Redd +costs and benefits

1

DIE DEUTSCHE GESELLSCHAFT FÜR INTERNATIONALE ZUSAMMENARBEIT (GIZ) GMBH Proyecto Conservación de Bosques Comunitarios CBC GIZ

REDD+ Costs and Benefits: A balance at a sub-national level Regional Change Project “Economía para REDD+” Ángel Armas

2

1

DIE DEUTSCHE GESELLSCHAFT FÜR INTERNATIONALE ZUSAMMENARBEIT (GIZ) GMBH

Proyecto Conservación de Bosques Comunitarios CBC - GIZ

REDD+ Costs and Benefits: A balance at a sub-national level Regional Change Project “Economía para REDD+” Ángel Armas

Contents

2 1.

Executive Summary ...................................................

page 8

Introduction ........................................................................

page 10

3.

Study Area ...............................................................

3.1.

Local economic activities

3.2.

Deforestation causes in the Peruvian amazon

3.3.

About deforestation in the study area

page 12 15 15 16

3.4.

Efforts to measure deforestation and greenhouse

2.

18

gases emissions 3.5.

tCO2-eq emissions according to the interventions

18

in the influence area 3.6.

Brief description of institutional and legal framework for REDD+

4.

What are the costs to reduce deforestation under a REDD+ scheme? ...................

20

page 22 22 23 23

4.1.

Opportunity costs

4.2.

Implementation costs

4.3.

Transaction costs

5.

Study objectives ................................................

page 24

6.

Methodology

6.1.

Analysis perspective

6.2.

Displacing deforestation

page 26 28 28

6.3.

Base situation (without project)

6.4.

Project alternatives

29 31

6.5.

Calculation summary

35

7.

Study assumptions ..........................................

7.1.

7.2.

7.3.

.................................................

page 36 37 General assumptions for the analysis 38 Temporary/Time horizon and discount rate for flow projection 38 Forest carbon current value

3

8.

Results

.............................................................................

40 41

Impacts determination.

8.1.

Base situation (without project).

8.2.

Intensive agriculture as a part of a carbon credits. generation and REDD scheme.

8.3.

page 40

Agroforestry systems as a part of a REDD scheme.

44 46

page 48

9.

Analysis

9.1.

Comparison between base situation and alternatives.

9.2.

Decision criteria: cost/efficiency indicators.

9.3.

Benefits distribution.

9.4.

Unit costs to avoid deforestation

48 50 51 52

9.5.

Balance and redistribution

53

9.6

One dimensional sensitivity analysis: Which alternative is more sensible to

.............................................................................................

54

con text parameter change?

10.

Discussion

10.1.

About total costs to displace deforestation

10.2.

The options: How far should the alternatives be applied?

10.3.

Identification and description of non-quantifiable impacts

..........................................................................................

10.3.1. Impacts on the soil 10.3.2. Impacts on biodiversity 10.3.3. Impacts over local population cultural practices

page 56 57 60 62 63 63 63

11.

Conclusions and recommendations

12.

References

13.

Annexes

.................................

page 64

.........................................................................

page 68

..............................................................................

page 70

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Acknowledgements This study was carried out by request of the ‘Conservación de Bosques Comunitarios (CBC)’ project developed by the German Cooperation and implemented by GIZ, within the framework of the National Forest Conservation Programme for Climate Change Mitigation (Forest Programme-Programa Bosques) conducted by the Ministry of Environment of Peru (MINAM).

The analysis here presented was elaborated thanks to the valuable information provided by numerous national institutions such as MINAM, the Ministry of Agriculture (Ministerio de Agricultura y Riego - MINAGRI), the National Institute of Statistics and Information Technology (Instituto Nacional de Estadística e Informática - INEI), the Research Institute for the Peruvian Amazon (Instituto de Investigaciones de la Amazonía Peruana - IIAP) and the National Institute for Agrarian Research (Instituto Nacional de Investigación Agraria - INIA).

Ricardo Burneo / GIZ - CBC

We would like to share our deepest gratitude to the people that collaborated with suggestions and comments to enrich this study, especially Paul-Gregor Fischenich, Coordinator for GIZ-CBC project who opened the space to carry out this sort of study, and Carlos Cubas, Technical Advisor for the same project, who provided valuable comments and permanently provided support to this study. Likewise, the participation of the whole technical staff was very useful in the diverse technical discussions. It is indispensable to also express my gratitude to Giovanna Ortocoma Escalante, General Coordinator for the REDD+ Project of MINAM; Bruno Paino for the inputs regarding economic aspects; Cecilia Larrea and Lucas Douroujeanni, thematic coordinators for the REDD+ Project of MINAM, for the support provided to improve the analysis focus; and Dave Pogois from the United Nations Development Programme (UNDP) for the inputs presented in the internal workshops carried out during the development of this study.

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Preface In the last 35 years, observations about the climate patterns behavior have shown alterations at a global level in reference to the frequency and intensity of diverse natural events which means a potential threat to the economies of the countries that are most vulnerable to such changes, as is the case of Peru.

During this period, a number of anomalies have been seen such as ENSO (El Ni単o Southern oscillation) phenomenon, the same that already being erratic has increased its irregularity as well as its intensity.

Likewise, several critical events have been registered: periodicity and intensity increase of droughts as the one that provoked the water flow reduction of Amazon River in 2010 and before in 2005; glacial decrease and the loss of species that depend on them; hurricane and tropical typhoon strength and frequency increase in different parts of the globe, among the most relevant issues. All of these situations identify temperature increase in oceans and continents as the cause of the changes.

Human activity is, in a great deal, the direct responsible. Over 90% of Global Climate Change is, certainly, caused by anthropogenic sources. The increase of Greenhouse Emissions is one of the main factors generated by men. These emissions come from the burning of fossil fuel (carbon, oil, gas), and also from forests clearing, agricultural practices and other activities related to the generation of energy from nonrenewable sources.

There is international consensus about the important contribution that forests can provide in order to reduce global warming. Forest conservation and the sustainable use of their resources are the main contributions towards mitigating climate change globally.

Ricardo Burneo / GIZ - CBC

6 Miguel Schmitter / GIZ – CBC

Miguel Schmitter / GIZ – CBC

Bárbara Lehnebach / GIZ – CBC

7 In this context, Peru as the country with the second biggest forest extension in Latin America, and occupying the ninth place worldwide, is a country that brings attention from different and various international and multi-lateral efforts due to its great potential to mitigate climate change. This creates opportunities to access to resources that contribute to a low-carbon green economy growth.

Nevertheless, Peru, with more than 60% of its territory covered with forests, shows a series of demands to be solved in order to develop its forest potential facing the challenge of contributing to conserve its natural patrimony, which at the same time will be consequent with its contribution to mitigate climate change. One of the needs is to incorporate the value of the forests, and all their services and goods, inside the national economy.

One of the factors that limit the options to generate richness from standing forests is the lack of technical instruments that allow the implementation of productive activities in an effective manner and in accordance to the reality and the scale of each actor and appropriate financing to carry out the necessary tasks to obtain greater benefits from the forests without impacting them negatively.

All of this makes evident the need to place more effort and carry out more activities related to research, analysis and the elaboration of decision-making tools at different levels. The amount of resources, and the high capacity of the forests to provide ecosystem services and goods, forces the necessity to study and assess their potential and current uses and benefits. Having adequate tools to make better decisions about the resources and the territory where they are located will help to generate social, economic and environmental benefits.

The Peruvian government has been promoting a number of policies related to the environment, and more specifically the forests. Part of these initiatives was the creation of the National Program for Forests Conservation and Climate Change Mitigation in 2010, which aims at avoiding the loss of forest patrimony through the application of productive projects and conservation.

This kind of initiatives to assess and conserve the forests resulted relevant to the Deutsche Gesellschaft für Internationale Zusammenarbeit – GIZ, which with the demand of the German Federal Ministry of Environment, Nature Protection and Nuclear Security, considered pertinent to start a series of studies related to the forests situation, the actors and activities that affect them.

This document is based on a study that intends to provide greater and better tools to help the Ministry of Environment, and specifically the National Program for Forests Conservation and Climate Change Mitigation, to continue building the National Forest and Climate Change Strategy which includes conservation mechanisms based in incentives as one of the main parameters.

The National Program for Forests Conservation and Climate Change Mitigation expresses its gratitude to the German Federal Ministry of Environment, Nature Conservation, Building and Nuclear Security for the support received through the project “Conservación de Bosques Comunitarios” operated by GIZ, and hopes this communication serves as a platform and source of information for future studies, and also allow to fill spaces lacking of relevant information.

Gustavo Suárez de Freitas Calmet Executive Coordinator Programa Bosques – Ministerio del Ambiente del Perú

8

Executive Summary

The current situation of REDD+ in Peru shows a dynamic progress among two parallel and complementary processes. The first one is the preparation and design of REDD+ mechanism at a national level, leaded by MINAM, where diverse sub-national REDD+ initiatives are being actively articulated and involved in political, technical and legal aspects. This dynamic is promoting the State to focus on designing clearer guidelines, for all the actors involved, which are expected to be included in the National Forests and Climate Change Strategy, the same that includes the REDD+ National Strategy, which represents the second process mentioned before.

Nevertheless, there are still some elements missing in order to have an appropriate amount of inputs to properly design the mechanism. In that sense, this study intends to fill recurrent information gaps, both at national and global levels, in relation to the REDD+ mechanism.

Whilst there are a number of studies that explain the opportunity costs involved, there are scanty research works that cover the mechanism total cost , which encompasses other costs such as the implementation and transaction ones, which are most definitely decisive for the design.

9

“Nevertheless, there are still some elements missing in order to have an appropriate amount of inputs to properly design the mechanism. In that sense, this study intends to fill recurrent information gaps, both at national and global levels, in relation to the REDD+ mechanism. Whilst there are a number of studies that explain the opportunity costs involved, there are scanty research works that cover the mechanism total cost �

Therefore, this study intends to provide evidence about the profitability of the mechanism considering the most part of the costs, in spite of the information limitations.

Likewise, the analysis allow to center the discussion on the potential benefits that can be obtained by forest users, the investment required from the government, as subsidies for instance, and other elements that must be prioritized in order to have the REDD+ mechanism achieving positive impacts at local and national levels.

The study area comprehends the central part of the Peruvian amazon region, considering the territory that goes from the beginning of the basin in the eastern slopes of the Andean mountain chain to the amazon lowlands reaching the border with Brazil. This zone was selected due to its intense productive dynamics, the considerable impact in regards to historic deforestation and the emerging carbon projects. The methodology consists in comparing three scenarios which include the current situation (business as usual) and two sustainable productive alternatives to be implemented directly in the field and that allow their inclusion in a REDD+ incentives mechanism.

The study aims at responding a number of questions such as: what is potentially the most profitable alternative for the policy/project decision-maker as well as for the forest

inhabitants? What are the gain/loss estimates, with or without a determined project? What alternative is most feasible and which is the most adequate implementation scale?

The results demonstrate that the alternative productive activities, within a REDD+ project, are by far more profitable than the group of benefits perceived by the farmers in their activities without a project, nonetheless they demand considerable costs.

It is also clear that the bulk of the costs and benefits correspond to the activities implemented on the field to combat and reduce deforestation. In these projects the incentives or payments increase the profitability without incurring in a significant raise in the total costs.

Finally, the work finds two important points for an adequate and positive functioning in the results of a REDD+ scheme: 1) it is important the involvement of the government through funds that help to reduce the costs of the scheme, so the prices can be competitive with those offered in the international voluntary markets and 2) the need to define tenure rights over lands not yet categorized, since this restriction acts negatively on the REDD+ project impacts as well as on the benefits that can be obtained.

10

Introduction

11

Several studies at a national level, as well as at an international level, assert a high competitiveness in the amazon region in terms of opportunity costs (Markku et al., 2007), to reduce the emissions of greenhouse gas emissions through the reduction of forest deforestation (Grieg-Gran 2006, Swallow et al. 2007, Wunder et al.

2008).

