Before others, Merrill Lynch & Co. saw the forest for the trees. In 2008 the US bank agreed to purchase carbon credits, under an option agreement, in what was billed the world’s first commercially financed avoided-­deforestation project. This effort focused on preserving nearly 3,000 square miles of the Ulu Masen rain forest on the Indonesian island of Sumatra, which was losing 135 square miles annually to logging and clearing. Behind the project were nongovernmental organization Fauna & Flora International, carbon brokerage Carbon Conservation and the government of the province of Aceh.

For its contribution, which was paid over four years and helped reduce deforestation in the area, Merrill (now Bank of America Merrill Lynch) won the right to buy future carbon credits at $4 per ton of avoided emissions. Fauna & Flora says the project is expected to prevent 100 million tons of carbon emissions in the next three decades.

“We approached it from the perspective of a typical carbon market deal,” says Abyd Karmali, global head of carbon markets at BofA Merrill in London. But the deal wasn’t typical. Merrill was one of the first big financial firms to invest in projects seeking to avoid deforestation, partly so it could play a role in developing the emerging forest carbon sector.

Experts champion this space as an immediate and cost-effective way to forestall the release of carbon and other greenhouse gases into the atmosphere. REDD (reducing emissions from deforestation and forest degradation) is shorthand for forest conservation activities, while REDD+ covers reforestation and sustainable forest management as well. But so far, the market hasn’t done much to encourage private investment in either.

With little public money to spare, the need for that investment is urgent. Forests play a crucial role in sequestering carbon and release vast amounts of it when they vanish. Deforestation accounts for 17.4 percent of annual global greenhouse-gas emissions — more than the entire transportation sector — according to a 2008 independent report commissioned by the U.K. government. In a 2004 Science magazine article, Princeton University scientists Stephen Pacala and Robert Socolow wrote that halting tropical deforestation and planting new forests could do as much to slow global warming as doubling the world’s nuclear energy capacity or building 2 million new wind turbines.

But on official, regulated carbon markets, only credits derived from the creation of new forests are tradable. This relegates those earned through conservation and better management to voluntary, over-the-counter exchanges. In the OTC world, however, REDD and REDD+ credits have thrived. They jumped from less than 2 percent of the voluntary forest carbon market in 2006 to 71 percent in 2010. “The expectation has been that the REDD+ segment would represent the next phase of the carbon market,” says BofA Merrill’s Karmali.