Imperial College Business School Imperial College London

Reducing Emissions from Deforestation and forest Degradation (REDD) – Assessing the Opportunity in Costa Rica By Federico Castro Kahle

A report submitted in partial fulfilment of the requirements for the MBA degree and the Diploma of Imperial College London September 2009

© Federico Castro Kahle 2009 federico.castro08@imperial.ac.uk

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SYNOPSIS
Deforestation and climate change are closely interlinked. Indeed, forest loss

accounts for approximately one fifth of global greenhouse gas emissions. In response to this situation, the international community is envisioning the creation of a mechanism –called REDD– that would provide financial compensation for countries to avoid deforestation. This system would involve channelling money from the global carbon financing sector to individual forest users with the purpose of making forest conservation more profitable than contending non-forest uses. The objective of this project is to assess Costa Rica’s prospects in becoming an important destination of financial incentives generated by REDD. The relevant characteristics of the country are thus measured against the main factors that will determine the country’s participation in the mechanism. The results of the investigation show that Costa Rica’s forestry evolution positions it in an unfavourable situation with regards to essential REDD factors. It appears that the next climate change mitigation agreement would predominantly channel financial incentives to deforesting countries, a group in which Costa Rica does not take part due to its successful conservation policies and actions. Nevertheless, there is still room for the country to have a significant participation in REDD. If the mechanism embraces countries that are currently enhancing their carbon stocks –rather than depleting them through deforestation– Costa Rica is in a good position to benefit from the synergies of forest conservation and market-based instruments.

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Osa Peninsula, Costa Rica - GARCIALACHNER.com

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To my parents, who instilled the value of forest conservation in me

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ACKNOWLEDGEMENTS
Firstly, I would like to thank Mr. Zen Makuch for his invaluable direction and advice. His genuine interest in the outcome of the project provided additional motivation to excel. Moreover, I would like to extend my gratitude to all primary research participants, whose insightful contribution played a fundamental part in this project. Lastly, my deepest acknowledgement is to María Paula for her everlasting support and companionship.

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LIST OF CONTENTS
Synopsis Acknowledgements List of Contents List of Diagrams List of Tables Notation 1. INTRODUCTION 1.1. Background 1.1.1. Deforestation and Climate Change 1.1.2. The Economics of Deforestation and Forest Conservation 1.1.3. Financing REDD 1.1.4. REDD in Costa Rica 1.2. Aims and Objectives 1.2.1. Research Questions 1.2.2. Specific Objectives 1.3. Project Structure 2. REDD IN COSTA RICA 2.1. Introduction 2.2. Costa Rica’s Forestry Trends and Dynamics 2.3. Scope of REDD 2.3.1. Costa Rica and the Scope of REDD 2.3.2. Specifc REDD+ Proposals 2.3.3. Risk Analysis’s Conclusion 2.4. Baseline 2.4.1 REDD Baselines for Costa Rica 2.4.2. Risk Analysis’s Conclusion 2.5. Additionality 2.5.1. Additionality in Carbon Stocks Conservation 2.5.2. Risk Analysis’s Conclusion 2.6. Governance 2.6.1. Governance in Costa Rica 2.6.2. Risk Analysis’s Conclusion 2.7. Forest Biodiversity 2.7.1. Biodiversity in Costa Rica 2.7.2. Risk Analysis’s Conclusion 2.8. Payments for Ecosystem Services (PES) 2.8.1. Costa Rica’s PES system 2.8.2. Limitations of the PES system in CR 2.8.3. Risk Analysis’s Conclusion 2.9. REDD in Costa Rica - Preliminary Conclusion 3. METHODOLOGY 3.1. Exploratory Study 3.2. Literature Review 3.3. Primary Research 3.3.1. Survey 3.3.2. Interviews 4. RESULTS & DISCUSSION 4.1. Scope of REDD 4.1.1. Discussion VII III VI VII IX X XI 1 1 1 2 3 5 6 6 6 7 9 9 10 13 13 15 16 17 18 19 20 21 23 24 25 27 28 30 30 31 32 33 34 36 38 38 39 40 41 42 45 45 46

4.2. Baseline 4.2.1. Discussion 4.3. Additionality 4.3.1. Discussion 4.4. Governance 4.4.1. Discussion 4.5. Biodiversity 4.5.1. Discussion 4.6. Payments for Ecosystem Services (PES) 4.6.1. Discussion 4.7. Additional Insights 4.7.1. Discussion 5. CONCLUSION 6. REFERENCES 7. BIBLIOGRAPHY APPENDIX 1 – Sample of online survey APPENDIX 2 – Additional information about interviewees

46 48 48 49 50 51 52 53 53 54 55 56 58 62 68 i xiii

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LIST OF DIAGRAMS
Diagram 1.1: Global greenhouse gas emissions by source Diagram 1.2: Project’s road map Diagram 2.1: Forest cover evolution in Costa Rica (cartographical) Diagram 2.2: Forest cover figures in Costa Rica as found in publications (graph) Diagram 2.3: Historical baseline Diagram 2.4: Cumulative effect of temporary emissions abatement Diagram 2.5: Governance-related indices Diagram 2.6: Effect of PES in deforestation/conservation Diagram 4.1: Survey responses to statement about REDD+ in Costa Rica Diagram 4.2: Distribution of survey responses to question about baselines in Costa Rica Diagram 4.3: Survey responses to question about global baseline Diagram 4.4: Survey responses to statement about additionality in Costa Rica Diagram 4.5: Distribution of survey responses to statement about Costa Rica’s governance capacity Diagram 4.6: Survey responses to question governance factor in REDD Diagram 4.7: Survey responses to question about co-benefits remuneration in REDD Diagram 4.8: Survey responses to statement about Costa Rica’s PES system 1 7 11 11 17 21 26 34 45 47 47 49 51 51 53 55

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LIST OF TABLES
Table 2.1: Governance-related indices Table 3.1: Synthesis of activities carried out as part of exploratory research Table 3.2: Names and organisations of individuals targeted with the online survey Table 3.3: Information about the interviews. 25 39 42 43

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NOTATION
BAU: Business-As-Usual CDM: Clean Development Mechanism CR: Costa Rica GHG: Greenhouse Gases PES: Payments for Ecosystem/Environmental Services SFM: Sustainable Forest Management REDD: Reducing Emissions from Deforestation and forest Degradation REDD+: Reducing Emissions from Deforestation and forest Degradation; and enhancement of carbon stocks UNFCCC: United Nations Framework Convention on Climate Change

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Orosi, Costa Rica - GARCIALACHNER.com

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1. INTRODUCTION
‘Protecting forests means fighting for the very survival of humanity’
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1.1. Background
1.1.1. Deforestation and Climate Change Deforestation and climate change are closely interlinked. Tropical forests cover Through the

about 15 percent of the world’s land surface (FAO, 2006) and contain about 25 percent of the carbon in the terrestrial biosphere (Bonan, 2008). decomposition and burning of plant matter and the oxidation and burning of soils, deforestation and forest degradation release carbon into the atmosphere (The Prince's Rainforests Project, 2009). Forest loss thus contributes to global warming and climate change. This contribution is significant. Deforestation and modification of primary forest

areas is the largest source of global greenhouse gas (GHG) emissions in the developing world (Houghton, 2005) and the second largest contributor to global warming after the combustion of fossil fuels (IPCC, 2007). The resulting forest loss occurs at a rate of 6 million hectares per year (FAO, 2006) –an area greater than the territory of Costa Rica– and accounts for approximately 17 percent of GHG emissions (Pachauri, R.K. and Reisinger, A., 2007). Diagram 1.1 illustrates global GHG emissions by source.

Diagram 1.1: Global GHG emissions by source. From Parker et al. (2009).

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Yvo de Boer, UNFCCC’s Executive Secretary. Forest Day 2, 6 December 2008, Poznań, Poland.

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In spite of this, the forestry sector is currently relegated to a secondary position in the world effort against climate change (Streck et al., 2008). The agenda under the United Nations Framework Convention on Climate Change (UNFCCC) does not contain any mechanism to reward actions aimed at avoiding nor reducing deforestation in developing countries (Ebeling & Yasué, 2008). However, if a comprehensive solution to climate change is to be developed, deforestation, a major source of carbon emissions and one of the underlying drivers of climate change, must be taken into meaningful consideration by the international community (Streck et al., 2008). Reducing deforestation is therefore a viable means of lowering GHG emissions. It has been estimated that savings of 9 billion tones of carbon per year could largely be made by scaling up policies to reduce emissions from deforestation and degradation (Garside, 2009). Yet this reduction comes at a cost. It has been estimated that the finance required to halve emissions from the forest sector by 2030 could range between US$17-33 billion per year if forest carbon is included in global carbon emissions trading system (Eliasch, 2008). However, compared to other emissions reductions, reducing GHG emissions from deforestation is the most cost-effective effective alternative (Stern, 2007). Avoiding global warming greater than 2°C –relative to pre-industrial levels– by the end of the century, and hence its dangerous interference with the climate system, requires rapid and large-scale reductions in GHG emissions from both developed and developing countries. (Lubowski, 2008). 1.1.2. The Economics of Deforestation and Forest Conservation The drivers of deforestation reside in a market failure situation. Private benefits of forest exploitation –e.g. timber extraction (Stern, 2007); land for agriculture (Parker et al., 2009); real estate development– are valued and financially rewarded through the market. On the contrary, social benefits of forest conservation –e.g. regulation of GHGs; hydrological and climatic process; biodiversity preservation; aesthetic (World Resources Institute, 2005)– are not. Consequently, high returns from alternative land uses and lack of remuneration of forest environmental services sets the protection of forest ecosystems at a disadvantage and encourages forest Reducing deforestation in tropical forests offers an immediate opportunity to mitigate a major source of emissions at relatively low costs

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owners to deforest (Kanninen et al., 2007). The result is the prevalence of private interests that leads to deforestation and forest degradation. Traditional policy instruments have had limited effect in protecting forest ecosystems from deforestation (Parker et al., 2009). On their own, regulation –a command-andcontrol approach– and education fail to address the fundamental issues underlying the asymmetrical relationship between private and public benefits of forests (Portela et al., 2008). Other instruments are thus needed in order to solve the prevailing market failure situation. Economic and financial instruments are powerful means to reverse the benefit disparity that drives deforestation. These instruments ultimately provide financial incentives to individual land users in order to compensate them for forgone profits from non-forest land uses (Kanninen et al., 2007); and from a different perspective, to remunerate them for the ecosystem services that their forests provide to the world in general. Economic and financial instruments, therefore, balance the benefit inequality that drives deforestation. Reducing Emissions from Deforestation and forest Degradation (REDD) is a tangible proposal that builds on financial incentives to conserve forests (CIFOR, 2009). Broadly speaking, it proposes financial compensation for countries that avoid deforestation (i.e. conserve forests, which act as carbon sinks) and/or reduce emissions from deforestation (Scholz & Schmidt, 2008) below a predetermined reference level. REDD therefore involves channelling money from the global community to individual forest users with the purpose of making forest conservation more profitable than agriculture and other contending non-forest uses (CIFOR, 2009). Additionally, besides combating climate change, REDD could simultaneously facilitate the protection of biodiversity and other ecosystem goods and services (Gibbs et al., 2007). 1.1.3. Financing REDD Due to the magnitude of economic resources required for REDD to be effective, financial mechanisms would play a crucial role. Renowned studies such as the Eliasch Review (2008) and the proposal backed by the government of Norway (Meridian Institute, 2009) suggest the establishment of a hybrid system; regulatory carbon markets as well as public and private funds would satisfy the financial needs

