HARNESSING CARBON MARKETS FOR TROPICAL FOREST CONSERVATION: TOWARDS A MORE REALISTIC ASSESSMENT SUMMARY

Under the Kyoto Protocol to the Convention on Climate Change (1997) industrialised countries and economies in transition (Annex B countries) undertook to reduce their greenhouse gas emissions by around 5% below 1990 levels (in terms of CO2 equivalent) by the year 2010. For the forestry sector, a highly significant development is that the Protocol incorporates a Clean Development Mechanism (CDM) under which Annex B countries can obtain credit for funding projects that enhance carbon sequestration or reduce emissions in the forestry or energy sectors of developing countries. This paves the way to international financial and technological transfers to support forest conservation in developing countries. CDM also differs from other emission trading mechanisms in that its stated objective is not only to lower the cost of emission reduction, but also to promote sustainable development in countries hosting CDM projects. The concept of using forest sinks for mitigating climate change has been intensely controversial since its inception. It has been enthusiastically supported by those who believe that conservation of tropical forests will be difficult unless forest owners and managers are compensated for the environmental services their forests provide. CDM is seen as a mechanism for achieving this, without resorting to subsidies (Pearce 1996). On the other hand, others have been concerned that large financial transfers oriented towards forest conservation or “carbon-farming” may ignore social concerns and the full range of products and environmental services of forests. CDM induced increases in forested land may also be incompatible with the development objectives of host countries (Cullet and Kameri-Mbote 1997). It has also been argued that climate change mitigation would be more effective if focused on reduction in fossil fuel usage, rather than reductions in tropical deforestation (Cullet and Kameri-Mbote 1997). Emissions from tropical deforestation are estimated to be about 29% of emissions from fossil fuel and cement production (Schimel et al. quoted in Brown 1997). Brown (1997) suggests that if existing carbon budgets are adjusted to take account of carbon uptake by tropical forests, the estimated net flux from tropical forests could be as low as 9% of emissions from fossil fuel and cement production. CDM may thus enable developed countries to “export” their industrial pollution, without changing unsustainable patterns of energy use in developed countries (TERI 1998; La Rovere 1998).

In this paper, we examine the implications of CDM for forest conservation and sustainable use. We draw on recent research as well as insights from a Policy Dialogue with representatives of the various constituencies interested in carbon sequestration and forests. The Policy Dialogue entitled “Are joint implementation and the clean development mechanism opportunities for sustainable forest management through carbon sequestration projects” was organized by the International Academy of the Environment (IAE), Geneva and the Center for International Forestry Research (CIFOR), Indonesia at IAE, Geneva, on August 28 and 29, 1998 (Mulongoy et al. 1998; Mulongoy 1998). Results show that the high initial expectations about the potential contribution of CDM forestry to both climate change mitigation and to forest conservation, may need to be scaled down. Ironically, this realization may contribute to a convergence of views between the opposing schools of thought. On the hopeful side, we indicate ways in which a more modest set of expectations about Kyoto may be able to increase the effectiveness of on-going efforts to conserve forests and manage them sustainably.

Initial estimates of the contribution forests could make to climate change mitigation assumed that large areas of land could be allocated for carbon forestry. Estimates quoted in IPCC (1996) indicate that in Latin America, Africa and Asia 251 to 551 million ha of land could be available for forest plantations. Sedjo (1989) estimated that 465 million ha of fast-growing plantations could compensate for the expected increase in carbon emissions during the next 30 to 50 years. These estimates implied that large-scale plantation forestry could play a major role in mitigating climate change. At the same time, initial estimates indicated that the potential gains from trade in carbon emissions between industrialised countries and tropical countries were very large. Schneider (1995) showed that the value of carbon stored in tropical forests was 2-30 times greater than the agricultural value of forestland in expanding frontier areas in the Amazon. These estimates led to expectations of very large North-South financial transfers. Many foresters, for example, are hopeful that CDM can contribute towards filling the gap of around US 30 billion between current ODA for forestry and annual funding requirements estimated by UNCED (Mulongoy et al., 1998).

The magnitude of these potential transfers heightened the optimism of those who saw these funds as a means of saving tropical forests, while simultaneously fuelling the fears of those who saw massive transfers directed single-mindedly at carbon-farming, as derailing the efforts to incorporate social and environmental concerns into sustainable forest management. This led to a marked polarization of views on the advantages and disadvantages of incorporating forests in the Kyoto Protocol. Recent studies that have looked more carefully at the economic and political realities of implementing the mechanism imply, however, that the potential for trade may be considerably less than previously believed.

