A Financial and Economic Assessment of the Conservation of Northwestern Madagascar Mangroves

by Fall 08

Emily Witt

Dr. Jeffrey Vincent, Adviser

May, 2016

Masters project submitted in partial fulfillment of the

requirements for the Master of Environmental Management degree in

the Nicholas School of the Environment of

Duke University

Executive Summary

Programs such as REDD (reducing emissions from deforestation and forest degradation) that provide financial incentives to maintain natural carbon stocks are being implemented worldwide to address climate change and the conservation of threatened ecosystems. In developing countries, where the relative cost of conservation is high, these programs are especially attractive to promote sustainable resource use and prevent conversion of valuable ecosystems to other land uses. To incorporate REDD effectively in these areas, the financial costs and benefits resulting from the project implementation needs to be accessed. Quantification of income received from ecosystem services under baseline and project scenarios needs to be estimated, along with other costs of conservation management in order for a comprehensive comparison to be done. Ensuring that the project not only generates additional value, but also promotes the livelihoods of communities that rely on these ecosystems is key to the long-term sustainability of conservation efforts. This report serves as a cost-benefit analysis case study in Ambro-Ambanja Bay, Madagascar. This financial analysis looks at Blue Ventures’ proposed conservation of mangrove forests in Northwestern Madagascar using a REDD project. Project cash flows center around net income derived from certain ecosystem services, carbon income generated from REDD and project implementation and transaction costs. One limitation of this analysis is the exclusion of several partial, indirect and non-use ecosystem services provided by the Ambro-Ambanja Bay mangrove forest. To address this, a total economic valuation framework of all ecosystem services provided by Ambro-Ambanja Bay mangroves was created to provide additional insight into the entire estimated value of healthy mangrove forests. The first chapter of this report provides a background on mangrove ecosystems, the state of Ambaro-Ambanja Bay mangroves, and the general objectives of the proposed project. The second chapter provides an overview of methods used to estimate deforestation, methods used to derive the net income generated from various ecosystem services, and estimates of the costs associated with the project. The chapter details how these costs and

2 benefits were derived under the baseline and project scenarios to provide insight on the impacts the two scenarios have on the estimated financial cash flows. The third chapter consists of a financial analysis of the project from the perspective of each of the major stakeholders. The financial assumptions are stated along with an overview of the government, project developer and community perspectives. Costs and benefits for each perspective were summarized in the form of net present values (NPV), which were calculated under various scenarios. It was found that the project was profitable for the government and community perspectives, and breakeven for the project developer, when carbon income was included. Major differences in NPVs between the assorted scenarios were analyzed and the sensitivities of those NPVs to changes in the stated assumptions were also tested. The fourth chapter details a proposed framework for valuing the additional ecosystem services that were not valued in the initial cost benefit analysis. An overview of those ecosystem services along with the various methods chosen to value each service is discussed. Benefit transfer was the main method employed to value the partial, indirect and non-use services. The section then details what literature estimates, data and calculations were used or are needed to derive the annual per hectare value provided by each service from healthy Ambaro-Ambanja Bay mangroves. The fifth chapter identifies the aspects of the project that might introduce risk to the long-term sustainability of the project. These risks include delayed benefits from the community perspective due to a 14 year project payback period, heavy reliance on carbon credit income for project profitability from the community perspective, and reliance on donor funding to break even from the project developer perspective. Proposed management considerations to mitigate these risks include project refinancing, potential development of an additional project income generating activity, and diversification of donor funding sources.

This report makes several key points and recommendations:

• Analyzing project profitability from the perspective of all major stakeholders is important in identifying where potential risks lie and who will be bearing those risks.

3 • Although measures of net present value provide a simplified summary of the total discounted value received, it is critical to look deeper into the characteristics of the distribution of costs and benefits over time and the impacts it might have on stakeholders, especially those that are risk-averse.

• Assumptions based on extremely volatile and new markets, such as the Voluntary Carbon Market, need to be made with caution and tested for project sensitivity.

• Estimation and assessment of the total economic value (TEV) of all of the ecosystem services is needed to determine the true value of healthy mangroves in Ambaro- Ambanja Bay. The indirect value of these services and the impact of deforestation on that value need to be considered by the stakeholders.

4 Acknowledgements

I would like to thank Blue Ventures for guidance and supervision, as well as providing extensive background knowledge to the project. Specifically, Aude Caro and Leah Glass for being my Madagascar-based advisors. I would also like to thank Jeff Vincent for being a supportive project advisor, always giving insightful feedback and a good perspective.

5

Table of Contents Executive Summary ...... 2 Acknowledgements ...... 5 List of Acronyms ...... 8 Chapter 1: Introduction ...... 9 1.1 Background ...... 9 1.2 The Mangroves of Ambaro-Ambanja Bay, Madagascar ...... 10 The Current State of Ambaro-Ambanja Mangroves ...... 10 Project Proposal ...... 10 Project Location ...... 10 Blue Ventures ...... 11 1.3 Project Evaluation ...... 11 Problem Statement ...... 13 Objective ...... 13 Chapter 2: Methodology ...... 14 2.1 Overview ...... 14 2.2 Measuring Deforestation ...... 14 VCS: Verified Carbon Standard ...... 14 VM0009 Methodology for Avoided Deforestation ...... 14 Baseline Deforestation ...... 15 Project Conservation ...... 17 2.3 Income Generating Activity Valuation ...... 17 Activities Valued ...... 17 Carbon Credits ...... 18 Beekeeping ...... 20 Mud-Crab Fishing ...... 20 Timber Harvesting ...... 21 Charcoal Production ...... 21 2.4 Project Costs ...... 22 Implementation and Transaction Costs ...... 23 Chapter 3: Financial Analysis ...... 25 3.1 Assumptions ...... 25 3.2 Overview ...... 25 3.3 Government Perspective ...... 26 Baseline Scenario ...... 26 REDD project: No Carbon Income ...... 26 REDD project: Carbon Income ...... 26 Incremental Cash Flows ...... 27 3.4 Project Developer Perspective ...... 27 Baseline Scenario ...... 27 REDD project: No Donor Funding ...... 28