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of the envisioned REDD mechanism. Regardless of the final configuration, it is clear that the bulk of the financing will have to come from market-based systems similar to the emissions trading schemes currently under operation (Eliasch, 2008; Dutschke et al., 2008). Nonetheless, an important political hurdle must be overcome. The compliance carbon markets, which have been developed to help meet emissions targets as mandated by international and national regulatory authorities (Portela et al., 2008), exclude REDD at the moment. It is probable, however, that REDD projects will be allowed under one of the mechanisms of the post-Kyoto agreement. The current climate change negotiations recognise that forests must be part of the solution to reducing GHG emissions (CIFOR, 2009). At UNFCCC’s COP 15, which will take place in Copenhagen in December 2009, negotiators are expected to make REDD a part of the agreement to replace the Kyoto Protocol, which expires in 2012 (CIFOR, 2009). This would mean that REDD could access a very attractive market. In 2008, the regulatory carbon markets traded 4090 million metric tonnes of carbon for a total value of just below US$120 billion (Hamilton et al., 2009). It has been estimated that if only 5 percent of the projected carbon markets in the European Union and the United States of America are made up of REDD credits, the funds needed to cut deforestation by 50 percent could be successfully raised (CIFOR, 2009). Furthermore, assuming a conservative carbon price of US$10 per ton of carbon results in a global value of REDD at a net present value of US$150 billion (Chomitz et al., 2007) and an annual revenue of US$2.3-12 billion (Ebeling, 2006). More positive assumptions about the carbon price (US$10-20 per ton of carbon) and deforestation reductions (20-50 percent) result in annual REDD revenues of US$723 billion (El Lakany et al., 2007). Meanwhile, the voluntary carbon market continues to be the main financing source for forest conservation projects. Most of the offsets generated by these projects are currently traded in the voluntary market, where rules are typically more flexible and accommodating of such projects (Streck et al., 2008). This market, consisting of carbon offset trades that are not required by regulation (Hamilton et al., 2008), offers alternatives for companies, governments, organizations, and individuals operating outside regulatory mandates to reduce carbon emissions (Portela et al., 2008). Companies, governments, organizations, and individuals seeking to reduce the

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climate effects of their operations voluntarily invest in projects that credibly reduce GHG emissions (Portela et al., 2008). However, in spite of being the niche that currently provides most of the financing for avoided deforestation projects, it is clear that the voluntary markets do not have the volume to finance REDD to the required scale. 1.1.4. REDD in Costa Rica The forest carbon-financing scenario described above could represent an attractive prospect for countries that have tropical forest. In the specific case of Costa Rica (CR), 46.8 percent of its territory –2,391,000 hectares– is covered by forests (FAO 2006). This represents a potential opportunity in the context of a prospective REDD mechanism that aims to financially reward forest conservation. CR’s own forest-related characteristics could positively or negatively affect its quest to become a realistic REDD-investment destination. The country’s potential access to financial incentives, at a significant scale, must therefore be carefully analysed. Only after such an analysis has been developed, can a model aimed at reaping the benefits of REDD in CR be seriously formulated. In summary, the international climate change framework is likely to create a mechanism that would exploit the synergies between forest conservation and financial incentives. The resulting scenario could in turn facilitate the creation of specific opportunities in tropical rainforest countries. This report revolves around identifying and assessing the specific prospects of one of those countries: Costa Rica.

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1.2. Aims and Objectives 1.2.1. Research Questions Taking into consideration the dynamic climate change mitigation and financing scenario described above, this project addresses the following fundamental questions: How does Costa Rica fit in the upcoming REDD mechanism? What are the country’s prospects for becoming an important destination of financial incentives generated by the REDD mechanism? 1.2.2. Specific Objectives The following are the project’s specific objectives: To establish CR’s historic evolution and current standing within the forestry sector • To study other ecosystem services –besides carbon– provided by the country’s forest capital, specifically focusing on biological diversity given its relevance as a co-benefit of REDD • To determine CR’s forestry governance capacity by analysing a series of institutional factors • To study in detail the country’s national Payments for Ecosystem Services (PES) system. • To assess the proposed REDD mechanism, particularly focusing on the factors that, in conjunction with the nations’ characteristics, would determine the country’s individual participation in the mechanism • To produce a risk analysis in relation to CR’s participation in the envisioned REDD mechanism • To validate the risk analysis

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1.3. Project Structure Chapter one lays out the general context. The scene is set by describing the role of forestry in relation to climate change. The international carbon-financing scenario is portrayed and the basic elements of the proposed REDD mechanism are provided. Chapter two analyses CR’s positioning in the forthcoming REDD mechanism. A description of the countries relevant forestry characteristics is followed by an analysis of the main REDD factors that would affect the participation of countries within the mechanism. Finally, an assessment of how CR fits in the proposed REDD system (i.e. risk analysis) is elaborated. Building on the risk analysis, Chapter three defines and justifies the most appropriate methodology to carry out the validation exercise. Chapter four analyses the results generated by the primary research phase and assesses their implications on the risk analysis. Finally, Chapter five provides the main conclusions and recommendations. Diagram 1.2 below illustrates the project’s road map.

Diagram 1.2: The project’s road map.

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Santa Rosa, Costa Rica - GARCIALACHNER.com

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2. REDD IN COSTA RICA
“Costa Rica has done what the rest of countries want to achieve in the next 20 years with the REDD mechanism”
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2.1. Introduction
This chapter explores how Costa Rica (CR) fits within the future REDD mechanism. The relevant characteristics of the country are thus measured against the main factors that are going to determine the country’s participation in the upcoming international REDD mechanism3. Other factors, not strictly related to the individual country’s characteristics, are indirectly assessed as part of the main analysis contained herein. The following are the specific REDD factors4 analysed in this chapter: Scope of REDD Baseline Additionality Governance Forest Biodiversity Payments for Ecosystem Services (PES) system

• • • • • •

Each individual REDD factor is examined from a general perspective, followed by a detailed exploration of how CR positions itself within the overall mechanism in relation to that specific element. analysis is then constructed. Based on this assessment, the country’s risk

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Carlos Manuel Rodríguez, Vice President for Conservation Policy of Conservation International and former Minister of Environment and Energy for the Republic of Costa Rica. 3 It is assumed, for the purposes of this investigation, that the REDD mechanism will be a reality in the post-Kyoto framework. 4 ‘REDD factors’: Term used in this paper to refer to aspects of the REDD mechanism that can be studied independently in order to determine their impact in the country’s participation in the mechanism.

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2.2. Costa Rica’s Forestry Trends and Dynamics
Historical and projected forest dynamics will play a fundamental role in REDD. As it is demonstrated during the course of this chapter, forest evolution has a direct impact on a series of individual factors (e.g. scope of REDD, baseline, additionality) that are going to determine, to a great extent, the rainforest countries’ participation in the future REDD mechanism. Therefore, it is important to fully understand CR’s forestry trends. The following are the main facts and figures that illustrate CR’s forestry evolution: • • • CR was once almost 100 percent forested (Kleinn et al., 2002) 1943: Natural forests covered 76.5 percent of the territory (Keogh, 1984)* 1950’s – 1980’s: Period of most severe deforestation in the country (Hartshorn & 16 further authors, 1982)* • During this period CR had one of the highest deforestation rates in the world, 3.9 percent per year (Leonard, 1986), which was two to three times higher than the overall regional average for Latin America (Wendland & Bawa, 1996)* • 1970s: Official reports show a deforestation rate of 50,000 hectares per year (MINAE)* • • • 1985: Forests covered 24.4 percent of the national territory (MINAE)* 1990s: Deforestation was strictly controlled and reduced 1990 - 2000: CR experienced an annual loss of 19,000 hectares of forest, representing a change in forest area of -0.8 percent per year (FAO 2006) • 1996: Forestry Law was implemented, prohibiting land use change and providing the legal and regulatory basis to compensate forestland owners for the ecosystem services provided by their forests (Castro et al., 2000) • 2005: CR had a forest cover of 46.8 percent, representing 2,391,000 hectares of forest area (FAO 2006) • 2000 - 2007: CR experienced a net forest cover increase of 3000 hectares per year, which translates into a 0.1 percent annual increase in forest area (FAO, 2009). • CR’s forest biomass carbon stocks estimates range between 471 MtC and 704 MtC (Gibbs et al., 2007) • Studies show that approximately 60 percent of CR’s territory is most suitable left as forest (Castro et al., 2000)
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Cited from Kleinn et al. (2002)

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Diagrams 2.1. and 2.2. illustrate CR’s forest cover evolution.

Diagram 2.1: Forest cover evolution in Costa Rica (cartographical). The green shading represents areas of the country covered by forests. From MINAET (2009).

Diagram 2.2: Forest cover evolution in Costa Rica (graph). The solid red line represents the country’s forest cover figures as found in a series of publications compiled by Kleinn et al. (2002). Post-1998 figures were sourced from FAOSTATS (2009). The dotted line represents the forest transition curve adapted from Angelsen (2007) and Murdiyarso et al. (2008).

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Based on the information and diagrams outlined above, it is evident that CR is in the fourth stage of forest transition (i.e. increasing forest cover). This has important implications in the following REDD factors: (i) scope of REDD, (ii) Baseline; and (iii) Additionality. The scope of REDD (section 2.3.) refers to the activities that will be considered eligible for generating emission reductions, namely deforestation, forest degradation and/or carbon stocks conservation and enhancement. Diagrams 2.1 and 2.2 above clearly show how CR’s current forestry stage is primarily concerned with the latter. Therefore, the country would benefit more from the REDD mechanism if its scope included activities related to carbon stocks conservation and enhancement. Once the scope has been defined, emissions reductions must be measured against a predetermined baseline (section 2.4.) in order to credit them. The question that arises is how far back should CR extend its baseline in order to generate significant emissions reductions? Should this baseline be adjusted in order to reflect its early actions to halt deforestation? Additionality (section 2.5.) is another crucial factor in the forest transition stage that CR is currently in. This concept refers to the occurrence of emissions reductions or enhancements of carbon stocks over and above what would have otherwise happened as a result of the implementation of the REDD mechanism. In other words, the additionality factor aims to ensure that the financial incentives go to crediting activities that would not have happened without the implementation of the mechanism. That is, the activities must be additional (hence the term ‘additionality’). However, looking at CR’s forest transition curve it is clear that the country has not only halted deforestation, but has also started to increase its forest cover, all in the absence of an international mechanism similar to REDD. additionality of a REDD mechanism in CR might be questionable. Consequently,