Cost-effectiveness

In a pure market-based system, the extent to which industrialised countries invest in CDM forestry will depend on the cost of tropical forestry projects relative to the cost of other options, such as emission reduction energy projects in industrialised and developing countries and forestry projects in industrialised countries. Reliable estimates of relative costs are hard to come by, primarily because of methodological problems and data availability. Subject to these caveats, the limited estimates available indicate that the cost-effectiveness of tropical forestry as a sequestration strategy depends on emission reduction targets. The range of estimates given in Table 1 indicate that for emission reduction targets above about 20%, tropical forests appear to be substantially more cost-effective than energy projects in either industrialised or developing countries. For less ambitious targets, a number of low cost opportunities appear to exist in the energy sector and the cost-effectiveness of tropical forests appears to be far less clear cut. Forestry in industrialised countries appears to be more expensive than in tropical countries, although some overlap in costs is seen.

The above discussion indicates that in a fully-fledged market, a blend of different mitigation options is likely to be traded. Jepma and Munasinghe (1998) estimate the cost-effective combination of mitigation options for achieving a global emission reduction of 2.4 GtC. Almost half of the reduction (1GtC) would come from energy and forestry projects in industrialised countries and countries in transition. Tropical forestry would contribute 700 million tC and energy projects in developing countries another 100 million tC. These results indicate that once cost considerations are taken into account, tropical forests are likely to account for less than a third of targeted emission reductions. This still constitutes a considerable contribution to mitigation, but implies that even in a purely market-based system, a very substantial part of mitigation activities would take place within the countries that currently have emission reduction targets.

Potential market size

The size of the market for carbon sequestration services from tropical forests is likely to be lower than Jepma and Munasinghe’s estimates indicate. Their estimates are based on a global emission reduction target of 2.4GtC. This is equivalent to a reduction of about 55% relative to 1990 emissions for Annex B countries (Bolin, 1998). A 55% reduction in emissions is above the level the US may have to achieve by 2010, to meet its emission reduction commitment of 7% below 1990 levels. The US Energy Information Administration estimates that US emissions will be 33% and 47% above 1990 levels in 2010 and 2020 respectively (Climate News, December 1, 1998). In addition, economies in transition are unlikely to be purchasing carbon sequestration services, having reduced emissions 29% below the 1990 level by 1995 (primarily because of the collapse of Soviet era heavy industries). About eight industrialised countries had also reduced emissions below 1990 levels by 1995 (Bolin, 1998). Based on projected emission levels for 2010, Pearce et al. (1998) estimate that developed countries may have to reduce emissions by around 730 million tC. If, as Jepma and Munasinghe estimate, about 30% of this were supplied by tropical forests, around 220 million tC would be demanded from forests. This figure could be even lower if limits were placed on the extent to which credits can be obtained through CDM projects. Pearce et al. (1998) estimate a market size of 60-120 million tC if trading were limited to 10-20% of emission reduction commitments. If we assume, as Pearce et al. (1998) suggest, that carbon may trade at a price ranging from $5 to $23/tC, the size of the market could range from $0.3 to $5 billion, which though not negligible, would clearly be well below initial optimistic estimates.

Additionality and leakage

According to the Kyoto Protocol, projects that qualify for credits have to satisfy the “additionality” requirement, i.e. reductions in emissions must be additional to any that would occur in the absence of the project. This implies that forest conservation qualifies only if the conserved forest is under threat of conversion to other uses. Sequestration projects, such as reforestation, qualify only if the project is not financially viable without CDM, or if CDM funding is required to overcome other barriers to implementation. Projects may also turn out to be “non-additional” because of “leakage” which occurs when the emission reduction achieved within the project, causes increased emissions outside the project boundary, or at a later period of time. Leakage could occur for example if local communities agree to preserve a forested area, with the intention of increasing deforestation in other areas, as compensation. Leakage could also occur if, for example, a forest protection project, by forbidding logging, increased the price of timber, which in turn increased logging outside project boundaries. Additionality and leakage may not reduce the cost-effectiveness of forestry versus energy projects, because these problems also frequently apply to the energy sector (Chomitz, 1998). Considerable progress has also been made in developing methodologies for screening out “non-additional” projects (Chomitz, 1998). On the other hand, a survey of pioneer investors in carbon projects shows that investors consider the risk of leakage to be considerably higher in forestry projects relative to energy projects (Newcombe, 1998). Overall the implication is that initial estimates of the land available for CDM forestry may need to be scaled down because of additionality and leakage problems.

