Climate change and forests

part fivenational systems and voluntary carbon offsets 18 Legislative Approaches to Forest Sinks in Australia and New Karen Gould, Monique Miller, and Martijn WilderCase Study: The West

change

EmErging Policy

and markEt oPPortunitiEs

charlotte streck, robert o’sullivan,

toby Janson-smith, and richard g tarasofsky

Editors}

climate change

climate change

Emerging Policy and Market Opportunities

Charlotte Streck, Robert O’Sullivan, Toby Janson-Smith, and Richard Tarasofsky

Copyright © 2008

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Climate Change and Forests: Emerging Policy and Market Opportunities may be ordered from:

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Library of Congress Cataloging-in-Publication data

Climate change and forests : emerging policy and market opportunities / Charlotte Streck [et al.], editors.

p cm.

Summary: “Frames forestry activities within climate-change policy context Analyzes the operation and efficacy of market-based mechanisms for forest conservation and climate change Explores voluntary schemes for carbon crediting, provides an overview of carbon accounting best practices, and presents tools for future sequestration and offset programs Concludes with options for slowing deforestation”— Provided by publisher.

Includes bibliographical references and index.

ISBN 978-0-8157-8192-9 (cloth : alk paper)

1 Climatic changes 2 Forest microclimatology 3 Carbon sequestration I Streck, Charlotte II Title.

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Foreword ix

David Freestone

part one

introduction

Charlotte Streck, Robert O’Sullivan, Toby Janson-Smith,and Richard Tarasofsky

Rosimeiry Portela, Kelly J Wendland, and Laura LedwithPennypacker

part two

the international arena

Eveline Trines

4 Risks and Criticisms of Forestry-Based Climate Change

Johannes Ebeling

Contents

v

5 Forest Carbon and Other Ecosystem Services:

Jan Fehse

6 Forestry Projects under the Clean Development Mechanism

Sebastian M Scholz and Martina JungCase Study: The Humbo Community-Based

Paul Dettmann, Tony Rinaudo, and Assefa Tofu

Bernhard Schlamadinger, Sandra Greiner, ScottSettelmyer, and David Neil Bird

part three

practical experiences

8 Design Issues in Clean Development Mechanism

Bruno Locatelli, Lucio Pedroni, and Zenia Salinas

Carmenza Robledo and Patricia Tobón

9 The Permanence Challenge:

Franck Lecocq and Stéphane Couture

10 Project-Based Mechanisms: Methodological Approaches

Timothy Pearson, Sarah Walker, and Sandra Brown

Dominique Hervé and Edmundo Claro

12 Legal Issues and Contractual Solutions for LULUCF Projects

Monique Miller, Martijn Wilder, and Eric Knight

part four

outlook: avoided deforestation

and the post-kyoto agenda

13 Reducing Emissions from Deforestation

Robert O’Sullivan

from Deforestation and Degradation of Forests

Danilo Mollicone, Sandro Federici, Frédéric Achard,Giacomo Grassi, Hugh D Eva, Edward Nir, Ernst-DetlefSchulze, and Hans-Jürgen Stibig

Case Study: Creative Financing and Multisector Partners

Jeannicq Randrianarisoa, Ben Vitale, and Sonal Pandya

15 A Latin American Perspective on Land Use, Land-Use Change, and Forestry Negotiations under the United Nations

Manuel Estrada Porrua and Andrea García-GuerreroCase Study: The Noel Kempff Climate Action Project,

Jörg Seifert-Granzin

16 Compensated Reductions: Rewarding Developing Countries

Stephan Schwartzman and Paulo Moutinho

17 Creating Incentives for Avoiding Further Deforestation:

Charlotte Streck, Lucio Pedroni, Manuel Estrada Porrua,and Michael Dutschke

part five

national systems and voluntary carbon offsets

18 Legislative Approaches to Forest Sinks in Australia and New

Karen Gould, Monique Miller, and Martijn WilderCase Study: The West Coast Development Trust,

Sean Weaver

19 Using Forests and Farms to Combat Climate Change:

How Emerging Policies in the United States

Cathleen Kelly, Sarah Woodhouse Murdock, JenniferMcKnight, and Rebecca Skeele

Case Study: The Van Eck Forest Management Project

Michelle Passero, Rachael Katz, and Laurie Wayburn

Katherine Hamilton, Ricardo Bayon, and Amanda HawnCase Study: Reflections on Community-Based

Richard Tipper

21 Developing Forestry Carbon Projects for the Voluntary Carbon

Marisa Meizlish and David BrandCase Study: Carbon Sequestration in the

David Patrick Ross

Iam delighted and honored to have been invited to write a foreword for this

excel-lent and timely work It is particularly timely because in December 2007, in ahistoric decision, the parties to the 1992 UN Framework Convention on ClimateChange (UNFCCC), meeting in Bali, Indonesia, decided to include the issue ofavoided deforestation—or “reducing emissions from deforestation and forest degra-dation” (REDD), as it is known in UNFCCC argot—in the Bali Action Plan Thisplan is the so-called road map for negotiations that aim to develop by 2009 a legalinstrument to replace the 1997 Kyoto Protocol when it expires in 2012 The KyotoProtocol to the UNFCCC requires its developed country parties to make reduc-tions in their emissions of greenhouse gases by an average of some 5.2 percent from

1990 levels throughout its five-year commitment period, 2008–2012 The Bali roadmap is of particular importance in that the UNFCCC parties agree to consider

“measurable, reportable and verifiable nationally appropriate mitigation actions” for

all parties, including developing country parties, although developed country parties

also agree to consider “commitments, including quantified emission limitationand reduction objectives.” For present purposes, even more significant is the provi-sion of the action plan that commits the parties to consider “policy approaches andpositive incentives on issues relating to reducing emissions from deforestation andforest degradation in developing countries; and the role of conservation, sustain-able management of forests and enhancement of forest carbon stocks in developingcountries.”