6 REDD project: Donor Funding ...... 28 3.5 Community Perspective ...... 29 Baseline Scenario ...... 29 REDD project: No Carbon Income ...... 30 REDD project: Carbon Income ...... 30 Incremental Cash Flows ...... 30 Opportunity Cost Analysis ...... 33 3.6 Sensitivities ...... 35 Government ...... 35 Project Developer: With Donor Funding ...... 35 Project Developer: Without Donor Funding ...... 36 Communities ...... 36 Chapter 4: Ecosystem Services Co-Benefits ...... 39 4.1 Valuation Methods ...... 39 4.2 Overview ...... 40 4.3 Shoreline Protection ...... 41 AAB Average House Price ...... 41 Replacement Cost Value of AAB Mangrove Shoreline Protection ...... 42 4.4 Offshore Fisheries ...... 43 AAB Offshore Fishing Capture ...... 44 Offshore Fishing Revenues ...... 45 Production Costs ...... 46 AAB Offshore Fishery Value of Mangroves ...... 47 4.5 Biodiversity ...... 47 4.6 Existence Value ...... 48 Chapter 5: Risk Management ...... 50 5.1 Major Risks ...... 50 5.2 Project Re-financing ...... 50 5.3 Additional Project Income Generating Activities ...... 51 5.4 Diversification of Donor Funding Sources ...... 52 5.6 Conclusions ...... 52 Appendices ...... 56 Appendix 1. Beekeeping Profit Calculation ...... 56 Appendix 2. Mud Crab Fishing Profit Calculation ...... 57 Appendix 4. Charcoal Profit Calculation ...... 59

7 List of Acronyms

AAB Ambaro-Ambanja Bay CGAR Compound Annual Growth Rate FAO Food and Agriculture Organization GNI Gross National Income NGO Non-Governmental Organization NPV Net Present Value PPP Purchasing Power Parity REDD Reducing Emissions from Deforestation and Forest Degradation tCO2e Tons of Carbon Dioxide Equivalent VCS Verified Carbon Standard VCU Verified Carbon Unit WTA Willingness to Accept WTP Willingness to Pay

8 Chapter 1: Introduction

1.1 Background One of the most productive and diverse ecosystems in the world are mangrove forests. These forests are characterized by salt tolerant trees and shrubbery and located in the intertidal zones of tropical and sub-tropical regions of the world (FAO, 2007). Mangroves are well known for their unique adaptions to these harsh environments comprised of high saline concentrations and extended periods of inundation. These adaptions come in the form of exposed roots for aeration, salt excreting leaves to maintain salt balance and using viviparous water-dispersed propagules for reproduction (Hill, 2009). These adaptations contribute to why mangrove forests are a main source of primary production, shoreline stabilization, habitat and biodiversity, among several other ecosystem services, for coastal areas. The ecosystem services provided by coastal mangroves support the economic livelihood of many coastal communities and nations. But, in many of these areas, mangroves are threatened by anthropogenic-driven deforestation and degradation. Increasing human population has led to the unsustainable extraction of natural resources from these delicate ecosystems at an alarming rate. Recognizing the vital role that mangroves play in the livelihood of surrounding communities, many nations have begun mangrove conservation and rehabilitation projects. Unfortunately, many developing countries that contain mangrove ecosystems do not have the economic stability to support long-term conservation projects. For this reason the United Nations Framework Convention for Climate Change developed the reduction of emissions from deforestation and degradation program, also referred to as REDD. Fueled by the active push by nations to reduce worldwide carbon emissions in order to combat global climate change, REDD aims to monetize the carbon stored in forests in the form of ‘carbon credits’ and use those as financial incentives to promote the conservation of carbon sequestering ecosystems (UN-REDD Programme, 2009).

9 1.2 The Mangroves of Ambaro-Ambanja Bay, Madagascar

The Current State of Ambaro-Ambanja Mangroves Given an estimated 15.2 million hectares of mangrove forest worldwide, Madagascar has approximately 2% of the global area and the 3rd largest area in Africa. But, over the last 25 years more than 20% of that area has been heavily degraded or deforested (FAO, 2007). Madagascar’s second largest mangrove ecosystem resides in the northwestern Ambaro- Ambanja Bays (AAB) (Jones, 2013). Driven primarily by increased and unsustainable charcoal production and selective timber harvesting, AAB is losing approximately 1.8% of mangrove area per year. Continued loss poses considerable challenges to the many coastal communities that rely on the ecosystem services provided by healthy, intact mangrove forests. Without any intervention, the mangroves of AAB will be deforested to 50% of their current area within 30 years. A REDD project has been proposed by a nonprofit organization, Blue Ventures, to conserve the mangroves of AAB and support the livelihoods of the surrounding communities.

Project Proposal The proposed REDD project aims to reduce greenhouse gas emissions from mangrove deforestation in AAB, while contributing to alleviating coastal poverty and conserving mangrove biodiversity. To do so, the project will tackle current deforestation drivers, create sustainable livelihoods for local communities, develop their management capacity and ensure they hold legal user rights. An integrated forestry and fishery management approach will be used to ensure the maintenance of economically important fisheries as well as of other goods (timber, fuel wood, medicine) and services (protection against storm, coastline stabilization) critical to local communities. Together with its climate change benefit, the conservation and sustainable use of mangroves will allow for the conservation of the rare and endangered biodiversity it hosts.

Project Location The project area includes the southern part of the AAB mangrove complex on the Northwestern coast of Madagascar (Map 1). This area lies within the Diana region of the

10 Antsiranana Province, with the project area concerning a total of 11,593 hectares of land. The estimated total population of the project area is 33,147 making up an estimated 7,177 households.

Map 1. Mangroves of Ambanja-Ambaro Bay Madagascar (Blue Ventures, 2014)

Blue Ventures Blue Ventures, the project developer for the AAB mangroves, is a non-profit organization that promotes coastal conservation in developing nations with an emphasis on sustaining local livelihoods through community-based management. Using ecotourism, Blue Ventures educates, conserves and promotes environmental and economic sustainability for these communities. Placing a high value on integrating the local communities into conservation activities and management allows for greater success in the longevity of those sustainable practices.

1.3 Project Evaluation It is extremely important that REDD programs are analyzed not only from an ecological standpoint for the feasibility of individual projects, but also from a financial standpoint. In order for these projects to be successful and economically sustainable, there must be an expectation of reasonable returns for the given risk of a project in order to go forward with investment.

11 REDD projects are targeted at communities within developing countries that do not have the economic stability to support long-term conservation projects. These projects are financed by multilateral institutions, such as the World Bank, developed donor countries, such as Norway, and private foundations, such as the Moore Foundation (Forest-Trends, 2013). Some of the largest carbon stocks in the world are found in coastal mangrove ecosystems, such as the ones in the Ambaro-Ambanja Bays of Northwestern Madagascar, making it a desirable area for a carbon project such as REDD+. Mangrove ecosystems account for approximately 13.5 Gt year -1 , or 1% of the global forest carbon and 14% of the carbon sequestered by coastal ecosystems (Alongi, 2012). But, mangrove ecosystems also provide several other valuable ecosystem services to the surrounding communities. In the mangroves of AAB these services include: o charcoal production o apiculture (bee keeping) o timber harvesting o mud crab fishing o offshore fishing o carbon sequestration o shoreline protection o biodiversity o existence/ bequest values

With the implementation of a conservation project, there will be costs incurred by communities dependent on certain activities that require the unsustainable extraction of natural resources or cause degradation or deforestation. To accurately account for the potential economic costs or benefits of a REDD project to communities, it is important to account for all of those services that might be affected. There are several ways to quantify and value the benefits provided by these mangrove ecosystems. Over the years, several studies have attempted to value these non-market goods through the use of methods such as travel cost models, hedonic pricing, contingent valuation,

12 avoided cost, market pricing, replacement cost and the production function approach (Vo, 2012). These methods have the ability to capture the value of certain use and non-use ecosystem service values, but there is no one method that captures the total value. It is therefore necessary to employ several methods for the quantification of these resources.