Permanence of forestry projects

A further complication that could reduce the competitiveness of forestry is that in forestry projects, carbon is stored or sequestered only while the forest or harvested forest products exist. By comparison, in an energy project, when a new clean technology is adopted, the emissions avoided are prevented from entering the atmosphere in perpetuity, irrespective of the duration of the project. This implies, that if a ton of carbon sequestered in a forestry project is to off-set a ton of industrial emissions, the forest will have to exist in perpetuity or at least as long as the residency time of carbon emitted into the atmosphere. Such long- term obligations are likely to considerably increase the price of supplying forestry carbon sequestration services. Also, permanent forest conservation may not be consistent with the host country’s development objectives, particularly if political, market and social conditions change.

The concept of ton-years has been proposed as an alternative to permanent obligations (Fearnside, 1997; Chomitz, 1998). In this approach, the temporal implications of energy and forestry projects can be made comparable by computing the number of ton-years of reduction in atmospheric concentration achieved by the forestry project. If we assume that an emitted ton of carbon is resident in the atmosphere for 100 years, a ton of emission reduction from an energy project could be off-set by 100 tons sequestered in a forestry project lasting one year, or (equivalently) two tons sequestered for 50 years. This concept is refined by the incorporation of two adjustments, one of which favors earlier emission reductions, while another favors later emission reductions (Ridley, 1998). Firstly, a discount rate is used which values later emission reductions at a lower rate than earlier reductions. The use of a discount rate is justified because earlier emission reductions avoid the damage caused by global warming for a longer period than reductions at a later date (Fearnside, 1997). The second adjustment favors later emission reductions, because the damage from emissions increases over time as a result of increasing atmospheric concentrations. Applying this concept, Smith et al (1998) show that taking account of the permanence factor increases the cost of sequestering carbon in an agroforestry project almost fourfold for a 15 year project (at a 3% discount rate) and almost three-fold for a 25 year project. Thus taking account of permanence could further reduce the cost-effectiveness of forestry versus energy projects.

The ton-year approach has the advantage of reducing the risk of investing in forestry projects and permitting more flexibility in land use to forest owners and policy makers in host countries. At the same time, it should be recognized that the ton-year approach is based on the concept that non-permanent forestry projects slow down the build up of atmospheric concentrations, unlike energy projects, which actually reduce emissions. Non-permanent forestry projects should therefore be regarded as an intermediate policy option or a way of “buying time” until more permanent ways of reducing emissions become viable.

Future trends in forestry’s cost-effectiveness

Forestry’s cost-effectiveness is likely to decline in future if the cost of emission reduction in the energy sector declines. A consensus appears to be emerging that the cost of emission reduction in the energy sector will depend on how soon and how deeply emissions have to be cut (IPCC, 1996; Richels and Sturm, 1996). In the next few decades, costs are likely to remain high because of the lack of economical fuelswitching technologies. Although certain low cost technological options exist (such as switching building heating systems to natural gas), their adoption is currently impeded by pre-existing capital stock based on high emission technologies. The World Energy Council (1993) estimates that fossil fuels will remain dominant in 2020 and that their share will remain close to the 1990 level of 76%. Coal prices are also expected to fall by 30% between 1997 and 2020 (Climate News, December 1, 1998). Thus, in the next few decades, certain countries with rapidly increasing emissions (such as the US, Japan, Canada, Portugal, Spain and the Scandinavian countries: Bolin, 1998) may be major players in the market for carbon sequestration services.