Foreword

david freestone

ix

This decision represents a major breakthrough in the UNFCCC tions In addressing the issues of climate change, it is worth recalling that thetext of the 1992 convention puts the important role of sinks, such as forests, inabsorbing carbon on a par with the need for the reduction of greenhouse gas(GHG) emissions For example, article 4(1)(d) requires the parties to “addressstabilization of climate by sources and use of sinks,” and article 3(2) requiresthat parties “should take precautionary measures [and] lack of scientific cer-tainty should not be used as a reason for postponing such measures which[should] cover all relevant sources, sinks and reservoirs [of GHGs].” Nev-ertheless, the issue of sinks was highly controversial in the negotiation of theKyoto Protocol and thereafter in the protracted process leading to the develop-ment of the “guidelines, policies and rules” for the implementation of the pro-tocol contained in the now-famous Marrakech Accords—agreed at the seventhsession of the Conference of the Parties (COP) to the UNFCCC in Marrakech

negotia-in November 2001 The Marrakech Accords set out the basic regulatory work for the protocol and its so-called flexibility mechanisms, including theClean Development Mechanism (CDM) Under the CDM, industrializedcountries can invest in projects in developing countries that reduce emissions

frame-of GHGs and then use the “certified” emission reductions produced by thoseprojects toward their own reduction targets Despite the fact that agriculture,forests, and other land uses (AFOLU) account for some 20 percent of the totalamount of carbon that exists on the planet, it was decided at Marrakech thatonly reforestation and afforestation projects would be eligible for considerationunder the CDM—and indeed to date only one such project has been approved

by the CDM Executive Board In the same vein, the European Emissions ing Scheme (ETS), which began operations among the EU countries in 2005,does not count sinks at all

Trad-There are a number of reasons for this—some political but others ological However, as we move into the beginning of the Kyoto commitmentperiod and attention is focused on the post-2012 regime, it is important thatsinks, and particularly forest sinks, are firmly back on the agenda In 2005, at theeleventh session of the COP, Papua New Guinea and Costa Rica—with supportfrom a number of important forested countries—put forward a formal proposalthat considers the crediting of benefits from avoiding further deforestation This

method-is a vitally important method-issue The 2006 Stern Review on the Economics of Climate

Change, commissioned from a team led by economist Sir Nicholas Stern by the

then U.K chancellor of the exchequer, Gordon Brown, identified avoided estation as the cheapest option for mitigating increases in emissions of greenhouse

mon-1 See www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_summary.cfm

itoring mechanisms, often involving satellite surveillance, need to be put intoplace and effective compensation systems devised to encourage governments andtheir nationals to stop cutting down trees.

Nevertheless, the fourth assessment of the UN Intergovernmental Panel onClimate Change (IPCC) has shown that the current situation and prognosis fordangerous climate change is already far worse than had previously been envisaged.The Stern Review highlights the fact that if serious action is not taken within thenext fifteen to twenty years, then the costs of coping with climate change could be

in excess of 20 percent of total global income annually The World Bank has mated total global income currently at some U.S.$35 trillion a year, rising by

esti-2050 to perhaps U.S.$350 trillion, when the global population is estimated to besome 9 billion, with major relocations of population in developing countries and

U.S.$350 trillion in 2050 is some U.S.$70 trillion a year This is an enormoussum of money that puts the current need for serious investments in new technol-ogy and innovative approaches to tackling both mitigation and adaptation intoproper perspective

It is also clear that the public sector by itself is unlikely to be able to lize the scale of resources necessary The success of the emerging carbon mar-ket has shown how the private sector can respond The World Bank annual

mobi-State and Trends of the Carbon Market has shown huge growth in carbon

dominated by the European ETS, with some U.S.$24 billion in trades, theCDM, mobilizing resources for developing countries, reached nearlyU.S.$5 billion The system is a long way from perfect, but it does demonstratevividly the scale of resources that can be mobilized, mostly from the privatesector By contrast, Charlotte Streck and colleagues pointw out that the publicsector response—the Global Environment Facility (which includes five otherfocal areas besides climate change within its mandate)—mobilized U.S.$3.2billion in 2006 for a four-year replenishment

Forests are no quick fix for these issues There is no quick fix This scale of lenge will require a wide range of approaches and technologies However, agricul-ture, forests, and other land uses are an important part of the mix of mitigationefforts that will be necessary to achieve the reduction in carbon emissions that wewill need Avoided deforestation, or REDD, in particular carries with it benefitsthat are not simply carbon-centric Loss of forests worldwide has put strains on thelifestyles of local communities and indigenous peoples, the conservation of bio-logical diversity, and a wide range of ecosystem services In particular, loss of forests

chal-2 K Hamilton and I Johnson, Responsible Growth to 2050 (Washington: World Bank,

2004)

3 K Capoor and P Ambrosi, State and Trends of the Carbon Market 2007

(Washing-ton: World Bank, 2007)

has caused problems of water conservation and drainage, of air quality (throughhaze and dust), and of erosion and loss of topsoil It has caused land slips and sil-tation problems, which in turn affect the viability of other marginal land.

It is against this background that the contributors to this book reexamine some

of the key issues necessary for an informed view of the realistic role that forests(and AFOLU) should play in a post-Kyoto regime and the role that carbon trad-ing might play in support of this agenda

The book is divided into five parts After an excellent introductory section thatsets out the basic issues of the forestry and climate change agenda (chapter 1, bythe editors) and the use of market mechanisms for forest conservation (Portela,Wendland, and Pennypacker), the contributors to part two look at the basic issuesraised by forests under the 1992 UNFCCC and the Kyoto Protocol They coverthe history and background of the forest issue in the UNFCCC process (Trines)and why it is so controversial (Ebeling) Fehse considers the important synergiesbetween the Rio Conventions, and Scholz and Jung look at the fate of forest proj-ects under the Kyoto mechanisms—not an encouraging story Schlamadinger andcolleagues then look at the related issue of bioenergy and at the way bioenergyprojects have been considered, especially in relation to their status as “renewables.”Part three is a thoughtful section on methodological lessons learned Itsauthors offer “state of the art” observations about the issues faced by forest car-bon projects After a detailed discussion of the way forest projects have been con-sidered in the CDM process (Locatelli, Pedroni, and Salinas), chapters aredevoted to permanence (Lecocq and Couture), the quantification of sequestra-tion (Pearson, Walker, and Brown), experiences with attempting to do this inChile (Hervé and Claro), and the contractual aspects of such projects (Miller,Wilder, and Knight)

The core of the book is part four, in which contributors look at the post-Kyotoagenda and the ways in which avoided deforestation might be operationalized in anew post-Kyoto regime Here the book really pushes the agenda importantly After

a look at ways of creating incentives to reduce emissions from deforestation livan), there is a highly technical but important and accessible assessment ofaccounting for such activities (Mollicone and others) After consideration of LatinAmerican perspectives on deforestation (Estrada Porrua and García-Guerrero) andcompensation possibilities for deforestation (Schwartzman and Moutinho), thesection ends with an excellent discussion of ways in which national and projectapproaches to avoided deforestation could be combined in a complementaryway—the “nested approach” (Streck and others)

(O’Sul-Part five looks at the experience of national systems in Australasia (Gould,Miller, and Wilder) and North America (Kelly and others) in providing incen-tives for forestry projects at various levels of government Authors from theUnited States (Hamilton, Bayon, and Hawn) and Australia (Meizlish and Brand)

discuss the methodologies adopted for schemes offered in the important voluntarysector of the carbon market Throughout the book, contributors offer useful casestudies describing lessons learned, which reinforce some of the more theoreticalpieces.

