Pagiola, World Bank, Payment for Ecosystem Services International parliamentary hearing on forest protection and the model of Payment for Ecosystem Services Earth University, Costa Rica, 5-7 June 2009 Financing Forest Conservation The REDD Initiative Stefano Pagiola World Bank 1818 H Str NW Washington DC USA The opinions expressed in this presentation are the author’s own and do not necessarily represent those of the World Bank Group. The materials in this presentation may be freely reproduced with appropriate credit to the author and the World Bank. Stefano Pagiola Latin America and Caribbean Sustainable Development Department World Bank

Pagiola, World Bank, Financing Forest Conservation The REDD Initiative  Payments for environmental services (PES)  Strengths and limitations of current financing sources  Payments for water services  Payments for biodiversity conservation  Payments for carbon sequestration  REDD financing for forest conservation  Potential  Challenges  Learning by doing through the FCPF

Pagiola, World Bank, Why deforestation? Benefits to land users Water Biodiversity Carbon Costs to downstream populations Deforestation and use for pasture Conservation

Pagiola, World Bank, The logic of Payments for Environmental Services (PES) Benefits to land users Water Biodiversity Carbon Costs to downstream populations Deforestation and use for pasture Conservation  Payments must be annual  So must funding Payment Conservation with payment for service Cannot depend on donors!

Pagiola, World Bank, Payments for water services  Government-financed national PES programs  Costa Rica PSA  Mexico PSAB  China SLCP  User-financed programs local PES programs  Hydroelectric power producers  Domestic water supply systems  Industrial users  Irrigation

Pagiola, World Bank, User-financed PES for water services Hydropower producer Domestic water supply Bottler Irrigated agriculture Hotel 10 15/ (US$/ha/yr): Total 18,000ha ca US$500,000/year Energía Global (renewed twice) Platanar S.A. CNFL/Río Aranjuez CNFL/Río Balsa CNFL/Río Laguna Cote Florida Ice & Farm and Heredia ESPH Azucarera El Viejo Hidroeléctrica Agua Zarcas Misc 0ha2,000 ha4,000 ha6,000 ha Costa Rica: Payments by water users

Pagiola, World Bank, Guatemala: Watersheds with hydroelectric power plantsGuatemala: Watersheds with large-scale irrigationGuatemala: Watersheds with domestic water use (>1000 hhs) Payments for water services are spatially specific Source: Pagiola, Zhang, and Colom, 2007 Guatemala: Watersheds with significant potential for water PES 1.9 million ha

Pagiola, World Bank, Payments for water services are spatially specific Source: Zhang and Pagiola, 2008 Costa Rica: Watersheds with water concessions

Pagiola, World Bank, Amounts of payments for water services vary substantially Source: Pagiola, Zhang, and Colom, 2007 Guatemala: Watersheds with hydroelectric power plants High potential for payments Low potential for payments

Pagiola, World Bank, Amounts of payments for water services vary substantially Source: Zhang and Pagiola, 2008 Costa Rica: Watersheds with PES funding from water tariff

Pagiola, World Bank, Payments for biodiversity services  Few examples  Bioprospecting has disappointed  Tourism  Few examples of voluntary user payments (Tanzania)  Some examples of government-imposed fees (Belize)  Industry generally too fragmented  Conservation organizations  Generally limited to short-term funding  Trust Funds convert short-term funding into long-term funding but only feasible for high-value cases (Monarch Butterfly Reserve, Mexico)  Some longer-term arrangements by Conservation International

Pagiola, World Bank, Payments for carbon sequestration services  Not eligible for EU ETS  CDM market  Only for afforestation/reforestation (A/R)  Limited total amounts  Restrictive conditions  Voluntary (‘retail’) markets  Weak requirements  Emerging certification standards  Lower prices (but very variable)  Potential for REDD  Still being negotiated

Pagiola, World Bank, BioCarbon Fund projects  “Learning-by-doing” for CDM A/R projects through carbon purchase transactions  Tranche 1  Window 1: Afforestation & Reforestation  18 projects in 16 countries  ERPAs for 5.7 MtCO 2 e by 2017 worth US$ 24 million  First 7 of 10 approved CDM-approved methodologies  First two CDM-approved A/R projects  Window 2: Forest Protection, Soil Carbon Management  3 projects in 3 countries  ERPAs for 0.9 MtCO 2 e by 2017 worth US$ 2.7 million  BioCarbon Fund buys about 40% of project’s potential

Pagiola, World Bank, BioCarbon Fund: Costa Rica CoopeAgri  Joint project between FONAFIFO and CoopeAgri  Work with 600 farmers in Brunca region:  300 ha of reforestation  3,000 ha of assisted natural regeneration  180,000 trees in agroforestry systems  Purchase of 558,000 tCO 2 e by 2017  Contract signed in April 2006

Pagiola, World Bank, Reducing emissions from deforestation and forest degradation in developing countries (REDD)  Deforestation causes 20% of total GHG emissions  REDD could help reduce emissions at much lower cost than many alternatives  Stern Review (2007): US$1-2/tCO 2  Kindermann and others (2008): US$10-21/tCO 2  High additional benefits from biodiversity conservation, protection of water services  Likely to focus on different areas than water payments

Pagiola, World Bank, Challenges for REDD  How to establish a reference scenario (baseline) against which to measure reduced deforestation  How to monitor, report, and verify REDD  How to address potential leakage issues  How to address permanence  Whether and project-based activities might be included  How to ensure forest-dependent peoples are not harmed  etc etc

