Saporta Young Isee2008

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Carbon Markets and Reforestation Projects: an opportunityfor the recovery of the Brazilian Atlantic Forest

Luis Alberto da Cunha Saporta1 and Carlos Eduardo Frickmann Young2

1MSc Student, Escola de Ps-Graduao em Economia, Fundao Getlio Vargas

(EPGE/FGV) Rio de Janeiro, Brazil. Email: [email protected] Associate Professor, Instituto de Economia, Universidade Federal do Rio de Janeiro

(IE/UFRJ) Rio de Janeiro, Brazil. Email: [email protected]

ABSTRACT

In this article, we studied the feasibility of reforestation projects with native speciesfinanced by the selling of certified emissions reductions, or other carbon credits. Thus, landowners would have financial incentives to develop private reforestation projects, contributing

to the sustainable development of their regions. The gains from reforestation exceed thecarbon sink, as it also increases air and soil qualities, hydrographic regulations, andbiodiversity protection in the areas where it is established. The positive externalitiesassociated with these projects are so important socially and environmentally that it should notwait for governments money (trifle and rare in developing countries) to be implemented. Acase study is presented to illustrate these possibilities, based on a hypothetical project ofreforesting pasture land around the Biological Reservation of Poo das Antas (state of Rio deJaneiro, Brazil).

The case study uses information from previous studies in order to estimate the netpresent value of the reforestation project. Secondary data was gathered for carbon sinkcharacteristics of native Atlantic Forest species, and revenues and costs of reforestation

projects in the same region (Rambaldi et al. 2003), including implementations costs(reforestations costs, inscriptions fees and procedures costs) and opertation costs (verificationand monitoring costs, fire control brigade, and managements costs).

Two different functions (logarithmical and linear) are used for estimating the carbonsink after 20 and 40 years from native species re-growth. Then, we calculated the net presentvalue of the project after forty years, assuming different scenarios for carbon prices anddiscount rates. The present value of the opportunity cost of land is also considered, using datafrom IBGE (1996) for cattle ranching industry in the region.

KEYWORDS:

Carbon market, reforestation, conservancy unit, golden lion tamarin,Leontopithecus rosalia.


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1. Introduction

This work examines the economic viability of reforestation projects that sell carboncredits to finance the restoration of biologically important areas such as endangered specieshabitats and river banks. As public funding is difficult for this kind of project, one of the

biggest questions is how to involve landowners in conservation efforts. In order to have theirsupport, this type of project must generate a greater income than their current economicactivity; that means that the net present value of the project, including opportunity cost ofland, should be positive. Environmental service payments are becoming popular as a form ofincentive to conservation projects, and this article analyzes the sale of carbon credits, asgrowing forests capture carbon from the atmosphere, contributing to the efforts of globalwarming mitigation.

We present the case study of REBIO Poo das Antas, in the state of Rio de Janeiro,Brazil. This biological reserve is the last habitat of the golden lion tamarin and a rare exampleof Atlantic Forest in the So Joo River basin. We used data of Atlantic Forest species carbonsink, implementation and operation costs of a project in CDM framework, established by the

Kyoto Protocol, and opportunity costs of land around Poo das Antas reserve, estimated bythe income generated by cattle ranching in the region, to create an hypothetical project forthat area. We defined the area of this hypothetical project as that necessary to reduce the risksof the golden lion tamarin extinction (the area necessary to support around 2,000 tamarins).The present value of the projects costs was compared to the income that such project couldgenerate by selling carbon credits in the CDM market. As a result, we found that incomefrom carbon credits is insufficient to fully finance a reforestation project of native species inthe Atlantic Forest. However, it could be an additional source of funding that might allow thedevelopment of this type of project in association with other incentives.

Finally, we also indicate other incentives and opportunities that could increase thefeasibility of reforestation projects. We concluded that despite the insufficient incomegenerated by the sale of carbon credits (as forest projects are under valued by the CDMcarbon market), these projects could help, partially financing the restoration of the AtlanticForest.

The work is divided in four sections. In the first, we write about the relationship ofcarbon credits and forestry projects in tropical areas from the 1980s to the beginning of theKyoto Protocol, and the discussions for Kyotos second commitment period (after 2012). Thesecond section describes the REBIO Poo das Antas and the So Joo River basin, includingtheir characteristics, such as geography and soil occupation. The third section analyzes thefeasibility of a reforestation project developed by land owners near REBIO Poo das Antas.We conclude our work indicating different forms of additional funding that could make this

type of project economically viable.