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2.3. Scope of REDD
The scope of REDD determines, to a great extent, the participation of individual countries in the mechanism. It is therefore pertinent to begin the analysis with this factor. The scope of REDD refers to the activities that are considered eligible for generating emissions reductions under the mechanism (Parker et al., 2009). These activities can fall in one of the following categories: Activities that Reduce Emissions from Deforestation (RED) Activities that Reduce Emissions from Deforestation and forest Degradation (REDD) • Activities that Reduce Emissions from Deforestation and forest Degradation and enhance carbon stocks (REDD+) These three classes of activities refer to distinct forestry processes. Deforestation is characterized by the transformation of forests to non-forest land (Fry, 2008). Meanwhile, forest degradation has been defined as the “decrease of carbon stocks per unit area not resulting from the reduction or disappearance of forest cover” (Fry, 2008 p. 167) below a defined percentage of crown cover –usually between 10-30 percent– (Murdiyarso et al., 2008). The plus sign after REDD (i.e. the activities that the REDD+ scope additionally embraces), in general terms alludes to flows of carbon between the land and the atmosphere (Parker et al., 2009). While REDD refers to reductions of emissions from activities that increase the level of carbon in the atmosphere (i.e. deforestation and forest degradation), REDD+ additionally deals with the sequestration or removal of carbon from the atmosphere (carbon stocks enhancement). In its broadest sense REDD+ also includes the conservation of forests (Parker et al., 2009). 2.3.1. Costa Rica and the Scope of REDD CR’s forestry transition stage seems to fit more adequately within one of the described categories of activities. Taking into consideration the country’s forest trends and dynamics described in section 2.2., it seems that CR’s forestry reality adjusts better to a REDD+ scope; the country’s relatively high forest cover and increasing net forest cover, at first glance, exclude it from pure deforestation and/or

• •

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forest degradation scopes. Ebeling and Fehse explicitly state that CR “would gain little from a REDD scheme purely focused on reduced deforestation” (Ebeling & Fehse, 2009 p.38). In addition, countries with the characteristics of CR might be more interested in including enhancement of carbon stocks and accounting for forest degradation in the scope of REDD (Murdiyarso et al., 2008). In brief, CR seems to fit better under a REDD+ scope. Still, this scope seemingly encounters some level of resistance. Parker and others (2009), who have analyzed a large and varied number of REDD proposals, point out that forest degradation and carbon enhancement could be implemented in the mechanism at a later phase, primarily due to the greater political feasibility of negotiations that a simple scope would provide. The UK Department of Energy & Climate Change and the Norwegian Government –an influential stakeholder in the climate change negotiations– are also inclined towards a gradual inclusion of REDD+ (Penman, 2009; The Norwegian Government, 2009). All in all, because the majority of stakeholders tend to prioritize deforestation and forest degradation, their proposals pay little attention to carbon stock enhancement and forest conservation (Parker et al., 2009). In spite of this resistance, REDD+ is likely to be included in the scope of the next climate change agenda. The concept of international leakage (further developed in section 2.5.), which refers to the displacement of deforestation from one country to another, has created the necessity to include all tropical forest countries in the adoption of a mechanism along the lines of REDD+. There seems to be a widespread support towards the creation of a comprehensive mechanism that would include tropical forested countries in all stages of the forest conversion process to avoid simply displacing emissions (Strassburg et al., 2009), instead of reducing them. For these reasons it is probable that carbon stock countries5 would be able to participate in the next REDD mechanism if carbon stocks conservation and enhancement activities are included in its scope. With this in mind, the question that arises is to what extent will countries qualifying only under REDD+ be able to

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Carbon stock countries: term used in this paper to refer to countries that are in the fourth forestry transition category (refer to diagram 2.2) in which carbon stock conservation and/or enhancement are the predominant forest activities taking place.

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access financial incentives? answer.

The specific REDD+ proposals may provide an

2.3.2. Specifc REDD+ Proposals The majority of proposals that REDD+ embraces suggest the distribution of funds generated by REDD to carbon stock countries (Parker et al., 2009). Fry (2008), for instance, proposes using part of a REDD fund to support the conservation of forests in the context of adaptation to impacts of climate change (e.g. watershed protection, prevention of erosion and landslides, severe weather events). Others promote a REDD+ mechanism that would reward low deforesting countries by providing them with an assumed reference level –e.g. half or a third the global average– (Mollicone et al., 2007). As a result, REDD+ countries would receive some incentives to avoid leakage in the short term. Strassburg and others (2009) propose a combined mechanism whereby each country would simultaneously receive two kinds of incentives: (i) to reduce emissions in relation to the historical Business-As-Usual (BAU) emissions level; and (ii) to emit less than the country would have emitted if it followed an average behaviour given by the global baseline emission rate (a fraction of forest carbon stocks in developing countries emitted per year). Such mechanism would therefore incentivize all developing countries not only to conserve their ecosystems, but also to reduce deforestation rates in the short-term and to maintain them over the long term. The weight of each incentive would be determined according to each country’s forest characteristics (Strassburg et al., 2009). Other proposals6 have suggested the creation of a distribution mechanism that would generate most of the funds by withholding a fixed portion of the revenues generated by REDD; alternatively, by applying a levy to all REDD transactions. Funds would then be redistributed as dividends to carbon stock countries in proportion to their tropical carbon stocks that are susceptible to being deforested or degraded later on (Parker et al., 2009).

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Separately put forward by the Woods Hole Research Center (WHRC), The Nature Conservancy (TNC) and the Central African Forest Comission (COMIFAC). (Parker et al., 2009)

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2.3.3. Risk Analysis’s Conclusion Although a REDD+ scope encounters some level of resistance among a series of stakeholders, it appears that carbon stocks will be necessarily included in the mechanism in order to broaden up country participation. By doing so, important risks that would ultimately undermine the effectiveness of the climate change mitigation mechanism (e.g. international leakage) would be minimized. However, if carbon stock conservation and enhancement activities are not included in its scope, CR would not be able to access the financial incentives that such framework would generate. Finally, it continues to be unclear how the specific REDD+ mechanism would channel financial incentives to the carbon stock countries. Therefore, there is still a large level of uncertainty regarding the viability of REDD+ as a significant source of financial incentives for the country.

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2.4. Baseline
The baseline (also referred to as reference period) constitutes the reference level along with the scope. Emissions reductions produced by activities included in the scope (section 2.3. above) are measured against the baseline and potentially rewarded (Parker et al., 2009). The baseline concept becomes very important within the future REDD mechanism as it determines the quantity of emissions reductions generated, and thus, the amount of financial incentives captured by each country (Angelsen, 2008). A country’s baseline is primarily driven by its deforestation rate. Although forest degradation can be a significant source of GHG emissions (Murdiyarso et al., 2008; Gibbs et al., 2007), the difficulty to measure it rules it out as a viable means for determining the reference period (Ebeling & Yasué, 2008). Historical and projected are the two fundamental types of baselines (Parker et al., 2009). National historical baselines use past deforestation rates –multi-year average (Ebeling & Yasué, 2008)– as a proxy for future behaviour (Parker et al., 2009). Emission reductions are achieved when actual emissions fall below the reference level, as illustrated by diagram 2.3. This type of baseline, however, does not take into consideration potential changes in national circumstances, such as changing rates of deforestation as a result of economic development (Karsenty, 2008; Parker et al., 2009). In addition, poor availability of time series data for most countries makes it difficult to determine their historic deforestation levels accurately.

Diagram 2.3: Historical baseline. Emission reductions are achieved when actual emissions fall below the reference level. From Parker et al. (2009).

Historical adjusted baselines, alternatively, try to solve this shortcoming by including a development-adjusted factor to reflect predicted changes in future deforestation levels in the historical baseline (Angelsen, 2008; Parker et al., 2009). However,

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historical adjusted baselines can create ‘hot air’ by “rewarding reductions in GHG emission that would have occurred anyway” (Ebeling & Yasué, 2008 p. 1918). On the other hand, projected baselines predict how deforestation rates might change in the future. They do this by means of econometric models that take into consideration the underlying socio-economic and structural forces that lead to deforestation (Parker et al., 2009). This type of baseline also has the potential drawback of producing hot air (Karsenty, 2008), and its complexity –arising from the requirement of adequate data on key variables– makes it unlikely to become accepted (Parker et al., 2009). Parker and others (2009) claim that although the choice of reference level greatly impacts the type of countries that can generate emissions reductions, this factor does not necessarily influence which countries would benefit from a future REDD mechanism. This is so because a REDD+ mechanism could address conservation and enhancement of carbon stocks through a separate financing mechanism (i.e. distribution funds –section 2.3.2.) 2.4.1. REDD Baselines for Costa Rica Chapter two begins by discussing how CR’s historical forestry evolution and current standing on the forest transition curve position the country in a REDD+ scenario. Likewise, the analysis shows how deforestation and forest degradation do not characterize the country’s modern forestry evolution. Hence, the determination of a baseline for the country loses importance; no baseline is necessary given that emissions reductions would not be achieved by carbon stocks countries such as CR. This is why REDD+’s financial incentives would be channelled through a distribution mechanism that excludes individual country baselines. In spite of this, it is important to analyse CR’s baselines for two main reasons. First, REDD+ is not guaranteed. In fact, as illustrated in a comparative analysis by Parker et al. (2009), out of 32 proposals from various governmental and non-governmental organizations only nine include a REDD+ scope. Second, even if REDD+ becomes the scope of the mechanism, it is possible that carbon conservation and enhancement activities only come to be included in later implementation stages (Penman, 2009; The Norwegian Government, 2009; Parker et al., 2009). Therefore, analysing CR’s fallback position is relevant.

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As illustrated in section 2.2., in the 1970’s and 1980’s CR had one of the highest deforestation rates in the world. As a consequence, historical or historical-adjusted baselines set with reference to the 1970s-1980s deforestation rates would allow the country to generate significant emissions reductions. On the contrary, a baseline set relative to CR’s deforestation trends from 1990 onwards, when deforestation was dramatically reduced, would only allow for a limited generation of emissions reductions. Similarly, a projected baseline would not be favourable as there is not enough evidence to suggest that current forest trends would change dramatically in the short and medium term. 2.4.2. Risk Analysis’s Conclusion In brief, CR’s relatively recent forestry evolution (1990-2009) lacks a baseline capable of allowing the country to generate significant emissions reductions. Ebeling and Yasué (2008) assert that in this scenario “CR would have very little to gain from RED” (p.1918). Extending the baseline as back as the 1970s and 1980s –when deforestation in CR was at its peak– or adjusting it in accordance to ‘early actions’ to control deforestation, could create a more favourable scenario. However, this approach might generate political and technical friction, as it would inflate the risk of hot air (Angelsen, 2008). REDD+ and its distribution approach therefore seems to be the most feasible alternative for CR to access the financial incentives created by the mechanism.

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2.5. Additionality
Additionality is linked to the notion of BAU emissions levels, which is in turn closely related to the concept of baselines (previous section). Basically, additionality refers to the occurrence of emissions reductions over and above what would have otherwise happened as a result of the implementation of a policy or project –such as a REDD project– (Sierra & Russman, 2006; Angelsen, 2008). Baselines determine the BAU scenario against which the additionality of an activity, project or programme can be assessed. If a programme results in lower emissions levels than the ones projected by the BAU scenario, then it means that additionality has been achieved by means of the programme’s implementation. Specifically, an activity, project or programme is additional if it can be demonstrated that in its absence: the proposed voluntary measure would not be implemented, or the mandatory policy/regulation would not be systematically enforced and that noncompliance with those requirements is widespread in the country/region, or • that the activity, project or programme will lead to a greater level of enforcement than the existing mandatory policy/regulation. (UNFCCC, 2008) Fry (2008) characterizes additionality as one of the pitfalls connected to marketbased approaches (i.e. carbon markets). His assertion, nevertheless, can also be extended to non-market mechanisms, such as public funds. He sustains that additionality tests if the carbon trading mechanism is having an effect (i.e. leads to reductions in emissions) that is greater than the one obtained in its absence, therefore seeking to avoid giving credits to projects that would have happened anyway (Fry, 2008). Within the REDD mechanism, additionality constitutes an important barrier for countries with low or non-existent deforestation rates. As a result, forest conservation projects or countries with stable carbon stocks would not comply with this requirement; given that these countries currently do not emit GHGs due to deforestation, no emission reductions could be credited as a result of a REDD mechanism. It would seem illogical, according to some, to include conservation in the carbon market because there is no real change in carbon stocks, and hence,

• •

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nothing to trade (Fry, 2008).