Problem Statement With the proposed implementation of a REDD project in the mangrove ecosystems of Northwestern Madagascar, there is a need to determine how to value the ecosystem services provided by the mangroves to the local communities in this specific area. In addition to this valuation, financial analysis of the project needs to be conducted to determine the feasibility and possible risks associated with the project. It is important to pinpoint any sensitivities to the project beforehand so that mitigation strategies can be put in place to help sustain the project over at least a 30 year period.

Objective This study seeks to assess financial sustainability and value the additional ecosystem services associated with implementation of a REDD project in the mangrove ecosystem complex of AAB in Northwestern Madagascar. The primary goal of this research is to provide a framework to determine the total economic value of ecosystem services provided by the AAB mangroves, further assess the financial sustainability of this particular REDD project, and provide recommendations to project leaders to mitigate potential risks and sustain economic benefit.

13 Chapter 2: Methodology

2.1 Overview This chapter will describe the methods for determining the rate of deforestation, the estimation of carbon credits, the valuation of income generating activities for the project and the costs associated with the Ambaro-Ambanja Bay REDD project.

2.2 Measuring Deforestation

VCS: Verified Carbon Standard The project developers have employed the Verified Carbon Standard (VCS) to implement this project and generate verified carbon units (VCUs) to sell in the voluntary carbon market. VCS standards use pre-defined criteria to streamline the process of establishing baselines and positive lists for classes of activities done (VCS, 2013).

VM0009 Methodology for Avoided Deforestation There are many different methodologies for accounting and monitoring various VCS projects, but the VM0009 methodology for avoided mosaic deforestation of tropical forests was chosen for this particular project. This methodology was developed by Wildlife Works and employs a deforestation model that incorporates historic trends in deforestation within the reference region. This key factor allows this methodology to be employed in areas that have variable cloud cover that may skew or hinder spatial analysis ("Project Developer’s Guidebook to VCS REDD Methodologies", 2013). Table 1 shows the carbon pools and sources of GHG emissions that are included, excluded or optional within this methodology.

14 Table 1. VCS VM0009 Methodology GHG emissions/Carbon Pool Sources (adopted from "Project Developer’s Guidebook to VCS REDD Methodologies", 2013) Carbon Pool or GHG Emission Source Included or Excluded in VM0009 Methodology? Aboveground tree biomass Included Aboveground non-tree woody biomass Optional Belowground biomass Optional Litter Excluded Dead wood (standing & lying) Optional Soil Optional Wood Products Included CO2 Excluded CH4 Excluded N20 Excluded

Baseline Deforestation Map 1 illustrates the historical gain, loss and persistence of AAB mangroves over 20 years from 1990 to 2010. Overall, during that specified time period there was a net loss of 23.7% of the ~26,000 ha mangrove forest. For this project, the specified area represents the southern 11,593 ha of AAB mangrove forest. The projected deforestation was calculated using spatial analysis of the Ambanja district mangrove forests from 2006 to 2014 (Jones, 2014). Based on the annual deforestation rates observed over the specified time range, an average deforestation rate of 1.86% was calculated. This rate was then used to project future landscape changes assuming the 1.86% rate is constant annually. Figure 1 shows the estimated decrease in mangrove forest area over a 30-year period.

15

Map 2. Historical mangrove dynamics from 1990–2000 and 2000–2010 illustrating mangrove gain, loss and persistence (USGS Map from Jones, 2014)

16 Baseline: Projected AAB Mangrove Deforestation

12000 10000 8000 6000 4000 2000 0 Remaining Mangroves (ha)

Year

Figure 1. Baseline estimated 30-year deforestation

Project Conservation With the proposed project, the implementation of restricted use for conservation is estimated to reduce the current deforestation rate to zero in five years. Based on the avoided deforestation of 4587 ha of mangroves from the baseline predictions, there will be an estimated reduction of 1,060,033 tCO2e (tons of carbon dioxide equivalent) emissions over the 30-year project-crediting period. With the implementation of this project, these tCO2e will be able to be certified as carbon credits under the Verified Carbon Standard, and then sold on the voluntary carbon market.

2.3 Income Generating Activity Valuation

Activities Valued For the financial analysis of the baseline and project scenarios, there are five different income-generating activities valued as benefits to the baseline scenario or to potential REDD project. These activities include carbon credit generation, beekeeping, mud-crab fishing, sustainable timber harvesting, and charcoal production. Table 2 lists the income-generating

17 activities identified and their association with the baseline scenario, REDD project scenario or both scenarios.

Table 2. Income-Generating Activities Income-Generating Activity REDD Project Activity, Baseline Activity, or Both Carbon Credits REDD Beekeeping REDD Mud-crab fishing Both Sustainable Timber Both Harvesting Charcoal Production Baseline

Carbon Credits Under the VCS methodology, potential carbon credits for the avoided emissions that would result from the deforestation of AAB mangroves was determined to total 1,060,033 tCO2e over the 30 year project. The net factor income approach was used to determine the value of these credits. Carbon prices and premiums were set using global trends taken from the annual “2015 State of Voluntary Carbon Markets”, shown in Table 3. A carbon price growth rate of 1% was also assumed and adopted from a previously successful VCS REDD+ project in eastern Madagascar (Makira, 2012). Market absorption, the expected rate of credits sales during the available time period, is assumed to be 25% based on past projects and the state of the current buyer-favoring voluntary carbon market (MAKIRA) (“2015 State of Voluntary Carbon Markets”). Costs of certification and marketing carbon credits include a newly increased registration fee of $0.10 per credit, previously $0.04 per credit before July 2015, from the Verified Carbon Standard and a brokerage fee of 7.5% of sales was assumed (Makira, 2012).

18 Table 3. Carbon Price Assumptions Carbon Markets Price per tCO2e USD $5.9 REDD+ price premium USD $1.5 Market Absorption Rate % 25% Carbon Price Growth Rate % 1% Registration Fee USD/Credit $0.10 Brokerage Fee % of Sales 7.5%

The generated credits are planned to be sold every five years starting in year 10 of the REDD project, with two upfront sales occurring in years 13 and 14, and additional bulk sales occurring in years 23, 24, and 28. In addition, an added carbon credit sales sharing component was added to the project cash flow distributions. The government has undisputed ownership rights to the forestland where the project will take place, and where there is currently exploitation. Therefore, the Malagasy government is the sole and exclusive owner of any carbon credits generated from the REDD project. In order to support the project financing and the livelihoods of communities impacted by the project, the government agreed to a carbon credit-sharing scheme modeled after the Makira project. The Table 4 shows that the carbon credit income will be distributed between the local communities of AAB, the national government, and the project developer in a ratio of 50/20/30 respectively and Figure 2 shows the distribution of the yearly income generated over the 30-year project.

