Developing PES schemes in Latin America: The potential for combining carbon sequestration with watershed management UNECE Enrironmental Services Seminar, Geneva, October 2005 Jan Fehse, EcoSecurities Ltd.

What is EcoSecurities?  EcoSecurities specialises in the development of projects in the Kyoto carbon market and trading of ‘carbon credits’: emission reduction and carbon sequestration in forests.  Investigating the combination of C sequestration and water-related ES payments for financing of watershed forest restoration in developing countries  Projects with UNCCD’s Global Mechanism – Ecuador, Nicaragua  Project with CORNARE - Colombia.

Hydro-PES systems in Latin America In LA generally a great lack of watershed management regulation (enforcement) and funding. However, interesting institutional structures in Colombia and Peru: Autonomous Authorities set up to manage watersheds. In Colombia income from fees on hydro- energy sales (CORNARE). Provide a legal and institutional framework, can intermediate in PES schemes, can provide funding and help in monitoring. Not very advanced yet. In PES systems in LA great emphasis on self-organized private deals.

Hydro-PES systems in Latin America Landell-Mills & Porras (2002) identified 12 hydro-PES systems in LA. Some examples: Colombia - Sugar producers Cauca Valley (irrigation) Ecuador - Quito EMAAP-Q (municipal drinking water) Costa Rica - PROCUENCAS (municipal drinking water) ES sought: water volume, water quality, reduced sediment load.

Valuation of hydro-ES How to link money spent on upstream watershed management with water ES performance? Quantification very difficult! In developing countries near impossible: lack of data. More a matter of marketing the idea, supported by scientific evidence and financial arguments (e.g. damage cost avoided) Valuation cannot be based on ES indicators (m3, sediment load, etc.), but must be based on cost per activity: (forest) area conserved or restored.

Valuation of conservation Cost for conservation activities based on opportunity cost. Recurring payments to landowner, financed through levies on water or electricity. - Requires in-depth valuation analysis. Opportunity cost Value and income from the forest PES Value of landowner’s awareness of ES Other use

Valuation of restoration Cost for restoration easy to determine, but difficult to finance. Costs front-loaded: trees need to be planted. Capital is needed!! More difficult for water user to finance out of ongoing product sales. How to overcome capital needs?

Financing of forest restoration Capital invested in watershed restoration could also create other returns: Products from plantation activities (e.g. timber, fruits) Other ES (carbon sequestration!) Optimal plantation plan for watershed (e.g. native species) likely to be sub-optimal for commercial investor. Payments from hydro user and C sequestration can make investment attractive!

Financing of forest restoration Payments from water user Income from C sequestration Contributions from Watershed Management Authorities Capital investment FOREST RESTORATION Ecosystem Services Higher returns on capital investment Income from products

Development of the C market  CDM Emission reductions projects are trading full out! Demand larger than supply: prices are rising (currently approx. € 4-5 / tCO 2 e)  C sequestration projects face some hurdles yet: – development of baseline and monitoring meths – linkage with the EU emissions trading system  But market interest is starting to show clearly. Institutional and private buyers are preparing, as well as post-2012 investors  Ball park potential income : € 500+ / ha over 20 years

Requirements for C/hydro-PES Downstream water user(s) with financial capacity and willingness to pay. Supporting legal and regulatory framework (e.g. CORNARE) Clear land tenure! Basis for contracting. Willing ES providers with understanding of issue. Land not needed for subsistence. Impartial intermediary with track record in region Capable and credible forestry service provider and manager

Requirements for C/hydro-PES Sufficiently large area to overcome transaction costs Capital investor with environmental vision; or Carbon investor (e.g. POSCO).

Conclusions Water-related PES systems in LA largely private deals Lack of funding a great limiting factor Carbon market can strengthen financing of watershed forest restoration – and vice versa: potentially a very powerful synergy with benefits for water users, environment and communities!

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