Emission reduction costs are however expected to come down in future, thus eroding the advantage of forestry. Jepma and Munasinghe’s (1998) analysis of the physical and economic potential of a range of technologies concludes that renewable energy may have a 15-30% share in the next 30-40 years and that natural gas and hydrogen could allow for a massive switch-over in energy sources by 2100. Johansson et al., (1996), conclude that renewable energy in electric power generation could meet more than half of global energy needs by 2050. Other promising opportunities are improved efficiency of fuel conversion in the transport industry through hybrid and fuel-cell technologies and co-generation of heat and electricity using (mainly) natural gas (Climate News, November 23, 1998). Technology development will depend on whether or not energy policies create the right signals for the private sector. Recent developments indicate that major changes in attitude are occurring in some companies in the sectors conventionally opposed to emission reduction commitments. In the auto industry, Toyota released the world’s first mass produced hybrid (gasoline-electric) car in December 1997 (Climate News, March 30, 1999). A heavily financed R&D race among the world’s biggest auto makers to release commercially viable fuel-cell powered vehicles within five years is underway (Climate News, March 30, 1999). General Motors is replacing steel with aluminum to promote fuel efficiency. British Petroleum has set itself an internal target to cut emissions by 10% by 2010 and has introduced an internal emissions trading program (Climate News, December 1 and November 23, 1998). Thus the demand for forest carbon sequestration services may decline after the next few decades, unless emission reduction commitments are progressively increased.

Political realities

The incorporation of forests into the Kyoto Protocol impacts on a wide range of stakeholders in investor and host countries including local forest-dwelling communities, the private sector, forestry specialists, economists, energy and climate specialists and biodiversity conservation specialists. A Policy Dialogue which brought together representatives of some of these stakeholders (Mulongoy, 1998), confirmed the potential for tension between the different constituencies and indicated that a purely market-based mechanism is unlikely to be able to reconcile the conflicting agendas of the different stakeholders. This may impede implementation of CDM forestry projects. A particular problem is that, with a few exceptions, the debate seems to be along the lines of a North-South divide, with developing countries opposing CDM and developed countries arguing in its favor. A number of potential host countries are concerned that ad-hoc carbon sequestration contracts between private parties may result in land use changes that are not compatible with the host country’s land use priorities (Johnson, 1998). On the other hand, Costa Rica sees CDM as one of several instruments for achieving its own forestry objectives and has set up an institutional and financial structure which may enable it to use these mechanisms to support implementation of its land use plans. To achieve this, Costa Rica has taxed its people, thus providing evidence of political will to conserve its forests (Maldonado et al., 1998). The Costa Rican model however, may not be appropriate for poorer countries, which may be unwilling to tax their populations. The model may also be unattractive to countries where forest conservation is not high on the list of national priorities. These may be countries that still have very large forested areas or countries where the pressure to convert forest to other uses is high, due to factors such as high population densities (Lopez, 1996). These countries may be unwilling to participate in carbon markets. CDM forestry projects are likely to have greater support from host countries (and may therefore be more effective) where forest conservation coincides with national priorities and where host countries have provided concrete evidence of political will to conserve forests.

Investor priorities

Currently, very little is known about the priorities of potential CDM investors. A recent survey of pioneer investors in carbon markets (Newcombe, 1998) indicates that forestry projects are regarded as somewhat riskier than energy projects, primarily because of leakage problems. Investors are likely to be selective in their choice of host countries. Among the various types of risks associated with carbon projects, investors were most anxious to avoid countries prone to economic and political instability. On the positive side, the next most important concern was to provide other environmental benefits, in addition to carbon sequestration. Among non-carbon benefits, biodiversity conservation and poverty alleviation were rated most highly (Newcombe, 1998). These results indicate that while investor priorities could limit the number of countries that are able to attract investors, within these countries well designed projects that provide social and environmental benefits may be more attractive than cost-efficient carbon-farming projects to at least a segment of the market.

Summary

Initial estimates about the share of tropical forestry in mitigation options and the magnitude of North- South financial transfers may need to be scaled down. The cost-effectiveness of forestry may have been overestimated. Also, political realities and investor priorities may not have been sufficiently understood. Initial perceptions that CDM could provide long term funding to support the forestry sector may also need to be modified. CDM funds for forestry are likely to be most significant during the next few decades. During this period forestry projects could make a valuable contribution towards slowing down emission concentrations in the atmosphere and lowering the cost of meeting emission targets. As a result there may be a substantial demand for forest sequestration services in the medium term. After this period, the costeffectiveness of forestry is likely to progressively decline due to the development of cheaper technologies for reducing industrial emissions. This revised assessment of the role of forestry in CDM could have major implications for the successful implementation of CDM forestry projects.