2,000 Carbon Income Distribution Developer 1,600 Government 1,200 Community 800 (Thousands of USD)

Carbon Credit Income 400

- 1 6 11 16 21 26 Project Year

Figure 2. Carbon Credit Income Distribution

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Table 4. Carbon Credit-Sharing Scheme Carbon Credit-Sharing % to Communities % 50% % to Government % 20% % to Project Developers % 30%

Beekeeping Beekeeping, or apiculture, is a traditional Malagasy activity that can be implemented without causing any destruction or degradation to the mangrove forests of AAB. The value of this activity has estimated using the net factor income approach. Using local market prices for honey and expert knowledge on the costs of production from Blue Ventures’ pilot sites implemented in the Ambanja district in 2009 and from the FITAME Malagasy farmer association for Apiary (a.k.a beekeeping) development, yearly profit from beekeeping was estimated (Razafiarison, 2009). Appendix 1 shows a detailed input of those costs and revenues from production. The production calculations are based off of a set 150 producers over the 30 year project, but for consistency the yearly profit was divided by the total project area to determine a profit of $0.88/ha/yr. This is the only land based activity that is only associated with the project, as it will not be implemented as a baseline activity.

Mud-Crab Fishing Mud-crab fishing is a traditional fishing method used in this area of Madagascar. These mud-crabs are fished in the shallow waters of the mangrove forest and are carried out without destruction or degradation of the land. This activity was estimated using the net factor income approach. Using data from a socioeconomic survey complete in the AAB area in 2013 by Blue Ventures, along with a study on mud crab fishing practices in the Southeastern Mandabe region carried out by the World Wildlife Fund in 2013, costs and revenues from production were calculated. Appendix 2 shows a detailed input of those costs and revenues. A yearly profit was calculated and divided by the total project area to determine a $5.75/ha/yr profit. It was assumed that the entire project area standing mangroves contribute to maintaining mud crab populations for fishing,

20 Timber Harvesting Under the implementation of the project, sustainable mangrove timber harvesting will be allowed in the project area. It is important that not all resource extraction is prohibited to the communities, and this project aims to ensure that basic needs of the communities are met. Many households of the AAB communities rely on timber to maintain structures and fencing. The net factor income approach was used to estimate the value of this activity. Using data from socio-economic surveys implemented by Blue Ventures in 2013, along with data on consumption rates from a study conducted in the Mandabe region, revenues and costs were calculated (Renoux, 2011). Appendix 3 shows a detailed input of those costs and revenues. A profit of $0.50/ha/year was determined. This value was multiplied by the area of remaining forest each year under the baseline and project scenarios to determine the estimated yearly income. This assumes that the harvesting is equally distributed across the project area.

Charcoal Production Charcoal production is the current income-generating driver of deforestation in the project area. With increasing populations and unsustainable extraction practices, this activity will be one of the main causes of deforestation of AAB mangroves. The value of this activity was estimated using the net factor income approach to derive the nominal annual per hectare profits from charcoal production. Using data collected by Blue Ventures from their annual “Evaluation of traditional charcoal production technique performance in AAB” reports from 2013 to 2015, along with their 2014 “AAB Tier2 carbon stock inventory from 2012-2013” the traditional charcoal production revenues and costs for an average producer in AAB were used in the valuation of this activity. A value of $150/ha/yr for charcoal production was calculated for the AAB mangrove area. Appendix 4 shows an excerpt of input calculations. For the financial analysis, the estimated hectares of deforested area for each year in the baseline scenario was multiplied by this nominal $150/ha/yr to determine the income generated each year over the 30-year project.

21 2.4 Project Costs The Forest Carbon Partnership created a tool to analyze the true economic costs and/or benefits of REDD projects. In general there are three main types of costs associated with REDD projects. Costs Of REDD

Implementation Costs

Transaction Costs

Opportunity Costs

What are the costs of REDD? ("Estimating the Opportunity Costs of REDD: A Training Manual", 2011)

1. Implementation costs: These are the costs associated with efforts to reduce forest deforestation and degradation through the implementation of a REDD+ program. These may include: a. Improved forest and land management b. Administrative costs c. New job training costs d. Governance reform e. Land use planning 2. Transaction Costs: These are the costs associated with the establishment and operation of a REDD program. These may include: a. Certification costs (measuring, verification, and monitoring) b. REDD program development costs c. Brokerage fees

22 3. Opportunity Costs: These are the foregone benefits that would have accrued to local communities and the national economy if the project had not been implemented.

As is emphasized by the framework’s name, the Forest Carbon Partnership identifies opportunity costs as the most important of the three to estimate and model ("Estimating the Opportunity Costs of REDD: A Training Manual", 2011).

• Many believe that opportunity costs make up the largest portion of the overall REDD costs. • Opportunity cost estimation provides valuable insight on the drivers and causes of deforestation. • Opportunity cost estimation can help pinpoint the potential impacts of REDD programs on various stakeholders. • Equitable compensation can be determined for those who change their land use practices due to the implementation of REDD using opportunity cost estimation.

Implementation and Transaction Costs Two major costs of the REDD project come in the form of implementation and transaction costs. These costs were determined by Blue Ventures based on their knowledge of conservation costs and costs of monitoring the project under the VCS requirements. Figure 3 shows the breakdown of the costs incurred each year over the project analysis time period.

23 3500 Project Implementation and Transaction Costs 3000

2500 Implementa tion Costs 2000 Transaction 1500 Cost 1000 Thousands of USD 500

0 1 6 11 16 21 26 Project Year

Figure 3. Project Implementation and Transaction Costs

24 Chapter 3: Financial Analysis

3.1 Assumptions As with other financial analyses of potential projects, several assumptions have been made. This project is being analyzed over a 30-year time period, from 2015 to 2044. For the government and community perspectives, a discount rate of 12.5% was used based on the current bank deposit interest rate in Madagascar. This rate reflects the rate of return received if this money were to be deposited in the bank rather than invested in this project (World Bank, 2016). For the project developer, a discount rate of 3% was chosen based on the suggested rate to use for issues regarding climate change and the environment from Nordhaus’ critique of “The Stern Review on the Economics of Climate Change”. This rate reflects the developer’s value of the environment and long-term costs of environmental degradation. For consistent reporting, prices were converted to USD from the Ariary (Ar), the national currency of Madagascar (Oanda, 2016) (Table 5).