Nevertheless, these opportunity costs studies, frequently related to referential values for payments or incentives to conserve the forests, are the first step of a strategy of actions and policies that aim to have the investments reducing deforestation and emissions to have more realistic impact, but with lesser costs (J. Busch, 2008).

A following level, subject of this study, is to enquire about the costs derived from the implementation of the mechanism that will carry out the activities to reduce deforestation, from the office to the field, and also the necessary costs to have the financing funds for conservation flow correctly.

Therefore, it is necessary to focus on a local level and deeply study the different costs involved in the implementation of forest conservation projects.

By knowing these costs, the reference scenario for the actual and projected deforestation, and the socioeconomic situation of the local actors, it will be possible to define the best equitable and most costeffective combination of the diverse intervention modalities to reduce the emissions from deforestation and forest degradation (REDD).

The analysis is positioned from the viewpoint of policy-developers searching for solutions to improve the situation of the natural capital contributing to local economies. However, it is important and necessary to take into account the distributive impact of the situation in the analysis. Even though it is very difficult to get to a fine detail, a macro vision of the impact distribution can be useful.

This study evaluated the impact of the activities that normally take place in the study, defined as the actual situation, and the development of two alternatives based on sustainable activities on the field that can function under a REDD+ scheme. The latter ones will be compared to the first type of activities.

A set of assumptions has been carefully formulated in order to construct the economic context under evaluation.

Regarding the analysis of the study scenarios, there are at least three: Scenario without the Project (keeping the status quo, will function as baseline) Reference scenario with a reduced intervention Scenario with a higher impact project The levels for the minimum or high-impact intervention will be defined according to the results of this study and will depend on the viability of each evaluated intervention.

For this matter, it is intended to answer the main question: which is the activity or feasible project potentially more profitable for the policy developer and the economy of the people in the forest? In a more specific manner, the analysis will answer the following questions: What is the estimate size for the profit and losses, with or without the project?

What intervention level is the most profitable and which alternative corresponds to that level?

What is the optimum scale for the Project?

What are the main restrictions?

12

Study Area

Before describing the study area it is important to review the potential of the amazon forests to storage and release carbon. The amazon basin in the forested natural area with the biggest amount of carbon in the world and surpasses other regions by millions of tons of stored carbon (Figure1).

According to FAO (2011), by 2010 Peru had 8560 millions of tons of carbon in different forest reservoirs.

This is a very good opportunity to place Peruvian forests as an important source of services for climate regulation and the mitigation of global climate changes.

13

Figure1.Carbon Content. Source: FAO (2006).

Carbon in tree and plant biomass Giga Tonnes (Gt) 50

Europe North America

25

West and Central Asia East Asia

North Africa

Central America South America 91Gt

West and Central Africa

East and South Africa

5

South and southeast Asia Oceania

The study area is located in the central region of the Peruvian amazon, formed by parts of the departments of Ucayali, Huánuco, Pasco, Junín and Huancavelica, with a total surface around 17.2 million hectares. This region has a population of 872 000 families with 2.2 million inhabitants (INEI, 2007 #2). Huánuco, Pasco and Junín are located in the mid and lower part over the eastern slope of the Andes, commonly named ‘Selva alta or yunga’ (CDC-WWF 2006), while the department of Ucayali is completely located in the amazon lowlands or ‘Selva baja’ presenting the characteristic vegetation coverage of the amazon forests.

Perú

Huanuco Ucayali Pasco

Junin Figure2.Study zone

Huancavelica

14

All of the Ucayali territory is inside the humid tropical amazon forest, while Huancavelica, Huanuco, Junin and Pasco occupy only 60% of the territory or less. In the case of Huancavelica, only 3% of its area is a part of the amazon territory forming the basin headwaters (Table 1).

These differences confer certain peculiarity to the area at the time of analysis (see Table 1).

Amazon forest (thousand ha)

% Amazon forest

Ucayali

10.186.510

97%

340

348.108

3%

893

10.534.618

Huánuco

1.371.081

58%

745

988.419

42%

1982

2.359.500

Pasco

1.139.039

65%

799

622.636

35%

1798

1.761.675

Junín

1.518.454

60%

1119

996.926

40%

2062

2.515.380

Departament

% Montane Amazon Andean-amazon forest forests(ha)

Total

2,956,089

% Montane forest

Altitude (masl)

Total (ha)

17.171.173

Table1.Area distribution according to ecological system and department.

The city of Pucallpa, capital of the department of Ucayali, is the greater and more dynamic city in the study area and the second biggest in the Peruvian amazon.

This main connection link with the coast has enhanced the importanceof other cities in the amazon region such as La Merced, Oxapampa, Satipo, Tingo María and Atalaya, wich form part in this study.

Historically, Pucallpa is and has been a city with strong industrial activity in regards to the extraction of natural resources, probably on the top list in the country.

This city has been the main provider to national and international markets during the time of ‘caucho boom’ (resin from Hevea brasiliensis tree) by the first half of the XX century until the recent settlement of timber transformation plant, oil and natural gas extraction (Yanggen 2006) and the sowing of coca (Erythroxylon coca). These activities have increased along the Federico Basadre highway, which continues to be one of the main transportation ways in the Peruvian amazon.

It is important to mention that this region is committed to the South American Initiative for the Integration for Regional Infrastructure (Iniciativa para la Integración de Infraestructura Regional Sudamericana- IIRSA), with a total investment of US$ 117.8 million1 and although this initiative is in its study phase, IIRSA eventually could significantly increase the pressure over the natural resources, the competition over territories and the threats to the subsistence of biodiversity and indigenous peoples, which are concentrated more so in this region than in any other zone in the Peruvian amazon (COICA 2009).

1. http://www.iirsa.org/proyectos/detalle_proyecto.aspx?h=1407.

15 3.1. Local economic activities.

3.2. Deforestation causes in the Peruvian amazon.

Other studies, carried out in Selva Central and Ucayali, show that the main productive activity is agriculture, followed by cattle industry and then the extraction, transformation and sell of timber.

The main causes of deforestation in Peru are directly related to practices that intend to satisfy demands that, in most cases, depend on social and economic reasons (Aramburu et al. 2003).

Due to the great extension in the study area, it is easy to find plains and lowland sites, but also hilly spaces with humid montane forests. For this reason, there is a diversity of agricultural uses of the soil.

There are diverse insights about the direct and indirect causes of deforestation in Peru, but these studies still lack of depth both in the data and analysis (Armas 2012, Che Piu et al. 2013). Nonetheless, in general terms, within the Peruvian context the direct causes recognized are, in the first place, the agriculture and small-scale cattle ranching, mostly related to subsistence (Yanggen 2006, Armas 2012, Che Piu y Menton 2013). Since these operations are not profitable, it demands the farmer to open new areas and abandon the parcels already utilized. Is in these spaces where cattle and pastures are installed.

According to data gathered for the MACC project in Selva Central, there are certain references about land use tendencies. The study indicates that in one rural unit in the ‘Selva alta’ 34% of the area is covered by pasture, 27% by permanent crops, 36% by annual crops and 3% by reforested lands with timber commerce purposes. On the other hand, in the ‘Selva baja’ the distribution shows a tendency for the annual crops with 38%, followed by permanent crops with 30%2, 17% dedicated to pastures and 15% to activities related to timber extraction in forest concessions and lands with permits. Likewise, the rural units differ in size, since one rural unit in the ‘selva alta’ occupies an average area of 4.66 hectares (σ=3.58) while in ‘selva baja’ the value is 3.1 hectares (σ=1.97).

The zones with higher altitude, as the section closest to the Andes mountain system, are characterized for producing cacao and coffee, while in the lower parts of the study area, mainly Ucayali, there are oil palm crops and timber extraction activities. In regards to annual crops, both zones produce corn, plantain and manioc predominantly, but differ in that ‘selva baja’ produces more plantain3.

Industrial agriculture, characterized by highly profitable commercial crops, has also been responsible for the elimination of important areas in natural forests. In the last five years the increasing transportation network, the abundance of public lands and the tendency of increasing prices for certain agricultural commodities, are turning the country very appealing to big-scale projects but diminishing areas of natural forests (Dammert 2013).

Another high impact activity is the formal and informal mining representing a potential threat to the forests in the study area. Currently mining is concentrated in the south, in the department of Madre de Dios, where its impact is highly significant (Mosquera et al. 2009, Álvarez et al. 2011).

Finally, although non-sustainable timber extraction and illegal felling do not directly cause deforestation, they contribute to forest degradation and, in many cases, stimulate major land use change processes4 (FAO 2001, Yanggen 2006).

2. This increase in the area utilized for permanent crops has gone up during the past decade due to the economic support provided to alter native products to eradicate coca, among which cacao, coffee and oil palm have had relative success (DRAU, 2012).

3. Field results complemented with secondary information from MINAGRI (2012). Dinámica agropecuaria 2001-2010. Capítulo III. Subsector Agrícola. Lima, MINAGRI.

4. According to FAO (2001) deforestation is defined as a land use change that involves canopy coverage elimination, reducing it by at least 10%. Likewise, forest degradation is related to the changes inside the forest including biomass gradual reduction, species composition changes or soil degradation.

16

It is also important to consider the underlying causes of deforestation which can be grouped in three main factors: social, political and economic.

Out of the three, and for the objectives of this study, the focus can be placed in the social and economic factors that basically respond to aspects that affect the means of life of the population. One important factor is poverty which forces migration from the Andean cities to the amazon in order to seize the lands and extract and change forest to agricultural crops. It is important to identify that currently the agricultural practices mainly utilized in the amazon are characterized for being inadequate to the ecosystem and thus present low productivity and profitability. This becomes more evident when observing forest soils which are very marginal, in agricultural productivity terms and also provide very little areas suitable for crops (ONERN 1985).

Among the economic factors it is clear to see the separation between forest sustainability and its conservation, and economic development. While the development responds to a model of unsustainable international markets demanding primary products, conservation lacks of elements and tools to assign value to the natural capital, which put forests in a unfavorable position in front of other land use alternatives that are more profitable.

3.3. About deforestation in the study area.

In regards to the database from PROCLIM (2005)and MINAM, there are numbers for historical deforestation for the study area. Although there are methodological differences between both studies, limiting the comparison, PROCLIM data will be taken into account and MINAM data as well will be used for a more recent analysis.

The historical deforestation analysis for the study area shows that for the 2000 – 2011 period 477,369 hectares–38% of Peruvian amazon basin deforestation were lost. The deforestation rate is equivalent to an average of 43,397 hectares per year (PNCB et al. 2014).

This is one of two regions with the higher density of historical deforestation in Peru. The biggest deforested areas are located 30 kilometers away from Pucallpa city and are very close to the highway.

However, not all of the deforestation occurs in areas where land tenure and use rights are defined, as well as in the rest of the deforestation cases along the Peruvian amazon.

According to MINAM, 57% of the deforestation occurs in areas that have not been categorized and thus have no defined use but in spite of this are occupied and utilized without land tenure rights or under registered possession for private farmers for agricultural uses.

Bárbara Lehnebach / GIZ – CBC

17

“57% of the deforestation occurs in areas that have not been categorized and thus have no defined use but in spite of this are occupied and utilized without land tenure rights ”

Figure3.Deforestation in the study area:in lands with and without possession or use rights. Source: PNCB-OTCA-DGFFS, 2014.

Legend

Cities 2000-2011 loss in land with rights Nueva Requena Pucallpa Pucallpa Campo Verde Campo Verde Masisea

2000-2011 loss in land without rights

Curimana

Central Amazon Forests without defined rights

San Alejandro Aucayacu Aguaytia Aguaytia Tingo María

Iparia Breu Esperanza

Ciudad Constitución - V Etapa

Huanuco

Bolognesi Puerto Bermudez Huariaca Oxapampa Paucartambo

Villarica

Atalaya Atalaya

Bajo Pichanaqui La Merced San Ramon Satipo Huasahuasi San Martin de Pangoa

Tarma

Huancayo

Sepahua

18 3.4 Efforts to measure deforestation and greenhouse gases emissions.

3.5 tCO2- eqemissions according to the interventions in the influence area.