In 2005 Charlotte Streck and I edited a volume based on a series of expert

widely the considerable experience and expertise that the World Bank and a widerange of partners had developed in the field of carbon finance in the first few years

of working on the pioneering Prototype Carbon Fund (PCF) Established by thebank in 2000, well in advance of the coming into force of the Kyoto Protocol,with some U.S.$180 million in contributions from public and private sector par-ticipants, the PCF had a strong “learning by doing” agenda Many of its opera-tions and the instruments it developed were truly first of a kind

In the few years since then the growth in the carbon market has been ishing From 2000, when the PCF was virtually all that was available, the markethas grown to be worth U.S.$10 billion in 2005 and more than U.S.$30 billion

aston-in 2006 What is equally impressive, albeit understandable with such a high level

of investment, is that in this relatively short time the carbon market and its ticipants have developed a very high degree of sophistication This book drawsextensively upon the practical expertise developed in the fashioning of carbonprojects in other sectors and the general methodological lessons learned in pre-senting projects for review by project sponsors as well as under the Kyoto mech-anisms It also reflects the considerable research and thought that has already goneinto trying to make forest projects meet CDM criteria and into pushing the enve-lope beyond the artificial straitjacket put upon such projects by their restriction toreforestation and afforestation activities

par-The editors are to be commended for having assembled an extremely sive and highly qualified group of authors at the cutting edge of their subject Theresult is a book that is valuable for the insights if offers to those interested orinvolved in current forest sector projects However, it is more than this—it draws

impres-on the widest spread of thinking to offer ways forward in the area of avoideddeforestation, or REDD—the sector regarded as the “lowest cost option” in theStern Review Now that the Bali Action Plan has recognized the importance ofreducing emissions from deforestation and forest degradation in developing coun-tries, it is clear that any new post-Kyoto regime must consider forests and landuse much more centrally in its approach This book will be invaluable in thatprocess

4 D Freestone and C Streck, eds., Legal Aspects of Implementing the Kyoto Protocol

Mechanisms: Making Kyoto Work (Oxford University Press, 2005).

PART ONE

Climate change is one of the most significant global challenges of our time,

and addressing it requires the urgent formulation of comprehensive andeffective policy responses A changing climate affects nearly every sector of theworld’s economy and is intricately intertwined with other major environmentalthreats such as population growth, desertification and land degradation, air andwater pollution, loss of biodiversity, and deforestation To date, most of the inter-national attention directed toward combating climate change has been strikinglyinsufficient and focused primarily on the industrial and energy sectors The agri-culture, forestry, and other land use sector—AFOLU in current climate policyjargon—has so far been treated as an unwelcome distraction from tackling indus-trial and energy-related emissions, rather than being seen as an integral part of

The resulting bias has led international climate negotiators to disregard themajor role forests and agricultural systems play in climate change In the context

of the Kyoto Protocol, widespread controversies and a lack of knowledge made

recog-nition in 1997 that, with the adoption of the Kyoto Protocol, any attempt to bilize atmospheric greenhouse gas (GHG) concentrations will have to bringland-use-related emissions and removals into the equation According to a 2006study led by former World Bank chief economist Nicholas Stern, the costs ofreducing the effects of climate change can be significantly lowered if reduced

sta-Climate Change and Forestry:

An Introduction

charlotte streck, robert o’sullivan,

toby janson-smith, and richard tarasofsky

1

3

deforestation and reforestation options are used effectively: “Curbing tion is a highly cost-effective way of reducing greenhouse gas emissions and hasthe potential to offer significant reductions fairly quickly It also helps preservebiodiversity and protect soil and water quality Encouraging new forests andenhancing the potential of soils to store carbon offer further opportunities to

The idea for this book was triggered by the conviction that an effective Kyoto agreement must include a comprehensive system that allows for the ac-counting of land-use-related emissions and removals and establishes incentives toreduce emissions from deforestation With a view to the forthcoming debate, wethought the time was ripe to compile existing knowledge, expertise, and experi-ence and make it available in one volume At the same time we sought to produce

post-a prpost-acticpost-al reference mpost-anupost-al outlining the history of AFOLU in internpost-ationpost-al mate change negotiations, identifying key lessons learned from implementing thevarious policy frameworks and from actual forestry project experience to date, anddrawing on all this to propose solutions for how best to move forward This bookhas benefited from contributions and input by the leading forestry and climatechange experts in government, international organizations, academe, civil society,and the private sector

cli-In this chapter we provide a short overview of the role of forestry and ture in current climate policies—a recurring theme throughout the book Like theother contributors, we focus our review on potential approaches to incorporatingcarbon sequestration and emission avoidance into emerging climate policy frame-works, rather than addressing the scientific debate that has surrounded the topic

agricul-of climate change and forestry, which has already been written about at length

Forestry and Climate Change

Forests are the world’s most important terrestrial storehouses of carbon, and theyplay an important role in controlling its climate The world’s remaining forestecosystems store an estimated 638 gigatonnes (Gt) of carbon, 283 Gt of which

carbon—approx-imately 50 percent more than all the carbon in the atmosphere Forest ecosystemsare sensitive to climatic change Over long periods of time plants have adapted tolocal climatic, atmospheric, and soil conditions, and this, combined with tem-perature and rainfall patterns, is what characterizes an ecosystem A change inthese variables can dramatically affect species viability Stress caused by a change inthe conditions of an ecosystem may also increase its vulnerability to pests andfires Thus, massive areas of forests could be lost from these climate-inducedthreats, which in turn could further accelerate climate change in a vicious posi-tive feedback loop

On the other hand, land-based activities represent one of the most significantuntapped opportunities for mitigating climate change:

—Simply leaving mature forests intact will lock up significant amounts of bon that might otherwise be released into the atmosphere Land-use changes, pre-dominately deforestation, currently contribute about one-fifth of global carbonemissions (see chapter 15) Deforestation is the greatest source of GHG emissions

car-in many developcar-ing countries, car-includcar-ing Brazil and Indonesia, the world’s biggestGHG emitters after the United States and China Reducing emissions fromdeforestation may be one of the most cost-effective tools for reducing GHG emis-sions globally and could give people the time needed to mobilize the resourcesand develop the technology for “decarbonizing” the world’s energy and industrialproduction