Table 5. Basic Financial Assumptions Assumptions Discount Rate [Communities & % 12.5% Government] Discount Rate [Project Developer] % 3% Exchange Rate Ariary (Ar) per USD 2,677

3.2 Overview This financial analysis of the value of implementing a REDD project in the AAB mangrove forest aims to assess the project from three major stakeholder perspectives: the government, the project developer, and the local communities. This analysis will first compare the baseline, “business-as-usual”, scenario to the project scenario ignoring income generated from carbon credits for the government and community perspectives and donor funding for the project developer perspective. Then the analysis will consider the scenario comparison with carbon credit income and donor funding to determine project viability reliance on these cash inflows.

25 3.3 Government Perspective The government financial perspective represents the cash flows received and cash outflows paid by the government under the baseline and project scenarios. The cash inflows received by the government are tax revenue and carbon credit income, but this perspective does not include any outflows. There is incomplete information on the costs incurred by the government in the management of income generated from the carbon credits and administrative costs of disbursing that income, but for the sake of including all financial stakeholders, the government perspective was still included for this analysis.

Baseline Scenario The baseline scenario from the government perspective represents a ‘business as usual’ with regard to their current benefit received from taxes generated from certain community activities. In this scenario the only cash inflows are from taxes on charcoal production and there are no cash outflows. The profits from these activities were calculated and extrapolated over the 30-year period by multiplying the area of expected deforestation by the charcoal profits received per hectare of that loss. As seen in table 6, this scenario has an overall NPV of $1,323.

REDD project: No Carbon Income This first project scenario from the government perspective represents cash flows from taxes on project activities but excludes income from carbon credits. In this scenario the only cash inflows are taxes generated from sustainable timber harvesting and there are no cash out flows. Table 6 shows that this scenario has a NPV of $86,068.

REDD project: Carbon Income This second project scenario from the government perspective represents cash flows from project activities and income from carbon credits. In this scenario the main cash inflows are the same as in the previous scenario with the addition of the government’s 20% share of the project carbon revenue. Under this scenario cash outflows include registration and brokerage fees from the sale of the carbon credits. Table 6 shows that this scenario has a NPV of $150,282. In this scenario profits from the carbon credits more than triples the NPV of the previous scenario.

26 Incremental Cash Flows As was done from the community perspective, incremental cash flows were created to compare the project scenarios to the basement. Table 6 shows that the incremental cash flow comparing the baseline to the project without carbon income has a NPV of $84,745 and then when carbon is included the NPV increases to $148,959. These positive values indicate that the project adds value from the government perspective whether or not the project carbon income is considered.

Table 6. Government Financial Perspective

Government Perspective Scenario NPV Baseline $1,323 Project: No Carbon $86,068 Project: Carbon $150,282 Incremental: Project vs No Project [No Carbon] $84,745 Incremental: Project vs No Project [Carbon] $148,959

3.4 Project Developer Perspective The project developer, Blue Ventures, represents the cost bearing perspective that supports the implementation and certification of the project. Covering all of the fees associated with certifying the project under the VCS standards, there is donor funding needed to aid the financing of those costs because carbon credit income is not able to cover those costs. This perspective will consider the project scenarios with and without the donor funding rather than carbon credit income because donor funding is main revenue source from this perspective.

Baseline Scenario The baseline scenario from the project developer’s perspective represents the rejection of this project. In this scenario there are no cash in or outflows to be analyzed. As seen in table 6, this scenario has an overall NPV of $0.

27 REDD project: No Donor Funding This first project scenario from the project developer perspective represents cash in flows from carbon credits and outflows from project implementation costs as well as registration and brokerage fees from the sale of the carbon credits. Table 6 shows that this scenario has a NPV of $(17,418,389). The project developer is bearing a majority of the direct implementation costs associated with the project. These costs can be seen represented by Figure 11.

REDD project: Donor Funding This second project scenario from the project developer perspective represents the same cash flows from the previous scenario, but also including $21 million of donor funding. Table 6 shows that this scenario has a NPV of $13,150. Although the donor funding allows the project to reach a positive NPV, it can be noted that it takes significant funds for it to reach a positive NPV, and it is still relatively low. A comparison of the project developer perspective project inflows can be seen in figure 4.

Table 6. Project Developer Financial Perspective

Developer Perspective Scenario NPV Baseline $0 Project: No Donor Funding $(17,418,389) Project: Donor Funding $13,150

28 Undiscounted Project Developer Cash Inflows

$25,000 $21,246

$20,000

$15,000

$10,000 Thousands of USD)

$5,000 $2,020

$0 Carbon Credit Donor Funding

Figure 4. Project Developer Cash Inflows

3.5 Community Perspective This perspective represents the collective communities directly impacted by the change in income generating activities resulting from deforestation or the addition of the REDD project. Cash flows were created under various scenarios and analyzed from the community perspective using the above assumptions. Those scenarios include the baseline scenario, project without carbon revenue, project with carbon revenue, and incremental cash flows comparing the baseline scenario with both project scenarios.

Baseline Scenario The baseline scenario from the community perspective represents ‘business as usual’ with regard to their current and future resource extraction. This is also known as the deforestation scenario. In this scenario the main cash inflows are profits from charcoal production, timber extraction and crab fishing, and there are no cash outflows. The profits from these activities were calculated and extrapolated over the 30-year period, accounting for expected deforestation. As seen in table 7, this scenario has an overall NPV of $700,904. Undiscounted cash flows from each activity can be seen in figure 7. Charcoal production is

29 shown as the baseline activity contributing the most to the overall baseline undiscounted income, followed by crab fishing and then timber harvesting. It can be seen in this graph that the net income generated from deforestation is steadily declining over the 30-years.

REDD project: No Carbon Income This first project scenario from the community perspective represents cash flows from project activities but excludes income from carbon credits. In this scenario the main cash inflows are profits from bee keeping, crab fishing and sustainable timber harvesting. Under the project conservation conditions, charcoal production from timber in this area will be prohibited. Under this scenario there are no cash out flows from the community perspective. Table 7 shows that this scenario has a NPV of $646,765. Discounted cash flows from each activity can be seen on figure 8. In this scenario profits from the crab fishery contributes the most the undiscounted income, followed by beekeeping and timber harvesting.

REDD project: Carbon Income This second project scenario from the community perspective represents cash flows from project activities and income from carbon credits. In this scenario the main cash inflows are the same as in the previous scenario with the addition of carbon revenue. Under this scenario cash outflows include registration and brokerage fees from the sale of the carbon credits. Table 7 shows that this scenario has a NPV of $932,482. Undiscounted cash flows from each activity, unchanged from the previous scenario other than the addition of the carbon credit income flows, can be seen on figure 9. In this scenario profits from the carbon credits contributes overwhelmingly to undiscounted income after year 15 of the project, but since this is further in the future, discounting lessens the impact of carbon credit income on the overall NPV.

Incremental Cash Flows In order to examine the value added, or lost, with the addition of either project scenarios to the baseline scenario, an incremental cash flow was created. Subtracting baseline revenues and costs from those of each project scenario did this, and then the NPV of that added, or lost, profit was calculated to represent the true benefit gained from the project.