Between 2000 and 2005 the Peruvian government conducted the Programme to Strengthen National Capacities to Manage the Impact of Air Pollution and Climate Change (PROCLIM)5, which included the ‘Inventory of Greenhouse Gases (GHG) from the sectors agriculture, land use change and forestry’, which objective was to determine the deforested area and the land uses that replaced the forest, providing information for the inventory of GHG originated by the effect of land use changes.

As a result of that study, by the year 2000, 7.1 million deforested hectares were identified and mapped (IIAP 1998). In addition to this, the study found that between 1990 and 2000 the average forest loss in the Peruvian amazon was of 150 000 hectares per year (PROCLIM 2005).

Almost a decade later, MINAM and the Department of Global Ecology of the Carnegie Institute initiated a series of activities to contribute to monitor coverage change from deforestation. The result was a study about the quantification of forest coverage and deforestation in the Peruvian amazon, for the 2000-2005-2009-20102011 periods, aiming at producing updated information (MINAM 2012).

REDD+MINAM project, along with the University of Maryland, wanted to improve the monitoring tools which lead to measure annual forest cover loss between 2000 and 2011, as well as the elaboration of the base forest – nonforest map from year 2000.

Based on this map, the average annual deforestation rate in the study area was 43.4 thousand hectares for the 2000 – 2011 period and 477.4 thousand hectares were lost in the whole period.

Based on data generated by Baccini et al. (2012), an spatial analysis was carried out over the whole study area in order to quantify the amount of carbon per hectare in megagrams or tons stored in Aboveground Live Woody Biomass. It is important to highlight that the estimated data do not include the amount of carbon stored in belowground biomass, roots, decomposed plant rests and debris and mineral carbon.

For the estimation of the carbon content in the biomass, the conversion factor used was the “biomass-carbon” index proposed by the IPCC6.

The annual rate for the land use change from forest to non-forest in the study area is 43,397 hectares, impacting five million tons of carbon (tC) stored in the aboveground biomass. Considering that GHG emissions come from changes in the use of lands with more carbon to ones with less carbon (IPCC 2000). This implies that primary and/ or secondary forests transformation occurs towards uses such as pastures and crops.

It is important to mention that deforestation processes do not remove the total amount of carbon form the soil, in non-cultivated areas herbaceous vegetation, that regenerates naturally, still contain a small remnant portion of biomass and thus carbon. Fearnside et al. (2007) show that the remaining carbon content in these cases is equivalent to an average of seven million tons per hectare.

Some recent secondary information show that land uses such as crops or pastures contain an average value below 12 tC per hectare (Barbaran 2000, Lapeyre 2003).

Finally, the estimation requires to convert the amount of carbon that was stored before into GHG emitted (IPCC 2001). This result in more than 18 million of tons of equivalent carbon dioxide (tCO2-e) annually emitted to the atmosphere for all the study area.

5. This initiative was developed within the Climate Change National Strategy, which objective was to contribute to poverty reduction by integrating climate change and air quality as sustainable development policies.

6. FAO, 2005. Carbon content is obtained from the weight of kiln-dried biomass by utilizing conversion factors. It varies according to the different parts of the plant, the species and the site. For such reasons IPCC has agreed to utilize a standard value of 50% in the carbon – biomass relation.

19 Table2. Situation of the areas where emissions are generated.

Annual deforestation rate (ha)

Average tC/ha7

Total

43.397

104

5.013.048

3,66

18.347.757

Defined rights

18.458

116

2.232.085

3,66

8.169.431

Without rights

24.939

123

2.780.963

3,66

10.178.326

Emissions generation areas

Out of the 18 million tons emitted, only 8.2 million are emitted in lands where possession and use rights are well defined. The remaining 10.2 million of tons are emitted in lands where, by not having defined rights over the land, is very hard to determine and point who is responsible.

Figure 4 shows the distribution of aboveground biomass carbon content according to Baccini, Goetz et al. (2012) for the study area. The darker areas

Tons of C impacted

Conversion factor C to CO2eq

Total emissions(tonsof CO2eq)

indicate higher average values for carbon tons per hectare, while lighter ones show lower averages.

Ucayali, being the biggest department (10.47 million hectares) and located in the amazon lowlands, presents the higher values of carbon content per hectare among all the departments involved in this study. In second place, Junin (2.44 million hectares) also contains significant carbon reserves, but less that Ucayali.

“ Out of the 18 million tons emitted, only 8.2 million are emitted in lands where possession and use rights are well defined. The remaining 10.2 million of tons are emitted in lands where, by not having defined rights over the land, is very hard to determine and point who is responsible.�

7. This value is an average value for a range that goes from 25 over 174.5 tC per hectare.

20 Carbon

tCO2/ha Legend Cities Rivers

Deforestation 2000-2011

0-25 25-50 50-100 100-150 150-194.5

Departament limits

Figura 4. Map of the carbon content in the aboveground biomass in the study area according to Baccini, A. et al. 2012 and places impacted by activities that cause deforestation.

3.6. Brief description of institutional and legal framework for REDD+.

The current state of REDD in PerĂş could be considered as the combination of two parallel and complementary processes: a) REDD+ at a national level, leaded by MINAM. At the moment of development of this study the regional forests and climate change strategy was being elaborated (MINAM 2011); y b) REDD+ subnational processes, conformed by a mosaic of pilot projects (Che Piu et al. 2011, Entenmann 2011).

REDD+ is part of a big scale national mitigation strategy, the National Program for Forests Conservation and Climate Change Mitigation (PNCBMCC) promoted by MINAM to preserve 54 million hectares of forests (DSN 008-2010-MINAM).

On the other hand, REDD projects have advanced at a rapid rate and have prompt the implementation of government´s public policies as well as mechanisms that synchronize international initiatives with government public plans. Nowadays, there are diverse governmental initiatives oriented to identify and valorize forests.

Among them, there is the National Forest Inventory, the National Carbon Inventory;as well as the monitoring, reporting and verification system (MRV), currently under construction, and also the registry for early REDD initiatives and projects.

On the other hand, the national structure required to exercise the functions of registry, prosecution, supervision and sanctioning is being developed.

21 All of the pilot projects8 cover 3.1 million hectares, located in areas designated for different uses, such as, protected areas, forest concessions and areas assigned with diverse uses (Entenmann 2011).

Statistics about the number and state of REDD projects in Peru considerably vary between them due to their own dynamics. According to Che Piu and Garcia (2011) there are 47 projects, but only 10 achieved significant progress and two of them got certified. On the other hand, the database for the projects certified under the VCS standard shows nine of these pilot projects9, from which three of them10 are selling carbon credits to private enterprises. In addition to this, REDD desk11 database shows that there are other 26 projects active, or being developed.

These projects sell carbon credits at a referential value between US$5 and US$8 per ton. A common strategy among much of the REDD+ projects is to have local communities developing economic alternatives in order to replace subsistence activities that cause deforestation. Other relevant aspect is the construction of surveillance and monitoring mechanisms, as well as the implementation of activities different to those that cause deforestation (Che Piu y Garcia 2011).

Nonetheless, up to this moment, there is no sufficient information available about the costs and benefits that these projects present in REDD+ schemes, generating an important gap for decision making processes at a national level.

Miguel Schmitter / GIZ – CBC

8. A pilot Project is one which is objective is to diminish carbon emissions due to land use changes, as well as the ones that intend to increase the existing reserves.

9. VCS Project Database.Reviewed in February, 2014.

10. Madre de Dios Amazon REDD Project; Campo Verde Reforestation Project; y Alto Mayo Conservation Initiative (AMCI) are the three projects in Peru dealing with carbon certificates.

11. http://www.theredddesk.org.

22

What are the costs to reduce deforestation under a REDD+ scheme?

It is very important to define the costs implied in the development of a project related to the reduction of emissions from deforestation or Climate Change mitigation costs related to the forest, as named in scientific literature.The following are the most common costs categories involved in this kind of projects and also who would assume these costs

4.1. Opportunity costs.

These costs appear when, by reducing deforestation, benefits that the population can obtain from the forest are lost. For instance, the income perceived from tree felling to install agricultural parcels, pastures o timber extraction, will be lost by conserving these forests.

According to Pagiola et al. (2010), this normally is the most important category on which a country could incur if reduces its forest loss rate under a REDD+ scheme.

Knowing the opportunity costs provides references about the magnitude of the pressure responsible for deforestation helping to understand who wins and who loses in a REDD scheme, and how benefits are distributed.

This is also important to build equitable schemes, avoiding placing the losses on the most vulnerable group of actors, and finally get to know if a REDD+ scheme is economically and politically viable, since certain economic groups could hamper the adoption of REDD policies or oppose to their implementation (Pagiola y Bosquet 2010, WorldBank 2011).

23

In general terms, these are recurrent costs and, depending on the design of the project, their distribution on the reduction of emissions caused by deforestation will vary during the project lifespan.

Likewise, these costs are associated and can be useful when providing referential values for the establishment of direct incentives for conservation.

Finally, opportunity costs can also cover sociocultural costs and indirect costs that are very hard to quantify, as it will be shown later on in the document.

4.2. Implementation costs.

Implementation costs are the ones involved in the development of a scheme for deforestation reduction.

They mainly involve the development of a group of governance elements necessary to make the investment have a real repercussion over the forest, for instance, capacity building and institutional strengthening (Corbera et al. 2011).

This category includes the costs of indispensable field activities to displace the deforestation direct drivers.

Some of these costs include the rearrangement of productive activities according to the land use capacity (agriculture in agricultural lands, reforestation agroforestry in recovery lands, and conservation in protection forests). The intensification of agriculture or farming can increase the productivity reducing the need for bigger areas for food production. It is also important to consider the costs for delimitating and entitling lands that are under some type of conflict, have not been categorized or do not have defined rights (WorldBank 2011).

Implementation costs tend to be charged at the initial stages of a REDD+ scheme. In other cases, these costs are related to operation costs, which are normally recurrent, like the ones related to constant monitoring

and the follow-up to the conservation commitments adopted as a part of the scheme. Since these operation costs ante closely related and represent the “maintenance� for the system implemented, they will be considered in the implementation costs group.

4.3. Transaction costs.

These costs are related to the arrangements needed to link all the actors in the project, being the buyer, seller, donor, beneficiary and other actors such as evaluators and certifiers, throughout the project chain. This requires the identification and design of the project, investments negotiations, administrative costs for monitoring, reporting, verification and certification procedures to meet the goals agreed by the parties (Cacho et al. 2005, WorldBank 2011).

Usually, these costs are generated at the beginning of the REDD+ Project.

Mitigation costs

Implementation costs

Emission reduction costs (recurrent)

Transaction costs

Monitoring costs Opportunity costs

Figura 5. Categories for the costs from the mitigation of emissions from deforestation and degradation of the forests - adapted from Eliasch (2008).

24

Study objectives

The main objective of this study is to determine the profitability among the activities that directly affect the forest (carried out by land users and local, rural and indigenous communities) and the alternative productive projects within REDD+ mechanism.

Research questions related to the objectives:

25

How profitable are the current land use activities that cause deforestation?

What incentives should be given to land users in order for them to move towards sustainable alternatives?

What is the most attractive and feasible sustainable activity that could be adopted by land users?

What are the costs of forest loss and carbon emissions?

What benefits could be achieved by adopting sustainable alternatives that conserve the forest?

26

Methodology

27

Revision and verificacion of secondary information and complied data.

Identification of the current and alternative situations.

This study is based on national secondary information coming from government institutions or, when required, from international institutions that published studies carried out in the Peruvian amazon o the Pan-amazon region. A number of spatial, statistic and qualitative contextual data has been collected, specially local, regional and national policies.

The list containing the data used to develop the study is presented in Annex 2.

In the cases for production volume, land use types, available land according to usage type, cultivated area, production costs and selling prices the data used strictly corresponds to information coming from national sources in order to have realistic estimations and potential scenarios (detailed in Annex 2).

Figure 6 describes, in a general fashion, the methodological steps followed in this work. The collection and latter revision of data showed that there is enough information to run the analysis12.