As Strassburg and others (2009) point out, some

argue that simply offering incentives to all forests would be a violation of the additionality principle. Countries with low or inexistent deforestation rates would therefore be left out of the REDD framework because of their apparent noncompliance with the additionality requirement. 2.5.1. Additionality in Carbon Stocks Conservation In spite of what has been said, positions that question the additionality requirement fail to acknowledge two important arguments. First of all, conserving forests is additional as it decreases sources of emissions. Ebeling and Yasué explain this point: Protecting carbon stocks in existing forests now can mean that the stored CO2 is emitted later, thereby merely delaying emissions from a defined source –but the same argument can be made of fossil fuels. In fact, a time delay in emissions through temporary abatement measures results in permanent climate benefits because the cumulative atmospheric concentrations of GHGs will be lower at any future point in time [Diagram 2.4]. (Ebeling & Yasué, 2008, p.1919).

Diagram 2.4: Cumulative effect of temporary and permanent emissions abatement. From Ebeling (2008).

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More importantly, critics of the additional climate benefits of forest conservation seem to minimize the role of emissions displacement, known as “leakage” in climate change jargon. Leakage occurs when mitigation efforts in one area (for instance, implementation of a REDD project) result in a direct or indirect increase in deforestation emissions in another area. This phenomenon can occur within a country (internal or domestic leakage) or across national boundaries (international leakage). “If only some countries participated in a regime for reducing deforestation, global markets might shift supply and demand patterns for timber or agricultural commodities across borders and lead to greater deforestation rates in countries not attempting to gain RED credits” (Ebeling, 2008 p. 51). Consequently, standing forests with no history or threats of deforestation could, all of the sudden, become recipients of the deforestation that REDD projects in other geographical areas ‘leak’. Besides leakage, deforestation can be fuelled by broader social changes. Indeed, migration, urbanization, and more recently, the rapid rise in agricultural and energy prices, as well as the growing demand for biofuels, could push deforestation rates up (Kaimowitz, 2008) in areas that have historically maintained low deforestation rates. “Higher prices and demand for commodities that are ‘deforestation agents’ can have profound impacts, even capable of generating strong snowball effects, which multiplies the initial impact” (Angelsen, 2008 p.472). For instance, rising prices commodities (e.g. soya) have resulted in a significant increase in deforestation in Brazil, particularly in the state of Mato Grosso, which had notable declines in deforestation in recent years. (Fry, 2008; Karsenty, 2008). Moreover, Ebeling and Yasué (2008) state that in some countries low deforestation rates could rapidly increase, under a realistic BAU scenario, as land use conversion pressures increase with demographic growth. As a result, leakage and socio-economic pressures, recognized as existing REDD risks –even by some carriers of the additionality flag (e.g. Fry, 2008)– represent strong arguments for the notion that carbon stocks countries and projects can be affected by deforestation pressures in the future. Indeed, conserving forests would comply with the additionality requirement because it avoids future GHG emissions. This has important implications with regards to the distribution of financial incentives generated by the REDD mechanism. Monetary resources originated in REDD must also reach carbon stock countries so that the financial incentives are channelled to their forest owners. This way, forest conservation and enhancement would be able

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to compete with socioeconomic forces and/or non-forest land uses once they are displaced from other geographical regions. This notion goes hand in hand with the REDD+ scope analysed in section 2.3. All in all, it has been recognized that targeting only a subset of countries (e.g. countries with high levels of deforestation for instance) compromises the effectiveness of REDD (UNFCCC, 2007). The mechanism therefore needs to include countries in all stages of the conversion process primarily because those that are currently conserving their ecosystems might increase their forest conversion rates in the near future (Strassburg et al., 2009). Thus excluding countries from the REDD mechanism on the basis of lack of additionality might be counterproductive. 2.5.2. Risk Analysis’s Conclusions Additionality emerges as one of the most serious obstacles that CR encounters in its path to integrate the REDD mechanism. Based on this factor, forest conservation and carbon stocks enhancement –CR’s main forestry activities– could be left out of the upcoming REDD mechanism due to their lack of short-term implications in producing emissions reductions.

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2.6. Governance
Governance factors play a major role in determining what happens to forests. Governments have the responsibility of receiving, using and distributing the revenues generated by their forest credits. Under a national scale reference level – for which a strong international consensus exists according to the analysis of Parker et al. (2009)– the governance factor gains much more importance. Such an approach consists of two phases: i) governments are provided with financial incentives by the international REDD mechanism; and ii) those monetary incentives are then transferred to the forest land users so that forest conservation can effectively compete with the drivers of deforestation (Angelsen, 2008). Transparency, accountability and strong financial management in the role of the government (Eliasch, 2008) will thus be of the utmost importance. Besides, there are a number of governance-related aspects that will play a key role in the successful implementation of the REDD mechanism. Land tenure, institutional capacity and land use planning are some of the elements worth highlighting. More specifically, clear and secure land tenure and user rights have been characterized as fundamental by the Eliasch Review (2008), as they determine who owns the resource that produces the forest credits and who receives the income they generate. Furthermore, a strong institutional capacity –at a national, regional and local level– not only promotes broader participation of forest communities but also ensures a better implementation of the REDD mechanism at a micro level (Eliasch, 2008). Indeed, secure property rights and effective local institutions are needed for investment in sustainable forest management (Kanninen et al., 2007), recognized by many as a fundamental piece of a successful REDD system (The Prince's Rainforests Project, 2009). Implementation of Payments for Ecosystem Services (PES) schemes is also an integral element of the necessary governance capacity (Ebeling & Yasué, 2008). Finally, inclusive land use planning and zoning is critical (Eliasch, 2008), as it allows for a comprehensive development of the forestry sector in general, and a subsequent reduction in the existing pressure over forest resources. conservation. On the contrary, poor governance –characterized by illegal logging, corruption and land speculation (Pedroni et al., 2009)– tampers with forest conservation. Low levels of governance correlate strongly with high deforestation rates and low In short, good governance facilitates successful forest

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conservation effectiveness (Smith et al., 2003).

Additionally, even if lower

deforestation levels are achieved, the benefits cannot reach local communities due to fragile governance structures and corruption (Ebeling & Yasué, 2008). Furthermore, weak governance translates into higher investment risk environments in the countries where REDD programmes are located (Counsell, 2008), a situation that may deter private sector finance (Dutschke et al., 2008). Ebeling (2007) states that country political risk (another facade of the governance capacity) has the greatest impact on the price of forest credits. Track records on forest resource management, institutional set up, monitoring and reporting systems, land tenure security, economical, political and judicial security, are, inter alia, components of the governance risk that would affect REDD programmes, both at the national and project levels (Ebeling, 2007). In summary good governance reduces the investment risk and simplifies financing as less complex structures and counter-balances are needed. 2.6.1. Governance in Costa Rica Having analysed different components of good and bad governance, as well as their effect on REDD programmes and forest credit prices, it is pertinent to assess how CR performs in the governance arena. Table 2.1 and diagram 2.5 show how the average hectare of rainforest7 (Counsell, 2008) and CR compare in a series of governance-related indices.
Regulator y Quality (World Bank) 2007 Scoring Costa Rica Average hectare of rainforest +2.5=best -2.5=worst +0.49 -0.61 Rule of Law (World Bank) 2007 +2.5=best -2.5=worst +0.48 -0.80 Corruption Perception (Transparency International) 2008 1=best 180=worst 47 118 Government Effectiveness (World Bank) 2007 +2.5=best -2.5=worst +0.38 -0.57 Political Stability (World Bank) 2007 +2.5=best -2.5=worst +0.75 -0.72 Ease of Doing Business (World Bank) 2009 1=best 181=worst 117 119 Country Risk (OECD) 2008 1=best 7=worst 3 5

Table 2.1: Governance-related indices. Comparison between CR and the ‘average hectare of rainforest’. Indices from the ‘average hectare of rainforest’ were obtained from Counsell (2008).
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The ‘average hectare of rainforest’ is part of a study by REDD-Monitor that analyzed the 21 most forested countries, which among them contain over 95 percent of all tropical rainforests. The ‘average hectare of rainforest’ was determined by using a ‘weighted mean’ calculation that takes account of a country’s rating and its area of forest (Counsell, 2008). Costa Rica was not part of the study.

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Diagram 2.5: Governance-related indices. Comparison between CR and the ‘average hectare of rainforest’. Indices from the ‘average hectare of rainforest’ obtained from Counsell (2008).

Without delving too much into the representativeness behind the ‘average hectare of rainforest’ concept, it is important to emphasize the clear and concise picture that emerges: CR scores drastically higher than the vast majority of rainforest countries with regards to general governance factors like regulatory quality, rule of law, corruption perception, government effectiveness and country risk. Other works confirm this conclusion. For instance, a study by Ebeling and Yasué (2008) portrays CR as the second best country with regards to good governance indicators (p.1919). In light of the works that analyze country risk (Dutschke et al., 2008; Ebeling, 2007; Counsell, 2008) CR’s stronger governance capacity translates into a lower country risk. This in turn results in an enhanced attractiveness for private sector financing and possibly higher prices in the forestry credits that originate from the REDD programmes. In addition, other factors that specifically refer to forest institutionality seem to reiterate CR’s robust governance capacity. Forests in CR belong to a mixture of private landowners, governments, and indigenous communities, all of whom have secure land tenure (Kaimowitz, 2008). Compared to most of Africa, Asia and Latin America, CR has reasonably well-consolidated national and regional environmental agencies with capacity to implement forestry and conservation policies; the country comes close to having a rigorous, systematic and regular monitoring of forest cover (Kaimowitz, 2008). In addition, contrary to other regions, the Costa Rican protected

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areas –which represent around a quarter of the national territory– receive real protection (Kaimowitz & Paupitz, 1998 cited from Kleinn et al., 2002). Furthermore, in 1996 CR enacted its Forestry Law, which prohibits land use change (deforestation is thus illegal by law) and recognizes the obligation of the government to compensate landowners for the services provided by their forests to the ecosystem. That same year, CR implemented a countrywide PES system that pays individual landowners for the same ecosystem services (Forestry Law, 1996). 2.6.2. Risk Analysis’s Conclusion CR shows a more solid and robust governance capacity than most, if not all, countries with REDD potentials or interests. This makes the country’s forestry But more sector a relatively more attractive private investment destination.

importantly, its governance capacity makes CR a place where REDD activities, projects and programmes would have, from the outset, greater possibilities of being successful.