2. The Kyoto Protocol and the tropical forests

The first initiatives of carbon sinking in a forestry project precede the Kyoto Protocol.As far back as the 1980s, when there were no legal restrictions for GHG emissions,companies in the energy sector such as the American AES and the Dutch SEP alreadyfinanced such projects voluntarily with the intention of demonstrating better corporatepractices. At that time, consumers in developed countries started to be concerned aboutenvironmental issues. Therefore, polluting companies were questioned about their

responsibilities regarding the environmental degradation provoked by their operations. Thecompanies' strategy to improve their image with consumers was to reduce net emissions in


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their operations. As examples of activities in this period, we can mention the AES projects inGuatemala, Peru, Bolivia and Ecuador and the SEP project in Malaysia. The price paid perton of carbon was very low (between US$0.20 to 0.33) reflecting the fact that most of theprojects consisted in the preservation of forests, i.e. avoided deforestation (Moura Costa andStuart, 1999).

When UNFCCC was signed in 1992, there was a significant change in forestryprojects. According to the Convention, developed countries listed in the Appendix I agreedthat their GHG emission were contributing to global climate change. Thus, voluntary actionstook place, contributing to a great expansion of projects, this time financed by investorsinterested in the possible emission credits they could sell in the future. In that period, thepayments reached US$ 1.97 per ton of carbon, almost ten times more than in the previousprojects (Moura Costa and Stuart, 1999).

It still lacked the consolidation of carbon market to grow more, however, sinceinvestors had to engage from the beginning to the end of the process, and there were notplaces to sell and buy these permits.

With the beginning of the annual meetings of the Conference of the Parties (COP) of

the UNFCCC, the negotiations among countries turned explicitly to the impediments for awider agreement for reducing GHG emissions. As a consequence, forestry projects for carbonsinking suffered reductions in quantities and value. Many uncertainties regarding the progressof negotiations, mainly between the USA, Japan, and the EU (concerning flexibilizationmechanisms), but also between developed and developing countries (that would like to beincluded as a destination for mitigation and adaptation investments) resulted in the drastic fallof investments in the scope of this project. Between 1995 and 1996, the projects had a totalannual budget of US$6 million, well bellow the amount invested in previous year, US$50millions. The price for ton of carbon also fell to an average of US$0.59 (Moura Costa andStuart, 1999).

Finally, in 1997, during COP-3, emission quotas were established for countries in theAppendix I of UNFCCC, as countries signed the Kyoto Protocol. Despite the fact that USAand other countries latter rejected the implementation of the Protocol, at that time it wasconsidered great progress in the attempt to mitigate the emissions of GHG, and consequently,the effects of global warming. As a result, the number of forestry projects increasedsignificantly.

The third article of the Protocol made possible the use of afforestation, reforestationand conservation projects to reduce net emissions. However, in the same article, theadditionality criteria was established creating dubious interpretations about the possibilitiesof using conservation projects as generator of carbon credits. After COP-7, in 2001,conservation projects were definitively left out of the first phase of the Kyoto Protocol (from

2008 to 2012).TABLE 1: Evolution of forestry projects (up to July 1999)

Before 1992 1992-1995 1995-1996 1997 Jan.-Jul. 1998Number of

Projects0,5 3,3 1,5 4 14

Area (ha) 93,000 628,467 501,740 893,000 2,002,082Investments

(M US$)1 49.25 6.05 4.48 347

Price of ton. C US$ 0.19 US$ 1.97 US$ 0.59US$11.07

> US$ 12.00

Source: Moura Costa and Stuart (1999)


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There were many disagreements concerning land-use and forestry projects asflexibilization mechanisms under the Kyoto framework. Those projects carried someuncertainties regarding their efficiency in the effort of global warming mitigation as inmeasurement methodologies, validation rules and commercialization of temporary credits. Inthe end, COP established that Appendix I countries could not acquire more than 1% of their

emission quotas from credits originated by land-use and forestry projects (COP-7, DraftDecision/ CMP-1). As we previously stated, only reforestation and afforestation projectswere permitted after COP-7.

The following meetings of the COP (COP-8 and COP-9) created the rules thatpermitted the implementation of forestry projects by developing methodologies and designsfor them. Especially, the decision 19/COP-9 in 2004 defined relevant aspects for forestryprojects, among them non-permanence, additionality criteria, leakage, evaluation of risks, andsocioeconomic and environmental impacts. This decision also reiterated the Conferencesdesire to only consider conservation projects in the second phase agreements. In practicalterms, the decision 19 halted the demand for forestry projects in the Kyoto carbon market, asthey became expensive and hard to implement. Nonetheless, in voluntary carbon markets

such as the Chicago Climate Exchange (CCX), forestry projects began to have a strategicrole, becoming an important part of voluntary emission reductions.

In the other hand, the importance of reducing the deforestation and stimulating therecomposition of forests became increasingly evident, especially in tropical countries, as themost efficient means to mitigate emission. Therefore, carbon credits from avoideddeforestation projects held a significant place in the negotiation that took place in Bali (COP-13), in 2007. By the initiative of small tropical countries (New Papua Guinea, Costa Rica),this subject was included again in the negotiations of the second period of commitments forthe Kyoto Protocol.