Alternatives’ cost -benefit analysis.

Study’s discussion and conclusions.

Benefit distribution analysis.

Alternatives’ comparative analysis.

Figura 5. Flujo de pasos metodológicos

Figure 6. Methodological steps flow chart.

12. Nonetheless, it is always possible to find differences in the resultant data from different sources. It can be attributed to different methods applied at the moment of data collection and in the first systematization stages.

28 6.1. Analysis perspective.

The methodology will be implemented under ex-ante and feasibility forms of analysis, with a financial and social perspective (UE 2003).

The first theoretical premise used in the “Kaldor-Hicks criterion”, which can be formulated in an equivalent manner, as “state E1 is preferable over state Eo, if the ones gaining with E1 are capable to offset those who lose with E1” (Contreras 2004). In other words, one result would be considered as ‘optimum’ or ‘expected’ if at least one individual, context or situation improves without other individual, context or situation deteriorating. In terms of costs and benefits, in order to have a profitable project the costs must be less or equal to the benefit, otherwise there will be losses instead of earnings.

∑Costs ≤ ∑Benefits

6.2. Displacing deforestation.

The revision of some part of the secondary information provides relevant data for the methodology applied in this study. The cost/benefit analysis for REDD can only be obtained by analyzing activities that are capable to displace those which are impacting the forests(Angelsen 2008). This analysis will only inspect alternatives that are taking place as a part of current initiatives or projects related to the reduction of deforestation.

Two different situations were outlined, consisting on two alternative projects under the REDD+ scheme and with evidence of being applied previously. This was expected in order to be able to compare them to the current situation impacting the resources. As a result, the following situations were formulated:

intensive agriculture and REDD

This study was based on the ‘avoided costs’ method which uses a cost/benefit analysis for its calculation, from the most disaggregated level (matrix for land use value per hectare for each district) to the most aggregated one, in the comparison between the alternatives and the current situation (base situation or without project situation).

The Net Present Value (NPV) indicator was utilized to calculate the profitability and costs of each land use. Its use allows comparing the updated values of the net benefits and costs.

Agroforestry and REDD Systems

Traditional agriculture (BAU)

29 6.3. Base situation (without project).

Traditional agriculture and livestock practices (current scenario or business as usual).

Traditional agriculture in the Peruvian amazon consists on practices that normally start with tree felling (slash) and then burn primary or secondary forests. The main goal of ‘slash and burn’ agriculture is not to extract vegetation to sowing crops, but to obtain nutrients that they need. However, the obtained fertility is short-lived and the soil quality and yields decreases very rapidly (Yanggen 2006). Burning activities also imply less labor, and thus, less costs.

Agricultural practices allow modelling three agricultural classes according to how the land is utilized, which involves different types of crops, rest periods and crop cycles (Douroujeanni 1987, Pashanasi et al. 1995).

In this way, a model was generated based on three land use systems13 :

a. Annual crop cycles:

Land use oriented to short-lived crops, with a lifespan of one year or less. These occupy the land continuously for a period of time after which the land is left to rest until it recovers its fertility. Parcels are abandoned and the farmer starts the ‘slash and burn’ process in another area.

Bárbara Lehnebach / GIZ – CBC

After the rest time (fallow) has passed, the farmer usually returns to the abandoned parcel and, by the ‘slash and burn’ of the recovered forest (secondary forest or ‘purma’), establishes annual crops again repeating the cycle. It is considered that during the first two years the farmer invests inputs and labor to establish, maintain and harvest the crop. The first year additionally invests on the forest ‘slash and burn’.

b. Transition to perennial crops These types of crops are normally installed after the annual crops cycle, however their profitability in typically very limited due to the poor amount invested. The installation is made in a mixed manner: the two first years are for the establishment and utilization of annual crops and then proceed to harvest the perennial crops that have initiated their productive stage. Price instability and lack of external and internal support place these crops as a further step in the conversion of forests to degraded agricultural lands or functioning as a transitional stage towards pastures.

13. A land use system comprehends a series of uses that change with time, forming a cycle with a beginning and an end. Cycle´s duration depends on the land use system and the productive ends it has in terms of services and goods(Hyman, G.et al. 2011). Land use and land use change. REDD+ Opportunity Costs estimation – Training guide.P. Benitez, S. Tam, S. Pagiola and G. Kapp, Worldbank.

30 C. Transition to pastures:

After two years of annual crops production the soil is then used as pasture. Farmers that establish pastures also begin with annual crops to later install pastures and livestock. In some cases, along with natural grass, artificial pasture is also installed. Kudzu is the most common plant used in the study area. This system completely transforms the forests to pastures without allowing any possibility of recovery. Pasture lands normally present the most degraded soils (Vasquez 1991).

Land use has been categorized in three main groups in accordance to the actual agricultural practices. The three predominant groups define three types of systems for land use trajectory over time.

Table3. Land use categorization according to existing agricultural.

d an es ds Us erio p

01

02

Annual crops

Pasture

Permanent crops

Fallow land

03

Years

1

5

10

15

31 These modelled trajectories are consistent with the reviewed information: 1) rotations between subsistence or transitory crop and four-year fallow land; 2) transitory crops that leave the land to be used by permanent species; 3) transitory crops followed by pastures.

In all cases, farmer´s reality – mostly immigrants from the Andes or poor Amazonians – and soil limitations for agriculture (scarce fertility hinders crops growth), derives from the fact that the usage of products such as fertilizers, pesticides, qualified labor, adequate technology or machinery is not profitable. Due to the lack of capital, their utilization is very limited and almost inexistent in some cases.

The traditional farmer´s earnings are directly related to the profitability of their activities. The calculation evaluates the profitability of deforesting an area and installing a sequence of productive activities during a period correspondent to the average duration of land use systems in the amazon.

6.4. Project alternatives.

Alternative 1:

Intensive agriculture as a part of a REDD and carbon credits generation scheme.

Identification and justification Although, as mentioned before, annual crops are usually based on the ‘slash and burn’ of new areas, it is possible to intensify agriculture in areas already intervened and increase their profitability, avoiding the expansion towards forest areas (Cattaneo 2002).

It is clear that “permanence” of annual crops is feasible; it requires a significant amount of inputs and labor to counteract soil poor fertility after the first years. Due to the low prices obtained, farmers do not have the means or the incentives to intensify and permanently establish annual crops (Labarta et al. 2007).

On the other hand, permanent crop production is at most times contrary to the ‘slash and burn’ agriculture migratory system. Perennial crops require continuous production in one parcel, reducing the impact related to the expansion of agricultural areas. In addition to this, labor is a production restrictive factor and permanent crops are very labor demanding. In this sense, permanent crops tend to “absorb” labor in the production and thus available workforce for ‘slash and burn’ is reduced (Yanggen 2006).

Besides, permanent crops are generally market oriented and have more value than annual crops (Libelula 2011).

This offers better reasons to invest on enhanced inputs to maintain land´s productivity. Therefore, permanent crops can bring a decrease in deforestation levels.

Permanent crops intensification and their potential to avoid pressure and forest loss give space to a potential alternative to deforestation (Tomich, Noordwijk et al.

2001, Angelsen 2009).

Description of the alternative´s evaluation This alternative considers those permanent crops that are strategic in the context of the study area, and is based in the application of a mid or high technology management system. Permanent crops considered in this study are coffee, cacao and achiote.

Since the command and control methods have proven to be ineffective, and even represented a negative impact over the users since they were prohibited to carry out economic

32

“Perennial crops require continuous production in one parcel, reducing the impact related to the expansion of agricultural areas. In addition to this, labor is a production restrictive factor and permanent crops are very labor demanding. In this sense, permanent crops tend to “absorb” labor in the production and thus available workforce for ‘slash and burn’ is reduced (Yanggen 2006). ”

activities that generate income (Pagiola and Platais 2002), Payments for Environmental Services (PES) mechanisms represent a potential positive complement.

Bárbara Lehnebach / GIZ – CBC

This alternative gives space to consider its inclusion in a REDD Project, mainly considering the conservation of remaining mature forests in the area and also the secondary forests. Farmers must commit 14 to conserve the forests in the border of their agricultural lands.

The intervened areas would have permanent crops managed under best-practices ensuring high profits. Later, this intervention would be complemented with offsets generated by the sales of carbon certificates given as a result of the commitments to stop expanding the agricultural area.

An applied assumption here is that the profits increase for the permanent crops intensification, and the incentives received for conserving the forests, would be profitable enough for family economies and avoids the expansion to new areas.

14. The Peruvian experiences reviewed show that these commitments are referred as “conservation agreements”. These take place between the project manager and the farmer or land owner and could, or could not, have legal and formal contracts (AMPA, 2011)

33

Alternative 2:

Agroforestry systems as a part of a REDD scheme Alternative´s identification and justification Agroforestry systems are productive spatial arrangements constituted by annual and permanent crops associated with tress of several species with different purposes (Lundgren 1982).

The Project seeks to develop a recovery system for degraded areas through the inclusion of financially sustainable agroforestry systems that produce incomes by selling crop´s products as well as fast-growth tree species.

In addition, forest conservation as a result of avoiding the expansion of agricultural lands has the potential to a attract incentives as a part of a conservation commitment and the sale of carbon credit. This project could generate credits for carbon sequestration in above and belowground biomass due to the new system created to plant timber species (Ruiz P., Garcia F. et al. 2007).

While trees are growing, the income will come from the sale of permanent crop´s products complemented with the incentives obtained from the sale of carbon credits.

Description of the alternative´s evaluation Forest recovery through native species reforestation such as “bolaina” (Guazuma crinita) and capirona

Miguel Schmitter / GIZ – CBC

(Callycophyllum spruceanum) generate revenue after 7 years by extracting the first species and by year 15 by extracting both species. However, after year 7 the income is perceived annually, there are also expenditures during the first three years, due to the planting of trees and their maintenance, same as the harvesting year.

The economic productivity of one hectare for the whole 15 years cycle, considering harvest intensity that ensures progressive forestre population, is equivalent to 25% of the total reforested individual for each species. This turns this alternative to be environmentally sustainable and probably ensures the productive self-sustainability, and consequently, also economic over time.

The crops considered in this alternative are the permanent ones, which will be a part of a system mixed with trees. The study considers that this alternative will be implemented in (a) areas cultivated with products such as cacao and coffee, in silvo-pastoral systems for cattle shading, (b) occupying new areas with reforestation and (c) inside the secondary forests as enrichment belts.

In the case of permanent crops, benefits and costs are calculated annually and at the moment of harvesting the associated trees allowing an additional income from timber sales.

Although the potential for carbon sequestration due to the increase of aboveground and belowground biomass in reforested systems, and the incentives associated, could be considered it was not, in order to be able to make a homogenous comparison to the previous alternative.

34

a.

10

Distribution scheme for trees

6 10 6

b.

3

4

Figure 8. Distribution scheme for trees inside systems combined with permanent crops and/or pasture (a), in reforestation massif (b), and inside “purmas-secondary forest� (c). in the case (a) it is considered that trees species such as Bolaina y Capirona can be established at 6 meter separation distances in order to reduce the impact of the shade over permanent crops like coffee and cacao, or 10 meters, as minimum, when the tree species are Tornillo and Cedar (mentioned as reference). For case (b) the massif can show short distances between trees in order to increase natural competiveness. Similarly for case (c), the distance between trees must stimulate their growth.

4

4

3

3

3

3

c.

4

Capirona

Cedro

Bolaina

Cacao

Tornillo

Coffee

3

3

5

3

3

5

3

3

5

35

6.5. Calculation summary.

In order to calculate the gross income from land use, basically agriculture and farming for each district, a ten year historical series (2000 – 2010) was considered. The data utilized comes from MINAGRI and the regional agrarian directions of the four departments included in this study. These two information sources provided references about production, harvested areas, yields and prices, as well as allowed the identification of possible outliers in relation to the rest of the data.

Information limitations about production costs for each district compelled the use of fixed benefit-costs coefficients (ratios) per department, the same that were used to limit the gross income and obtain net benefits.