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2.7. Forest Biodiversity
This section explores the role of biodiversity in the REDD mechanism. In addition it briefly assesses CR’s biodiversity characteristics in order to determine whether or not these contribute to a better positioning of the country within a future REDD mechanism. Climate change, biodiversity and forest loss issues are inextricably interlinked (Nkem et al., 2008). Forest biological diversity (biodiversity) refers to all life forms found within forests, as well as to the ecological functions they perform (Convention on Biological Diversity, 2008b). According to the CBD (2008a), tropical deforestation is a major cause of biodiversity loss. Turner even typifies it as the single greatest threat to terrestrial biodiversity (Turner, 1996 cited from Ebeling & Yasué, 2008) As a consequence, there is a direct link between forest preservation (the ultimate goal of REDD in order to reduce GHG emissions) and biodiversity conservation, which is why biodiversity protection is considered to be a co-benefit of REDD (Laurance, 2007). For this reason some call for common approaches from the CBD and the UNFCCC that simultaneously address biodiversity preservation and climate change due to forest loss (Nkem et al., 2008; O'Connor, 2008; Jenkins et al., 2004; Butler, 2009). Nevertheless, the effectiveness of the link between REDD and biodiversity protection is questioned by some. Ebeling and Yasué (2008) conclude that Moreover, countries with high biodiversity index values (i.e. high levels of endemism and threatened species) do not have high income potential from REDD. carbon markets value carbon, not biodiversity; since these markets are designed to focus on the lowest cost options for generating emission reductions they will thus favour areas with low land use opportunity costs (Ebeling & Yasué, 2008). This situation may not coincide with areas of high conservation priorities (e.g. global biodiversity hotspots) since these areas typically have high land-use conversion rates (Myers et al., 2000). Furthermore, some suggest that biodiversity should not be the primary concern, as it does not provide a real benefit for addressing climate change. For example, it is argued that REDD actions that have biodiversity benefits at a local level but do not

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translate into climate benefits (i.e. do no result in emissions reductions) may lead to broader adverse effects on biodiversity primarily because climate change will result in greater ecosystem and biological diversity loss (Fry, 2008). biodiversity protection as stated above. Pursuing this further, resources generated through carbon finance may be channelled towards areas and countries that are biodiversity conservation priorities by providing supplementary international funding for REDD initiatives that specifically aim to enhance non-carbon benefits (Ebeling & Yasué, 2008). This position goes hand in hand with the REDD+ scope discussed in section 2.3., in which financial incentives would also be distributed to countries and projects that conserve and enhance carbon stocks. The much needed emissions reductions REDD+ would would not be undermined as the bulk of the mechanism would be directed towards reducing emission from deforestation and forest degradation. biological diversity preservation. Seemingly, from an investor’s perspective biodiversity might represent an added value generator. Some buyers in the existing voluntary carbon markets are willing to preferentially buy or pay higher prices for carbon credits if these are associated with measurable conservation and development benefits (Ebeling & Yasué, 2008). Ebeling and Fehse (2009) report that “this is mainly because of the reputational and CSR benefits for corporate buyers that are associated with being perceived as promoting biodiversity conservation and sustainable development” (p.4). In short, voluntary buyers will demand offsets with extra benefits while plain credits that deliver only reduced carbon will not do so well (ENDS, 2009). Indeed, a recent survey aimed at carbon offset buyers shows that 74 percent of respondents consider biodiversity benefits important or highly important, ranking it higher than other factors such as price and usefulness for compliance (Ecosecurities, 2009). In addition, 75 percent of respondents consider quantified biodiversity benefits/credits a desirable or highly desirable investment in ecosystem services other than carbon credits (Ecosecurities, 2009). Although it might be far-fetched to simply transfer the characteristics of the voluntary markets to the regulatory carbon market, the sentiment is that the voluntary offset therefore allow for synergies between carbon financing, emissions reductions and However, this position does not exclude the possibility of creating synergies between REDD and

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buyers might signal a behaviour that could be replicated in the future compliance markets. 2.7.1. Biodiversity in Costa Rica Having analysed the potential that the biodiversity factor has in the REDD mechanism, it is worthwhile exploring CR’s biodiversity capital. CR’s position in the neotropic (tropical zones of the Americas), its geological history as the bridge that links North and South America, and its mountain system that provides an array of micro-climates, all make it a biodiversity-rich country (Obando, 2007). The following are some specific biodiversity characteristics of the country: CR holds 3.6 percent (509,000 species) of the world's expected biodiversity and 4.5 percent (91,000 species) of the world’s known biodiversity while representing only 0.03 percent of the world’s surface (Obando, 2007) • Out of 228 countries in the world, CR ranks as one of the 20 countries with greatest biodiversity (Obando, 2007) • Additionally, CR is ranked among the nine countries with extremely high biodiversity in forest ecosystems (Obando, 2007) • CR ranks as the country with the highest biodiversity density in the world (Obando, 2007) • Biodiversity is recognized by law as an ecosystem service subject to payment by the government (Forestry Law, 1996) Taking into consideration these characteristics it appears that CR has a strong biodiversity capital, which positions the country as a world leader in this area. 2.7.2. Risk Analysis’s Conclusion It becomes apparent that CR possesses a biodiversity capital that would place it in an advantageous position if this factor were to have an important weight in a future REDD mechanism. It is not clear, however, that biodiversity will be meaningfully included in REDD. As Ebeling and Fehse (2009) conclude, despite there being a strong potential to link biodiversity conservation and climate change mitigation, at present it is hard to foresee the adoption of this synergy in the future compliance carbon markets.

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2.8. Payments for Ecosystem Services (PES)
This section further develops the concept of Payments for Ecosystem Services (PES) and, more specifically, how it fits in the overall REDD mechanism. In this setting, the Costa Rican PES system is then analysed with the purpose of determining the potential implications of the country’s participation in REDD. In basic terms, PES are payments made to forest owners in return for the ecosystem services that their forests provide. Specifically, these are voluntary transactions in which a well-defined Ecosystem Service (ES) is bought by at least one ES buyer from a minimum of one ES provider, if and only if the provider continues to supply that service (conditionality) (CIFOR, 2006). Prior to developing the concept of PES further, it is important to expand on an idea that was briefly mentioned in the introduction of this paper: rent from non-forest land uses as the ultimate driver of deforestation and forest degradation. Land users and decision makers convert forest to other uses because these provide higher rents than conserving forests (Angelsen, 2008). The basic economic approach underlying the PES is therefore inspired in Von Thünen’s Model of Agricultural Land Use, which was further developed and adapted in a series of recent works (Angelsen, 2007; Kanninen et al., 2007; Angelsen, 2008; Robalino et al., 2008). While private benefits of forest exploitation –e.g. timber extraction, agricultural uses, real estate development– are valued through the market, social benefits –e.g. regulation of GHGs, watershed protection, biodiversity conservation, aesthetics– are not (Portela et al., 2008). High returns from alternative land uses and a lack of remuneration for forest ecosystem services hence set the protection of forest ecosystems at a disadvantage (Kanninen et al., 2007). prevalence of private interests that lead to deforestation. Reducing deforestation therefore relies on making forests more valuable by increasing forest rents to a level that competes with non-forest uses (Angelsen, 2008). From another perspective, the PES is an instrument that can be used to reverse the cost-benefit asymmetry that drives deforestation (Angelsen, 2008). PES systems thus alter the decisions of individual land users through price signals and by compensating their forgone profits from not converting or degrading their forest (Kanninen et al., 2007). The result is the

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In the overall scheme, PES systems seem to be the missing link between financial resources originated at the international level and forestland owners. Market-based systems and/or public funds create the necessary resources that feed national or project-based PES systems. (Angelsen, 2008). As a result, PES systems appear to be a crucial element in the implementation of REDD, and more specifically, in the provision of financial incentives to solve the market failure situation that originates in the rent inequality between forest conservation and non-forest land uses. The Eliasch Review (2008), on the other hand, concludes that due to equity and efficiency challenges that PES schemes face, in addition to their reliance on external finance, these programmes do not represent, on their own, a viable alternative to channel REDD-originated finance to individual landowners. This conclusion must be threaded lightly. PES systems cannot work in isolation. A strong institutional governance framework (such as the one analysed in section 2.6) becomes a vital component for aligning the interests of the different stakeholders. Additionally, sustainable forestry management programmes are also crucial as they address one of the strongest drivers of deforestation: demand for forestry products (e.g. timber). complemented. Therefore, when the Eliasch Review questions the role of PES However, as aforementioned, PES are a vital element without schemes as the panacea for deforestation, it rightfully does it. They need to be which the market failure that drives deforestation will be difficult to solve. 2.8.1. Costa Rica’s PES system CR’s PES scheme “has been one of the conservation success stories of the last decade” (Pagiola, 2008, p.722). The country hosts the world’s first and only nationwide PES system (Hall, 2008) –in operation since 1996– reason for which CR is regarded by many as a true pioneer and leader in this area (Robalino et al., 2008). Grieg-Gran and others (2005) suggest that the Costa Rican PES system comes closest to the ideal system in which the users of the service pay for it directly to its providers. Lastly, CR’s PES system was built over a programme of tax incentives These systems ultimately provide the domestic incentives that decision makers and land users need to enhance or improve forests

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and payments for reforestation and forest management in place since the 1980s (Sierra & Russman, 2006), which provided the institutional capacity and know-how necessary for its subsequent evolution (Pagiola, 2008). The scheme recognizes four environmental services provided by forests: i) mitigation of GHG emissions, ii) watershed protection, iii) biodiversity conservation, and iv) provision of scenic beauty (Forestry Law, 1996). The PES programme is financed with a 3.5 percent of the revenues from the fossil fuel tax –approximately US$10 million per year– (Forestry Law, 1996) as well as a loan from the World Bank and a series of grants from NGO’s and governments (Pagiola, 2008). Additionally, in a transaction without precedents that took place in 1996, CR sold its first 200,000 tons of carbon emission reduction credits to Norway for US$10 per ton of carbon (Russo & Candela, 2006). The scheme now covers approximately 10 percent of the territory and benefits around 8000 landowners engaged in forest protection (which makes up 92 percent of the programme), management and reforestation of over 500,000 hectares, at a cost to date of US$120 million (Zbinden & Lee, 2004; Hall, 2008). The PES programme pays landholders about US$64 per hectare of conserved forest per year (FONAFIFO, 2009). An econometric study by Tattenbach et al. (2006) estimated that in 2005 primary forest cover in CR was 10 percent greater than it would have been without the PES programme in place. 2.8.2. Limitations of the PES system in CR Despite it successes, a number of limitations in the Costa Rican PES system have been pointed out. As Pagiola (2008) asserts, being the first nation-wide PES programme in a developing country inevitably generated some imperfections. The magnitude and inflexibility of the specific payments to forest owners delivers the first set of limitations. The PES programme offers relatively low payments, which causes the rejection of socially desirable land uses because of insufficient compensation (Pagiola, 2008). In other words, non-forest use rents continue to be higher than the PES. These payments are also undifferentiated and mostly untargeted, which attract participants whose opportunity costs are low or negative and that would have adopted the desired practices (i.e. forest conservation) anyway

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(Pagiola, 2008; Angelsen et al., 2008; Robalino et al., 2008). Diagram 2.4 illustrates the effects of a fixed payment on PES programme enrolment and impact on deforestation. A study by Robalino and others (2008) suggests that a more strategic targeting of areas with high deforestation pressures and differentiated payments across regions would increase the impact of the PES programme on deforestation.