—Sustainably managed forests can produce wood and other biomass that is arenewable, carbon-neutral alternative to fossil fuels and other construction mate-rials In this way sustainable forest management can help to reduce energy-relatedemissions (chapter 7)

—Forest ecosystems contain the majority (approximately 60 percent) of thecarbon stored in terrestrial ecosystems and have the potential to absorb about

10 percent of global carbon emissions projected for the first half of this centuryinto their biomass, soils, and associated products and, in principle, to store them

Forestry in Climate Negotiations

Both the UN Framework Convention on Climate Change (UNFCCC) and theKyoto Protocol acknowledge the role that forests play in global climate (chap-

and the increase of atmospheric GHG removals by sinks as parallel and equallyimportant elements in any climate strategy, the Kyoto Protocol focuses on creat-ing a framework for reducing industry- and energy-related emissions The defin-ing element of the Kyoto Protocol is a system of GHG emission targets withwhich all ratifying industrialized nations must comply Reflecting the protocol’sfocus on energy and industrial emissions, the targets of individual countries arecalculated without taking into account forestry- and land-use-related emissions.During the negotiations that led to the adoption of the Kyoto Protocol, contro-versy arose over whether parties should be allowed to offset emissions produced inother sectors with removals generated by biological sequestration or whether theeffort to combat climate change should be concentrated on the reduction of emis-sions from the use of fossil fuels (chapter 4)

Those arguing against the accounting and use of forestry offsets were concernedthat carbon offsets might be negated in cases where human action or natural events

such as wildfires reversed the carbon benefits If a tree is felled, stored carbon isreleased and the temporary climate benefit reversed—that is, the benefit is “non-permanent.” The existence of this permance risk distinguishes emission removalsgenerated by the forestry section from emission reductions generated by the indus-trial and energy sectors The issue has, therefore, been a core concern about cred-its from activities that rely on sequestration of carbon in trees or soils.

Eventually negotiators decided in Kyoto that “direct human-induced” changes

in GHG emissions and removals by sinks since 1990 could be used to meet a tion of the parties’ emission commitments Furthermore, articles 6 and 12, whichdefine the project-based mechanisms called Joint Implementation (JI) and theClean Development Mechanism (CDM), refer directly, in the case of JI, or at leastindirectly, in the case of the CDM, to carbon sinks AFOLU under the CDM islimited, however, to afforestation and reforestation projects, which are grantedcredits that can be used only for a limited period of time to comply with Kyotocommitments (chapter 6) The regulatory limitations of forestry under the CDMhave subsequently severely hampered the development of this sector (chapter 8).Nevertheless, the experience with crediting carbon from afforestation andreforestation projects has helped to create knowledge and overcome the scientificuncertainties that, among other things, stood in the way of an early agreement

por-on expanded cpor-onsideratipor-on of the forestry sector (chapter 10) In parallel, tries gained experience in authorizing relevant projects, and lawyers engaged indefining legislative and contractual frameworks (chapters 11, 12) Yet the limita-tions of the Kyoto Protocol can only be described as deeply unsatisfactory, becausethey have led to a situation in which there is an incentive to restore and protectforest systems in industrialized countries (chapters 3, 4) but no incentive to re-duce emissions from deforestation in developing countries—the most importantsource of emissions from the land-use sector

coun-Negotiations toward a post-Kyoto agreement started in the context of theUNFCCC and Kyoto Protocol annual meetings in December 2005 On this oc-casion Papua New Guinea and Costa Rica put forward a submission to considerwhether and how incentives to reduce tropical deforestation could be included inthe future climate regime This submission created a great deal of interest andearned significant support from developing and industrialized countries alike.This kicked off discussions on ways to address emissions from deforestation indeveloping countries Since then a number of ideas and policy approaches on how

to expand the carbon market to create incentives for forest conservation have beenproposed and are being discussed as part of a post-Kyoto agreement (chap-ters 13–17) There is some hope that progress will be made in formulating anincentive framework that might grant financial awards for reductions in defor-estation even ahead of final discussions on a more comprehensive post-Kyotoframework The Bali round of UNFCCC negotiations held in December 2007

produced encouraging results Demonstration projects that reduce emissions fromdeforestation and degradation (REDD) will be formally encouraged and recog-nized, and REDD in developing countries will be included in the Bali ActionPlan, which is the two-year process to negotiate a post-Kyoto agreement

Forestry and the Carbon Market

Many of the benefits provided by forests are currently considered part of theglobal commons and are freely available for everybody Forests purify air andwater, stabilize soil, support biodiversity, produce pharmaceutical substances, andact as carbon storehouses—all of which humans treat as unlimited and free ser-vices Typically, no legal rights and consequently no monetary value are assigned

to these services The value of a forest is usually defined solely in terms of thingsthat can be owned and readily traded—the timber in the trees and the land onwhich the forest grows This means that those who control or have access toforests often have greater incentives to clear them and turn them to economicallyproductive uses than to conserve them

These services provided by forests need to be appropriately priced if people are

to make decisions about forests that are based on their true value Schemes thatenvisage payments for “ecosystem services” try to address this market failure bycreating financial incentives to conserve, protect, and restore forests (chapter 5).Assigning value to emission reductions or removals (carbon storage) by creatingtradable carbon credits is one of the most developed and promising approachesfor tapping the forestry sector in the fight against climate change, and it is there-fore a key topic in this book

The carbon market relies on emission trading and the transfer of carbon its The CDM and JI allow countries to invest in emission-reducing projects orprograms in countries where abatement costs for emission reductions are lowerthan in their own economies In return for their payments, investors or carbonpurchasers receive a right to the carbon credits generated by the project Thesecarbon credits can be used to meet compliance obligations under internationaland national regulatory regimes The carbon market created under the Kyoto Pro-tocol and a number of regional and national emission-trading schemes is worthbillions of dollars each year (chapters 6, 8, 18, 19)

cred-Because the Kyoto Protocol does not address forest conservation—that is, theprevention of deforestation—in developing countries, these countries are re-stricted in their opportunities to benefit from the CDM Most of the offsets gen-erated by AFOLU projects are currently traded in the so-called voluntary market,where the rules are typically more flexible and accommodating of such projects(chapters 20, 21) Companies invest in voluntary offsets for marketing purposes,

to meet voluntary corporate social responsibility objectives, or to get ahead of

emerging regulations Increasing numbers of individuals are now joining them inwishing to offset their carbon “footprints.”