In order to establish the limits of the debate, thematic meetings have been heldperiodically. In March 2007, in Cairns, Australia, a workshop gathered countries withdifferent ideas of how to include those projects in Kyotos second phase. By the end of themeeting, no consensus was reached, and among the main existing obstacles for thedevelopment of a common proposal are the following (Cenamo, 2007):

a)Early actions: despite the fact that all countries agreed that early actions must be taken(as training less capable countries in accounting their avoided emissions or startingpilot projects), there is no consensus about selling credits generated before 2012.

b)Baseline scenario: three different methodologies were proposed for the establishmentof projects baseline. The Brazilian proposal determines a Deforestation ReferenceRate, obtained by the calculation of an average of deforestation rates in the past years.However, this methodology created controversy among the participants, because in

addition to the perverse incentive generated (rewarding the countries that haddestroyed more forested areas), it would also reduce the participation of countrieswhere the deforestation rates are low such as Chile and Costa Rica, or countries withsmall but important forested areas such as India and China. Then, other countriesproposed a baseline scenario calculated with projection models of deforestation basedin regional and national drivers, as public policies, roads construction, demographicexpansion, agricultural frontier dynamic, etc., besides an adjustment factor forcountries with low deforestation rates. Finally, it was proposed to use the estimatedstock of carbon from tropical forests as baseline, when countries do not have availabledata to make their own calculations. There was no agreement on the methodology forbaseline estimations.

c)Definitions: there was an argument for the need to establish common definitions forkeywords such as forest (national or international definition?), deforestation (can it


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include degradation?), project scales and emission due to deforestation (which gasesshould be considered?).

d)Mechanism Design: on one hand, Brazil proposed the creation of an international fundto avoid deforestation, financed by voluntary contributions from governments andNGOs, besides the existent Special Climate Change Fund from UNFCCC, and the

creation of taxes on commodities and international services that are high GHGemitters (international aviation, coal mining, etc.). On the other hand, some countriesproposed a market-based mechanism that could operate in the modes of CDM, sellingcarbon credits from avoided deforestation. There was also a suggestion to create anexchange market for avoided deforestation and international benefits such ascancellation of debts, trade preferences, reduction in tariffs, etc. There was noconsensus on the best mechanism.

e)Permanence and Leakage: we can mention temporary credits, prevention funds(financed by credit sellers in order to buy carbon credits in case of forest fires orplagues), or credit banking mechanisms as potential approaches suggested to solvepermanence and leakage problems related with forestry projects. All members agreed

that this subject must be discussed more thoroughly.Hence, we can conclude that, in spite of the consensus on the importance of

conservation project as an instrument against global warming, agents disagree in the best wayto deal with it. The excessive bureaucratization of CDM projects implementation (due to alarge number of requirements and validations) generate a great disadvantage of these projectsin relation to other flexibilization mechanisms, such as Emission Trading. For this reason, theprice paid for carbon credits generated by CDM project are significantly lower than thosetraded within developed nations. The situation is even worse for forestry projects as theyneed extra validations with greater risks. It is worthwhile to mention that forestry projects arethe kind of project for which Brazil has a comparative advantage in relation to otherimportant developing countries, such as China and India.

Thus, avoided deforestation projects could stay out of Kyotos second phase (after2012) as disagreements increase between countries. This implies that voluntary marketsshould continue to be the main destination of carbon credits from conservation projects. Onthe other hand, CDM could still provide an enormous incentive to reforestation projects intropical regions. This kind of project associates carbon sink, environmental protection, socialdevelopment, and economic growth and it can have a positive externality, particularly indegraded areas, endangered species habitats, river banks, and lands with low commercialvalue. That is exactly the case of the region around REBIO Poo das Antas, in So JooRiver basin.

3. REBIO Poo das Antas and its region

The Biological Reservation of Poo das Antas is located in the So Joo river basin,in the Rio de Janeiro State. The topography of that area is well diversified, with mountains(21%), plateaus (13%), hills (32%) and great slopes (30%). The vegetation of the area is thatof the Atlantic Forest, one of the ecosystems with largest biodiversity in the world. The landhas been used in agricultural activities for centuries, as the State of Rio de Janeiro was one ofthe first areas colonized in Brazil. In that State, the Atlantic Forest that remained is foundinside conservation areas or in places with difficult access, such as slopes of hills. Despitebeing protected, these areas correspond to a tiny fraction of the original (pre-colonization)area of forested land.

Many native species of this region are threatened seriously with extinction, since theirhabitat was destroyed to make space for farms and urban occupation (Illustration 1). The


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productivity of the soil is low, with great incidence of peat. Nowadays, the farms are mostlyoccupied by pastures for extensive cattle ranching. Clear signs of erosion exist in severalfarms in the region. This fact helps to explain the growth of exposed soil areas and thedecrease of the economic output in the last several decades.

The REBIO Poo das Antas is managed by IBAMA, with support of the Mico Leo

Dourado Association. The Association is an NGO that works against the extinction of thegolden lion tamarin (Leontopithecus rosalia), an endemic primate of the State of Rio deJaneiro and flag species for the conservation of the biodiversity of the Atlantic Forest for thewhole world. The goal of the Association is to reach the number of two thousand free animalsin nature. Thus, around 25,000 hectares of Atlantic Forest, habitat of the golden lion tamarin,is necessary to preserve the species.