Diagram 2.6: Effect of PES in deforestation/conservation. Y-axis: rent generated by non-forest land uses; X-axis: all forest land in the country, ordered according to the rent it provides (from the highest to the lowest). PES is illustrated by the red line. Without PES: deforestation will take place from A to C and forest will be maintained between C and D. With PES: landowners will decide to enrol in the interval B to C because the payment is higher than the rent from alternative uses. Enrolment of landowners from interval C to D will have no effect in deforestation. Adapted from Robalino et al., (2008)

Moreover, the PES programme has tended to benefit larger landowners disproportionately (Zbinden & Lee, 2004) and its potential as a ‘pro-poor’ mechanism is currently being examined (Hall, 2008). Funds are also insufficient to include all the applicants in the PES programme, thus resulting in a triple oversubscription (Pagiola, 2008). Angelsen and others (2008) point out that if rights’ holders were to be compensated according to their specific opportunity costs, the overall PES programme cost would be substantially lower. 2.8.3. Risk Analysis’s Conclusion The PES schemes seem to be fundamental in the implementation of the REDD mechanism. These connect the individual forestland user to the monetary resources generated at the international level, therefore providing the financial incentives that make forest conservation more profitable than non-forest land uses.

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CR has been a pioneer and a leader in implementing large-scale PES systems. The institutional framework behind the system, facilitated by the country’s governance capacity (section 2.6.), has made the strong growth and success of the PES programme possible. Nonetheless the Costa Rican PES programme has limitations and deficiencies. But these originate mostly in a lack of adequate funding. However, this financial gap is what a REDD mechanism aims to solve8. Limitations of the programme and their solutions have already been identified by countless studies that have analysed the pioneering Costa Rican PES system. This fine-tuning would not require radical structural changes as the system and the institutional capacity are already in place. As Pagiola concludes, what CR needs is “to be flexible and to adapt to lessons learned and to changing circumstances” (Pagiola, 2008 p.722). All in all, CR’s PES system appears to create a comparative advantage for the country in relation to the implementation of a REDD mechanism.

8

This represents another argument to sustain that a REDD mechanism in CR would be additional (section 2.5.). The ‘financial additionality’ factor would be present in the Costa Rican PES system.

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2.9. REDD in Costa Rica - Preliminary Conclusion
The main obstacle that CR faces in its quest to meaningfully access REDD financial incentives appears to be its own early action to halt deforestation. Being ahead of its time by successfully halting deforestation means that CR’s position in a future REDD mechanism is weakened by technical factors such as additionality, baseline and scope of the mechanism. However, if the upcoming climate change negotiations eliminate these hindrances, the country could then benefit from the mechanism. CR’s forest capital characterised by factors such as successful forest conservation and enhancement, strong governance capabilities, rich biodiversity, and a solid PES system- places the country in a differentiated and privileged position within the forthcoming REDD system. Ultimately, the country could become the ‘low hanging fruit’ to facilitate the generation of momentum and experience in the novel REDD arena. This could in turn trigger the mechanism’s adoption on a large scale elsewhere in the world where overall conditions to implement REDD also seem to be more complicated.

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Osa Peninsula, Costa Rica - GARCIALACHNER.com

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3. METHODOLOGY
At this stage it is relevant to recall the main goals of the project as they play an essential part in shaping its methodology. The main research questions that this project aims to answer revolve around the fit of CR within the overall REDD mechanism and, based on that, the level of financial incentives that the country will be capable of attracting from such mechanism. The project is structured in a way that allows for the gradual achievement of the specific aims and objectives. The risk analysis of the Costa Rican position is constructed based on the literature reviewed (previous chapter). This analysis is then subjected to validation by a series of experts and stakeholders in the primary research phase. Finally, conclusions are drawn taking into consideration all prior aspects of the project. The research that is carried out has a predominantly interpretative or reflective approach as it has been designed to generate insights about the object of the present study. Consequently, the investigation primarily involves qualitative and subjectivist research methods. The research methods that this project embraces can be grouped in four main areas: • • • • Exploratory Study Literature Review Survey Interviews

3.1. Exploratory Study
The first phase of this study was designed to provide the foundations on which the main pillars of the project (background knowledge, research scope, aims and objectives) could be built. The exploratory study phase mainly consisted of a preliminary literature review, attendance to a number of forums and conferences related to the subject, and membership to a series of organizations that act as information brokers in the industry. Table 3.1 below synthesises the exploratory research stage.

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Category Membership

Activity Prince’s Rainforest Project
(www.rainforestsos.org)

Date Since November 2008 15 October, 2008
th

Events, Forums & Conferences

Innovation and Investment Opportunities in Carbon Capture and Storage (CCS). Conference organized by Imperial College’s Energy Futures Lab
(www3.imperial.ac.uk/energyfutureslab)

General comments Provided initial concepts about the role of forest in climate change mitigation. Source of information about related initiatives, proposals and events. Although the conference’s main focus was CCS, it provided valuable background on carbon emissions, climate change and mitigation efforts. Provided valuable insights about the political challenges faced by a global agreement on climate change. Opportunity to ask speaker about the prospects of REDD within the agreement. This work compiles the latest thinking and academic publications on the areas related to its subject. It provided a wellrounded understanding of forestry and REDD. Source of information on markets and payment schemes for ecosystem services. Provider of news, analysis for European and global carbon markets. An all day event that provided the opportunity to refine the concepts developed to that date.

Events, Forums, Conferences

Is an agreement on climate change possible in Copenhagen? Seminar by Prof. Laurence Tubiana organized by the Grantham Institute for Climate Change
(www3.imperial.ac.uk/climatechange)

29 April, 2009

th

Preliminary literature review

“Climate Change and Forests: Emerging Policy and Market Opportunities” (Streck et al. 2008)

February – March 2009

Ecosystem Marketplace Membership Membership
(www.ecosystemmarketplace.com)

Since June 2009 Since June 2009 8 July, 2009
th

Point Carbon
(www.pointcarbon.com)

Events, Forums, Conferences

Dialogue on forests, governance and climate change. Event organized by the Rights and Resources Initiative and Chatham House
(www.chathamhouse.org.uk)

Table 3.1: Synthesis of activities carried out as part of the exploratory research phase.

3.2. Literature Review
The exploratory phase provided the initial direction for the literature review search and analysis. In particular, the compilation of peer-reviewed academic journal articles by Streck et al. (2008) provided straightforward access to the latest theories on the wide subject of forestry activities within the climate change policy context. As a result, this piece of work allowed for the initial identification of the main theory streams on the subject, which upon further exploration, resulted in a broad set of references. Furthermore, with the purpose of avoiding potential biases in the selection of works by the editors of the referred compilation, other academic journals were sought for. EBSCO and Imperial College’s MetaLib databases, as well as the academic search engine Google Scholar, were the selected sources of online academic literature on the subject. The searches were filtered by the following key words (used

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independently or in combination with one another): Avoided Deforestation, REDD, REDD+, Costa Rica, PES, Biodiversity, Governance and Carbon Markets. The main aims of the literature review were: (i) to identify the theoretical framework of REDD; and (ii) to build a risk analysis of CR based on the most relevant and latest theories (the resultant risk analysis is to be validated through the primary research). In addition, the literature compilation was complemented with secondary research about CR and its specific characteristics related to the REDD factors. This led to an assessment of the main theories on REDD through a Costa Rican perspective, which proved to be fundamental in the risk analysis exercise that followed.

3.3. Primary Research
Given that the main purpose of the primary research was to validate the risk analysis, it became essential to juxtapose CR’s risk assessment with an element of insight and feedback generation. Confirmation or invalidation of the risk analysis was thus the main objective of the primary research phase. The best method envisioned to achieve this was to expose the risk analysis to a number of selected individuals and receive their feedback, which therefore limited the primary research to qualitative and subjectivist approaches. Despite the limitations that a strictly qualitative research has, it was necessary to design it this way. The mechanism’s negotiations are still at a very immature stage, and there is still a lot of uncertainty regarding the feasibility of an international agreement on REDD and its final configuration. Nevertheless, it must be recognized that respondents and interviewees were not representative of the REDD sector as a whole. Hence, the results of this study cannot make statements about the population at large. Pre-determined criteria were used to define the population of the sample (i.e. judgement sampling approach was put in practice). Due to the complexity of the issue, the individuals to be included in the risk analysis validation had to be either experts on the subject or stakeholders in the current and upcoming climate change

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mitigation mechanisms. In addition, they had to represent a varied array of sectors potentially affected by REDD. targeted:
     

The following are the specific sectors that were

Non-Governmental Organizations (NGOs) – International and Costa Rican Government (Republic of Costa Rica) Academic Project Execution Fund Manager Carbon Consultancies

Finally, the validation exercise was carried out via two main avenues: online survey and face-to-face interviews. The latter was the preferred method as, in principle, it generates the greatest number of insights –a desired outcome of the investigation. In addition, in situ exploration of the specific issues potentially facilitates more indepth analysis of the risk assessment. However, not all the experts or stakeholders were available for an interview. As a consequence, these individuals were instead targeted with the online survey. 3.3.1. Survey The survey was intended as a validation tool for sending to individuals who could not be interviewed. Its purpose too was to obtain insights and validate the risk analysis –qualitative approach. Hence, sheer numbers –belonging to a more quantitative approach– were not an intended nor desired outcome. The questionnaire was designed following the same structure and rationale of the risk analysis constructed in Chapter two. Moreover, it contained both closed and open questions. Closed questions mainly tested the risk analysis, whereas open questions were included to allow for greater expression of the respondents, thus encouraging additional insights. Appendix 1 includes a sample of the survey that was distributed. The respondents were contacted via e-mail. A brief explanation about the purpose of the investigation led to a link that took them to the online survey. Table 3.2 lists the experts and stakeholders to whom the survey was sent.

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Organization Carbon Rating Agency (www.carbonratingsagency.com) Carbon Rating Agency (www.carbonratingsagency.com) Centre for Environmental Policy, Imperial College Angela Almassy (www.imperial.ac.uk/environmentalpolicy) Centre for Environmental Policy, Imperial College Sarah Nolleh (www.imperial.ac.uk/environmentalpolicy) Centre for Environmental Policy, Imperial College Charlotte Jourdain (www.imperial.ac.uk/environmentalpolicy) Mark Tarry Canopy Capital (www. canopycapital.co.uk) Simon Counsell Rainforest Foundation (www.rainforestfoundationuk.org) Johanes Ebeling EcoSecurities (www.ecosecurities.com) Jan Fehse EcoSecurities (www.ecosecurities.com) Till Neeff EcoSecurities (www.ecosecurities.com) Charlotte Cawthorne Prince’s Rainforest Project (www.rainforestsos.org) Andreanne Grimard Prince’s Rainforest Project (www.rainforestsos.org) Alex Townend AEA Technology (www.aeat.co.uk) Darren Chadwick Brite Green (www.britegreen.com) Charlie Parker Global Canopy Programme (www.globalcanopy.org) Mandar Trivedi Global Canopy Programme (www.globalcanopy.org) Oliver Moore ERM (www.erm.com) Adam Dawson Camco (www.camcoglobal.com) Elise McAuley Camco (www.camcoglobal.com) Ralph Ashton Terrestrial Carbon (www.terrestrialcarbon.org) Anna Creed Terrestrial Carbon (www.terrestrialcarbon.org) Ricardo Ulate Conservation International (www.conservation.org) Lucio Pedroni Carbon Decisions (www.carbondecisions.com) Tropical Agricultural Research and Higher Education Center Bastiaan Louman CATIE (www.catie.ac.cr) Table 3.2: Names and organisations of individuals targeted with the online survey.