A New International Framework

Despite a common understanding that the AFOLU sector is far too important,both as a sink and as a source, to be marginalized again, differences remain regard-ing when, to what extent, and how land-use-related sinks and emissions should beintegrated into a post-Kyoto regime Regardless of the design details, it is impor-tant that any post-Kyoto agreement provide the right framework and incentivesfor the following:

—Rewarding decreased deforestation; sustainable forest, land, and wetland agement; forest restoration; and the sustainable use of biomass

man-—Establishing a reliable accounting system that includes the flux of biologicalcarbon

—Promoting sustainable development and an inclusive climate policy

—Capturing synergies between the Convention on Biological Diversity, theConvention to Combat Desertification, and the Millennium Development Chal-lenge goals

Far from having embraced the full complexity of the issue, negotiators haveengaged in the initiative taken by Papua New Guinea and Costa Rica to narrowlyfocus on defining an instrument to reduce GHG emissions from deforestation indeveloping countries Until now, the broader question of how to effectively inte-grate AFOLU emissions, sequestration, and emission reductions into a post-Kyotoregime has been sidelined

At their annual summit held in Heiligendamm, Germany, in June 2007, theGroup of Eight leading industrialized countries (G8) expressed their commitment

to taking a leadership role in future efforts to reduce GHG emissions The mit’s declaration stressed, however, that developing countries had to contribute to

sum-a globsum-al effort to reduce emissions In subsequent stsum-atements the Europesum-an Unionmade it clear that it saw a commitment by developing countries to reduce emis-sions from deforestation as a promising example of how developing countries coulddemonstrate their commitment to mitigating climate change The EU envisaged asystem of national targets under which emission reductions would be rewardedwith carbon credits Although forestry per se still ranks low in the priority list ofmost EU member countries, developing countries’ willingness to consider sectoraltargets provides a welcome opportunity to negotiate industrial targets with majoremitting, developing nations, which remains the priority of most EU negotiators.When it comes to the debate over REDD, a number of options are being pro-posed, including both market- and non-market-based approaches Market-basedapproaches rely on the carbon market and aim to create incentives for avoiding

further deforestation In most cases they include the awarding of tradable carboncredits once a country or project has generated a proven climate benefit by reduc-ing GHG emissions below the business-as-usual scenario.

A number of proposals are associated with baselines developed at the nationallevel whereby countries take on voluntary commitments to reduce their nationaldeforestation rates in the form of reduction targets vis-à-vis the national baselines(chapter 16) In order to account for challenges developing countries face in es-tablishing national-scale systems, it has been proposed to combine national ap-proaches with the authorization of a project or subnational approach Thosearguing in favor of including project-based activities refer to the required level ofresource mobilization, which goes beyond what public funds could make avail-able and thus must tap private capital (chapter 17) Proponents of other ap-proaches, although less likely to prevail, argue that an efficient system has to moveaway from a baseline-and-credit approach toward a cap-and-trade approach,which will allow developing countries to access financing on the basis of a bind-ing conservation commitment

Another question—whether credits generated by activities or programs thatreduce emissions from deforestation should be fully fungible with other carbonmarkets—gets back to the old debate of whether GHG reductions achieved inforestry should be fully fungible with industrialized-country reduction commit-ments Taking into account the volume of reductions that may be achievedthrough REDD activities, and the need to avoid flooding the market, carboncredit fungibility must be matched by strict emission limitations in industrial-ized countries Mandating a tighter overall cap than would be possible withoutREDD crediting could create a win-win situation for the environment and theglobal economy Another option would be to create a separate or parallel mar-ket for REDD credits, although the economic viability of such an approach isquestionable

Forest and biodiversity conservation are intrinsically linked to the mitigation ofclimate change and humans’ adaptation to such change If we lose our forests, welose our biggest sink of terrestrial carbon and a system that regulates and influences

local and regional climate patterns and extreme weather events It is therefore essary that a post-Kyoto regime include a comprehensive carbon accounting mech-anism with the necessary incentives for conserving our forests, especially in thetropics, where they are most threatened and can play a vital role in supporting sus-tainable livelihoods for the world’s poor.

nec-Certainly from a development perspective, AFOLU carbon projects representone of the few means by which many of the world’s poorest people, includingmost Africans, will be able to meaningfully participate in and benefit from theglobal carbon market For the first time these people have the promise of beingable to sustainably capture an ecosystem service value associated with their land,instead of being forced to liquidate forest resources just to survive

Keeping in mind the broader context, we hope readers find the chapters in thisbook both interesting and useful for understanding the increasingly complex cli-mate change negotiations under way today We further hope that a deeper under-standing of the interlinkages between climate policy and forestry will helpnegotiators define a robust and enduring international framework for reducingGHG emissions from all sources while providing the right incentives for the con-servation and sustainable use of the earth’s most precious natural resources

Notes

1 International climate change experts have traditionally referred to “land use, land-usechange, and forestry,” or LULUCF, as the prevailing term for this sector However, themost recent Intergovernmental Panel on Climate Change (IPCC) guidelines refer toAFOLU, a more consistent and complete term by which to describe this sector See IPCC,

2006 IPCC Guidelines for National Greenhouse Gas Inventories, vol 4, Agriculture, Forestry, and Other Land Uses, prepared by the National Greenhouse Gas Inventories Programme,

H S Eggleston and others, eds (Institute for Global Environmental Strategies, Japan)

2 FCCC/CP/1997/L.7/Add.1 Decision 1/CP.3, “Adoption of the Kyoto Protocol tothe United Nations Framework Convention on Climate Change,” Annex, reprinted in

37 ILM 22 (1998), entered into force February 16, 2005 (hereinafter “Kyoto Protocol”)

3 N Stern and others, Stern Review on the Economics of Climate Change (London,

2006), p 537

4 This is the amount of carbon stored in the world’s biomass, deadwood, litter, andsoil See Food and Agriculture Organization (FAO), “Global Forest Resources Assessment2005: Progress towards Sustainable Forest Management,” Forestry Paper 147 (Rome:FAO, 2006)

5 IPCC, Land Use, Land-Use Change, and Forestry: A Special Report of the IPCC

(Cam-bridge University Press, 2000)

6 UN Doc Distr General A/AC.237/18(Part II)/Add.1, May 15, 1992 (hereinafter

“the UNFCCC”) The UNFCCC entered into force on March 21, 1994, and currentlyhas near-universal membership, with 191 countries having ratified it