Illustration 1: Location of the Vegetation in So Joo River Basin

Source: Laboratory of Geo-processing - AMLD (RJ) 2006.

Even adding the areas of the biological reservations Poo das Antas and Unio withthe private areas of conservation (RPPN) of the region, there would still be short of about16,300 hectares to guarantee enough space for the two thousand monkeys. Then, the numberof 16,300 hectares will be used as potential (theoretical) area for reforestation seeking carboncredits. That area would be around REBIO Poo das Antas and REBIO Unio reservations, inprivate properties. An important premise for our calculations is that the necessary land shouldnot be bought. The idea is to attract farmers interested in reforesting parts of their farms,creating live fences and ecological corridors, shifting from agricultural use when receivingincome from carbon credits sale, or restoring degraded areas with an opportunity cost close tozero.

Farmers could establish a cooperative in order to gather all of their activities in one

single project, unifying their expenses and incomes, optimizing their costs. It is worthwhile toemphasize the good relationship between some farmers and the Mico Leo Dourado


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Association and, therefore, with the Biological Reservation of Poo das Antas (Steffen 2005).An understanding of the importance of the Atlantic Forest by part of the farmers (some havealready created independently protection areas in the remaining forests in their properties)increases the viability of the project proposed in this paper.

It can be easily observed that the hypothetical project around the REBIO of Poo das

Antas perfectly fulfills the requirements needed for CDM reforestation projects. This is aproject that would seek to protect one of the richest and most threatened ecosystems of theplanet, thus it follows the premise that the project should help in the sustainable developmentof the area where it is implemented. Shifting from pastures to reforested areas with nativespecies, the farmers, besides receiving an income from the carbon credits, would contributeto improving the quality of the soil, saving the biodiversity and protecting the So Joo Riverbasin.

The So Joo River is responsible for the water supply of an important area of theState of Rio de Janeiro and its preservation is vital for the future development of the State. Itwould be necessary the commitment of farmers in protecting the new reforested areas,guaranteeing their maintenance in the long run. This prerequisite might be an obstacle to the

fulfillment of the project, because many farmers will allege that although their earnings endwhen the forest is mature, their expenses in maintaining it will persist. We should bear inremind, however, that besides possible earnings with ecotourism and a sustainable lumberindustry, the farmers could count on the help of several NGOs that will persist with theirwork on the preservation of those forests. Besides this, once the forest covering has beenrestored, the dynamics of the forest itself guarantee its maintenance in the long run, imposingsmall expenses to the proprietors, mainly in fire brigades. There still exists the possibility,depending on the extension and of the purpose of reforestation, to use the funds forenvironmental conservation, resulting from the new environmental legislation on investments(Geluda and Young 2004). However, since there is not a law on this specific subject, thatpossibility remains uncertain.

The case of REBIO Poo das Antas is also framed in the additionality criteria.According to data from Rambaldi et al. (2003), the forest area of So Joo River basin hassuffered a deforestation process for many years (Tables 2 and 3). Starting in the 1950s, thesituation has worsened considerably. Hydraulic works, such as canalization of rivers,drainage of flooded areas and the Jutumaba Dam, destroyed enormous forested areas thatwere either converted into pasture or flooded by the dam.

Table 2: Rate of Deforestation and Reforestation in the So Joo River Basin andRegio dos Lagos (projection for the next 40 years)

AnnualDeforestation

Rate (%)

ForestCover

Loss (Ha/Year)

% Deforested landafter 40 years

Deforestation 1.20% 2,137 38

Reforestation 0.41% 1,285 -

Source: Rambaldi et al., 2003, p.36


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Table 3: Evolution in the land use in So Joo River Basin (1986 -2002)

1986 1990 2002Land useArea (ha) % (*) Area (ha) % (*) Area (ha) % (*)

Forests 100,746.27 37.63 88,358.94 33.00 79,746.66 29.79

Crop Fields / Pastures 99,852.57 37.30 101,922.84 38.07 81,079.74 30.28Exposed soil 64,262.43 24.00 73,101.51 27.30 102,838.95 38.41Water bodies 2,874.87 1.07 4,352.85 1.63 4,070.79 1.52Total 267,736.14 100 267,736.14 100 267,736.14 100(*) total area of 267.736,14 haSource: Rambaldi et al., 2003, p.37.