Respondent Diego Arrigorriaga Fernanda Gusmao

The survey, which was available from the 7th to the 29th of August 2009, had a response rate of 46 percent. However, beyond any response rate, the sample was not envisioned to be representative of a wider population, and therefore the results were not meant to embody all opinions of the sector. To reiterate, the purpose of the questionnaire was to generate insights about CR’s risk analysis. 3.3.2. Interviews A total of eight interviews with key stakeholders were conducted as part of the tenday fieldwork in CR. The selected individuals, and their organizations, either play an active role in conservation projects in the country or currently hold important positions in its REDD-readiness process. information about the interviews. Table 3.3 below describes the main

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Date 10/08 2009

Interviewee Franz Tattenbach

Title Executive Director

Organization Foundation for the Development of the Central Volcanic Mountain Range (FUNDECOR)
(www.fundecor.org)

Duration 2.5 hours

Additional comments Mr. Tattenbach was member of the first CDM executive board. He also heads the Costa Rican Office On Joint Implementation (OCIC), of the UNFCCC’s Activities Implemented Jointly (AIJ) Programme. Mr. Rodríguez was Minister of Environment and Energy for the Republic of CR from 1998 to 2004. Mr. Corrales has a long trajectory conducting research about CR’s forestry sector. INBio is a private research and biodiversity management centre. FUNDECOR currently develops and administers forestry conservation projects under implementation and design stages. IPS is a presidential initiative -launched by CR’s President Oscar Arias- with a strong political commitment to fight against environmental degradation. FONAFIFO runs the nations PES programme. TNC is an important stakeholder in the climate change negotiations.

10/08 2009 12/08 2009 13/08 2009 17/08 2009

Carlos Ml. Rodríguez Lenin Corrales Randall García German Obando

Vice President for Conservation Policy Climate Change Science Specialist Director of Conservation Director of Research and Development Department Climate Change Programme Officer

Conservation International (CI)
(www.conservation. org)

1.5 hours

The Nature Conservancy (TNC)
(www.nature.org)

1 hour

National Biodiversity Institute (INBio)
(www.inbio.ac.cr)

1 hour

FUNDECOR
(www.fundecor.org)

1 hour

18/08 2009

Carolina Mauri

Peace with Nature Initiative (IPS)
(www.pazconlanatur aleza.org)

1.25 hours

21/08 2009

Resource National Forestry Management Financing Fund Department (FONAFIFO) (www.fonafifo.com) Coordinator 21/08 Irene Suárez Senior Policy The Nature 2009 Advisor - Conservancy International (TNC) Policy Climate (www.nature.org) Change Table 3.3: Information about the interviews. More detailed provided in Appendix 2.

Alexandra Sáenz

1.25 hours 1.25 hours

information about the interviewees is

The interviews followed the same logic of the risk analysis, which was used as a base for discussion. Although guiding questions were prepared, the interviews were semi-structured in order to allow for a conversational flow and facilitate the generation of insights by the interviewees.

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4. RESULTS & DISCUSSION
Results of the primary research phase and their discussion are displayed below. Each previously examined REDD factor has a subsection assigned to it in this chapter. The representative responses and insights provided by the interviewees and respondents of the survey are presented as quotations and, where suitable, diagrams are inserted to illustrate the survey’s closed questions.

4.1. Scope of REDD
Countries that are enhancing their carbon stocks, such as CR, are the big REDD losers, whereas countries that have never supported forest conservation are the big winners. REDD is rewarding all those countries that have never been committed with forest conservation. Carlos Ml. Rodríguez, Conservation International [CR will be able to meaningfully participate in the future REDD framework] only under a REDD+ scheme recognizing conservation and/or Carbon stock enhancement. Lucio Pedroni, Carbon Decisions Ltd. I think CR could benefit from a stabilization fund dedicated to carbon stocks. Charlie Parker, Global Canopy Programme The ideal mechanism is one that includes everyone. REDD+ is an important step in that direction. Carlos Ml. Rodríguez, Conservation International Under current official negotiations, REDD+ is the concept used for a post-2012 regime. Charlotte Jourdain, Imperial College London

Diagram 4.1:

Survey responses to statement “If REDD includes in its scope conservation and

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enhancement of carbon stocks (REDD+), CR’s carbon stocks, quantified at 471 MtC - 704 MtC and growing, place the country in a good position to access REDD incentives on a large scale”.

4.1.1. Discussion The results consistently picture CR under a REDD+ mechanism. The country’s carbon stocks conservation and enhancement reality appears to be the main reason for this. Similarly, access to financial incentives for the country seems to be conditioned to a REDD+ scope. However, it is not clear if those incentives are going to be available at a large scale. Therefore, it seems that a REDD+ scope will allow CR to participate in the mechanism, but the degree to which it will do so is still unknown. On the contrary, there was a consensus among respondents and interviewees that a purely RED or REDD scope, independent of other factors, would exclude CR from the mechanism.

4.2. Baseline
Baselines could be country specific, in the case of CR, credit for early action has been proposed, although the idea is still controversial. Imperial College London It is probable that there will be variable baselines. Simon Counsell, Rainforest Foundation [Under a national approach, baselines will be determined by] national emissions from a historic period times a negotiated factor. Lucio Pedroni, Carbon Decisions Ltd. [The] baseline will likely be historical adjusted although the adjusted part is open to change. Charlie Parker, Global Canopy Programme CR will push strongly to get its early actions recognized by means of an adjusted baseline and additional economic resources. The baseline will be determined individually for each country. Carolina Mauri, Peace with Nature Initiative Charlotte Jourdain,

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[Period most likely to be used to set the individual country baselines for CR:] • I think not more than the last 10 years, but possibly adjusted for international leakage risk. Jan Fehse, EcoSecurities It will be when CR started arguing that carbon was one of the reasons to do it [(conserve forests)], and that it expected international funds to cover for the cost. Diego Arrigorriaga, Carbon Ratings Agency The CDM’s e-minus rule can be applied to set CR’s baseline. With it you can

abstract from your project or national baseline the emissions that you would have produced in the absence of favourable legislation to reduce emissions that the country approved from year 1990 onwards (year used for afforestation and reforestation projects in the CDM). Franz Tattenbach, FUNDECOR

Diagram 4.2: Distribution of survey responses to question “Any type of baseline for CR (historical, historical adjusted or projected) established with reference to the 1990-2009 period would make it very difficult for CR to achieve significant emissions reductions”.

Diagram 4.3: Survey responses to question “Countries with emissions less than half the global average baseline would receive carbon credits for the difference between emissions at the end of the commitment period and the global baseline (Mollicone et al. 2006) How likely is it that proposals similar to the one above will be included in any future REDD framework?”.

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4.2.1. Discussion The results clearly show that a purely historical baseline for CR, based on the 19902009 period, would not allow the country to produce significant emissions reductions. However, the majority of interviewees and respondents seem to point towards a variable or historical-adjusted baseline that would allow the country to set a more suitable reference period based on its specific circumstances (i.e. early action). In addition, the global baseline concept did not generate enough responses or comments to exclude it as a potential distribution mechanism for CR. However, it is clear that primary research participants do not see it as a predominant proposal. Finally, the research outcomes also generated two insights that were not taken into consideration in previous phases of the project. Firstly, the intentionality of the country’s actions to reduce deforestation and enhance carbon stocks in order to access future carbon markets. According to some respondents, this is what would allow for the recognition of early actions within the baseline. Secondly, the potential applicability of the e-minus rule. If this rule is to be applied in a REDD context, emissions reductions resulting from country actions to reduce deforestation could be deducted from the historical baseline.

4.3. Additionality
Additionality is the REDD subject for CR (…) the country faces the risk of being declared non-additional for the good things that it has done in the past. Franz Tattenbach, FUNDECOR Additionality is a fundamental principle of environmental integrity so if REDD is to be integrated to the carbon market as we know it, then additionality will be a defining measurable. Charlotte Jourdain, Imperial College London REDD credits will most likely be used for offsetting. Offsetting does not make sense without additionality. Recognizing the value of carbon storage makes sense in itself, but not in an offsetting context. Therefore, CR has little chance of successfully participating in REDD in my opinion. Jan Fehse, EcoSecurities

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[There are] strong requirements that emissions reductions are additional to an agreed baseline. Charlie Parker, Global Canopy Programme It is incorrect to interpret additionality only in relation to a baseline resulting from historical emissions from deforestation. There are other ways to establish the additionality. For instance, demonstrating that the economy of the carbon market is what provides feasibility to the project (financial or economic additionality). Franz Tattenbach, FUNDECOR What happens if you get rid of the PES system in CR? It would result in a rent disequilibrium situation in favour of non-forest land uses. system in CR is additional. German Obando, FUNDECOR The fact that the country has borrowed US$10 million to feed its PES system is a great proof that additionality exists in CR. Franz Tattenbach, FUNDECOR International leakage is a risk for Costa Rican Forests. Therefore, the risk of deforestation exists in CR. Lenin Corrales, The Nature Conservancy CR has been additional. Public policies to reduce deforestation have been Carlos Ml. Rodríguez, Conservation Therefore, the PES

successful. The country must fight for the recognition of credits that have been generated in the past (early actions). International

Diagram 4.4: Survey responses to statement “A REDD mechanism implemented in CR would lack the 'climate additional' requirement (i.e. in relation to carbon emission reductions)”.

4.3.1. Discussion The primary research evidences that the additionality factor is the main obstacle

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faced by CR. There is a very strong tendency among respondents and interviewees to rule out CR’s climate additionality (understood as being capable of producing future emissions reductions). countries’ caps. However, the interpretation of additionality is not uniform among primary research participants. For instance, some mention that countries must be additional with respect to an agreed baseline; a concept that does not necessarily correspond with a climate-additional notion due to the adjustability to which the reference period might be subject. Alternatively, some interviewees introduced the concept of financial additionality, stating that without the carbon financing generated by the implementation of a REDD mechanism in CR, a series of conservation projects and programmes (including the national PES system) would not be feasible. Others suggested that the existence of the international leakage risk makes forest conservation projects additional, as they could become sources of emissions if financial incentives are not in place to counteract the displaced drivers of deforestation. Finally, when discussing the implications of this factor with the interviewees, the concept of early actions was recurring. This argument revolves around the notion that CR’s past actions were additional (i.e. deforestation was halted), reason for which the country must be compensated. This seems to have important implications in an offsetting context, in which the climate additional factor interacts strongly with other

4.4. Governance
Governance is fundamental. PES from REDD will not happen without addressing underlying governance issues. Charlotte Jourdain, Imperial College London CR has a comparative advantage with regards to governance. What other countries need to implement for the REDD-readiness plan should not be too different to what CR has with regards to institutionality and financial incentives. Rodríguez, Conservation International CR is a worldwide leader in governance and PES. Randall García, INBio Carlos Ml.

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The rule e-plus/e-minus has a lot to do with governance. If you have successful governance that results in lower deforestation, you need to recognize it in the baseline by means of the e-minus rule. Franz Tattenbach, FUNDECOR The Costa Rican Forestry Law from 1996 prohibits land use change. Therefore, any type of deforestation is always illegal in CR. In other parts of the world deforestation is permitted by law –it’s only illegal when the respective administrative permits have not been obtained. Carlos Ml. Rodríguez, Conservation International Domestic leakage in CR is almost impossible due to its robust land tenure system. German Obando, FUNDECOR

Diagram 4.5: Distribution of survey responses to statement “CR’s relatively stronger governance capacity represents a competitive advantage over the majority of forested countries”.

Diagram 4.6: Survey responses to question “What level of importance will any future REDD framework place on the governance factor?”.