Since each district presents various crops identified as forest impact (pressure) originators, each one had a different flow by district, which included the different crops. The flows varied in function to the relative weight each crop’s net benefits, which were determined by each crop´s relative expansion and their percentage participation in the district´s total production volume.

Finally, inflation also affected gross income by using the annual consumer´s price index, taking year 2000 as the base year.

Miguel Schmitter / GIZ – CBC

36

Study assumptions

7.1. General assumptions for the analysis In the current situation, deforestation is initiated by the establishment of annual crops. In this manner, there are some crops that come from ‘slash and burn’ practices. The study assumes that this crops expansion implies deforestation since the districts are located in the amazon basin where the soils are not suitable for agriculture and thus activities occurring in these lands go against forest natural dynamics.

Deforestation rate delimits the size of the area historically pressured. This study assumes that this situation will not change and the rate is considered to be stable for future periods. This means that the areas where the projects, or alternatives to the base situation, will take place are correspondent to an area equivalent to deforestation rate. Nevertheless, considering that not very surface has clear defined land rights, the interventions will only take place over areas where legal tenure situation is regular. Due to this the results’ comparability also demands that the calculations and estimations for the current situation only consider land with clear and defined rights.

The carrying capacity (land/livestock rate) measured in livestock units per hectare is referred to forage availability in the land for a determined amount of livestock in accordance to the alimentary requirements of the animals. According to the calculations found for the Peruvian amazon, the carrying capacity is estimated between 0.5 to 1 individual per hectare (INIA 2006). The study assumes a 0.5 carrying capacity in order to have conservative values.

Likewise, profitability obtained from livestock activity is limited only to meat. Dairy profits have not been included due to the limitation of information access for the whole study area and in order to be able to compare data with other studies (Kaimowitz, Mertens et al. 2002).

Permanent crops have a 15 year productive cycle; they initiate productive activities from the third year with 50% of maximum productivity; they reach 100% by the fifth year and maintain the productivity until the thirteenth year. By year 14 the crops reduce their productivity to 80% going to 75% by the last year.

Maintenance costs are constant from year 3 to 15.

A REDD project can only include areas that have clear tenure rights in order to negotiate and sell carbon certificates. This obeys to the fact that with no rights over lands it is almost impossible to ensure the fulfillment of conditions, identify and determine responsibilities or enter into an agreement.

The analysis considers that there is already an incentive for conserved forests areas. This incentive is equivalent to US$3 per hectare in the threatened forest that, through some kind of project, is kept standing.

Significant income coming from timber is considered for the first year exclusively. Timber sales in subsequent years are considered as insignificant, apart from reforestation timber. This project will reforest two native species, bolaina and capirona, which have 7 and 15 years cycles respectively. By years 7 and 15 the income form permanent crops will be complemented with timber sales.

37

38

7.2. The time horizon and discount rate for flow projection.

Due to the nature of this study, in order to define the time horizon baseline, temporary projections for carbon-based projects over 10 years were included since they can represent a lower occurrence probability, besides the real duration of the project (Shochet al. 2013). On the other hand, the National Public Investment System (Sistema Nacional de Inversión Pública - SNIP) defines that the evaluation period for a project must consider a ten year profit generation span.

However, by considering permanent crops and one tree species with a harvest cycle not less than 13 years within the study, it would not be pertinent to carry out a minor evaluation to the productive duration of the land use systems considered as alternatives. Due to this, the final time horizon defined for this work was 15 years.

In regards to the discount rates, different values were used in the current financial system, considering that the use of high discount rates in development countries has generated strong critiques (White, Pagiola et al. 2011).

In addition to this, greater discount rates and an extensive time horizon (more than 15 years), have stronger effects over the net present value (NPV), meaning the value of money at the beginning of the horizon (White, Pagiolaet al. 2011).

Discount rate for rural businesses in 2012, according to the Banco Central de Reserva del Perú (BCRP), is considered between 10% and 30%. On the other hand, Public Investment Projects (PIP) involving GHG reduction or mitigation environmental services have a social discount rate of 4% (MEF, 2013 #321). This study took an equivalent mid value of 10%.

Both the time horizon and the discount rate selected for this study, will allow the study results to be compared to other economic-financial studies for REDD at a local and national level in Peru.

7.3. Forest carbon current value.

Different carbon standards are a valuable tool in order to guarantee the quality of the credits generated by GHG emissions reduction and create confidence among buyers in the carbon markets. The costs demanded by the application of such standards (included in the transaction costs) are assumed by the carbon project implementers, being public or private, national or subnational (Merger, Dutschke et al. 2011).

In general terms, the value of forest carbon varies in relation to the value of the credits transacted in carbon markets. Even when the market increased by 9% in 2012, the average global price for the forest offsets dropped to US$7.8/ton, whilst in 2011 the price was US$9.2/ton. However, the value is still higher than the Price paid by voluntary buyers in all the offset projects range, with an average value of US$5.9/ton (ForestTrends 2014). This study considers a price of US$3/ton for the analysis, considering the market´s volatility and the need to be conservative in regards to the results.

Commonly, the sale of certificates begins after the project duly validation and registration. There are also initiatives that pre-sell the bonuses in order to obtain funds to implement the project. For practical ends, this analysis considers that only by year 3 the project would be ready to begin selling carbon credits.

Miguel Schmitter / GIZ – CBC

39

40

Results

This section shows the quantification of negative and positive impacts with updated values for all the proposed situations. Results will often show the comparison between the net benefit (net revenue) and the costs incurred to obtain these benefits. This was made with the intention to evidence the economic efforts involved to reach the desired yield levels. Likewise, the conservation impacts over the forest, the avoided emissions and the forest that could still be under threats are also measured.

41

8.1. Base situation (without project).

Main annual crops installed by ‘slash and burn’ in the forest are corn, rice, plantain and manioc. As well as in other land uses, the proportions these crops occupy vary depending on the district where they are inside the study area.

On the other hand, the permanent crops that extended the most and are more relevant to land use change were cacao and coffee.

The investment made for ‘slash and burn’ in the first year shows an enormous reduction in the net income, and in some cases for annual crops it turns negative. Nonetheless, the farmer achieves to recover its investment by selling some timber, mostly medium to low commercial value species15.

In this situation, the farmers invest on crops installation and maintenance during the first two years without obtaining additional income besides the ones directly obtained by annual crops. During years 3 to 15 the crops progressively start producing reaching maturity by year 5. During these years the only investment placed is related to maintenance.

In regards to bovine livestock, which is integrated to agriculture, its low net income is related to the soil´s small carrying capacity to support livestock, in other terms there is a very reduced amount of meat produced by hectare.

Tables 4 and 5 show NPV resulting from projected flows for a 15 year horizon for each land use type and per hectare, and later for the whole ‘without project’ situation area. Table 4 shows the NPV for each land use separately, and later shows the whole uses integrated as one agricultural practice, just like is carried out by farms in their lands, also including timbre sales at the beginning of the felling. It shows the NPV as an average.

Table 4. Net Present Value for each land use type.

Crops (land use type)

Annual crops

Permanent crops

Pastures

NPV (US$/ha) per use

1.352,2

2.776,1

905,5

NPV (US$/ha) mixed 16

3.043,3

3.043,3

3.043,3

15. An additional income from timber sales coming from ‘slash and burn’ in the first year of parcels establishment was included.

16. The three uses, with their relative weights to the percentage of the area occupied in one unit taken to a hectare,have been considered.

42

Out of the 76 districts forming part of this study, 22 work exclusively with annual crops; however, in 32 other districts annual crops range from 50 to 99% of land use.

While, as presented in Table 4, the average hectare profitability is 4,162 nuevos soles (US$ 1.505 approximately), it comes from a profitability value at a district level that ranges from-191.7 to 8.633,1 nuevos soles per hectare (US$ 69 to US$ 3122 approximately).

Table 5.Total benefits and costs.

Project

Intervention area (ha)

Current situation

43.397

Horizon (t)

Discount rate

Net Present Value (US$)

Total Cost (US$)

10%

56.046.932

54.336.403

15

By integrating the three land uses constituting the current economic project, it is estimated that the NPV in the current situation indicates an equivalent profitability of US$ 75,7 million.

On the other hand, in order to have all the current activities in the intervention area obtaining the estimated profitability a total cost of from US$ 68,6 million is required, representing a similar value to the project’s profitability.

Figure 6 shows the average net income year by year (gross income – production costs) for one hectare as a current flow for each land use separately.

Figure 9. Annual Net Income Flow by hectare for each agricultural land use in a “without Project” situation.

$50

Millones de dolares

$40 $30 $20 $10 $0 $10 $20 años

1

2

3

4

Gross income

5

6

7

8

Costs

9

10

11

12

Net benefit

13

14

15

43

Ricardo Burneo / GIZ - CBC

44 8.2. Intensive agriculture as a part of a carbon credits generation and REDD scheme.

Results are shown by units (hectares) as well as by total benefits and costs for the project development over the total area suitable for implementation, basically meaning the areas with rights.

Permanent crops intensification, consisting on the increase of permanent crops management technology: more trained labor, the application of a more complete technological kit that includes the use of best-quality seeds, organic fertilizers, phyto sanitary controllers applied with proper frequency, provide bigger profitability per hectare.

The average unit net value was estimated respecting the land use distribution for each permanent crop under study: Table 6. Unit benefit.

Land use Intensive Agriculture

NPV (US$/ha) 5.93,4

The portion where permanent crops production intensification would be feasible, due to the formality in regards to land tenure and rights, is equivalent to 18.458 hectares, representing 43% of the study area. This portion could have US$ 86,2 million as a profitability indicator for the project only implementing intensive agriculture. However, a REDD+ project in addition to this alternative could show a profitability of US$ 146,4 million due to the incentives received by credit sales (Table 7).

Miguel Schmitter / GIZ – CBC

45

Table 7. Intensive agriculture values and costs with and without a REDD+.

Net Present Value (US$)

Total cost (US$)

Intervention Area (ha)

Horizon (t)

Intensive Agriculture

18.458

15

10%

86.187.118

221.036.115

Intensive Agriculture + REDD

18.458

15

10%

146.369.268

222.850.575

Project

Discount rate

On the other hand, the expenses involved in the intensification of the crops are significant, around US$ 221 million.

If it were a REDD+ project, the implementation costs would reach to US$ 222,9 million, resulting on US$ 1,8 million over the initial value.

Figure10. Present total value and comparative total costs between intervention with and without REDD+.

$200

Thousand million dolars

$150 $100 Intensive agriculture

$50 0 -$50

Intensive agriculture + REDD

-$100 -$150 -$200 -$250

Net Present Value (US$)

Total cost (US$)

As shown in Figure 10, under the same assumptions and conditions, applying a REDD+ scheme represents a significant profitability increase by 72%, while the costs would only increase by 2%. The estimate results reveal that in a REDD+ project at least 95% of the costs come from the implementation of alternative activities in the field. This explains the short increase in the costs between the project with or without REDD+.

46 8.3. Agroforestry systems as a part of a REDD scheme Land use system combining permanent crops with commercially valuable tree species, show unit benefit indicators as shown in the following table: Table 8. Unit benefit.

Land use

NPV (US$/ha)

Reforestation Permanent crops

2379 4445,13

The profitability and costs of this alternative to intervene in the same 43% of the study area would be US$ 79.3 million and US$137.6 million according to the project´s NPV, including agroforestry systems and a REDD+ project.

These profitability levels are achieved with a total cost of US$ 170.4 million for tree installation and permanent crops maintenance as elements of the agroforestry systems. When including the REDD+ scheme the cost goes up to US$ 174 million.

Just like in the previous case, the benefits perceived by the incentives from environmental services significantly increase the project´s profitability by 74%, without significantly raising the total costs, only by 2%.

Table 9. Values and total costs for agroforestry with and without REDD+.

Agroforestry

Agroforestry + REDD

Intervention Area (ha)

18.458

18.458

Horizon (t)

15

15

10%

10%

79.298.174

137.633.451

170.378.752

174.040.085

Project

Discount rate

Net Present Value (US$) Total cost (US$)

47

Figure11. Present total value and comparative total costs between intervention with and without REDD+.

