Latin America, home to some of the world’s richest forest areas, is playing a critical role in developing viable carbon-based schemes to preserve and promote forest conservation.

Emerging international carbon mechanisms are continually changing, however. Plantar, a Brazilian iron foundry company, epitomises the project and market complexities that such uncertainty brings.

The pig iron producer, based in Minas Gerais, Brazil, was considering changing from charcoal from eucalyptus trees to coal in its production processes, a switch that would have resulted in greatly increased carbon emissions.

To persuade it otherwise, the World Bank stepped in with its Prototype Carbon Fund to facilitate funding for a 23,100-hectare commercial eucalyptus plantation in 2001. It was hoped that the additional carbon sequestered by the planted trees would qualify the project for credits under the Kyoto Protocol’s Carbon Development Mechanism (CDM).

Root flaws

However, the Plantar initiative quickly became a flashpoint for critics of monoculture tree plantations inspired under the Kyoto Protocol mechanisms.

A coalition of over 50 Brazilian non-profit groups, unions and other civil society movements have publicly condemned the ‘carbon sink’ project as “unsustainable” and “climatically worthless”.

They cite long-standing claims that credits for the temporary storage of carbon by forests fail to counterbalance the permanent release of fossil-stored carbon (see SinksWatchs’ report, ‘Forest Fraud’).

The World Rainforest Movement, a Uruguayan-based non-profit organisation, also draws attention to the absence of socio-economic development benefits from the Plantar project – a criticism echoed by indigenous groups and other forest-based communities in the region.

Yet more evidence of the project’s negative social and environmental impacts is provided in the recent ‘Carbon Connection’ documentary. Produced by the environmental group Carbon Trade Watch, the film finds evidence of water scarcity and a resultant reduction in native biodiversity.

After three attempts, the Plantar project was approved by the CDM Executive board last August. However, the scheme is now registered under altered criteria based on methane sequestration during the eucalyptus-burning process.

Change of tack

Commercial tree plantations represented many of the early wave of forestry projects under the Kyoto Protocol, following its introduction in 1997. Such projects benefited from an approved methodology and the potential of high carbon credit return rates.

Project developers gradually diversified into other afforestation and reforestation project areas, partly in response to initial criticism of plantation monocultures and partly as a consequence of growing technical and methodological expertise.

Latin America and the Caribbean currently are the regions with the highest projected share of carbon credits from forestry CDM. According to a recent report by the Tropical Agricultural Research and Higher Education Center in Costa Rica, over half (56%) of the estimated credits will come from the region.

“Since 2003, when the CDM modalities specified that forest conservation would not be included as an eligible activity, the focus of carbon forestry activities has shifted mainly to reforestation projects,” confirms Sabine Henders, a senior consultant at EcoSecurities, the project developer and consultancy group.

Growth benefits

Increasingly, project developers are looking to introduce additional social or environmental benefits into forestry sector initiatives. These co-benefit projects tend to be focused on the voluntary market, although their reforestation components can make them CDM compatible.

An illustrative project of the shift towards a broader sustainable development component in CDM forestry projects is provided by AES Tiete in the Brazilian state of São Paulo.

The initiative involves the reforestation of 9,544 hectares of unmanaged grassland beside five hydroelectric plant reservoirs with over 80 varieties of native forest species. In addition, the project promises to provide local jobs and to impede invasions of the river bank area by urban settlers.

The World Bank, through its BioCarbon Fund, is out in front in investing in new-generation forestry projects. The fund particularly focuses on delivering carbon finance to developing countries that otherwise have few opportunities to participate. i.

In Honduras, for example, the bank is backing a scheme to reconstitute a 2,600 hectares of degraded forest in the country’s Pico Bonito National Park buffer zone.

The initiative is expected to sequester a minimum of 0.45 to 0.55 million tonnes of carbon dioxide equivalent (CO₂e) by 2017. The project will also represent the first pilot for an avoided deforestation component, with predicted sequestration of around 0.5 Mt CO₂e.

Developed by the non-profit EcoLogic, the project learns from the Plantar case. As well as integrating social benefits for local small-farmers through agroforestry techniques, it will result in environmental benefits such as reduced soil erosion and the protection of threatened biodiversity.

The Pico Bonito initiative is being developed under a new tranche of activities aimed at reducing emissions from deforestation and forest degradation (known as REDD).

Seeds of progress

While yet to be formally approved as a CDM methodology, the notion of generating credits through avoiding deforestation is generating considerable interest among project developers.

Under its ‘readiness programme’, due to be launched in July, the World Bank is already in discussions with an undisclosed number of Latin American countries about preparing national strategies for REDD projects. The programme will also extend to developing scenarios for emissions from deforestation and degradation based on recent historical emissions and establishing monitoring systems for emissions and emission reductions.

Successful projects will be funded through the $165 million Forest Carbon Partnership Facility. Should REDD-based carbon credits gain inclusion in the post-2012 international climate change regime, experts predict that Latin America is well set to benefit from the avoided deforestation methodology.

“Under the CDM, we are seeing a focus on reforestation and planting projects and in the light of renewed discussions about avoided deforestation, that is shifting back slowly now to also include conservation projects as well,” says EcoSecurities’ Henders.


Few and far between

Forestry projects still remain the exception under CDM, however, constituting less than 1% of total CDM projects worldwide, according to the World Bank’s most recent report on the world carbon market.

The reasons are multiple. Continued ambiguity of such projects under current CDM rules marks a major disincentive for project developers. Problems of methodological uncertainty, technical complexity and the high cost of project development also reduce appetite in the region, according to Joana de Marsillac, executive director of the Brazilian project developer, CO₂ Soluções Ambientais.