The above discussion indicated that forests are likely to be an intermediate climate change mitigation strategy for buying time, until more permanent options become available. The implication is that the most important justification for including forests in CDM may lie in the contribution CDM could potentially make towards stimulating forest conservation and sustainable use in developing countries. CDM projects could influence where forests exist, which types of forests exist and who benefits from forests. Thus judicious use of this mechanism may be able to enhance the effectiveness of more conventional approaches, while misguided application could derail current forest conservation efforts.

Many uncertainties remain about CDM. While in principle CDM projects should be compatible with “sustainable development”, it is unclear how this is to be implemented and what aspects of sustainable development are to be addressed. Should CDM provide social benefits? How will equity issues be addressed? Should CDM require non-contravention of the Biodiversity Convention (1992)? Should CDM projects be compatible with the recommendations of international fora, such as the International Forum on Forests (IFF; i.e., an intergovernmental forum that started in 1997 and was re-labeled a forum in 1998)?

The wording of the Kyoto Protocol is unclear on which types of forestry activities (such as plantations, forest protection, forest management) qualify for credits under CDM, or indeed whether forestry activities will qualify at all for credit. Whether or not CDM funds could be used only for forestry projects or could also be used for stimulating changes that support forest conservation (such as policy or institutional changes, technology development, capacity building or enforcement of environmental regulations) has also not been clarified.

Many of these decisions could be taken by the end of 2000. Thus, considerable opportunity exists for informing global debates on CDM modalities. In this section, we present a few insights about the use of CDM and raise a number of issues that need to be resolved if CDM is to be effectively harnessed for the benefit of forests and forest stakeholders.

Choice of forestry activities for inclusion in CDM

Forestry activities contribute to lowering carbon concentrations either by preventing emissions or by sequestering carbon. A wide range of forestry activities, including the following can prevent emissions:

· Conserving forests that are under the threat of being converted to other land uses with a lower carbon stock, such as slash-and-burn agriculture with short fallows, permanent agriculture, pasture or agricultural plantations.

· Shifting from conventional logging to Reduced Impact Logging (RIL) in natural forests. RIL retains more carbon in living trees than conventional logging, by reducing damage to residual trees and surrounding vegetation. RIL also sequesters carbon, because forests recover faster (Pinard and Putz, 1997).

· Biomass fuel plantations. This is a particularly interesting candidate for CDM projects. It is a carbonneutral land use: the carbon being sequestered during growth is released into the atmosphere when the biomass is burned for fuel. Unlike other forestry activities that benefit the carbon cycle only while the forest lasts, biomass fuel plantations can reduce emissions permanently, if biomass fuels replace fossil fuels. Thus biomass fuel plantations may overcome some of the concerns about other forestry projects: their spread may result in more sustainable patterns of energy use, while simultaneously their costeffectiveness may not be adversely affected because they could be capable of permanent emission reduction.

Forestry activities contribute to carbon sequestration when the new forestry-based land use sequesters more carbon than the previous land use. Examples are:

· Establishment of forest plantations on previously deforested land (reforestation) or on land not recently forested (afforestation).

· Regeneration of secondary forests on previously deforested land

· Agroforestry systems on agricultural land

· Lengthening of primary or secondary forest rotation cycles

Equity implications: If only a sub-set of the above forestry activities is eventually eligible for CDM funds, this may introduce distortionary economic biases against those that are excluded. Even if CDM is open to all forestry land uses, market forces are likely to favor activities which deliver carbon at the lowest cost, where “additionality” is most easily established and where transactions costs, such as organisational costs and verification costs are lowest. Although pioneer investors appear to prefer projects which also provide social and environmental benefits (Newcombe, 1998), this may not reflect investor attitudes in a fullyfledged market. It is quite plausible that these factors may favor specialized blocks of simplified forestry ecosystems, such as large-scale plantations. Investors may prefer deals with large-scale operators (such as logging concession holders) in the interests of lowering transaction costs. Large-scale operators are also likely to be better informed about CDM and to see it as a ready source of subsidy for their operations. If CDM favors large-scale operators, it could have serious equity implications, by putting at an even greater economic disadvantage more diversified land uses that may be more appropriate for local communities. Multiple use forestry by small holders may also be more environmentally sound and may thus be more compatible with the “sustainable development” clause of CDM. Investor preference for large-scale forestry could also increase claims by large-scale operators to land holdings of small holders and increase disparities in political power, incomes and assets.