As noted by Rambaldi et al. (2003, p.30), "the sanitation system, roads construction,gas pipelines, oil pipelines and energy transmission lines in addition to the already existentrailroad, promoted an intense occupation of the region, followed by urban expansion." A

compilation done in the 1990s revealed that only 2% of the habitat of the golden lion tamarinstill existed. All those facts prove the additionality of the project that would allow thereforestation of areas threatened by a definitive devastation. The baseline described in thereport was done based on satellite images and socioeconomic data of the region. The studywas made taking into account the loss and gains of forest area between 1990 and 2001. Thetotal area of forest devastated in that period was of 23,689 hectares. This means an annualaverage loss of 1.2% of the forested area, representing a devastation of 38% of the total forestat the end of the forty years of the project:

[ There is ] a clear tendency of: 1) destruction of the forest remainders inthe basin; 2) decadence of the agricultural activity and 3) increase of

degraded areas. It is the perverse cycle for land degradation: the forest isremoved, an agricultural activity with low investments is put in its place,the lack of appropriate technologies and little diversification turns it into anon-profitable activity and it is abandoned, shifting to pastures for cattleranching that, for the same reasons, ends up demanding the enlargementof the cultivated area, pressuring for new deforestations. The cycle isclosed with the abandonment of the cattle ranching industry, leavingbehind immense portions of degraded and eroded lands.

(Rambaldi et al., 2003, p.37)

However, this picture of devastation can be reversed in the region with theimplementation of a reforestation project. The project, with the use of native species, protectsthe remaining forests, connecting fragmented forested areas (corridors), reducing the risk offire, expanding the habitat of numerous species of animals (including the golden liontamarin), and preserving the local biodiversity.

The report from AMLD made the calculation of the carbon sink, along forty years, fora neighboring farm to the REBIO Poo das Antas. We will use those data to calculate thepotential income for the theoretical projects area. It is worth noting that the property studiedis composed mostly by different types of pastures and for that reason it can serve as anaverage soil type of the region. This carbon sink calculation (of an area of 2,442.55 hectares)used already approved methods and is described in Rambaldi et al. (2003).

Regarding the subject of leakage, meaning the possibility of growth in net GHGemission for reasons related to the project (fires or irregular felling, inside or outside the


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projects boundaries), the study of AMLD says that the probability that activities previouslyperformed at the place (agriculture and cattle ranching) being transferred to another forestedarea is small. They argue that the soil quality in the region is very low and the agriculturalactivities already were being abandoned little by little by farmers anyway. It was alsoconsidered in the project costs the recruiting of fire brigades, reducing leakage risks.

4. Reforestation Project for the region around REBIO Poo das Antas

In this section, the potential income and costs of a hypothetical project in the area ofPoos das Antas will be calculated. For this purpose, we should consider some realisticassumptions, considering the availability of reliable data.

First of all, we will consider that the farmers have interest in reforesting open areas orpastures due to the low productivity or advanced degradation of the soil; that is, the cost ofopportunity of land is close to zero (areas without interest for the agricultural sector). Bydoing so, we will eliminate the acquisition and registration expenses of the land that will stayunder farmers' ownership. On the other hand, farmers will be indefinitely committed to the

preservation of reforested areas, either as conservation area or as a sustainable woodextraction property.

It is important to remember that only native species will be used for the reforestation.In this way, it is guaranteed that there will not be any negative impact in local biodiversityand, on the contrary, there will be a considerable increase in the habitat of countless nativespecies in risk of extinction.

The area destined for the reforestation in this hypothetical project will be of 16.300hectares. This area, taken together with the remaining forests of the region, should be enoughto liberate the gold lion tamarin from the danger of becoming extinct. Another importantconsideration is the fact that we will be using the average total cost of the project fromRambaldi et al. (2003), without considering the expected marginal gains. That simplificationwill increase the total costs of the hypothetical project, counterbalancing any optimisticsupposition.

The results of this calculation should be seen as an indication of the great opportunitythat opens up for reforestation projects connected to the Kyoto Protocol more than a preciseestimation of the expected profits. The result indicates the amount of capital related to aproject of this magnitude along forty years of its execution. The reforestation projects usingnative species won't be an investment of great financial profitability. The great opportunity isthe (total or partial) financing of the recovery of previously valuable areas (considering thebiological value of the Atlantic forest) that are degraded today.

Regarding costs, they are calculated for the same area studied in the carbon sink

analysis (2,442.44 hectares). We will use the values presented in Rambaldi et al. (2003) forthe calculation of the present value cost of the proposed project and will compare it to thepresent value income. It is known, however, that there is room for cost falls due to gains ofscale, as seen in relation to the acquisition of seeds and equipments, and spending associatedwith the validation, monitoring and verification related CDM rules.

The table below discriminates the implementation and operation costs of thereforestation project of 2,442.44 hectares, in forty years of execution. In contrast to the studyof Rambaldi et al. (2003), in this work we did not include costs related to the purchase,registration and maintenance of the properties. As previously stated, the proposed project hasas assumption the land owners participation, justifying the exclusion of these expenses. Wealso hypothesize that there is no or very little opportunity cost for this land due to its

advanced state of degradation. The maintenance expenses of the farms will not be included inthe costs of the project since such expenses would take place even without the project, not


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being necessarily altered by its presence. We included, however, the expenses with thereforestation process itself and those related to its adaptation to CDM standards.