$150 Millions of dollars

$100 $50 Agroforestry -$50

Agroforestry + REDD

-$100 -$150 -$200 Net Present Value (US$)

Miguel Schmitter / GIZ – CBC

Total cost(US$)

48

Analysis 9.1. Comparison between base situation and alternatives.

The comparison between the alternatives and the current situation show that in spite of the total costs incurred in the current situation are inferior, the profitability of the current situation is several times less than any of the alternatives. Agricultural intensification increase land’s profitability by over 2.6 times the value of the current ‘without project’ situation. However, whilst profitability increases the costs also do so, in reference to the current situation. Thus agricultural intensification represents costs 4 times higher than the base situation, while the implementation of tree species, in combination with other current uses, demand costs 3.2 times higher.

49

Figure12.Net income and total costs for the study area under the current ‘without project’ situation, and the alternatives 1 and 2.

Situation

Without project

Agricultural intensification

Land use enrichment with tree species

Net present benefits

Present costs

$56.046.932

$ 54.336.403

$ 146.369.268

$ 222.850.575

$ 137.633.451

$ 174.040.085

However, the two alternative projects complete analysis of the estimated profitability, considering the costs that both demand, suggests that the alternative that considers the systems enrichment with timber species is more profitable. This alternative also shows lesser total costs for its implementation (Figure12).

Crops intensification show significant profitability as well, nevertheless, the total costs estimation seems to indicate that for in order to reach such profitability level a great investment is required.

At this point, it is important to mention that the financial indicators used and shown up until this moment are exclusively based on 43% of the total area with the intention to reduce deforestation in the study area.

50

9.2. Decision criteria: Cost/efficiency indicators According to the bibliography reviewed for this study, the efficiency can be considered as the indicator related to emissions reduction at the lowest cost possible. It is important to reiterate that the values shown in this section come from considering the start costs, which include the most important transaction costs, implementation costs, operating costs (also known as recurrent costs) and finally, opportunity costs coming from the current situation analysis.

Table 10 shows the average cost-effectiveness regarding to the conservation of a deforested hectare and one ton of non-emitted carbon.

These indicators have been taken into account for the interventions that would take place in the viable areas, with clear legal status in regards to land tenure and use rights.

It is considered that the scheme costs should be distributed between the potential amounts of emissions to reduce, thus the average cost for a non-emitted ton of carbon dioxide would be equal to forest carbon credits selling offer. In both alternatives, REDD total costs raise carbon prices near to the maximum values reported for the competitive ranges in current voluntary markets according to King (2014) and Peters-Stanley M et al.

(2012). This occurs, even considering conservation already subsidized through incentives equivalent to US$3 per ton of carbon.

As it is the objective of this comparative table, the performance indicators reveal that an intervention such as agroforestry systems are more cost-effective in the reduction of deforestation and thus is the same for the reduction of emissions.

Table10. Cost-effectiveness indicators comparison.

Situation

Cost/effectiveness in relation to avoided surface ($/ha)

Cost/effectiveness in relation to avoided emissions 8.2 ($/tCO2)

Crops intensification

3.637,9

8,2

Agroforestry

2.528,7

5,7

51

9.3. Benefits distribution A good REDD scheme design allows the distribution of the benefits in a fashion where deforestation reduction can become a reality due to the improvement in the production conditions of the people that live and depend on the forest fulfilling their necessities and avoiding the expansion of agricultural activities.

This part of the analysis considers the NPV as a useful estimate in order to find the distributed benefits per hectare that each alternative would show over the area with clear legal status in regards to land tenure and use rights. The potential profitability per hectare, by using average values, is shown in Table 11.

Table11.Estimation of the profitability per hectare and per Project (alternative and current situation).

Type of intervention for the reduction of emissions from deforestation

Intervention area (ha)

a.Net Unit profits (US$/ha)

Current situation

18.458

3.036,5

Crops intensification + REDD

18.458

7.929,9

Enrichment of land uses with tree species + REDD

18.458

7.456,6

According to studies related to opportunity costs estimation in the Peruvian amazon(Armas, Borner et al. 2009, Fleck, Vera-Diaz et al. 2010), the estimated variability shows values that could be sufficiently covered in accordance to the potential profitability of the two evaluated REDD+ projects.

Table 11 shows the total profitability estimated values for each situation, with and without project, distributed over the intervention area. The potential values per hectare under the implementation of both alternatives do not differ much between them. The net unit profits are 2.6 and 2.5 times the profitability of a hectare ‘without project’. The value for one ‘without project’ hectare is equivalent to the opportunity cost and is overcome easily.

52

9.4. Unit costs to avoid deforestation.

The analysis in this section show the costs distributed over the same intervention area for each alternative, which is the same as the one where the benefits where distributed. This value allows having a cost estimate that will require establishing the two interventions studied within a REDD+ project (section b. Table 12).

The results’ analysis also shows that the costs to implement this type of projects have focus more on starting the field activities. These represent the 98.8% and 97.3% of total costs, while the implementation, operation and transaction costs represent no more than 1.2% and 2.7% of the total

cost per hectare for agricultural intensification and the tree species enrichment system respectively. This matches the results found in other scientific articles such as the one published by Thompson in 2013.

Considering the high costs involved in the establishment of any of the REDD+ projects, the analysis took into account the possibility for the producers to contribute with the investment they normally place on their actual agricultural practices (US$ 2.943,8 per hectare). This would help to reduce the total costs per hectare for both projects. However, some significant non-covered amounts would remain and would become almost impossible to be assumed by the producer (section c. Table 12).

Table12.Distribution of unit costs per hectare needed to implement alternative projects.

Type of intervention for the reduction of emissions from deforestation

Unit costs (US$/ha)

Unit costs with producers’ contribution (US$/ha)

Current situation

2.943,8

-

Crops intensification + REDD

12.284,7

9.340,9

Agroforestry

9.682,6

6.738,8

53 9.5. Balance and redistribution.

Considering that there are estimates for the costs and benefits at a hectare level, and compared between the situation with project and alternatives, it is important to start focusing on the difference between the benefits ‘without project’, equivalent to the opportunity cots for the current land use, and the benefits from both REDD+ alternative projects.

Considering that both alternatives’ profits surpass the opportunity costs, it is evident that there is a producer’s potential surplus per hectare (US$/ha).

This surplus represents a re-investment option that would reduce the costs for every project. The analysis shows that the tree species enrichment system is again the option with better results. Nonetheless, there still are remaining costs that are not covered.

Table 13. Final surplus redistribution balance over costs per hectare.

Situation

a. Net Unit profits (US$/ha)

b. Unit costs (US$/ha)

c. Unit costs with producer’s contribution (US$/ha)

d. Unit costs with producer’s contribution (US$/ha)

Without project

3.036,5

1.579,7

-

-

Agricultural intensification

7.929,9

12.284,7

9.130,6

4.236,2

Agroforestry systems enrichment

7.456,6

9.429,0

6.485,2

2.065,1

Miguel Schmitter / GIZ – CBC

54

9.6. One dimensional sensitivity analysis: Which alternative is more sensible to context parameter change?

Figure13.Discount rate changes.

Alternative 2

Alternative 1

In the sensitivity analysis, three parameters that influence the alternatives and base situation profitability varied.

S/.280 S/.233

S/.224

The parameters used to run the ‘sensitivy analysis’, being adjusted to different feasible values, were the discount rate, the intervention area and the carbon credits sale price. Five variations for each parameter, within the feasible occurrence values range, were made in this analysis. The curves resulting from these variations are seen in Figure13, Figure14 y Figure15.

S/.197 S/.282

S/.169

S/.148

S/.146 S/.119

S/.96

5

7

9

11

13

15

Discount rate 0%

Figure14.Intervention area changes.

Figure15.Carbon credits sale price changes.

Alternative Alternativa 2 2

Alternative11 Alternativa

Alternative 2

Alternative 1

S/.455

S/.335

S/.362 S/.270

S/.407

S/.324

S/.268

S/.241

S/.178

S/.249

S/.201 S/.85

S/.134

S/.157

S/.67

20

S/.208 S/.167

S/.125 40

60

80

Intervention percentage (%)

100

0

2

4

6

Carbon Credit Price (US$/tCO2)

8

55

The analysis showed that, by varying the discount rate, both alternatives are equally sensitive, reducing their profitability while the increasing the rate. Both alternatives maintain a similar proportional inverse relation and the difference in each alternative’s profitability is maintained in each increasing point of the rate.

The profitability sensitivity for both alternatives increased when the intervention area varied. When the area increased, the agroforestry systems alternative was more sensitive, increasing its profitability to a higher rate (a 1.4 relation between each evaluation point) that the

Miguel Schmitter / GIZ – CBC

alternative that applies intensive agriculture systems (an average rate of 0.4 between each evaluation point).

Figure14 clearly shows how both curves start to diverge while the intervention area increases.

Finally, both alternatives showed to be more sensitive to carbon credits price changes (Figure15). The increase in carbon credits price strongly promoted the use of agroforestry systems in opposition to the use of intensive agriculture systems. Both curves are markedly separated with each increase point in the credits prices.

56

Discussion

57

10.1. About total costs to displace deforestation.

If it were considered that the potential profitability in total termsfor each proposed alternative must equal or, as it should be expected, surpass the opportunity costs, then it could be said that the objective is accomplished.

This evaluation found that, besides one alternative can provide better profitability indexes than the other, both REDD+ projects are profitable enough as to consider an important liquid surplus potentially available. The discussion however underlies in the possibility that any potential surplus could be used to finance the high costs that each alternative demands.

It is important to focus on the mechanism design aspect, considering the policies and mechanisms that are built for benefits distribution and at the same time must include the needs and will of the producers to use the benefits that a REDD+ project could provide. The results and analysis reveal that the producers economic participation as a counterpart in the implementation of field activities, as well as the capacity and re-investment strategies they have and the ones provided by the government in order to cover the project’s costs, are key factors.

Nevertheless, it is important to note that the study is based only in the 43%of the land, which has clear rights over it, and not the whole area being affected year by year.

This could exclude, or maybe not, an important amount of forest people, specifically those who occupy that 53% of the land that cannot be included in a REDD scheme.

It is also possible that a great demand for labor in the intervention area opens work spaces that would benefits those people without legal rights over the land.

On the other hand, although the interventions are only carried out over land legally and officially granted to private owners, some REDD expenditure must cover the whole threatened area in order to avoid ‘leakage’.

This work has not gotten into detail about what would happen in areas without defined tenure or legal property established and, since it is not the formal objective, the uncertainty about the spatial approach of the REDD project is still there.

In order to provide better evidence about the benefits distribution and due to the limitations exposed in the previous paragraphs, it is necessary to return to a bigger hypothetical scale that expresses the functioning of a mechanism over the study area, considering the net total benefits and costs, as well as the surplus reinvestment strategies.

Figure 16 shows each alternative’s hypothetical potential to cover the total costs involved. A financial balance between the total profitability and costs, in accordance to the assumptions and parameters used, was developed. In order to have a clearer understanding of this balance, four stages are presented

58

Costs (year 0)

Stage I

Agriculture intensification

Enrichment in agroforestry systems

Total costs (orange bar under x axis) incurred in the implementation of alternative projects within the development of REDD+ mechanisms.

-$174 -$223

Costs

Estimated surplus (year 0)

Stage II Estimated profitability through actual net benefits is capable of covering aggregated opportunity costs paid by the producers in the ‘without project’ situation, and additionally generate surplus amounts for each alternative’s profitability.

$82

$90

$56

$56

Agriculture intensification

Enrichment in agroforestry systems

NPV Above opportunity cost (surplus) NPV Equivalent to opportunity cost

Figure15. Possible costs compensationby project’s profitability (both parameters restated to year zero).

59

Results from producer’s participation

Agriculture intensification

Enrichment in agroforestry systems

$54

$54

-$120

Stage III The producers contribute with the investments they usually place on their normal activities to cover a part of the total costs, reducing the size of the costs’ bar for both alternatives (still below the x axis). Surplus turns to zero.