Thus a better understanding of investor priorities is required. Evaluation of the different forestry activities on the basis of investors’ criteria and the trade-off with social and environmental benefits is required. This could be used to formulate criteria for the selection of forestry activities eligible for CDM. This could also indicate whether special mechanisms would be required to support activities that provide social and environmental co-benefits.

The complex and highly localised nature of forestry problems is well known. Evaluation of the social and environmental benefits is therefore likely to be contingent on a range of political, social, institutional and biophysical conditions. A considerable amount of literature now exists on the lessons to be learned from experiences of success and failure in forestry projects. Pilot projects where payment for sequestration services are being made could also provide useful insights. These lessons could contribute to the development of principles for the implementation of CDM.

Should CDM be used to subsidise unprofitable forestry activities?

The possibility of trade in carbon sequestration services initially raised the hopes of those who believed that forests were being converted to other land uses because of the lack of mechanisms for compensating forest owners for the environmental services provided by their forests. Doubts about the financial viability of forested land compared to alternative land uses are widespread in the literature, whether in relation to sustainable logging (Kishor and Constantino, 1993) or non-timber forest products (Southgate and Clark, 1993). Payments for carbon sequestration services, it was hoped, could fundamentally alter the economics of forested land compared to other land uses. We argue below, that for various reasons, this may not be the best use of CDM funds.

Research on the underlying causes of unsustainable land uses show that the poor economics of forested land is only part of the problem and, in many cases, is not necessarily the key factor. In the case of unsustainable logging, Sunderlin and Resosudarmo (1996) highlight political economy aspects, such as the political power of the forestry sector and rent seeking behaviour, which they attribute to the excessively high profitability of logging concessions, caused by factors such as low royalty fees. In an analysis of the underlying causes of deforestation, Kaimowitz and Angelsen (1998) emphasize the role of policies outside the forestry sector, such as agricultural subsidies which stimulate agricultural expansion at the forest margins and the construction of penetration roads which provide access to forests. Others have emphasized institutional obstacles to the sustainable use of forest, such as the nature of property rights (Orstrom, 1990) and the need to devolve decision making authority over forest resources from governmental authorities to community based organisations (Saxena, 1997). These studies indicate that in many cases, the impact of negative policy and institutional arrangements may overwhelm the positive incentives provided by CDM funds. Under these conditions, improved land use and carbon benefits may not occur, or are likely to result in high levels of leakage.

The possibility of the cost-effectiveness of forests declining over time raises additional complexities. Declining cost-effectiveness implies that the demand for forestry sequestration projects is likely to decline and in many cases sequestration payments are likely to be forthcoming only for a limited period. If the decision to change land use is driven primarily by the subsidy provided by sequestration payments, the implication is that land will revert to its previous use, once the payments cease. While even a temporary improvement in land use would delay the buildup of emission concentrations in the atmosphere and contribute to the lowering of emission reduction costs, it might not achieve the host country’s objective of stimulating a lasting improvement in land use patterns.

The temporary nature of CDM funding indicates that rather than using CDM funds to improve the economics of unprofitable forestry systems, a more effective strategy may be to use them for removing non-economic impediments to the adoption of economically viable forestry activities. Examples of noneconomic impediments may be access to information, training, technologies and markets. Investing CDM funds in mechanisms for overcoming such barriers is more likely to result in lasting improvements in land use, than cash handouts to forest owners.

Should CDM credit be given for policy and institutional reform?

Given the key role of policies and institutions in stimulating land use change, Lopez (1999) proposes that carbon credits be used to stimulate policies favorable to forest conservation. Clearly, however, the conditions under which policies and institutional changes could be made eligible for credit would have to be specified. Moral hazard problems could arise, for example, if credit is given for policies which while favorable to forests also increase the nation’s economic efficiency (such as the removal of agricultural subsidies). Pearce et al., (1998) also point out the difficulty of establishing the quantity of emission reduction that could be attributed to policy changes. One possibility would be to make CDM projects conditional on the removal of distorting policies (Pearce et al., 1998). While this would considerably limit the use of CDM, it would reduce the risk of leakage and project failure and would be more likely to result in lasting improvements in land use. If multilateral institutions made loans and other assistance conditional on policy and institutional reform, this could expand the pool of CDM projects that meet preconditions. Clearly therefore there is a need to establish principles for guiding the types of interventions which will receive credit, the preconditions which CDM projects will have to meet and mechanisms for catalyzing policy and institutional changes favorable to forest conservation.