Table 4: Costs of the Project (in 40 years)Costs

Reforestation US$ 2,076,395.00Leakage control US$ 197,766.00

Monitoring and verification US$ 311,635.00

Project development US$ 135,000.00

Sustainable rural activity* US$ 263,688.00

Local management US$ 1,360,706.00

Indirect costs US$ 1,200,785.00

TOTAL US$ 5,545,975.00

(*) Expenses related to the conversion of current rural activities to more sustainablepractices. Source: Rambaldi et al., 2003, p.27.

The total costs would add up to US$ 5,545,975.00 over the forty years of the project(Table 4).

As in Rambaldi et al. (2003), the costs are not discriminated along the years. Tocalculate the present value cost, we made the following assumptions:a) The expenses with reforestation were divided equally by the first five years of the project.b) Other expenses were divided equally by the forty years of the project.

With a discount rate of 5% a year, we reached a total of US $ 1,345.44 per hectare forthe current cost of the project. For a discount rate of 8% a year, the result was US$ 1,102.30

per hectare. Total present value costs, considering the 16,000 ha of the project, would beUS$21,930,717.65 (5 % discount rate) or US$ 17,967,495.10 (8 % discount rate).Besides the financial income (which will be calculated later) this project allows other

types of earnings, in the social and environmental plan. In the social plan, the reforestationactivity put an end to the domain, almost exclusive, of the semi-extensive cattle ranching inthe local job market. This low productive activity generates few and badly remunerated jobs.In contrast, according to data from the Fundao S.O.S. Mata Atlntica, for each reforestedhectare, 4 direct jobs are created. Other jobs associated with environmental protection, likefire brigades, are also foreseen. On the other hand, the deforestation in remaining areas ofAtlantic forest is not associated with generation of jobs, as seen in Young (2004, 2006).

This project also has the potential to stimulate the production of goods and services

related to the forest, like production of seedlings of native species, ecotourism and productionof sustainable and certified lumber (Rambaldi et al. 2003). Those activities can generate newincomes in the future, exactly when the generation of carbon credits will be close to an end,stimulating the maintenance of the forest in the long run.

Regarding the production of seeds and seedlings of native species, it is worth to pointout the potential use of that genetic information for income generation. The smallcommunities of MST (a social movement that fights for land reform) that surround the areacan take advantage of the new demand, making their small unproductive propertieseconomically viable. As for ecotourism, it is important to remember that the Poos das Antasregion is located between Rio de Janeiro, the main hub for foreign tourists arriving in Brazil,and Regio dos Lagos, another region in the state of Rio de Janeiro, that receives a great

number of national and international tourists.


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In the environmental plan, this reforestation project would protect the supply of waterand the regulation of water flow in the So Joo River basin:

...[the rivers of the area are] responsible for the maintenance of the watersupply for a high populated area like Barra de So Joo, Cabo Frio and

Armao de Bzios. Regulating the water flow in the small canals andrestoring the forest covering along Aldeia Velha and So Joo rivers, theproject will contribute to improve the water quality, to reduce the seasonalvariations in the water flow, to ease the effects of the tides, and to containthe soil salinization...

(Rambaldi et al., 2003, p.42)

Another possible source of income for farmers that choose to reforest is the earningsfrom environmental services. These services are provided by the forested lands (asregularization of water flows, soil protection against erosion, and biodiversity protection) andevery city in the region benefit from them. Then, it is fair that farmers receive some money as

an incentive to keep their forests intact. It is worth telling that the Committee of So JooRiver is organizing itself, and there is a real possibility for payments of water use by themunicipalities inside the river basin.

Proceeding with the environmental benefits of the reforestation project, its locationaround two conservation units (Poo das Antas e Unio) contributes to the preservation of thebiodiversity in the Atlantic Forest. Poo das Antas is home of the largest wild population ofgolden lion tamarin, besides other endangered species. In REBIO Unio, scientists identified17 threatened species of birds, the highest concentration in the Americas.

Those social and environmental benefits, despite their immateriality, have concreterepercussions on the peoples welfare. We can not underestimate those impacts whenevaluating a project of this nature. These gains are long run benefits, as they protect the soilquality, guarantee the water supply and quality, and protect biodiversity from the richecosystem of Atlantic Forest to future generations.

From now on, we will make the calculations for the present value income of thehypothetical project. First of all, the carbon sink per hectare will be estimated for the fortyyears of the project. Each ton of carbon captured by the forest can generate a CER (CertifiedEmission Reductions) by CDM rules. These CERs can be sold in carbon markets, becomingthe only source of income of our study case. As in Rambaldi et al. (2003), this hectare of landis an average land type, a combination of different types of pasture and open lands that existin the region. For this purpose we shall use the total carbon sink calculated for an area of2,442.55 hectares (table 5).

Table 5: Average Carbon SinkTotal Carbon Sink

(ton C in 20 years) 205,363.64(ton C in 40 years) 357,342.82

Total Area (hectares) 2,442.55Average Carbon Sink

(ton C/hectare in 20 years) 84.08(ton C/hectare in 40 years) 146.30

Source: Authors, based on Rambaldi et al. (2003).