“The cost of the reconstitution of a native species forest is very high. There are not enough economies of scale to make it work on a purely carbon basis,” de Marsillac maintains.

Sustainable increase


Some progress is being made in the region on developing technical expertise for forestry CDM methodologies. CO₂ Soluções Ambientais, for example, has developed a series of ‘sustainable preservation initiatives’ in a number of sites in Brazil’s Amazonas province.

Using on-the-ground scientific data collection, coupled with satellite imagery, the company is working towards a calculation system for incremental carbon stock and sequestration values of the region. It admits, however, that the concept of additionality as defined by the CDM remains a challenge.

The ‘FORMA’ project – an initiative funded by the Spanish government-backed National Institute for the Agricultural and Food Research and Technology (INIA), which provides technical and financial support to 11 forestry CDM projects across the region – has also developed a number of guides and tools for helping project developers. These include a tool for calculating ex-ante estimations of forestry CERs, known as TARAM.

At a political level, several forest-rich Latin American countries have also raised doubts over the emerging REDD programme. As the proposal stands, compensation under REDD would be tied to historical deforestation rates. Forest-rich countries with low deforestation rates could therefore be excluded. Potentially falling into that bracket are Colombia, Peru, Belize, Panama, Suriname and Guyana.

Brazil has also expressed concerns about the REDD process, which it sees as an attempt to limit its economic development of the Amazon rainforest.


Voluntary alternatives

Given the effort and expense of registering a forest-based project (registering a REDD project can cost up to US$50,000), it is understandable that most Latin American project developers have concentrated on easier, higher carbon revenue CDM projects, such as landfill, biomass and hydropower.

Project developers, forest conservation groups and high-risk investors, meanwhile, have begun to bet on a voluntary system developing outside the formal structures of the carbon market.

“There’s a limit for forest projects under the CDM scheme. We need to work with private company partners to develop the voluntary market,” argues Alexandre Curvelo de Almeida Prado, manager of conservation economics at the environment group, Conservation International (CI).

In keeping with the strategy, CI recently advised international hotel chain Marriott on an innovative “forest fund” to protect 589,000 hectares of endangered forest in the Amazonas state of Brazil. The $2 million investment, announced in April, will fund monitoring deforestation in the Juma Sustainable Development reserve, as well as providing employment and healthcare for the area’s 500 or so residents.

In Mexico, meanwhile, CI is working with coffee giant Starbucks on a five-year programme to protect standing forests. The initiative, which includes a $7.5 million investment over the first three years, will include training for coffee farmers to conserve the forests and other biodiversity around their land.

CI hopes that both projects will “ultimately” generate additional revenue through access to the CDM or emerging international carbon markets under REDD. The activities will be certified as ‘multiple benefit’ under the Climate, Community and Biodiversity Alliance (CCB) standards, one of the emerging voluntary schemes for evaluating land-based carbon mitigation projects.

The region also boasts a variety of innovative solutions to the absence of a standardised, fungible currency for voluntary forest initiatives.

Plan Vivo, for example, a UK-based carbon dealer, has developed a carbon financing mechanism for a pilot agroforestry project involving around 300 small-coffee farmers in Mexico.

Under criteria developed by Plan Vivo and assessed by environmental verifier Rainforest Alliance, the farmers agree a reforestation management plan for their plots. The proven, aggregated carbon reductions generated through the scheme are then sold to buyers with offset targets and the income returned to the farmers through individual trust accounts.

“There’s a recognition that carbon in some of these projects is a surrogate for a number of other benefits that are coming by conserving forests as part of a carbon forestry project,” says Jeffrey Hayward, senior services manager at the Rainforest Alliance.


Holistic solutions

Some project developers, however, are dropping the carbon element entirely, choosing instead to commercialise the eco-system services generated by native forests.

Garnering considerable interest in recent months, for instance, is a recently launched project in Guyana’s Iwokrama Reserve. London-based project developers Canopy Capital are working on a number of tradable investment products in an attempt to monetarise the services of the 371,000-hectare forest, such as rainfall protection, water resource preservation and conservation of native biodiversity.

The most probable financial instrument for the scheme is a tradable ‘forest-backed bond’, which would include a capital repayment on its expiry. Canopy Capital has ten undisclosed private investors backing the scheme, which operates completely separately from existing carbon markets.

“This is a more holistic way of looking at forest conservation,” says Niki Mardas of the non-profit Global Canopy Programme, a partner in the project.

Similar funds are now emerging to promote voluntary conservation projects that seek to price the value of forest services.

Brazil’s Agency for Sustainable Rural Development, for example, announced that it is proposing to pay residents of the Amazon money and credits for assisting in the preservation of the rainforest. Under the pilot scheme, up to 4,000 farmers, ranchers and small-scale woodsmen will be rewarded with public funds, special credits and a guaranteed market for environmentally sustainable products.


Thin on the ground

Voluntary forestry conservation projects that are both measurable and scaleable remain the exception, however.

“Today the problem isn’t money, as it was two or three years ago. Nor is it a problem of demand. It’s a problem of offer – the offer just isn’t there,” argues Guy Reinaud, president of Pro-Natura International, a Paris-based project developer with interests in South America.

Environmentally friendly forest schemes are developing in part due to the confusion in the carbon market and the difficulty in making them pay. If and when REDD gets the go-ahead, the market should clarify and amplify considerably.

At present, however, the offer in Latin America is dominated by reforestation projects, many of which are scheduled to come on stream under the CDM. When it comes to commercialising forest conservation, however, the high-risk money is on the voluntary market devising a solution first.