Lessons from the forestry literature

Plantations: Plantations are widely perceived as the archetypal candidate for CDM forestry. Persson (1995) however points out the high rate of plantation failures in the tropics. Persson (1995) found that only 70% of the plantation area established according to official figures could actually be found on the ground. On an average plantations were found to give only 20 to 30% of expected production. Although technical reasons were partly responsible for failure, the main reason, according to Persson, was that plantations were established without a clear market in mind. Large-scale plantation projects also failed because, in many cases, they had little support from local communities who had not been involved in the project and had often suffered from tenure conflicts resulting from plantation establishment (Fearnside, 1996). In many cases, plantations were established on land perceived by outsiders as “degraded” or “abandoned” but which were subject to a variety of uses by local people (Fearnside, 1996; Tomich et al., 1997). On the other hand plantations have been successfully established in Laos to supply the Thai market. Successful cases have also been reported from Chile and South Africa. An analysis of the causes of success and failure could provide useful guidance for the development of CDM guidelines on plantation projects.

Lessons could also be learned from cases where incentives have been provided for short periods and then withdrawn. The literature suggests that if CDM funds were used to stimulate plantation activities, that would otherwise be unprofitable, this could stimulate a temporary expansion in plantations and therefore in processing facilities. Withdrawal of CDM funds could then cause plantations to be abandoned. Processing facilities may then turn to unsustainable logging in natural forest, in order to procure raw materials (Fearnside, 1996). A more effective use of CDM funds may be to develop mechanisms for coordinating raw material supplies with processing facilities, in cases where both activities are perceived to be economically viable. For example, in certain cases, small-holder plantations providing biomass fuel for electricity generation in rural areas, may be considered economically viable, but are not established because adequate local processing facilities are not available. At the same time, the private sector is unwilling to invest in processing facilities due to the lack of raw material supplies and technology. CDM funds could be used to remove “chicken and egg” impediments of this nature and to make technology available for both plantations and electricity generation from biomass fuels. Land use changes of this nature, which provide local benefits (such as improvements in the quality of life, in this case), are less likely to suffer from leakage during the project and to persist after CDM funding ceases.

CDM funds may also be effective if directed at situations that are on the brink of a transition to a carbonfriendly land use. Saw mills which have traditionally relied on supplies from natural forests, may be receptive to the establishment of timber plantations, when increasing distance to timber supplies increases log prices and cuts into profits. In this situation, CDM funds may be able to speed up the transition to plantations. This is likely to be less risky than using CDM to finance plantations where forests are accessible, in an attempt to leapfrog the phase when logs are obtained from natural forests.

Improved management of natural forests: Technologies such as Reduced Impact Logging (RIL) have achieved little adoption so far. Clearly, as mentioned above, many of the reasons are due to policy failures and institutional weaknesses. While the economics of RIL versus conventional logging is controversial, Putz et al., (1999) show that the economic benefits of RIL depend on biophysical conditions, with benefits being highest in areas characterised by level terrain with well-drained soils and pronounced rainfall seasonality. Dykstra (1996) claims that training and the correct use of the right equipment is an important determinant of the profitability of RIL. Dykstra (1996) reports that a growing list of studies demonstrate that if logging operations are correctly planned, well supervised and carried out by well-trained crews with the proper equipment, harvesting costs under RIL can be substantially lower than under conventional logging. Clearly in addition to these factors the political and institutional context has to be considered, if CDM funds are to catalyse better logging practices and deliver carbon benefits. This implies that there is a need to identify the niches where these conditions apply, although they may be fairly limited in geographical area.

Even in these limited niches, the success of CDM funds for promoting sustainable use of forests will depend on how these funds are used. In the case of RIL niches, for example, they could be used for training and capacity building for concessionaires, logging contractors and workers. If on the other hand, CDM funds are used to subsidise the operational costs of RIL, it may increase the profitability of RIL and induce the expansion of RIL to areas which would otherwise not have been logged. Should CDM funding for forestry projects, turn out to be a relatively short-term phenomenon, as argued earlier, RIL would be abandoned when CDM funds cease and the logged area would likely be converted to agricultural use. Thus, if CDM funds are not judiciously used, they may lead to more deforestation and carbon emissions in the long run.

In general, a shift to carbon-friendly practices may be easier to induce under unfavorable market conditions, when concessionaires and mill owners may be more receptive to change. Putz et al., (1999) report, for instance that third party forest certification activity boomed in Bolivia in areas where the profitability of logging was low. In situations where excessive profitability drives the destruction of forests, CDM funds may exacerbate the problem.