The world has approximately 4 billion hectares of forests, roughly 30 percent

important role in the overall health of the planet and is of fundamental tance to human economy and welfare These goods and services—collectivelycalled ecosystem goods and services, or simply ecosystem services—include,among other things, food and timber, the formation of soils, the regulation of cli-mate and hydrological processes, and the spiritual, aesthetic, and recreational

Regulating greenhouse gases is one of the most significant ecosystem servicesprovided by forests today It is estimated that forests store more than 280 giga-

climate change When forests are destroyed, heat-capturing gases and aerosols are

certainly have ecological and physiological effects on forests, possibly altering thelengths of growing seasons, biomass production, and species competition and dis-

The Idea of Market-Based Mechanisms

for Forest Conservation and Climate Change

rosimeiry portela, kelly j wendland,

and laura ledwith pennypacker

2

11The views expressed in this chapter are those of the authors and do not necessarily rep-resent the views of Conservation International, with which the authors are affiliated

of climate change and habitat fragmentation pose the most important

Despite the numerous benefits that forests offer humans, decisions to convertforests to other land uses are often based on market incentives that do not incor-porate the value of ecosystem services There are several reasons for this In somecases people lack an understanding of the functioning of large-scale natural sys-tems and the effects that human actions can have on them In other cases losses offorests are associated with the fact that conventional market systems undervalue

mar-ket failure and change undesirable behaviors, policy instruments or incentives arerequired

In this chapter we first review the policy instruments that have been used toachieve forest conservation, looking particularly at the role of market-basedmechanisms We then discuss the opportunities that climate change and carbonmarkets present for forest conservation The current climate regulation regime,through voluntary and regulatory markets, particularly the Kyoto Protocol’sClean Development Mechanism (CDM), is already providing opportunities toharness market forces toward the conservation and restoration of forests Theeffects of these markets on forests, however, are still limited The implicationsfor forest conservation become more interesting when one starts to consider sev-eral potential market opportunities for forest carbon These new market oppor-tunities could dramatically shift forest conservation market practices and ensurethe provision of many other ecosystem goods and services, including globallyimportant biodiversity These new approaches offer a holistic approach tohuman-induced climate changes and would support ecological sustainability,human welfare, and the world economy

Policy Mechanisms for Forest Conservation

Although forest loss has been occurring for many centuries, the last few decadeshave shown alarming rates of deforestation, with about 13 million hectares of for-est converted to other land uses every year This cumulative loss of forest biomassrepresents a significant decline in total carbon stocks, which decreased by about1.1 Gt annually between 1990 and 2005 South America and Africa had thelargest net forest losses from 2000 to 2005, with averages of 4.3 and 4.0 million

prioritizes private, direct benefits from forest clearing, even though the loss ens the existence of forests and deprives society of biodiversity and other impor-tant ecological benefits This problem stems from the failure of policymakers andmarket institutions to translate demand for forest goods and services into income

threat-for local landowners and to account threat-for the social costs incurred by the clearing offorests for private benefits.

Market Failure in Forest Conservation

In a competitive economy, markets control the way the resources available to ety, influenced by preferences and available technologies, combine to producegoods and services that meet human needs For many situations the market econ-omy works well and provides the socially optimal level of goods and services Yetfor many other situations, such as the consumption of natural resources, marketsystems have led to excessive and unsustainable extraction The reason many nat-ural resources are not traded efficiently in market systems is that they do not meettwo crucial conditions necessary for a market outcome to be efficient: the good

soci-or service should be private rather than public, and there should be no difference

Forests and the ecosystem services they provide fail to meet these criteria.Along with producing a variety of marketable products, forests provide manyunpriced ecosystem services that benefit human well-being at local, national, andglobal scales Private benefits of forest resources are normally obtained from theeconomic returns of cleared forests, such as timber, crops, and pasture Social ben-efits, on the other hand, are normally associated with the functional properties ofintact forests, such as the regulation of regional and global climate patterns, theprovision of clean water, and the stabilization of soil—each of which contributes

to overall public well-being Whereas the private benefits of forest exploitationare valued through the market, social benefits are not valued in the market with-

costs of their actions in terms of foregone ecosystem services, they often useresources unsustainably, leading to inefficient allocation of forest resources and

behave in these ways because the marginal private benefits of their cleared land(for example, the monetary return from crop cultivation) are not balanced againstthe marginal costs to society of forest loss (for example, losses of important forestservices)

Market systems also fail to provide incentives for conserving forest ecosystemservices because most of these services are (quasi) public goods: they are nonrivaland nonexcludable, meaning that it is impossible to preclude someone’s using agood (nonexclusiveness), and use by one leaves no less for others (nonrivalry).This leads to what is known in economics as the “free rider” problem That is, ifone landowner maintains forest cover to ensure clean water or clean air, theneveryone else gets a free ride at the landowner’s expense Thus the incentive forany one person to conserve forests is low

Policy Mechanisms to Correct Market Failure

Given the pervasiveness of market failure and the consequent depletion of publicenvironmental goods and services, different policy tools have been used to alter

most common initiatives to protect and manage forests and the services they vide have been regulatory, or command-and-control, instruments Although thesetools are still common, a shift has taken place toward more participatory mecha-nisms and, recently, toward the use of economic incentives and market-basedinstruments

pro-At the national and local level, command-and-control mechanisms such as theestablishment of protected areas are common, and although they are effective inmany situations, their usefulness is often limited by lack of sufficient information

the international level, many environmental treaties, such as the UN Convention

on Biological Diversity and the UN Convention to Combat Desertification, are

in essence command-and-control regulatory regimes And although they sent important global efforts to protect natural resources, their ability to do so isoften limited by their voluntary nature (no enforcement of compliance), theirlack of binding obligations (with the exception of the Convention on Interna-tional Trade in Endangered Species, or CITES), and the absence of sustainable

Other approaches to trying to change people’s behavior from deforestation toforest conservation have relied on education and local participation Environ-mental education is a component of many conservation projects, with the hopethat more information about the benefits of ecosystems will lead to greater inter-est in conservation A recent approach has been to attempt to give local commu-nities a stake in resource management by establishing integrated conservation anddevelopment projects and community-based conservation programs These par-ticipatory approaches strive to create private interest in protecting public goods

kinds of initiatives fail to address the fundamental issues of market failure Thustheir effectiveness at protecting ecosystems is limited unless they are implementedalong with other policy instruments