30 Table 7 shows that the incremental cash flow comparing the baseline to the project without carbon income has a NPV of $ (54,138). This negative value indicates that the value generated by the project activities is less than those of the baseline activities, and therefore an opportunity cost to communities. When carbon is added into the incremental analysis the NPV increases to $ 231,578. This positive value indicates that the project with carbon revenue generates value above the baseline for the communities. It should be noted though, that there is still a 14 year payback period in the incremental analysis of the No Project vs. Project –Carbon scenario. Figure 10 displays this graphically, showing that the communities will bear the opportunity cost of reduced income due to the scheduling of the carbon credit sales. They will not see the added financial benefits from the project for 14 years.

Table 7. Community Financial Perspective Community Perspective Scenario NPV Baseline $700,904 Project No Carbon $646,765 Carbon $932,482 Incremental [Project vs No Project] No Carbon $(54,138) Carbon $231,578

31 100 Baseline: Net Income 80 Crab Fishery

60

Timber 40 Harvesng

Thousands of USD$ 20 Charcoal 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Project Year Figure 7. Community Undiscounted Baseline Net Income

100 Project: Net Income - No Carbon 80 Beekeeping

60

40 Crab Fishery

Thousands of USD$ 20

Timber 0 Harvesng 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Project Year Figure 8. Community Undiscounted Net Income: Project No Carbon

1000 Project: Net Income - Carbon Carbon 800

600 Beekeeping

400 Crab Fishery

Thousands of USD$ 200

Timber 0 Harvesng 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Project Year Figure 9. Community Undiscounted Net Income: Project with Carbon

32 3,500 Incremental Project Payback Period 3,000

2,500

2,000

1,500

1,000

Thousands of USD $ 500

0 1 6 11 16 21 26 -500 Project Year

Figure 10. Undiscounted Incremental Payback: Project with Carbon

Opportunity Cost Analysis As stated earlier, the foregone benefits that would have accrued to local communities if the project had not been implemented represent the opportunity costs. For the purpose of this analysis, this cost comes in the form of the forgone benefit of seemingly unlimited wood extraction for charcoal production in order to implement this REDD conservation project. The present value of the opportunity cost of conserving one hectare of mangrove over the course of 30 years, expressed in USD/ha, is presented in Figure 11 with and without carbon revenues. A positive opportunity cost expresses a net economic loss, while a negative opportunity cost shows a net economic benefit. This shows that when carbon income is not considered, there is a loss of $4.67/ha of mangroves conserved in the project. But, when carbon income is considered, there is a benefit of 19.98/ha of mangroves conserved in the project. These values are also expressed in discounted USD/tCO2 equivalent reduced or sequestered and presented on an opportunity cost graph in Figure 12. On the horizontal axis, the potential annual emission reduction of a given land use change (in our case conserving standing mangrove instead of converting them into deforested mangrove), on the vertical axis the costs per tCO2eq reduced or sequestered, with and without carbon income. When carbon credit income is not considered, communities incur an opportunity cost of 0.02 USD/tCO2e

33 with conservation. When carbon credits are included, then communities incur an opportunity cost of -0.08USD/tCO2e, or a benefit of 0.08 USD/tCO2e with conservation.

Opportunity Cost of Conserving AAB Mangroves: Per Hectare

$10.00 $4.67 $5.00

$0.00 Project vs. Baseline without carbon Project vs. Baseline with carbon revenue -$5.00 revenue -$10.00

USD per Hectare -$15.00

-$20.00 $(19.98) -$25.00

Figure 11. Cost of conserving one hectare of mangrove forest over the project duration

Opportunity Cost of Conserving AAB Mangroves: Per tCO2e

0.04 0.02 0.02

- Project vs. Baseline without carbon Project vs. Baseline with carbon revenue (0.02) revenue (0.04)

(0.06)

(0.08) (0.08) (0.10)

USD per Ton of CO2 equivalent (tCO2e) Figure 12. Opportunity cost of conserving one ton of CO2e over the project duration

34 3.6 Sensitivities Project sensitivities from the government, project developer and community perspective were tested on the project net present value scenarios that included carbon. Variables tested included carbon price growth rate, carbon credit market absorption rate, Ariary to U.S dollar exchange rate, discount rate, and carbon credit price including and excluding REDD price premiums. These variables were tested at values 50% lower and 50% higher than the assumed values used in the above analysis. Table 8 shows the variable value ranges tested.

Table 8. Sensitivity Test Variables Discount Carbon Price Rate Discount Carbon Price Exchange Absorption Carbon Price ($USD) [Community Rate ($USD) Rate Rate Growth (No & [Developer] (Premium) (Ar to USD) (%) (%) Premium) Government] (%) (%) 50% higher $8.55 $10.80 19% 4.5% 4737 37.50% 1.50%

Base Value $5.70 $7.20 13% 3% 3158 25.00% 1.00% 50% lower $2.85 $3.60 6% 1.5% 1579 12.50% 0.50%

Government Referring back to Table 5, the government has a NPV of $201,233 in the project with carbon scenario. Figure 13 shows this NPV reaction to changes in the variable assumptions described above. Increases in carbon price growth rate, absorption rate, and carbon price with and without REDD premiums lead to increases in the government’s NPV, while increases in the exchange rate and discount rate leads to a lower NPV. Change in the discount rate has the largest impact on the government NPV, with changes in the carbon price growth rate causing relatively small changes in the NPV.

Project Developer: With Donor Funding With the inclusion of donor funding to aid in the project costs, looking back to Table 6 it shows that the project developer NPV was $2,105. Figure 14 shows this NPV reaction to

35 changes in the variable assumptions. For this NPV scenario exchange rate was not tested since there were no exchange transactions included in this perspective. Increases in every variable tested except for discount rate lead to an increase in the NPV. Carbon prices have the impact affect on the NPV in both directions, while the discount rate has a relatively small impact on the project developer’s NPV.

Project Developer: Without Donor Funding Again, recall from Table 6 that the project developer NPV without donor funding was $(9,939,097), i.e. nearly a $10 million loss in present-value terms. Figure 15 shows this NPV reaction to changes in the variable assumptions graphically. Again, in this scenario exchange rate was not tested since there were no exchange transactions included in this perspective. We can see that changes in the discount rate have a dramatic affect in both directions on the project NPV compared to the other variables tested. We can attribute this to the high burden of implementation costs compared to the small impact of carbon income on the developer’s NPV.

Communities Finally, referring back to Table 6, the communities have a NPV of $888,615 in the project with carbon scenario. Figure 16 shows this NPV reaction to changes in the variable assumptions. Increases in carbon price growth rate, absorption rate, and carbon price with and without REDD premiums lead to increases in the communities’ NPV, while increases in the exchange rate and discount rate leads to a lower NPV. Change in the discount rate and exchange rate has the largest impact on the communities’ NPV, with changes in the carbon price growth rate and absorption rate causing relatively small changes in the NPV.

