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Impact of New Markets for Environmental Services on Forest Products Trade

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Impact of New Markets for Environmental Services on Forest Products Trade FAO Impact Assessment of Forest Products Trade in the Promotion of Sustainable Forest Management (GCP/INT/775/JPN) IMPACT OF NEW MARKETS FOR ENVIRONMENTAL SERVICES ON FOREST PRODUCTS TRADE Prepared by Marko Katila and Esa Puustjärvi in collaboration with Ecosecurities Ltd. The designations employed and the presentation of material in this information product do not imply the expression of any opinion whatsoever on the part of the Food and Agriculture Organization of the United Nations concerning the legal or development status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS I EXECUTIVE SUMMARY I 1. INTRODUCTION 1 1.1 Background 1 1.2 Objectives 1 1.3 Approach and Structure of the Report 1 2. CONCEPTUAL FRAMEWORK AND DEFINITIONS CONCERNING TRADE IN FOREST ENVIRONMENTAL SERVICES 1 2.1 What is Meant by Forest Environmental Services? 1 2.2 Environmental Goods and Services in International Trade Agreements and Negotiations 1 2.3 Markets and Market Mechanisms for Forest Environmental Services 1 2.3.1 Definitions of Markets for Forest Environmental Services 1 2.3.2 Transaction Costs 1 2.3.3 Level of Markets 1 2.3.4 Market-based Mechanisms 1 2.4 Essential Attributes for Effective Market Creation: Framework for Analysis 1 3. FUTURE TRENDS, POTENTIAL AND IMPACTS OF NEW MARKETS FOR CARBON OFFSETS 1 3.1 The Kyoto Protocol and the Flexibility Mechanisms 1 3.2 Summary of Carbon Forestry Activities to Date 1 3.3 Market Trends 1 3.3.1 Current Buyers 1 3.3.2 Market for Kyoto-compliant (JI and CDM) Forestry Credits 1 3.3.3 Other Market Developments 1 3.3.4 Non-market Based Carbon Forestry Funding 1 3.3.5 The Case of Bio-energy 1 3.4 Impacts on Trade in Forest Products 1 3.4.1 Carbon Market Projections and Risks 1 3.4.2 Potential of the Forestry Sector to Supply Carbon Credits 1 3.4.3 Potential Carbon Sequestration Market during the First Commitment Period 1 3.4.4 Potential Long-term Carbon Sequestration Market 1 3.4.5 Impact of Carbon Offset Trade in Trade in Forest Products 1 3.5 Impacts on Sustainable Forest Management and Social Well-being 1 4. FUTURE TRENDS, POTENTIAL AND IMPACTS OF NEW MARKETS FOR FOREST BIODIVERSITY SERVICES 1 4.1 Introduction 1 4.2 Current Status of Markets for Biodiversity Services 1 4.2.1 Commodities Representing Biodiversity Services 1 4.2.2 Market Mechanisms Used in Selling Forest Biodiversity Services 1 4.3 Future Market Development 1 4.4 Impacts on Trade in Forest Products and Sustainable Forest Management 1 4.5 Creation of Markets for Biodiversity 1 © INDUFOR: IMPACT OF NEW MARKETS FOR ENVIRONMENTAL SERVICES ON FOREST PRODUCTS TRADE, September 15, 2003 i 5. FUTURE TRENDS, POTENTIAL, AND IMPACTS OF NEW MARKETS FOR WATERSHED SERVICES 1 5.1 Introduction 1 5.2 Commoditisation of Watershed Services 1 5.3 Market-based Mechanisms 1 5.3.1 Self-organised Deals 1 5.3.2 Centrally Managed Private Schemes 1 5.3.3 Trading Schemes 1 5.3.4 Public Payment Systems 1 5.4 Characteristics of Current Market 1 5.5 Future Market Trends 1 5.5.1 Demand 1 5.5.2 Supply 1 5.6 Impact on Timber Trade 1 5.7 Creation of Markets for Watershed Services 1 6. FUTURE TRENDS, POTENTIAL AND IMPACTS OF NEW MARKETS FOR FORESTLANDSCAPE BEAUTY 1 6.1 Introduction 1 6.2 Current Status of Markets for Landscape Beauty 1 6.2.1 Fee-based Mechanisms 1 6.2.2 Mechanisms Involving Private Sector and Local Communities 1 6.2.3 Mechanisms for Protection of Landscape 1 6.3 Future Market Development 1 6.3.1 Demand 1 6.3.2 Supply 1 6.4 Impact on Forest Management and Timber Trade 1 6.4.1 Nature-based Tourism 1 6.4.2 Protection of Landscape 1 6.5 Creation of Markets for Landscape Beauty 1 7. VERIFICATION AND CERTIFICATION OF FOREST ENVIRONMENTAL SERVICES 1 8. CONCLUSIONS 1 8.1 Forest Environmental Services and Market Mechanisms with Potential 1 8.2 Impacts on Trade and Forest Management 1 8.3 Socio-economic Impacts 1 8.4 Limitations with Market-based Approaches, and the Role of the Government 1 9. RECOMMENDATIONS 1 9.1 Recommendations for Consideration at the National and International Levels 1 9.2 Recommendations to Enhance Poverty Alleviation Impacts of MES 1 9.3 Priority Areas for Research and Development 1 10. REFERENCES AND BACKGROUND LITERATURE 1 List of Figures Figure 2.1 Demand for and Supply of Forest Environmental Services in a Conceptual Framework 1 Figure 3.1 Yearly Average Number and Area of New JI/AIJ Projects 1989-1998 1 © INDUFOR: IMPACT OF NEW MARKETS FOR ENVIRONMENTAL SERVICES ON FOREST PRODUCTS TRADE, September 15, 2003 ii List of Tables Table 2.1 Total Economic Value of a Forest and Environmental Services 1 Table 3.1 Information on Forestry-based Carbon Offset Projects during