-$169

Non-covered costs with producer’s participation Costs assumed by producers

Non-covered costs with producer’s participation and surplus investment Agriculture intensification

Enrichment in agroforestry systems

$54

$54

$90 -$78

$82

-$38

Non-covered costs with producer’s participation and surplus investment Costs assumed by producers NPV Above opportunity cost (surplus)

Stage IV Surplus used to complement the counterpart provided by the producers in the study zone, resulting in a significant reduction of the costs for both alternatives. The amounts left to be covered are US$ 78 and 38 million for the agricultural intensification systems and the land use enrichment with tree species alternatives respectively.

60 Although the estimated results show that there is still remaining costs that need to be covered, it is important to highlight the noticeable costs reduction for both cases due to surplus reassignment and farmers’ counterpart.

In real terms, it is possible that legality issues over the lands and the exclusion of 57% of the intervention area is restricting the total profitability for both projects. A situation with less legal limitations could probably offer better results.

10.2. The options: How far should the alternatives be applied?

Section 9.5 provided information where the profitability for each alternative project does not cover the total costs17, even by reinvesting the surplus.

Likewise, the sensitivity analysis showed that while certain parameters vary the profitability and costs indexes increase or decrease.

In order to have one alternative to be optimum it is necessary to have the total profitability covering opportunity costs and its remaining18 amount covering the cost of applying such alternative, like this:

π-(γ+δ)>0

Miguel Schmitter / GIZ - CBC

17. As seen before, these costs involve operating, implementation and transaction costs.

18. The remaining amount results from subtracting the total costs and the opportunity costs to the project’s profitability

Parameters

61

Values

CER price US$/tCO2 4.9 Opportunity cost $56.046.932

Project: Agricultural Intensification

Option 1

Total cost (restated) Profitability Results: non-covered costs

$ 222.850.575 $ 185.633.788 $ 38.946.118

Project: Land use enrichment with tree species Total cost (restated) Profitability Results: Costs covered with surplus

$ 181.964.678 $ 227.428.142 $ 43.752.935

CER price US$/tCO2 7.5 Opportunity cost $56,046,932

Project: Agricultural Intensification

Option 2

Total cost (restated) Profitability Results:

$ 233.064.166 $ 236.551.533 $ 1.776.838

Project: Land use enrichment with tree species Total cost (restated) Profitability Results: Costs covered with surplus

$ 181.964.678 $ 227.428.142 $ 43.752.935

Intervention area 100% Opportunity cost $ 131,774,342

Project: Agricultural Intensification

Option 3

Total cost (restated) Profitability Results: non-covered costs

$ 517.698.809 $ 334.544.071 $ 187.176.437

Project: Land use enrichment with tree species Total cost (restated) Profitability Results: non-covered costs

$ 399.890.988 $ 318.523.270 $ 85.389.416

62

According to the parameters variation analysis in search of the best option, two main criteria were considered: 1) that the balance between the costs, benefits, producer’s share and surplus, allows to cover the project’s costs and 2) that the options are realistic, meaning that the parameter values are within the technically achievable ranges, or in the worst case, that there is an unreachable gap in the short to mid-term.

Angel Armas / GIZ - CBC

It is clear that the optimum option is the application of alternative 2 due to the high profitability that could be generated in any of the two projects if the carbon credit price was US$ 7.5, considering that the other parameters (43% of intervention area, 10% discount rate) remain the same. However, these prices could hardly be negotiable or competitive in current voluntary markets, reason why the option has feasibility restrictions for the implementation of a project.

The first option could be considered as the most feasible since 4.9 is still a competitive and negotiable carbon credit price in current voluntary markets, making the project related to land use enrichment with tree species work and have better costs coverage, still generating a surplus. This does not happen in the agricultural intensification project, which cannot cover its implementation costs.

Finally, it is possible that multidimensional analysis (variation of more than two parameters at a time) show other solid options. These analyses were not considered since the multidimensional analysis requires consistent information about external factors in order to create true scenarios. This sort of information was not available during the study.

10.3. Identification and description of non-quantifiable impacts.

Non-quantifiable impacts are the ones over which is impossible to make an economic valuation since they depend of subjective values that do not allow the development of models or mechanisms to foresee their occurrence and quantification in monetary terms.

Different proposed interventions can generate positive, as well as negative, non-quantifiable impacts that deserve to be identified and mentioned.

63

10.3.1. Impacts on the soil.

Reforestation contributes with a number of benefits and environmental services that are difficult to assess and quantify. Reestablishing or increasing the forest cover enhances moisture retention, structure and food content. It also reduces lixiviation, providing manure and nitrogen, when the species utilized are of this kind. If the lack of fuel wood forces the people to use manure as fuel instead of fertilizer for agricultural fields, the production of fuel wood in reforested areas will indirectly help to maintain soil´s fertility.

On the other hand, trees plantation stabilizes the soils, reduces wind and water erosion on the slopes, nearby fields and non-consolidated soils.

Negative impacts can occur if the reforestation takes place on primary forests or in lands with species that can impact the ecosystem’s biodiversity. In this case, it is possible to have inverse effects such as greater soil erosion and compression, hydrological cycle interruption and the rupture in the soil’s general structure and its subterranean root network (WorldBank 2008).

10.3.2. Impacts on biodiversity.

On the other hand, reforestation of areas previously degraded may cause the recovery of ecosystem niches that were lost. There are two reforestation projects in the study zone; both have experimental parcels with mixed native species plantations. It is observed that the recovery of areas made with native species had birds, which disappeared in the area, progressively return over time.

It is even harder to quantify the impact of the reforestation activities over the reintroduction of endangered species and the conservation of genetic diversity.

Interventions such as agricultural intensification can have positive impacts on certain species of insects that are beneficial to genetic variety recovery and increase.

A clear example is the improvement in permanent crops like coffee and cacao and the increase of pollinizing bees. Although the impact can be measured in terms of honey production for such industry, wider effects over other insect and plant communities are hardly quantifiable.

Nonetheless, the use of reforestation to ensure an area for fast-growth timber production, leaving aside the objective of recovering the forest in its primary stage, can also promote the reduction of genetic diversity and species in the way it was characterized naturally in the intervention area.

10.3.3. Impacts over local population cultural practices.

Implementing intensive agriculture systems on population that are culturally used to the annual crop system may present impacts very hard to measure. In spite of having mid-term net income from intensive agriculture systems being higher than the income obtained in conventional extensive agricultural production systems, the impact over the population can represent efficiency loss, commitments breach and sustainability issues in regards to the new land use systems (Aramburu, Bedoya et al. 2003).

Likewise, there have been cases where the incentives directly granted to the population that lives in and around the forest have been utilized in an appropriate manner, in unnecessary goods or that caused alterations in the social behavior of the community.

64

Conclusions and recommendations

65

D.

Every link to international schemes related to conservation incentives and climate change mitigation must be connected in the most direct and efficient way to the strengthening of local economies.

E.

A.

The Reduction of Emissions from forest Deforestation and Degradation, globally known as REDD, is a tool which design must include impact activities on the land. This study has emphasized that REDD+ must be based in the promotion of feasible activities, economic and environmentally sustainable: these things represent the backbone of the mechanism in the field.

B.

REDD+, considered as a combination where sustainable alternative activities will face and displace those activities affecting the forests, is a mechanism that carries high costs to the producer for him to migrate to other productive alternatives on the field, costs that the producer is not capable to cover by himself.

C.

It is indispensable for REDD+ to have financial support from the government, civil society and private actors that are influential to forest management, otherwise there is a big chance for the mechanism to fail due to economic unsustainability on the field.

International debates have already identified that REDD+ project developers must be willing to invest in advance in order to help local communities to develop and adapt to alternative income sources before implementing other aspects of the mechanisms such as conditional payments for forest conservation. Contrary actions go against the mechanism.

F.

In reference to the previous point, this study proposes the two most implemented land use alternatives in REDD+ projects, and that also meet the mechanism objectives. However, it is possible to consider other land use and management alternatives which cost/ benefit analysis must be relevant.

G.

Both activities cover the opportunity costs related to current land use from the population that depends on the forest resources, and have the potential to generate a significantly higher income, between 2 and 2.5 times more than current traditional activities, between US$ 220 and US$ 210 million versus US$ 56 million which is the profitability from current traditional activities. This demonstrates the mechanism potential to promote activities which could have had little support in the past but sure can be profitable at a mid and long term.

66

H.

Nonetheless, the estimates indicate that in order to achieve these economic benefits for the producer and ecologic benefits for the environment and specifically the forest, the activities incur in high total costs equivalent to 2.5 to 3 times more than the usual costs, this represents an amount of US$ 223 and US$ 174 million for the application of intensive agriculture and the enrichment of forest crop systems respectively. The distributive analysis for costs and benefits reveals that: The cost per carbon ton would be high, turning into non-competitive values in the present voluntary markets.

It is unavoidable for governments (local, regional and national) to have strategies that search for additional financial mechanisms besides the ones related to forest carbon credit sales. Without this, the process would be costly and there would be strong barriers for financial leverage that could be obtained from offsets by results.

Miguel Schmitter / GIZ – CBC

Government agencies and the communities identified as potential actors in a REDD+ scheme must work previously in order to have ready elements that contribute to the reduction of transaction costs.

A conservative position must be kept in regards to the potential benefits a REDD+ project could bring to the communities.

I.

The highest income in a REDD+ Project is generated by the land use alternatives profitability, which can include permanent crops and land use systems enrichment or others. Profitability and net benefits generated by incentives capture or offsets from avoiding deforestation and GHG emissions are complementary during the project’s lifespan and should be taken as a promoter of other sustainable activities.

Miguel Schmitter / GIZ – CBC

67 usual investments. This is a key element for the scheme competitiveness and the forest, and related sectors, credits offer, as well as for the tangible potential benefits for the population living in 68% of the national territory.

L.

The study also demonstrates the necessity to create a specific fund for field activities, the same that could generate incentives to cover the costs involved in deforestation reduction through productive alternative activities, and also the importance of such funds on local livelihoods. This second aspect is a key factor.

M.

However, the sensitivity analysis results reveal that agricultural intensification may be more or equally profitable than the forest species enrichment systems, when applied in low scale areas.

N.

The existing limitations in areas without any sort of categorization or assignation have been clearly demonstrated. Not only they restrict the implementation of a REDD+ mechanism, with the social exclusion it implies, but raise the costs of a large scale project as a departmental or national level.

J.

O.

K.

P.

This analysis exercise shows that, according to the assumptions and the area under analysis, combined activities of land use systems intensification and the enrichment of such systems by cultivating timber species, results being more profitable than the application of intensive agriculture systems exclusively.

This is due to the income from timber sales, which are significantly higher than ones obtained from permanents crops harvesting.

The redistribution of the benefits obtained from REDD projects is an essential aspect which needs to be researched and demands the generation of updated information. This study provides clear evidence of the feasibility of having a profitable REDD scheme if the costs and benefits distribution is carried out carefully and appropriately, using the production surplus and involving the producers as a counterpart by including their activities

One possible solution for the barrier exposed before is that, usually agricultural management intensification demands huge amount of labor. This provides the potential to generate jobs to those producers in non-categorized areas or land with no clear rights, reducing or annulling the exclusion factor. Permanent crops intensification included in this study, like cacao and coffee, absorb labor that could have been available for land use change into less productive parcels.

Finally, the study suggests carrying out a pilot accounting using local data at a smaller scale, probably at a district level, in order to have exact data of opportunity, transaction and implementation costs, as well as the expected benefits that could be obtained. This will help to refine and provide more evidence about the costs and benefits that a REDD+ project can generate.

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69 Piu, H. C. and M. Menton (2013). Contexto de REDD+ en Perú: Motores, actores e instituciones., CIFOR. Occasional Paper 90.

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Annexes

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13

ANNEX 1

REDD context and study summary

National context

Approved PIN and RPP presented to FCPF. FIP process in its final stage.