In contrast to nonmarket approaches to forest conservation, market-based anisms encourage a particular behavior by changing the incentives for individualagents These instruments are often described as “harnessing market forces” becausethey encourage individuals to take actions that meet both their private interests and

approaches in that they allow more flexibility in the way policy targets are met Thisreduces the amount of information policymakers need and reduces overall costs If

designed well, market-based mechanisms can even encourage participants to exceedpolicy targets and can spur innovation Market-based mechanisms for pollution

mechanisms for forest conservation in developing countries, although still limited,

is growing and has the potential to lead to more cost-efficient and effective vation projects In many situations the role of market-based mechanisms will be tocomplement rather than substitute for nonmarket instruments, and many market-based mechanisms can be used concurrently to meet policy goals A review of severalmarket-based interventions found that many of the most successful relied on a mix

market-based instruments being used to meet forest conservation objectives in developingcountries and provides brief descriptions of the main characteristics of the tool, its

Climate and the Market: Opportunities for Forest Conservation

The role of forests in climate regulation is important for both human welfare andthe economy However, because the social benefits of conserving forests outweighthe private benefits, public policy interventions will be necessary if forest conser-vation is to play a significant role in carbon sequestration or emission reductions.Some of the most cost-effective and efficient interventions are likely to be market-based mechanisms Well-designed and well-implemented market-based mecha-nisms for forest carbon sequestration can direct significant technical and financialresources toward climate change mitigation—at a relatively low cost compared

some progress, the forest carbon emissions market has experienced limited opment This is due in part to (1) poor understanding of the extent to whichforests contribute (both positively and negatively) to climate change and GHGemissions; (2) burdensome rules and constraints in regulatory markets that limitpotential demand; and (3) technical and methodological concerns surroundingthe verification of forest carbon emission reductions In what follows we provide

devel-a brief overview of current devel-and potentidevel-al mdevel-arket-bdevel-ased opportunities for forestconservation in the context of global climate abatement

Current Market Opportunities

Current carbon markets are complex and evolving rapidly Both regulatory andvoluntary carbon markets have developed in recent years as a result of interna-tional, national, and regional policies, as well as from increased public awareness

of climate change Regulatory markets have been developed to help meet sions targets as mandated by international and national regulatory authorities

environmentally and socially conscious consumers (for example, shade-gro

Sustainable timber management:

Voluntary carbon markets offer alternatives for companies, governments, zations, and individuals operating outside of regulatory mandates to reduce car-bon emissions.

organi-Opportunities for forest conservation in carbon markets rest in the based sector, in which a project must demonstrate that it reduces GHG emissionsrelative to a business-as-usual scenario Opportunities for forest carbon projectscurrently exist in forest conservation, restoration, and sustainable forest manage-ment The most common forest carbon emission projects are afforestation andreforestation (AR) projects, followed by agroforestry and avoided deforestation.Forest carbon projects are often designed and implemented according to the rulesand restrictions of the regulatory and voluntary markets, as well as according toopportunity and transaction costs

project-Forest carbon projects have the potential to generate benefits beyond carbonsequestration, especially strong community livelihood and biodiversity benefits.These additional benefits should allow such projects to generate higher prices forcarbon sequestration by forests, accurately reflecting the bundling of forest ecosys-tem services Unfortunately, opportunities for this are currently limited in the reg-ulatory market, and voluntary carbon projects generally fetch lower prices thantheir regulatory counterparts

The Regulatory Carbon Market The regulatory carbon market is inated by the Kyoto Protocol of the United Nations Framework Convention onClimate Change (UNFCCC) The Kyoto Protocol has created a framework inwhich market-based forestry activities can help mitigate climate change Activi-ties are allowed under both of the protocol’s flexible mechanisms, the CDM andthe Joint Implementation (JI) framework The Kyoto Protocol market frameworkhas influenced the creation of subsequent regulatory markets, including the Euro-pean Union’s Emissions Trading Scheme (EU ETS), Norway’s Emissions Tradingsystem, and the United States’ Regional Greenhouse Gas Initiative (RGGI)

dom-As shown in table 2-2, the development of forest carbon projects within theregulatory markets is currently constrained The CDM holds the greatest—albeit small—opportunity for forest conservation CDM forestry carbon proj-ects (frequently referred to as LULUCF projects, for “land use, land-use change,and forestry”) earn credits for carbon sequestration only through AR, and proj-ect development is considerably restricted For example, AR projects are lim-ited to 1 percent of base-year emissions of industrialized countries and aretemporary, requiring replacement with permanent non-LULUCF credits re-gardless of the state of the forest Moreover, project development and reporting

is especially complex and burdensome for LULUCF projects within the CDM,

No other forest carbon activities, such as avoided deforestation, are allowedunder the CDM or at any meaningful scale within the other regulatory markets

Because of this constraint, opportunities for forest conservation are severely ited, and the potential to capture additional forest ecosystem values is lost.The Voluntary Carbon Market The voluntary and retail carbon marketconsists of companies, governments, organizations, and individuals seeking toreduce the climate effects of their operations by voluntarily investing in projectsthat credibly reduce GHG emissions Several market frameworks exist for volun-tary projects, including the Chicago Climate Exchange (CCX)—the world’s firstvoluntary, legally binding, rules-based system to reduce and trade GHG emis-sions—and the retail market Voluntary retail carbon offsets, including forestrycarbon offsets, are often marketed through intermediaries who sell shares to con-sumers at desired quantities There are an estimated thirty to forty retail carbonoffset providers worldwide, most of them based in Europe, the United States, and

A large majority of these voluntary markets offer forestry carbon offsets withmultiple benefits Table 2-2 shows the potential of two of them for includingadditional benefits such as sustainable development, biodiversity, and other eco-system services Standards are even being developed in the retail markets to certifythat carbon projects provide these multiple benefits One example is the Climate

Despite these opportunities, the voluntary carbon market is still in its early stages

of development Typically, projects are small scale, in part because of limited

Table 2-2 Forestry Project Types and Allowances in Regulatory

and Voluntary Markets

Potential for incorporation of

Regulatory

Kyoto Protocol CDM Afforestation and reforestation b Low-medium

EU Emissions Trading Scheme All forestry excluded until at Low

least 2008 Emerging U.S regulatory markets U.S.-based forest conservation Medium (RGGI, Calif., federal) and restoration

New South Wales Abatement Australian forest restoration only Medium Scheme, Australia

Voluntary

Voluntary retail carbon market Tropical forest conservation and High

restoration Chicago Climate Exchange Tropical forest restoration and High

forest conservation

a Authors’ compilation.

b AR projects restricted to 1 percent of base-year emissions of Kyoto industrialized countries.