We came to the result of 84.08 tons of carbon captured by each hectare of reforestedarea after twenty years. As the rhythm of carbon sink falls in the same rate that the forest


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grows, at the end of forty years, we calculated that 146.30 tons of carbon per hectare would becaptured.

Comparing these results with the Brazilian National Inventory of GHG Emissions data(MCT, 2004), the carbon sink of these areas was larger than expected. According to thatstudy, Atlantic Forest regeneration capture 2.4 ton. C / ha each year. However, the data from

Rambaldi et al. (2003) points out an annual average capture of 3.66 ton. C / ha. It should beemphasized that the Inventory was quite criticized at the time of its publication, exactlybecause its numbers were considered very conservatives.

The next step to calculate the present value income of the project is to define the priceof the CERs. We will use three different scenarios for the price. Each scenario considers theprice constant over time to simplify our calculations. The first scenario estimates an averageprice of CER at US$ 5.00, considering the low value of forestry project under the CDMmarket. In the second one, the price is US$ 15.00, the median of price estimations publishedby PriceWaterHouseCoppers for CDM projects. At last, we give the price of US$ 25.00 perCER as a ceiling price as the project generate a charismatic carbon credit in face of itsenvironmental positive externalities and the important image that golden lion tamarin has in

the world media. International institutions and companies might be interested in financing aproject that could improve their image. We know that the price of US$ 25.00 per CER is high,clearly above market standards.

After that, two projections for the distribution of carbon credits along the projectsperiod were made with the purpose of calculating the present value income. Using data fromRambaldi et al. (2003) for the total carbon sink in 20 and 40 years, we estimated a logarithmicfunction and a linear function that represents carbon sink year by year. The logarithmicfunction concavity seems to better represent the natural evolution of the carbon sink by theforest faster in the beginning and slower in the end. These characteristic gives a higherpresent value income since the credits would suffer less with the discount rate. So, this couldbe considered the upper boundary of the present value income.

The linear function gives the average carbon sink per year, and it could be consider thelower bound of the present value income, as forests carbon sink function really has a concaveform.

First, we estimated the present value income (table 6) with the logarithmic function(Graphic 1) in the three possible scenarios for CER price.

Graphic 1: Projection of Carbon Sink with Logarithmic Function


y = 88400Ln(x) - 9405,4

-50000

0

50000

100000

150000

200000

250000

300000

350000

400000

1 3 5 7 9 1113151719 21 232527 29 3133 353739

Total carbon sink in20 and 40 years

Log. Function


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Table 6: Results for Present Value Income with the Logarithmic Function

Price of ton. C Discount Rate Present Value Income perhectare

Total Present Value(16,000 ha)

US$ 5.00 5 % US$ 412.62 US$ 6,725,773.63

US$ 5.00 8 % US$ 339.70 US$ 5,537,174.45US$ 15.00 5 % US$ 1,237.85 US$ 20,177,320.88US$ 15.00 8 % US$ 1,019.11 US$ 16,611,523.35US$ 25.00 5 % US$ 2,063.12 US$ 33,628,868.13US$ 25.00 8 % US$ 1,698.52 US$ 27,685,872.25


Table 7: Present Value of Implementation and Operation CostsDiscount Rate Present Value Costs per

hectareTotal Present Value Cost

(16,000 ha)5% US$ 1,345.44 US$ 21,930,717.656% US$ 1,102.44 US$ 17,967,495.10


Then, we made the same calculations (table 8) with the linear function (Graphic 2).

Graphic 2: Projection of Carbon Sink with Linear Function


Table 8: Results for Present Value Income with the Linear FunctionPrice of ton. C Discount Rate Present Value Income per

hectareTotal Present Value

(16,000 ha)US$ 5.00 5 % US$ 317.65 US$ 5,177,673.93US$ 5.00 8 % US$ 219.34 US$ 3,575,211.45US$ 15.00 5 % US$ 952.95 US$ 15,533,021.80US$ 15.00 8 % US$ 658.01 US$ 10,725,634.36US$ 25.00 5 % US$ 1,588.24 US$ 25,888,369.67

US$ 25.00 8 % US$ 1,096.69 US$ 17,876,057.26Source: Authors, based on Rambaldi et al. (2003).

y = 9148,9x + 1540,5

0

50000

100000

150000

200000

250000

300000

350000

400000

1 3 5 7 9 11 1315 171921232527293133353739

Total carbon sink in

20 and 40 years

Linear Function


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Table 7: Present Value of Implementation and Operation CostsDiscount Rate Present Value Costs per

hectareTotal Present Value Cost

(16,000 ha)5% US$ 1,345.44 US$ 21,930,717.656% US$ 1,102.44 US$ 17,967,495.10


As we can see, only three out of 12 scenarios showed income greater than costs. All ofthese scenarios have the higher price for ton of carbon. Despite that, the earnings originatedfrom carbon credits cannot be neglected, since they might finance, even if partially,reforestation projects that have positive externalities. Therefore, they can contribute to thesustainable development of the State of Rio de Janeiro.