4.4.1. Discussion The respondents consistently underlined the importance of the governance factor in any REDD mechanism. According to them, it provides the necessary conditions for a successful implementation of the specific actions that result in reduced 51

deforestation and enhancement of carbon stocks. In addition, the results highlight CR’s superior forestry governance capacity in relation to the great majority of countries that have potential in the mechanism. for the country. Moreover, there seems to be consent among the interviewees regarding the fundamental role that superior forestry governance and institutionality has played in reducing deforestation in CR. This was again related back to the e-minus rule, a recurring subject during the conversations. It was argued that since the country’s actions to improve its forestry governance are what caused the fall in deforestation, then the resulting emissions reductions must be deducted from the baseline. As a consequence, most of respondents and interviewees visualize this situation as a comparative advantage

4.5. Biodiversity
CR has the greatest biodiversity density in the world (…) This translates into an advantage for buyers who are interested in biodiversity. It’s more effective to conserve biodiversity per unit area in CR. Randall García, INBio Paying for biodiversity protection in CR is much more cost effective than in other parts of the world because of the country’s greater biodiversity density. Tattenbach, FUNDECOR A framework for REDD within the UNFCCC might place non-premium on biodiversity, whereas voluntary markets may do –though probably only marginally. Simon Counsell, Rainforest Foundation On rare occasions biodiversity translates into a price premium for carbon due to the informality and size of the voluntary market. The rule is ‘pay for carbon’; the exception is ‘pay for other environmental services’. Randall García, INBio A REDD regime will be difficultly workable if it aims to include too many issues hopefully other instruments will be create to reward biodiversity independently of carbon. Charlotte Jourdain, Imperial College London Franz

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Compliance buyers might choose higher-benefit countries over others, but this will be a minority. The 'normal' compliance buyer won't care. EcoSecurities Jan Fehse,

Diagram 4.7: Survey responses to question “Will the future REDD framework better remunerate countries and/or projects that demonstrate higher co-benefits (i.e. biodiversity protection, local community development)?”.

4.5.1. Discussion The results clearly depict the country as being in a privileged position with regards to biodiversity. The Costa Rican forests, having the greatest biodiversity density in the world, represent the most cost-effective alternative for stakeholders interested in the protection of biological diversity. Nevertheless, primary research participants consistently questioned a causal link between biodiversity-rich carbon and its price in the existing voluntary carbon markets and any upcoming REDD mechanism.

4.6. Payments for Ecosystem Services (PES)
Our studies show that between 2005-2010 the PES system in CR will have saved approximately 60,000 hectares of forest from deforestation. taking decisions because of the PES. Forest owners are If you remove those US$20 million you

change the balance of the forest rent. Therefore, eliminating the PES system in CR has huge implications. The PES has additionality. Franz Tattenbach, FUNDECOR The efforts have not been consolidated. For instance, funds for the PES system in CR will last until year 2015. Therefore, the PES system is temporary. It needs to be consolidated. Carolina Mauri, Peace with Nature Initiative

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Other countries cannot reach CR’s level of PES development because they do not have the governance and institutionality that backs the PES system in CR. Randall García, INBio CR doesn’t pay for environmental services to reduce deforestation. CR pays for environmental services because it is obliged to do so according to the Forestry Law. Carlos Ml. Rodríguez, Conservation International Using existing PES schemes as the basis for implementing REDD strategies would definitely lead to enhanced co/benefits. Ricardo Ultate, Conservation International I think activities are more likely to be based on 'projects' than on individual landowners, though every country can of course decide how they want to implement activities domestically. Jan Fehse, EcoSecurities The PES system was created because of the expectation that the Kyoto Protocol generated. But Kyoto never created the mechanism to reward avoided deforestation. Nevertheless, the country bootstrapped itself and managed to move the PES system forward. Carolina Mauri, Peace with Nature Initiative

Diagram 4.8: Survey responses to statement “CR is at the forefront of PES systems in the world”.

4.6.1. Discussion Based on the results generated by the primary research it is clear that CR is seen as a worldwide leader with regards to PES systems. The interviews also put in perspective how the Costa Rican PES system has been fundamental in halting deforestation and enhancing carbon stocks.

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Furthermore, the interviewees provided insights on how PES in CR link to other factors analysed in this study. For instance, it was repeatedly sustained that the cornerstone in the success of the PES system in CR was the institutionality and forestry governance behind it. Moreover, it was consistently stated that the Costa Rican PES system demonstrates that a REDD mechanism in the country would have additionality (specifically, financial additionality).

4.7. Additional Insights
CR is a small independent country that, unlike other countries who cannot get their act together, does not need the rest of the World to find solutions for it. In this perspective, REDD could be seen as a rescue package designed for laggard countries, not for CR. Charlotte Jourdain, Imperial College London Given the strong biodiversity and ecotourism drivers in CR, REDD and its focus on carbon is not necessarily of great value to CR. From a climate change perspective, REDD is more applicable to large forested areas such as Brazil. Jourdain, Imperial College London CR would be a prime case study for a PINC type mechanism that rewards standing stocks - let's see if that is included in REDD. Charlie Parker, Global Canopy Programme Everyone is pushing to get the deforesting countries to a phase of increasing forest cover and enhancement of carbon stocks. What will happen once this is achieved? If an inclusive REDD mechanism is in place (with a stabilization fund for carbon stock countries), CR can become the model of how to use the necessary incentives to maintain all countries in the forest transition phase where CR is. Irene Suárez, The Nature Conservancy9 If an agreement is in place in which countries take commitments in avoiding deforestation, CR will have negative targets and could sell the allowances generated for that (like Russia's hot air, but good). The real problem would then be what reference year would be chosen, and I tend to think that under the Kyoto
9

Charlotte

Mrs. Suárez views may not necessarily represent those of The Nature Conservancy.

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Protocol it will be 1990. Diego Arrigorriaga, Carbon Ratings Agency CR wants to become carbon-neutral by 2021. The mechanics to become carbon neutral will not be based on international markets, but on the local market. CO 2 neutrality cures the additionality sickness produced by the country’s early actions. A domestic REDD mechanism will generate the necessary certificates that will allow the other sectors of the economy to grow sustainably. FUNDECOR 4.7.1. Discussion The primary research generated additional insights that might have an implication in the conclusions of this project. Specifically, there is notion that REDD is not necessarily a mechanism designed to house the gourmet carbon credits, like the ones produced by CR. Instead, it seems to be a mechanism that deals primarily with junk carbon credits produced by the laggards of forest conservation. Based on this, REDD might not be suitable for the country’s interests. Nevertheless, while the REDD door closes others might open. Other opportunities, such as PINC (Pro-active Investment in Natural Capital) arise. In addition, auctioning allowances generated by negative targets in a compliance REDD mechanism, and becoming UNFCCC’s showcase for successful carbon stocks conservation and enhancement could be attractive alternatives for CR and its individual conservation projects. Above all, CR’s carbon-neutrality commitment might provide a strong alternative to REDD. Conservation projects in the country could, under a carbon neutrality scenario, become the best source to provide the carbon offsets required by other sectors of the economy. The domestic REDD market could potentially eliminate the dependence on international mechanisms. German Obando,

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5. CONCLUSION
This document initiated by describing how forests play a fundamental role in the efforts to mitigate global warming and climate change. It then analysed –based on the relevant academic literature– how CR fits in an envisioned international mechanism designed to reduce deforestation and conserve forests. As a result, a risk analysis for the country was elaborated. The project then entered a primary research phase in which the risk assessment was consulted with a series of Costa Rican and international experts and stakeholders. CR’s forest cover evolution has important consequences for its participation in the REDD mechanism. Specifically, the country’s increasing forest cover and enhancement of carbon stocks positions the country in an unfavourable situation with regards to three essential REDD factors: scope, baseline and additionality. REDD is a mechanism that is fixed on deforestation; even forest degradation is relegated to a secondary position. Carbon stocks conservation and enhancement are not a priority. Instead, the main concern is to reduce the 18% of global GHG emissions produced by deforestation (which is understandable to a certain degree). Therefore it appears that the next climate change mitigation agreement would predominantly channel carbon financing to deforesting countries. The academic literature seems to indicate that REDD+ would be the scope of the mechanism, therefore embracing countries like CR. The primary research validates this view. However, the extent to which carbon financing would reach carbon stock countries is still unknown, although it is clear that it would be a small fraction of what deforesting countries would receive. Another unfavourable factor for the country is its emissions baseline. CR’s successful actions to reduce deforestation mean that the resulting historic emissions baseline would not allow the country to achieve significant emissions reductions. However, the validation exercise highlighted that there is room for the country to negotiate an individually adjusted baseline, as well as to make use of CDM regulations –such as the e-minus rule. Hence the production of more credits for emissions reductions could be increased.

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Yet, even if a more favourable baseline is set, the country’s role as a generator of offsets for developed countries and its industries appears to be questionable due to it’s apparent lack of climate additionality (i.e. achieving emissions reductions over and above the BAU scenario). Both the risk analysis and validation exercise held it as the most important risk for CR. Nevertheless, the primary research provided other perspectives on additionality. For instance, additionality with respect to the baseline, which may not necessarily coincide with a BAU emissions scenario due to adjustments and variations in the reference period, could create room to generate emissions reductions. Furthermore, financial additionality, a concept borrowed from the CDM, could also be argued and fundamented to position the country and its projects more favourably. Moreover, the risk analysis placed CR’s biodiversity as a possible competitive advantage. It concluded that while it represents a desirable co-benefit, it will not translate into higher prices or enhanced participation in the REDD mechanism. The validation exercise confirmed this conclusion. Likewise, the risk analysis placed CR in a privileged position with regards to other two important factors: governance and PES system. The validation stage not only confirmed CR’s lead position in these two aspects, but also demonstrated how intrinsically related they are. Moreover, it was put into perspective how CR’s successful forestry evolution (i.e. from high deforestation levels to enhancement of carbon stocks) did not occur by chance. It was, on the contrary, a direct result of the country’s robust governance capacity and solid PES programme. Ironically, it seems that CR’s superior forestry governance capacity and PES system –by accomplishing their objectives– are the cause of the country’s difficult position with regards to the three REDD factors initially analysed. This situation is paradoxical. Strong governance and PES systems result in lack of additionality, unfavourable baseline and secondary participation in the REDD mechanism. Poor forestry governance, on the contrary, indirectly leads to high It seems, therefore, that these two concepts are mutually returns from REDD.

exclusive. Unfortunately for CR, the country appears to be on the wrong side of the equation for the purposes of a REDD mechanism.

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However, not all its lost for CR. The negotiations to define the final configuration of the REDD mechanism have not finalized; these will, in fact, enter a critical stage in December this year. REDD mechanism: Press strongly for the inclusion of a REDD+ scope, primarily backed up with the argument of international leakage risk. • Negotiate an adjusted baseline that would recognize early actions. The e-minus rule, currently applicable in the CDM, is the ideal argument for this. The base year should be 1990 –same year afforestation and reforestation projects use in the CDM. • Defend the financial additionality of the country’s conservation programmes and projects. • Push for mandatory commitments and targets to avoid deforestation, so that the country, which would in theory have negative targets, could sell its allowances to countries that cannot meet their deforestation targets. • Market CR as the indispensable ‘showcase’ that the world needs in order to replicate its successful conservation experience in the rest of the world. With this in mind, the following are some specific recommendations that would result in a better position for the country within a

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6. REFERENCES
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