Pagiola, World Bank, The FCPF: A partnership to make REDD happen

Pagiola, World Bank, FCPF guiding principles REDD = climate change mitigation mechanism  Not the silver bullet of development  Main effectiveness criterion is emissions reduced Partnership  Developing (“REDD”) countries have equal voting rights with donors and CF participants on Participants Committee Voluntary & country-driven Neutral to climate change negotiations  Capacity building  Various performance-based financial approaches will be tested Catalyst  Large financial flows are necessary  Private sector is needed for scaling up National  National strategies for REDD  National reference scenarios  Projects within national accounting approach  “National” does not mean “governmental” only Test, learn and disseminate  Inputs to discussions at CoP15 (Dec.2009) and beyond

Pagiola, World Bank, FCPF governance Readiness Fund (World Bank as Trustee) Carbon Fund (World Bank as Trustee) Participants Committee (PC) Facility Management Team (World Bank) Ad Hoc Technical Advisory Panels Carbon Fund Participants Committee Participants Assembly All Eligible REDD Countries, Donors and Buyers -Forum for exchange of information -Meets at least annually -Opportunity for ‘subgroups’ to meet and discuss experiences, elect their representatives Primary decision making body, including all policy issues Decision making on specific carbon transactions Observers

Pagiola, World Bank, FCPF: Two mechanisms Readiness Mechanism READINESS FUND Capacity Building ( ) Carbon Finance Mechanism CARBON FUND Payments for Emission Reductions (2009-?) ~$150 million 30 countries ~$200 million ~ 5 countries

Pagiola, World Bank, FCPF Participating countries Africa Cameroon a Central African Rep. c Congo, Dem. Rep. a Congo, Republic b Equatorial Guinea c Ethiopia a Gabon a Ghana a Kenya a Liberia a Madagascar a Mozambique c Tanzania c Uganda b Latin America Argentina b Bolivia a Chile c Colombia a Costa Rica a El Salvador c Guatemala c Guyana a Honduras c Mexico a Nicaragua b Panama a Paraguay a Peru a Suriname c Asia Cambodia c Indonesia c Lao PDR a Nepal a Papua New Guinea a Thailand c Vanuatu b Vietnam a a Countries with access to total grant b Countries with access to $200,000 grant; access to further resources subject to availability of funding in the Readiness Fund. c Countries whose access to grants is subject to availability of additional funding for the Readiness Fund.

Pagiola, World Bank, FCPF Participants Committee REDD COUNTRIES Bolivia DRC Gabon Ghana Guyana Madagascar Mexico Nepal Panama Vietnam DONORS AFD Australia Germany Japan Netherlands Norway Switzerland TNC United Kingdom United States OBSERVERS Forest-Dependent Peoples, Private sector, International Organizations, NGOs, UNFCCC, UN-REDD Programme

Pagiola, World Bank, FCPF Readiness Mechanism (1) Reference Scenario  Historical emissions  How many years and data points?  Future emissions?  Adjustment coefficient applied to past emissions?  Based on national development policy?  Estimation of carbon stocks  Test various methodologies based on IPCC Good Practice Guidance and Guidelines

Pagiola, World Bank, FCPF Readiness Mechanism (2) National REDD Strategy In the countries interested in REDD, how will emissions be reduced? Where? When? At what cost?  Economic analysis National or sub-national implementation? Policies or projects? How will investment costs be financed? Who will participate in REDD activities? How will they be able to participate?  Information, consultations, capacity building Who will be allowed to sell?  Legal framework How will additional social and biodiversity benefits be recognized?  Valuation, monitoring Sector strategies (environment, forestry, energy, transport, etc.) are the basis for the national REDD strategy, but the focus is the resulting emission reductions The strategy must be national Public sector Private sector Civil society Indigenous peoples

Pagiola, World Bank, FCPF Readiness Mechanism (3) National Monitoring System  System design + implementation  National accounting of emissions  Link sub-national projects with national system  National registry including sub-national/private accounts  Monitor carbon and more?

Pagiola, World Bank, What does ‘ready’ mean? National REDD strategy: 1. REDD strategy: how to reduce emissions? 2. REDD implementation framework 3. Stakeholder consultations Monitoring: 1.Design system 2.Conduct forest inventory 3.Capacity building 4. Carbon stock assessment: different levels  Using default factors/existing inventory data  Finance additional inventories, permanent plots  Full assessment for forest degradation Governance: Implementation of Land-(use) reforms Legislative reforms Institutional reforms Improve law enforcement Financial sector reforms Where to draw the line between readiness and investments? Emissions reference scenario FCPF Readiness

Pagiola, World Bank, Readiness + investments + payments Incentive payments for REDD Reforms & investments for REDD readiness FCFP Readiness Fund, UN-REDD, Australia, Norway, AFD, etc. ODA, IBRD, GEF, private sector Forest Investment Program, etc. FCPF Carbon Fund, Norway, private sector, etc.

Pagiola, World Bank, What does the Readiness Mechanism pay for? 1.Direct grants  US$200,000 to assist country prepare R-Plan for all REDD Country Participants  Up to US$3.6 million (average) to help country execute R-Plan  Progress report at ~ US$2 million 2.Implementation support by WB country teams 3.Country advisory services 4.REDD methodology support

Pagiola, World Bank, What would the Carbon Fund pay for? Emission Reduction (ER) generated by reducing deforestation and/or degradation ER = all rights, titles, and interests attached to a ton of CO 2 e of emission reduced ER delivered to the FCPF when verification report is received Performance-based payments Carbon + other benefits ERs distributed to Carbon Fund Participants through internal registry

Pagiola, World Bank, Conclusions  PES is not a universal solution to all problems  May not be applicable in some situations  Will not solve all development problems  Within PES, many possible approaches  Need to understand strengths and limitations of each