36

Figure 13. Government Project NPV Sensitivities

Figure 14. Project Developer Project NPV [With Donor Funding] Sensitivities

37

Figure 15. Project Developer Project NPV [No Donor Funding] Sensitivities

Figure 16. Community Project NPV Sensitivities

38 Chapter 4: Ecosystem Services Co-Benefits

4.1 Valuation Methods Beyond the land-based activities estimated and analyzed in the Opportunity cost model, there are still several other ecosystem services provided by mangrove ecosystems that provide value to coastal communities. These services can be more difficult to directly quantify because mangroves only have a partial contribution to the overall value of the direct use service, or because the service is an indirect or non-use value. Economists have developed several approaches to estimating the value of those ecosystem services. Currently, non-use values can be assessed using the Contingent Valuation Method [CVM] or choice experiments. These methods employ the use of surveying sample populations to determine maximum willingness to pay (WTP) or willingness to accept (WTA) for a proposed change in environmental quality. The Travel Cost method [TC] is used to define the recreational value by employing travel costs as implicit prices to assess the recreational demand for that site. Services that can be replaced by a alternative engineered by humans can be valued using the Replacement Cost Method. As used in the opportunity cost model, there is also the net factor income [NFI], which measures the ecosystem service value as the revenue generated less the cost of production inputs. A similar, but generally upward skewed approach, is the production function method, [PF] which values services using their market price values, but does not factor in the incurred production costs (Salem, 2012). All of these methods have been applied to the valuation of a range of ecosystem services in countless studies, but they unfortunately require extensive data, human resources and time. When these are lacking, there is one final valuation method that can be employed: benefit transfer. In general terms, benefit transfer involves using the value estimates of ecosystem services from previous research that employed one of the aforementioned valuation methods and applying it to the desired site. Although we have these value estimates it important to note that the value of mangrove ecosystems varies from site to site. In order to capture the true value of the ecosystem and the services it provides, valuation needs to be site-

39 specific, using the current market prices and preferences of the immediate area of the ecosystem (Vo, 2012). There are different types of benefit transfer methods, including unit value transfer, benefit function transfer, meta-analysis, and preference calibration. For the valuations that utilize benefit transfer in this analysis, the unit value method will be used due to its simplicity and less stringent requirement for calibrating data (Johnston, 2015). Although this leads to the potential for higher errors in the value estimates, studies with similar site characteristics were chosen to reduce the likelihood of significant error. Table 7 shows the ecosystem service values that will be estimated and the methods that will be implemented for each use. The values are estimated from the standpoint of coastal communities, not the project development or the government.

Table 7. Additional Ecosystem Services and Valuation Methods Value Type Use Method Damage Cost Avoided, Direct Use Shoreline Protection Benefit Transfer Production Function, Benefit Offshore Fisheries Indirect Use Transfer Biodiversity Benefit Transfer Non-Use Existence Value Benefit Transfer

4.2 Overview The indirect values of carbon sequestration and biodiversity, along with the non-use value of existence were estimated on a yearly per hectare basis. These estimates will contribute to the total economic valuation of the AAB mangroves along with the land-based direct used activities valued earlier and the proposed framework for valuing the remaining direct use values. Unfortunately, due to time constraints for data collection, values for offshore fisheries and shoreline protection were unable to be completed. Methodologies for valuing of these ecosystem services were created for the client, Blue Ventures, to use to derive the yearly per hectare value contribution when data does become available.

40 4.3 Shoreline Protection Shoreline protection from storm and other extreme weather events is another often underestimated ecosystem service provided my mangroves to coastal communities. Many coastal mangrove communities that witness these extreme events testify that in areas protected by intact mangroves, there is noticeably less damage and flooding (Dahdouh-Guebas, 2005). Past studies have estimated that mangroves provide an average $3,604/ha/yr of protection to coastal communities. The area surrounding AAB is especially susceptible to increasing value of shoreline protection with the rising population in and around the area. The valuation of this indirect service uses the damage-avoided cost and benefit transfer methods to determine the contribution mangroves have to storm protection for local communities. An estimate of 73% mangrove contribution and a yearly 5% chance of an extreme weather event occurring are adopted from the Gazi Bay mangrove valuation in Kenya. The similar site characteristics, including its equal proximity to an active volcano and being an East African coastal mangrove ecosystem, led to the belief that these are acceptable estimates. The rest of the valuation will use a sample of house prices in AAB collected using expert knowledge from Blue Ventures to determine the potential loss that can occur from an extreme weather event when no mangrove protection is provided.

AAB Average House Price First, using data collected locally in the Ambanja district and surrounding communes, an estimate of average housing price will be created. Table 13 shows how a sample of average house prices for various housing types, along with their respective percent compositions will be used to determine a total average house price for the AAB area.

41 Table 13. Average AAB House Price Inputs (adopted from UNEP, 2011) House Type House Price (USD or AAB Housing Contribution to Ar) Composition Total Average House Price Permanent TBD # Permanent Permanent House Houses/ Total # Price * Permanent Households House Composition % Semi-Permanent TBD # Semi-Permanent Semi-Permanent Houses/ Total # House Price * Semi- Households Permanent House Composition % Tempoary TBD # Temporary Temporary House Houses/ Total # Price * Temporary Households House Composition % TOTAL -- 100% SUM ( Above) = Total Average AAB House Price

Replacement Cost Value of AAB Mangrove Shoreline Protection Using the number of households in AAB and average house price, a total value of AAB homes will be calculated using the number of households in AAB. This value will then be multiplied by the extreme weather likelihood and the estimated mangrove contribution to determine a yearly value of AAB shoreline protection. This value is to be further divided by the total area of AAB mangroves to come to a yearly per hectare value of shoreline protection provided by the AAB mangroves (Table 14).

42 Table 14. Value of AAB Shoreline Protection (adopted from UNEP, 2011) Number of Households in AAB 7177 Average House Price (USD) TBD Extreme Weather Event Liklihood (per 5% year) Estimated Mangrove Contribution to 73% Shoreline Protection Mangroves in AAB (ha) 11,593 SHORELINE PROTECTION VALUE (Total Value of AAB Houses * Extreme (USD/ha/yr) Weather Event % * Mangrove Contribution )/ Mangrove Area

4.4 Offshore Fisheries As an island nation, Madagascar has a heavy reliance on fishing for sustenance as well as providing a commercial product. A socio-economic survey of the communes surrounding the project area carried out by Blue Ventures in 2013 revealed that the main economic activity was fisheries, which represented 41% of household revenues. In this case of offshore fishing, mangroves are considered an indirect use since they only partially contribute to the offshore fish stock. Mangroves are vital in the development of juvenile fish, providing nursery habitat and a food source. For this reason, the valuation of this resource will use both the net factor income and benefit transfer approaches. Many studies have attempted to estimate the actual percent contribution of mangroves to offshore fisheries. Estimates of mangrove contribution range between a low of 5% (Spurgeon, 2002) to a high of 90% (Naylor, 1999). For this valuation, an estimate of 31.7% will be adopted from a study by Aburto-Oropreza where mangrove contribution to Mexican fisheries was estimated in the Gulf of California. This more recent study looked at small-scale fisheries that were comprised mostly of marine crab and fish species, both similar characteristics to the fishery sector of AAB(FAO, 2008; Aburto-Oropreza, 2008). The estimation of offshore fisheries valuation was broken down into three parts; estimating the AAB fish capture, determining the estimated revenues, and determining the costs of inputs (Gazi Bay, 2011).