Five Phases since 1989 1 Table 3.2 AIJ and Other Carbon Sink Projects Worldwide in 2003 1 Table 3.3 Post-COP 7 Carbon Prices For the First Kyoto Commitment Period under the No-Trade and Full-Trade Scenarios, In USD Per T CO2 1 Table 3.4 Annual Global Carbon Sequestration and Conservation Potential from Forestry-based Activities 1 Table 4.1 Impacts of Markets in Selected Biodiversity Service Commodities on Trade in Forest Products and SFM 1 Table 4.2 Indicative Estimates on the Area of Private Protected Areas in Selected African and Latin American Countries 1 Table 4.3 Forests in Protected Areas 1 Table 8.1 Market-based Mechanisms by Degree of Public Sector Involvement 1 Table 8.2 Marketability of Forest Environmental Services and Their Impacts on Trade and SFM 1 List of Boxes Box 3.1 Certification of Sustainable Forest Management and Carbon Sequestration Services 1 Box 4.1 Conservation Easements: A Rapidly Growing Segment of the Conservation Movement in North America 1 Box 5.1 Examples of Economics of Watershed Management 1 Box 6.1 The Impact of Proposed Reform of CAP on Forestry 1 Box 6.2 Impact of Concentration of Tourism Flows on Distribution of Benefits 1 Box 7.1 Certification of Environmental Services and Forest Management 1 List of Annexes Annex 1 Project Reviews Annex 2 List of Carbon Sequestration Projects Annex 3 Forests in Protected Areas by IUCN Classes Annex 4 Major Watersheds Annex 5 Case Studies on Markets for Landscape Beauty Annex 6 Tourist Visits in World Heritage Sites in Developing Countries © INDUFOR: IMPACT OF NEW MARKETS FOR ENVIRONMENTAL SERVICES ON FOREST PRODUCTS TRADE, September 15, 2003 iii ABBREVIATIONS AND ACRONYMS % Percent a Annum AAs Assigned amounts ADB Asian Development Bank AFE-COHDEFOR Honduran Forestry Service AIJ PP Activities Implemented Jointly Pilot Phase AIJ Activities Implemented Jointly APEC Asia Pacific Economic Co-operation ARD Afforestation, reforestation and deforestation BP British Petroleum BRL Brazil Real C Carbon C&I Criteria and indicators CAP Climate Action Partnership CATIE Tropical Agriculture Research and Education Center CBD Convention of Biological Diversity CCD Convention on Combating Desertification and Drought CDM Clean Development Mechanism CEC North American Commission for Environmental Co-operation CER Certified Emission Reduction CERU Carbon Emission Reductions Unit CERUPT Certified Emission Reduction Units Purchase Tender CI Conservation International CIEL Centre for International Law CO2 Carbon dioxide COP Conference of Parties CTO Certified Tradable Offset DANIDA Danish International Development Agency DNPWC Department of National Park and Wildlife Conservation DNS Debt-for nature swaps DOC Department of Conservation, Government of New Zealand EBRD European Development Bank EC European Commission EMU Emission Reduction Unit eq. Equivalent ERUPT Emission Reduction Units Purchase Tender ERUs Emission Reduction Units ESCOM Electricity Supply Corporation of Malawi EU European Union EUR Euro FAO Food and Agriculture Organisation FFEM French Fund for the Global Environment FONAFIFO National Fund for Forest Financing in Costa Rica FONAG Water Fund in Ecuador FRIS Forest Restoration Information Service FSC Forest Stewardship Council FSU Former Soviet Union © INDUFOR: IMPACT OF NEW MARKETS FOR ENVIRONMENTAL SERVICES ON FOREST PRODUCTS TRADE, September 15, 2003 iv FUNDECOR Fundación Para El Desarrollo De La Cordillera Volcánica Central en Costa Rica FWPS Farm Woodland Premium Scheme g Gram GATS General Agreement on Trade in Services GATT General Agreement on Trade and Tariffs GEF Global Environment Facility GEMCo Greenhouse Emission Management Consortium GERT GHG Emission Reduction Trading GHG Greenhouse gas GIWA Global International Waters Assessment Gt Giga tons ha Hectare IBRD International Bank for Reconstruction and Development ICBG African International Cooperative Biodiversity Group ICDP Integrated Conservation and Development Project IDA International Development Agency IFC International Finance Corporation IIED International Institute for Environment and Development IPCC Intergovernmental Panel on Climate Change ITTO International Tropical Timber Organization IUCN International Union for Conservation of Nature JI Joint Implementation KP Kyoto Protocol LNG Liquefied natural gas LULUCF Land use, land use change and forestry MARD Ministry of Agriculture and Rural Development MEA Multilateral Environmental Agreement MES Markets for environmental services MFN Most-favoured nation mill. Million MIT Massachusetts Institute of Technology Mt Million tons NAFTA North American Free Trade Agreement NCC Nature Conservancy of Canada NGO Non-governmental organisation NORAD Norwegian Aid Department NPC National Power Company NPS National Park Service NPV Financial and economic analysis NSW New South Wales
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