REDD+ projects being implemented

Two sub-national REDD+ projects validated with VCS standards, ~8 projectswith PDD completed and approximately 40 initiatives being developed. Four REDD+ projects being developed in the study area.

Institutions

MINAM: focal point for FCPF inPeru.

MINAM’s Climate Change Direction as REDD coordinator in Peru.

MINAM: in charge of the Protected Natural Areas System.

MINAGRI: in charge of the sustainable forest management Regional Government of Ucayali: Natural Resources Directionin charge of the political and technical guidelines at a regional level for the study area.

Legal framework

Environment’s General Law 28611 (2005), Forest and Wildlife Law 29763 (2011).

Study zone

Selva central: Ucayali, Huánuco, Pasco, Junín

Coverage area (ha)

17.2 million hectares

Current situation

Deforestation due to migratory agriculture

Costs

Production costs (inputs, transportation)

Benefits

Income fromagriculture, livestock and timber extraction

71

Alternative 1

Enhanced Agriculture

Costs

Production costs (inputs, labor, transportation).

Benefits

Income from enhanced agricultural systems, agroforestry systems and silvo-pastoral systems.

Alternative 2

Enhanced Agriculture articulated to a REDD+ project

Costs

Production costs (inputs, labor, transportation), local transaction costs.

Benefits

Income from enhanced agricultural systems, agroforestry systems and silvo-pastoral systems Income from carbon credits sales

Relevant aspects

Whole REDD+ Project development will not be carried out alone. It is expected to build a partnership with a private or public organism that promotes REDD+.

Prices Reference data

5 year data (2007-2012) for prices, production and discount rate.

Scale

Sub-national

Time horizon

10 to 15 years

Discount rate (invested capital cost + inflation)

10 or 13%

72

ANNEX 2

Compiled and revised data Data according to categories: 1) Spatial (Raster/Shapefileformats with , documentation, metadata and legend) Deforestation map -ProClim (2000) Coverage from forest/non-forest maps - General Direction for Territorial Planning (MINAM) for the years 2000,2005,2009 Vegetation coverage map - General Direction forPatrimonial Patrimony Evaluation, Valuation and Financing (MINAM, 2013) Political Map of Peru, regions and districts (INEI, 2007) Roads, highways and infrastructure (MTC, 2009) Peru’s hydrographical network (INEI, 2001) Urban areas (cities, villages, towns) (INEI, 2007) Forest concessions, non-timber products concessions, both certified and not certified (MINAGRI, 2007) Forestation/Reforestation concessions (MINAGRI, 2007) Protected areas and private and communitarian conservation areas (SERNANP, 2007 – GOREU, 2009) Ecotourism areas (SERNANP, 2007) Informal mining locations indigenous territories (IBC; COFOPRI; AIDESEP) REDD+ projects areas/initiatives (Conservation International, WWF) Land registry database (COFOPRI, 2009)

2) Statistical. The cost/benefit analysis will be developed at a district level therefore statistics should be run at such scale. It is also necessary to have the required data for a period of 5-6 years.

Agriculture (MINAGRI) Agricultural productionper district (crops, production per hectare, cultivated area, harvesting area, prices) Agricultural production costs per district (transportation costs, labor, daily wages, inputs – seeds, fertilizers, pesticides) Information regarding to agricultural practices after ‘slash and burn’

Livestock (MINAGRI – INEI) Number of individuals and grazed area per district Meat prices per district

73

Timber (MINAGRI – GOREU) Timber by forest types and Surface per district Region and prices for each species (considering most valuable, commercial, low-mid quality species) Sawn wood and round wood productivity (cubic meters) per type of forest and location.

Extraction, transportation and transformation costsper district/region (considering most valuable, commercial, low-mid quality species)

Socioeconomic (INEI) Demographical Information per districts (number families, students and economically active people) Informationfor internal migration Reports about opportunity, deforestation and degradation for cases in the Peruvian amazon

Data source There is information from the following institutions: Ministries Environment (MINAM), Agricultureand irrigation (MINAGRI), Energy and mining (MINEM), Economy and finances (MEF), Transportand Communications (MTC) Cooperation, development and research institutions: Instituto del Bien Común (IBC) WWF, TNC, AIDER, CI Fund administrators such as: El Fondo de Promoción de las Áreas Naturales Protegidas (PROFONANPE), Fondo Nacional del Ambiental (FONAM) Academic entities such as the Universidad Nacional Agraria La Molina

International institutions FAO The Wood Hole Research Center The World Agroforestry Center – ICRAF The Center for International Forestry Research (CIFOR)

It was also necessary to carry out direct consultations with local experts.

74

ANNEX 3 Modelling steps

The following steps have been adapted from the methodology used byWunderet al. (2008) in the study “Payments for Environmental Services in the Brazilian amazon” and later replied by Armas, Borner et al. (2009)for the Peruvian amazon.

Uses and periods

Modelling steps for opportunity costs calculation

Annual crops

Pasture

Permanent crops

Fallow land

1.

2.

3. t 1

10

15

I) Crops and pasture with greater expansion Different data collected from MINAGRI and other data available in references and expert’s work helped to identify k crops that had relative expansion in the districti, in a period of 7 years – since 2004 to 2010.

In the case of livestock, k represents seeded or non-natural pastures, and its relative expansion has also been measured with regards to the district total.

II) Net income calculation per hectare of each crop In order to adjust the gross income and find the net income (Π), cost-benefit rates (ck/bk) were generated by using the production costs.

Later the net calculation is obtained by the following formula:

Π ik = GR G R ik * (1 −

ck ) bk

GR stands for gross return per hectare for each crop k.

III) Flow construction for each land use In order to evaluate the best land use in the Peruvian amazon during the production period for a parcel, several ‘trajectory’ models were elaborated. They show the land use year by year in a sequential manner.

A minimum productive period of 15 years was taken and land use was categorized in three big groups according to current agricultural practices. The three predominant groups define three main land use systems over time trajectories.

IV) Net Present Value calculation per trajectory The calculation was made in regards to the NPV from each district’s trajectory.

VAN j = ∑ t

Π k =1,t =1

+

(1 + r ) t =1

Π k = 2 ,t = 2 (1 + r ) t = 2

+ ... +

Π k = K ,t =T (1 + r ) t =T

Where j represents the trajectory from which the NPV is being calculated andtrepresents duration time, equal to 15 years.

V) Average Net Present Value calculation per hectare Finally, it is important to consider the influence of the relative expansion over the crops forming the trajectories evaluated per district, in order to estimate the average NPV per hectare for each one.

This can be achieved by multiplying the trajectory’s value by the index of the contributionfrom the crops in it. This index was calculated as the expansion relative to the total agricultural expansion in the district.

VAN i = ∑ t

∑ s VAN j

j

ij

(1 + r ) t

Where VANi is the district´s present value and S the contribution index according to the relative expansion of the crops in the trajectory.

75

ANNEX 4

Parameters table, with their respective sources

Deforestation rate.

Forest/Non-forest coverage maps for the years 2000,2005,2009. MINAM, 2012

District areas.

Peru’s Political Map. INEI, 2007

Demographical data.

National Census. INEI, 2007

Agricultural production, cultivated area, prices by products and district.

Database, MINAGRI. Updated to 2012

Agriculture production costs (transportation, labor, inputs, wages).

Regional Agrarian Direction from Huánuco, Junín, Pasco y Ucayali. Updated to 2012

Livestock numbers by department.

Database, MINAGRI. Updated to 2012

Meat price by department.

Database, MINAGRI. Updated to 2012

Timber price.

Database, MINAGRI. Updated to 2012

Round wood productivity .

Database, MINAGRI. Updated to 2011

Costs for production and extraction of planted/ reforested species.

ReforestaPerú S.A.C. Updated data to 2013

Aboveground biomass carbon content .

Baccini A. et al. 2012; WHRC, 2012

76

ANNEX 5

Quantified REDD+ costsused in the analysis REDD+ costs A number of diverse sources were taken into account to quantify the establishment costs for a REDD scheme among secondary information(Cacho, Marshall et al. 2005)as well as balances from related avoided deforestation projects. These costs will be charged to the policies implementer, being regional or national government.

Costos Tabla 15. Costos de implementaci贸n de actividades para REDD+ y costos de transacci贸n

Cycle phases

Total cost (US$)

Costs (US$)

Costs (S/.)

Frequency

Conceptual design and feasibility

200.000

516.000

1

200.000

Elaboration

250.000

645.000

1

250.000

Validation

100.000

258.000

1

100.000

Negotiation

120.000

309.600

1

120.000

Registry

80.000

206.400

1

80.000

Certification

60.000

154.800

1

60.000

Subtotal years 1 and 2

810.000

2.089.800

Costs (US$)

Costs (S/.)

Implementation

Frequency

Total cost (US$)

13

2.275.000

13

4.550.000

387.000

13

1.950.000

125.000

322.500

3

375.000

275.000

709.500

9.960.000

6.050.100

20.730.000

Monitoring (technology)

175.000

Monitoring (operation) costs

350.000

Surveillance

150.000

Verification Recurrent Subtotal

Total

810.000

1.085.000,00

451.500

Glosary ACTO ACTO ANP BAU BCRP CATIE CDC CDM CMNUCC CO2-eq COICA DGFFS DRAU EU FAO FONAM FONDEBOSQUE GHG IIAP IIRSA INEI INRENA IPCC MINAGRI MINAM NGO ONERN PES PNCBMCC PROCLIM PROFONANPE

REDD REDD+ SERNANP SUNAT UE UNDP VAN VBP VCS WWF

77

Amazon Cooperation Treaty Organization Áreas Naturales Protegidas (Natural Protected Areas) Business as usual Banco Central de Reserva del Perú(Central Reserves Bank of Peru) Centro Agronómico Tropical de Investigación y Enseñanza Centro de Datos para la Conservación(Conservation Data Center) Clean development Mechanism Convención Marco de las Naciones Unidas para el Cambio Climático(United Nations Framework Convention on Climate Change) Equivalent Carbon dioxide Federación de las Organizaciones Indígenas de la Cuenca Amazónica Dirección General Forestal y de Fauna Silvestre(Forest and Wildlife General Direction) Dirección Regional Agraria de Ucayali (Ucayali’s Regional AgrarianDirection) European Union Food and Agriculture Organization Fondo Nacional del Ambiente (National Fund for the Environment) Fondo de Promoción de Desarrollo Forestal(Fund for the promotion of forest development) Greenhouse Gases Instituto de Investigaciones de la Amazonía Peruana(Peruvian Amazon ResearchInstitute) Iniciativa para la Integración de Infraestructura Regional Sudamericana (Initiative for the Integration of Regional Infrastructure in South America) InstitutoNacional de Estadística e Informática (National Institute of Statistics and Information Technology) InstitutoNacional de RecursosNaturales (Natural Resources National Institute) Intergovernmental Panel on Climate Change Ministerio de Agricultura y Riego (Ministry of Agriculture and Irrigation) Ministerio de Ambiente (Ministry of Environment) Non-governmental organization Oficina Nacional de Evaluación de los Recursos Naturales(National Office for Natural Resources Evaluation) Payments for environmental services Programa Nacional de Conservación de Bosques para la Mitigación del CambioClimático (National Programme for Forests Conservation and Climate Change Mitigation) Programa de Fortalecimiento de Capacidades Nacionales para Manejar el Impacto del Cambio Climático y la Contaminación del Aire (Programme to Strengthen National Capacities to Manage the Impact of Air Pollution and Climate Change) Fondo de Promoción de las Áreas Naturales Protegidas (Natural Protected Areas Promotion Fund) Reducing Emissions from Deforestation and Forest Degradation Reducing Emissions from Deforestation and Forest Degradation including conservation, and carbon stock increase and recovery Servicio Nacional de Áreas Naturales Protegidaspor el Estado (Protected Natural Areas National Service) Superintendencia Nacional de Administración Tributaria (National Superintendence for Fiscal Administration) Unión Europea (European Union) UNDP United Nations Development Programme Valor Actual Neto (Net Present Value - NPV) Valor Bruto de Producción (GrossProductionValue) Verified Carbon Standard World Wildlife Fund

78