We also tried to estimate the opportunity cost of land in the region. We searched datafrom IBGE (Federal Census Bureau) for the cattle ranching activity in the districts around theREBIO Poo das Antas, in the So Joo River basin in order to do that. As we could not findinformation about this activitys cost and profitability, the value of output was the best proxy

available.The last census of the agricultural sector in Brazil was made by IBGE in 1996. There,

we were able to find information about the value of milk production, cattle selling and buying,meat production, and the total area used by the industry in the region. Table 9 illustrates theinformation gathered from IBGE Agricultural Census. We converted R$ 1.00 to US$ 1.00.That was the exchange rate from 1994 to 2002, when Brazilian government established acurrency peg to fight inflation.

Table 8: Value of the Annual Cattle Ranching Production in the So Joo River basin

Area 62,720.34 haAnnual Value of Meat Production US$ 132,200.00

Annual Value of selling Cattle US$ 2,943,555.00Annual Value of buying Cattle US$ 1,233,508.00

Annual Value of Milk Production US$ 4,654,663.00NET Value of

Cattle Ranching IndustryUS$ 6,496,910.00

Source: Authors, based IBGE (1996).

The total annual value of the cattle ranching industry in the region wasUS$6,496,910.00. The average annual value of output per hectare was US$ 103.58, as the

total area occupied by this activity reached 62,720.34 ha.Finally, we calculated the present value opportunity cost for 40 years. As results, wefound:

a) Present Value Opportunity cost of US$ 1,777.34 / ha, with a 5 % annual discountrate; or Total Present Value Opportunity cost of US$ 28,970,642.00.

b) Present Value Opportunity cost of US$ 1,235.15 / ha, with an 8 % annual discountrate; or Total Present Value Opportunity cost of US$ 20,132,945.00.

As we can see, these results are smaller than the income generated by carbon credits inthe more optimistic scenario for carbon prices. In either case, we considered the costs of theactivity, but it is easy to assume that semi-extensive cattle ranching activities have lower coststhan reforestation. Adding all costs (implementation, operation and opportunity costs), there is

no scenario for credit prices that could fully finance the hypothetical project.


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Nonetheless, it is worth telling that these numbers confirms the information that thecattle ranching industry in this region is a very low productive activity. Also, it seems to geteven worse with time, as soil degradation continues to increase. In addition to that, we canpresume that there are already areas so degraded that no commercial activity can take place,therefore their opportunity costs are practically zero.

5. Conclusion

Regarding the reforestation project of Atlantic Forest with native species around theREBIO Poo das Antas and the REBIO Unio, the following conclusions can be made:

1)Since the expenses of the projects implementation appear before in time than any income,and given the current discount rate in Brazil, it will be difficult for a project of this scope tobe completely self-financed. Adding all costs and considering the discount rate, a very highprice would be necessary for the carbon credit to make the project economic feasible. Thisprice is outside of todays market standards. However, the sale of carbon credits may

perform a partial role in financing reforestation projects.2)If there were any market development for environmental services as water supply and

quality, climate regulation, biodiversity protection, etc., the project could be possiblyviable. It is important that the property rights of these services be given to farmers,proportionally to the forest cover of their proprieties. The cities that receive the benefitsfrom the forested lands should pay for their use of natural resources (Young, 2005).

3)To execute the reforestation only in degraded lands, with opportunity costs near zero, canalso be a form to implement this project. Without competition with other activities,reforestation projects would be feasible if they could finance implementation and operationcosts. Even so, the price must be higher than the market standards. As we estimated insection 5, only one forth of the scenarios did that (those with higher prices).

4)Reducing the projects cost can make it more attractive. There are some ways to do this:cost reduction with reforestation through donations of seedlings and voluntary work; costsreduction with local administration thanks to gains of scale; donations from NGOsinterested in biodiversity preservation; donations from companies or internationalinstitutions that want to engage in corporate sustainability activities; and campaigns forindividual donations (Rambaldi et al., 2003). The law that forces paper and cellulosemanufacturing companies to plant native species in a proportion of their commercialreforestation (State law 4063/2003) can also reduce project costs (Oliveira, 2007).

5)The government has an important role in the development of reforestation projects. It couldgive incentives to farmers, granting tax reductions to land owners that decided to reforest

with native species part of their lands. Also, the government is responsible for thedevelopment of markets for environmental services, and it must provide land owners theproperty rights over these services.

Finally, reforestation projects with native species are not easy to finance, since they donot bring economic return to the investments needed. However, the social andenvironmental benefits generated are enormous and vital to society. The ratification of theKyoto Protocol and the development of a carbon market can be great incentives forreforestation of important areas, such as rivers banks, endangered species habitats, andareas with advanced soil erosion.


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