(although growing) demand and the prevalence of smaller-scale forestry activities.25

Opportunities for forest conservation are expanding, however, with the inclusion

of most, if not all, forest carbon project types And although most voluntary bon markets impose standards and verification guidelines, considerable flexibilityexists to invest in small-scale projects with multiple co-benefits, because compliancewith stringent CDM rules and paperwork is not required

car-Regulatory versus Voluntary Markets: Market Share, Value, andVolume Forest carbon projects account for a very small share, in both volumeand value, of all emission reduction projects in the regulatory and voluntary carbon

but as shown in table 2-3, the regulatory carbon markets are orders of magnitudelarger than the voluntary markets Thus, given the constraints the regulatory mar-kets impose on forest projects and the lack of opportunities for multiple-benefitsprojects, considerable forest conservation opportunities are being lost

The estimates in table 2-3 also show the significant differences in market valuebetween regulatory and voluntary carbon projects: traditionally, regulatory proj-ects receive higher prices per unit than their voluntary counterparts In addition,both regulatory and voluntary forest carbon projects receive a fraction of the price

reg-ulatory complexities and the restrictions and burdens placed on forest carbonprojects, which lead to limited demand within the market

Potential Market Opportunities

Given the limited effects current forest markets have on both forest conservationand GHG emissions, recent initiatives in the regulatory sector have begun toreevaluate the role of forest conservation and protection New opportunities inthe forest carbon project sector include California’s climate regulatory regime andAustralia’s proposed cap-and-trade system These initiatives have the potential toaffect forest conservation significantly if international forest conservation oppor-tunities are included in them at a meaningful scale However, what holds thegreatest promise for cost-effective climate abatement and forest conservation isallowance-based emissions credits for developing countries that make commit-ments to reduce deforestation We briefly highlight the mechanisms proposed toimplement such an approach and discuss their potential to reduce emissions fromdeforestation

The UNFCCC has begun to explore policy instruments that could provide anincentive to “reduce emissions from deforestation and degradation” (REDD) in

carbon cycle; they take up carbon from the atmosphere and accumulate it in theirbiomass When forests are destroyed, the carbon they store is released into the air,

contributing to global warming Current rates of tropical deforestation, which isoccurring primarily in developing countries, account for about 18 percent of total

deforestation rates in South America and the second highest in the world, carbonemissions from deforestation account for more than twice the emissions from fossil

biodi-versity and human livelihoods For example, biologists estimate that 1,800 species

populations go extinct every hour from forest destruction, or 16 million populations

Given these trends, it is imperative that the regulatory sector, particularly theUNFCCC, properly address the effects of deforestation on climate change Inclu-sion of REDD as a viable mitigation strategy in the next global climate agreement(post-2012) would give developing countries significant financial and technicalcapacity for forest conservation and the protection of forest ecosystem services.Carbon financing, by helping to align the preferences of private individuals withpublic needs, would help minimize the current market failures that allow for thedestruction of tropical forests worldwide

Developing policy mechanisms that provide incentives for forest protection in

a regulatory scheme, however, is complex Significant risk and uncertainty exist

in generating credible and verifiable emission reductions and in awarding such

Table 2-3 Market Values and Volumes of Regulatory and Voluntary

Carbon Markets, 2005 and 2006

Market value Volume Market value Volume

emission reductions for forest protection at the national level, not just restoration

at the project level “Additionality,” “leakage,” and “permanence” are among the

mea-surements of carbon forest stocks, emissions, and credits from forest conservation(carbon inventory, monitoring, and verification) poses technical and scientific chal-lenges for most forest carbon projects, and particularly for a REDD policy In addi-

tion, designing a framework that includes all current and potential tropical forest

emitters is essential if meaningful emission reductions are to occur at the global

The scientific community believes that the challenges associated with ing and monitoring deforestation emissions are surmountable in a cost-effective

imple-menting a UNFCCC REDD policy; two of these are dealt with in more detail

in subsequent chapters of this book One is the compensated reduction approach,

in which a country receives post-facto compensation when it reduces tion below a national baseline of average historical deforestation The country isthen obligated to use these funds in activities that further contribute to the goals

this system, carbon stock credits (called carbon stock units) are allocated to acountry on the basis of existing carbon pools stored in tropical forests at a certainreference date A certain percentage of these credits would have to be held con-stant within the country, and forest areas would be placed under protection Aquota of the credits would be available for trading among countries to allow fordeforestation More recently, an approach called the “nested” approach has beenproposed, which seeks to combine the national baseline approach, outlined in thecompensated reduction approach, with a project-based approach that allows flex-ibility in forest carbon crediting for countries unable to measure or control

Market-Based Mechanisms for Forest Conservation and Carbon: Additional Considerations

For a market-based mechanism to operate efficiently, certain institutional and ulatory systems must first be in place What many critics of market-based systems

reg-do not acknowledge is that these same systems are necessary to implement anypolicy instrument We highlight some of the general conditions needed formarket-based mechanisms aimed at forest conservation and carbon outcomes andtouch on the issue of equity within market systems Among the general condi-tions needed are the following:

—Property rights: Property rights are central to the idea of “privatizing” the

forest resource so that an exchange can be made between the supplier of the good

ap-propriate for a particular good or service will vary depending on the nature of theresource and the characteristics of the user group

—Legal framework: A legal framework is necessary to establish who is

respon-sible and liable for different aspects of market transactions How the legal work is set up determines which party, the buyer or the seller, bears the brunt of

—Regulatory framework: A regulatory framework defines the conditions under

which the market will operate It can be used to identify how potential buyersand sellers will be brought together, how market exchanges will be carried out,and appropriate market prices In general, the better established a market is, the

—Monitoring and enforcement: Some type of monitoring and enforcement

sys-tem is necessary to ensure that sellers adhere to the rules and conditions of tions For many forest services this requires satellite imagery and statistical capacity

transac-As with command-and-control mechanisms, lack of monitoring and enforcement

An additional consideration is equity A number of researchers have recently tioned whether market solutions in developing countries will effectively benefit ruralpopulations who live near forests and other landscapes that provide ecosystem ser-

from the fact that many of the poorest lack property rights, and concern exists that asnew economic opportunities are introduced for forest resources, the poor may beunable to retain access to or control over them Another concern is that transactioncosts will exclude the poorest of the poor from participating in emerging opportu-nities Some project-based evidence shows that these factors can be an issue and that