deforestation and forest conservation, as well as payments for sustainable forest management and in­creas­ing carbon stocks. Examples of REDD+ mecha­nisms include the Amazon Fund, which is designed to increase investments for the protection and sustainable manage­ment of tropical forests. TFFF payments can be awarded for the same areas as REDD+ as its financing mechanism operates outside carbon and biodiversity trading schemes, recognising the value that standing forests hold for conservation. This complementary design aims to avoid double-counting and lack of transparency. The TFFF builds on the assumption that as deforestation rates decrease, payments for avoided deforestation shrink and a financing gap for stand­ing forests widens.

Alongside REDD+, a wide range of financial mechanisms, including bonds, forest funds, and community-led initiatives, for forests exists. At COP30, France, Germany, Norway, Belgium, and the United Kingdom pledged USD 2.5 billion towards protecting the Congo Basin, the largest rainforest in Africa. At COP30, the Forest and Land Tenure Pledge was also renewed to raise USD 1.8 billion for Indigenous and Afro-descendant community land tenure rights.

In addition to forest conservation, forest restoration is crucial for climate mitigation. Both the Bonn Challenge of 2011 and the New York Declaration on Forests set the global target to restore 350 million hectares of forest by 2030. A recent analysis suggests a potential of up to 49 Gt CO₂ for the resto­ration of tropical forests deforested since 2001.

There is substantial potential for carbon dioxide removal (CDR). National greenhouse gas inventories suggest that more than 90 per cent of current levels of CDR are the result of afforestation, reforestation, and forest management.

CDR indirectly falls within the scope of JREDD+ and some mechanisms rewarding removal activities are emerging. For instance, the World Bank launched the Amazon Re­forestation-Linked Bond with the intention to mobilise USD 225 million for reforesta­tion in Brazil with measurable carbon removal outcomes. However, financial chan­nels through which deforested areas are restored and their capacity to act as a car­bon sink can be sustainably re-established remain scarce. Ambassador André Corrêa do Lago, the COP30 president, requested a report assessing the prospects of a complementary scheme to the TFFF. Economists subsequently developed a proposal for a Reversing Deforestation Mechanism that could be disbursed at the jurisdictional level for restoration.

Schemes that generate credits for resto­ration target different objectives than the TFFF. Restoration and conservation are dis­tinct processes, and the per hectare pay out potential varies. At the 2025 average credit price of USD 15.5 / t CO₂ for removals from forestry and land-use, up to USD 1,500 could be raised for restoring a hectare of tropical forest. By contrast, the TFFF is expected to generate a pay out of USD 4 per hectare of forest cover to incentivise a policy shift away from deforestation. This highlights the complementary roles of the TFFF and additional, market-based financial streams. The potential of forest finance is large, but the required large-scale international demand for high-quality removal credits has not yet been realised. Instead, low-quality emission reduction credits dominate the market.

Challenges and Opportunities in Implementing the TFFF

The TFFF seeks to establish a long-lasting financial framework for the conservation and restoration of standing tropical forests. The resilience and potential of the new mechanism have yet to be proven. How­ever, the resulting attention to tropical forests and their importance for climate tar­gets is valuable beyond reducing emissions. It highlights the gap in forest finance and the prevalence of harmful economic incen­tives that prevent reaching forest conserva­tion and restoration targets. Moreover, the fund introduces innovative elements, par­ticu­larly financial penalties for deforesta­tion, and a dedicated portion of direct payments to Indigenous Peoples and Local Communities.

The innovative elements of the TFFF have the potential to benefit the forest financial system as a whole. The details of the fund’s implementation will be decisive for its suc­cess in achieving complementarity and fos­tering the restoration of tropical forests, in addition to forest conservation. While the current concept note has improved several aspects in accordance with criticism from stakeholders, a successful implementation requires the adoption of measures to in­crease transparency and avoid the duplication of shortfalls from previous forest finance mechanisms, such as JREDD+. Robust moni­toring, reporting, and verification will be important to re-establish trust. Germany has been part of the TFFF’s Interim Steering Committee and has announced an interest-free commitment of USD 1.15 billion on 17 November 2025, signalling valuable support for the fund. Germany, which has already been strongly involved in co-design­ing the TFFF, should contribute to shaping the details of its implementation, including ensuring the additionality of countries’ con­tributions through stronger environmental and social safeguards and liability rules.

The engagement in the TFFF represents a window of opportunity to uplift the stand­ard of monitoring. With the World Bank hosting the TFFF secretariat only on an in­terim basis, a permanent solution oversee­ing transparency is yet to be established. To ensure compliance, the secretariat, among other tasks, selects and interacts with the third-party verifiers of the satellite-based monitoring, which are typically third-party bodies active on the established yet flawed voluntary carbon market. This could be an opportunity to set the standard. Laying the financial groundwork is one step towards cohesive forest finance, but without rigor­ous monitoring and a transparent disburse­ment scheme, conservation and restoration remains out of reach.

A Comprehensive Approach to Forest Finance

The challenges that the TFFF faces underscore the need for complementary forest finance. For successful conservation of the forest stock, an economic case needs to be made for governments to realise anti-defor­estation policy and funds need to suffice for a trickle-down effect to the individual land­owner level. Besides conservation efforts, restoration-focused mechanisms, such as JREDD+, other payments for ecosystem services, or proposals like the Reversing Deforestation Mechanism, can be complementary and fill financial gaps.

Various existing initiatives remain im­portant, but fall short in delivering on their targets. Voluntary efforts alone will not close the gap in forest finance. Therefore, the question of how to create a sufficiently large, comprehensive financing system that covers conservation and restoration efforts in line with the global climate’s dependence on forests remains.

International carbon credits, tradable units representing one tonne of CO₂ reduced or removed, now feature in the EU’s 2040 climate target, and contributed to reaching a consensus on this target. In the trilogue between the European Parliament, Council, and Commission, the EU determined that it would allow a maximum share of “up to 5 per cent” of emission reduction to be met outside its borders, starting in 2036. The Com­mission had previously proposed a share of 3 per cent. While the Council and Parliament agreed on 5 per cent, Members of the European Parliament demanded additional safeguards to secure environmental integrity.

The agreement signifies, that international credits are now prominently featured in EU climate policy post 2036, with a sub­stantial share of emissions reduction efforts dependent on the rigour of monitoring estab­lished under Article 6 of the Paris Agreement. These credits need to be subject to the highest quality criteria to maintain cred­ibility within the EU climate target, which the average international carbon credit currently does not achieve. Therefore, it should be a central concern for the EU to build on the Parliament’s position and ad­vocate for the highest environmental inte­grity. This could be realised by moving away from troubled emission reduction credits, introducing a share of removal credits, or substantially raising the integrity bar of Article 6.2. As the vast majority of credits traded under the Paris Agreement Crediting Mechanism are forestry credits, the moni­toring and land tenure rights challenges described above are inextricably linked to the credibility of the EU’s climate targets. With the EU still holding influential steer­ing capacity, also known as the “Brussels Effect”, the 2040 target now presents a chance to elevate the standard of inter­nationally traded carbon credits.