Non-timber forest products: A number of authors have studied the conditions under which extraction of non-timber forest products (NTFP) by local populations could contribute to forest conservation. The importance of both an appropriate policy and institutional framework (such as forest dwellers’ rights and local empowerment) as well as biophysical and socioeconomic factors (such as sound management practices and transparent markets) has been raised by some (Ruiz-Perez and Byron, 1998; Fearnside, 1996). Others such as Crook and Clapp (1998) and Coomes (1995) have pointed out the dangers of over exploitation resulting from boom and bust cycles and the negative relationship that usually prevails between NTFP profitability and forest diversity. NTFPs may therefore be able to contribute to forest conservation and the resulting carbon benefits under a relatively narrow range of biophysical and socioeconomic conditions. CDM may be able to support forest conservation if used for creating these conditions and thus expanding the niche for NTFPs.

Summary

The discussion in this section reveals the importance of involving forest stakeholders more closely in CDM debates. CDM could have major implications for forests. At the same time, lessons from forestry successes and failures could make important contributions to the design of effective CDM projects. CDM funds may best be seen as a mechanism that could enhance the effectiveness of on-going efforts to stimulate a change to more sustainable systems. Crook and Clapp (1998) point out the importance of targeting market-based mechanisms to areas where sufficient understanding exists of complex local decision making, as well as the broader political and institutional context. Within these areas, certain niches may exist where CDM could make a valuable contribution. Where the knowledge base is inadequate, CDM projects are likely to suffer from leakage problems and have unintended perverse outcomes.

The history of the international debate on forests shows that “magic solutions” have periodically been put forward. Examples are intensification of slash-and-burn agriculture, sustainable forest management for timber and non-timber forest products and integrated conservation and development projects. Each has met with only limited success. Trade in environmental services, also raised the hope that it could fundamentally alter the economics of forested land compared to alternative land uses. This paper shows that:

· Expectations should be scaled down and payments for carbon sequestration services may in reality be received in a far more limited area than initially expected and for only a limited period.

· The use of CDM funds to subsidise unprofitable forestry activities is unlikely to result in lasting improvements in land use. CDM may be more effective if used to remove non-economic impediments to the adoption of forestry activities that are economically viable and meet local needs. This implies that the concept of additionality in CDM should be broad enough to accommodate such possibilities.

· A comparative evaluation of potential CDM forestry activities will be required to investigate whether investor preferences are likely to exacerbate existing disparities between large and small-scale operators or reinforce trends towards simplified ecosystems.

· To prevent perverse outcomes and reduce leakage of emission reduction, CDM projects will probably have to be limited to niches which meet certain preconditions such as favorable policies and institutions and where sufficient understanding exists of local decision making and the broader political and institutional framework. Lessons from the forestry literature and experiences with pilot carbon sequestration projects thus need to play a more prominent role in the formulation of CDM guidelines. Mechanisms for catalyzing policy and institutional reforms could broaden the niche for CDM forestry.

Carbon markets should be seen as one more tool in the battle to achieve sustainable use of forested land. This paper illustrates the complexity of using CDM, provides some examples of the dangers of misusing it but also gives examples of how it could be harnessed to increase the effectiveness of more conventional ways of promoting forest conservation and sustainable use.

Acknowledgements

The authors are grateful to Dennis Dykstra and Jack Putz for helpful comments

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Table 1 Cost estimates of carbon sequestration forestry projects compared to emission reduction energy projects. $ / tC Forestry projects Developing Countries 2 to 25 1/ Industrialised countries and economies in transition 5 to 81 2/ Energy projects: developing countries Level of emission reduction: 5 to 10% negligible 3/ 10 to 25% ~ 100 3/ Not specified 36 to 376 4/ Energy projects industrialised countries Level of emission reduction: 10 – 15% negligible 5/ 35 – 40% 100 – 200 6/ 1/ Source: IPCC (1996); Ridley (1998); Swisher and Masters (1992); Boscolo et al (1997); Smith et al (1998) 2/ Source: Ridley (1998); IPCC (1996) 3/ Halsnaes (1996) 4/ Ridley (1998) 5/ Swisher & Masters (1992); IPCC (1996) 6/ Swisher & Masters (1992)