Payment for Ecosystem Services International parliamentary hearing on forest protection and the

1. Stefano Pagiola World Bank 1818 H Str NW Washington DC 20433 USA spagiola@worldbank.org 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. Financing Forest Conservation The REDD Initiative Stefano Pagiola Latin America and Caribbean Sustainable Development Department 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

2. Financing Forest ConservationThe 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

3. Why deforestation? Costs to downstream populations • Water • Biodiversity • Carbon Deforestation and use for pasture Conservation Benefits to land users

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

5. 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

6. User-financed PES for water services Hydropower producer Domestic water supply Bottler Irrigated agriculture Hotel 0ha 2,000 ha 4,000 ha 6,000 ha Costa Rica: Payments by water users (US$/ha/yr): Total 18,000ha ca US$500,000/year 10 Energía Global (renewed twice) 15/30 Platanar S.A. 40 CNFL/Río Aranjuez 40 CNFL/Río Balsa 40 CNFL/Río Laguna Cote 45+22 Florida Ice & Farmand Heredia ESPH 45 Azucarera El Viejo 45 Hidroeléctrica Agua Zarcas 45 Misc

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

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

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

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

11. 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

12. 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

13. 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 MtCO2e 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 MtCO2e by 2017 worth US$ 2.7 million • BioCarbon Fund buys about 40% of project’s potential

14. 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 tCO2e by 2017 • Contract signed in April 2006

15. 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/tCO2 • Kindermann and others (2008): US$10-21/tCO2 • High additional benefits from biodiversity conservation, protection of water services • Likely to focus on different areas than water payments

16. 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

17. The FCPF:A partnership to make REDD happen

18. 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

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

20. FCPF: Two mechanisms Readiness Mechanism READINESS FUND Capacity Building (2008-2012) Carbon Finance Mechanism CARBON FUND Payments for Emission Reductions (2009-?) ~$150 million 30 countries ~$200 million ~ 5 countries

21. FCPF Participating countries Africa Cameroona Central African Rep.c Congo, Dem. Rep.a Congo, Republicb Equatorial Guineac Ethiopiaa Gabona Ghanaa Kenyaa Liberiaa Madagascara Mozambiquec Tanzaniac Ugandab Asia Cambodiac Indonesiac Lao PDRa Nepala Papua New Guineaa Thailandc Vanuatub Vietnama Latin America Argentinab Boliviaa Chilec Colombiaa Costa Ricaa El Salvadorc Guatemalac Guyanaa Hondurasc Mexicoa Nicaraguab Panamaa Paraguaya Perua Surinamec 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.

22. FCPF Participants Committee 2008-09 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

23. 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

24. 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

25. 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?

26. What does ‘ready’ mean? Emissions reference scenario FCPF Readiness National REDD strategy: 1. REDD strategy: how to reduce emissions? 2. REDD implementation framework 3. Stakeholder consultations • Monitoring: • Design system • Conduct forest inventory • 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?

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

28. What does the Readiness Mechanism pay for? • 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 • Implementation support by WB country teams • Country advisory services • REDD methodology support

29. 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 CO2e 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

30. 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