43 AAB Offshore Fishing Capture In order to determine the actual current catch from offshore fisheries in the vicinity of AAB, catch volumes from past years need to be extrapolated. This was done using data collected from FAOs FishStatJ on Western Madagascar marine fish catch shown in figure 12. Offshore fish catches can be seen increasing over the last 25 years, but slowing and even declining in recent years. To estimate current catch amounts, the compound annual growth rate was calculated using catch volumes from two time periods, 1988 and 2013, and the formula shown below. A yearly growth rate of 1.075 % was calculated for fish catch in Western Madagascar (Table 8). Assuming that the composition of catch volumes and growth rate is representative of the waters off the coast of AAB, then this growth rate can be applied to project fish catch in AAB, shown in Table 9. Figure 12. Western Madagascar Marine Fish Catch (adopted from UNEP, 2011) Western Madagascar Marine Fish Catch: 1988 -2013

120000

100000

80000

60000

40000

20000 Marine Fish Catch (tons) 0 1985 1990 1995 2000 2005 2010 2015 Year

Table 8. CAGR Inputs Equation 1. CAGR Equation CAGR t0 1988 tn 2013 V(t0) 54594 V(tn) 71317 CAGR 1.075%

44 Table 9. Projected Annual AAB Offshore Fish Catch Values (tons)

Year Fish Catch

2014 TBD 2015 2014 catch × (1+CAGR)

2016 2015 catch × (1+CAGR)

Offshore Fishing Revenues The next step of the offshore fishery valuation is the determination of overall revenues from offshore fisheries. This is done using the simple revenue calculation of multiplying quantity by price. The quantity portion, AAB offshore fish catch volume, was determined above (Table 9), therefore an estimate of average price needs to be determined. Using expert knowledge from Blue Ventures, a sample of average prices and catch composition for each commercial species will be collected. These values will then be used to determine a total average fish price, shown in table 10. Using these prices, an estimate of yearly revenue can be generated for offshore fisheries.

45

Table 10. Average AAB Fish Price Inputs (adopted from UNEP, 2011) Contribution to Species (ASFIS Average Price AAB Composition total average fish species) price Marine mollusk Avg. Marine mollusk Price * Marine Marine molluscs TBD Catch/ Total Catch mollusk Composition Cephalopod Avg. Cephalopod Catch/ Cephalopods TBD Price * Cephalopod Total Catch Composition Natantian decapod Natantian decapod Avg. Price * Natantian decapods TBD Catch/ Total Catch Natantian decapod Composition Marine fish Avg. Marine fish Catch/ Marine fishes TBD Price * Marine fish Total Catch Composition Sharks, rays, skates, Sharks, rays, skates, Sharks, rays, skates, etc. Avg. Price * TBD etc. Catch/ Total etc. Sharks, rays, skates, Catch etc. Composition Marine crab Avg. Marine crab Catch/ Marine crabs TBD Price * Marine crab Total Catch Composition Sea cucumber Avg. Sea cucumber Price * Sea Sea cucumbers TBD Catch/ Total Catch cucumber Composition SUM ( Above) = SUM (Average TOTAL 100% Total Average AAB Prices) Fish Price

Production Costs The final step in determining the value of offshore fisheries is to determine the yearly costs of production inputs. Again, using Blue Ventures expert knowledge, costs of vessels, nets and other inputs will be determined for AAB fishermen.

46 AAB Offshore Fishery Value of Mangroves Using the revenues and costs estimated in the previous calculations, net income can be derived. Then, using the mangrove contribution estimate from Aburto-Oropreza and the area of AAB mangroves, a yearly per hectare estimate of the value of mangrove contributions to offshore fisheries can be determined (Table 11).

Table 11. Total Value of AAB Offshore Fisheries (adopted from UNEP, 2011) Offshore Fishery Value Fishing Revenues Ar or USD/yr TBD Vessel Cost Ar or USD/yr TBD Net Costs Ar or USD/yr TBD Net Income Ar or USD/yr Fishing Revenue – Vessel Cost – Net Cost Mangrove Contribution % 31.7% Mangrove Area ha 11,593 Offshore Fishery Value of USD/ha/yr (Net Income * Mangrove Mangroves Contribution %)/ Mangrove Area

4.5 Biodiversity One of the least estimated values of mangrove ecosystems, especially African mangroves, is the value of biodiversity (Vegh, 2014). This service, which is classified here as an indirect use, could be argued to be both direct, indirect and non-use depending on how you value biodiversity. Ruitenbeek (1992) states that historically the “capturable biodiversity benefit” in terms of the potential benefit a country received from the international community for conserving biodiversity was zero. But, now with the increase in NGO’s and availability of funding for conservation projects, there it opportunity for “capturable biodiversity benefit” for areas conserving intact systems. The valuation of AAB biodiversity will use the unit value benefit transfer method of an estimate of biodiversity value in Sri Lanka of $1500/km2/year from Ruitenbeek (1992). Adjusting for inflation and using purchasing power parity (PPP) of gross national income (GNI) per capita to adjust for wealth disparities between Sri Lanka and Madagascar, an $2.43/ha/yr of AAB biodiversity value was estimated (Table 15) (UNEP, 2011).

47 Equation 2. Benefit Transfer Wealth Adjustment

Table 15. AAB Biodiversity Value (adopted from UNEP, 2011) Biodiversity Value Biodiversity Value (Sri Lanka) USD/ha/yr $15 PPP GNP (Madagascar) USD $1,400 PPP GNI (Sri Lanka) USD $10,370 Elasticity 1 AAB Biodiversity Value USD/ha/yr $2.43

4.6 Existence Value One of the most difficult ecosystem service values to capture is a true estimate of non- use values. Economists define these values in terms of a person’s “willingness to pay” (WTP) to continue receiving peace of mind that a particular ecosystem exists, known as existence value, or that the ecosystem will still be intact for future generations, known as bequest value. These values can only truly be uncovered using extensive surveying of target populations through the contingent valuation method or choice experiments (Salem, 2012). These stated preference surveys are amongst the most costly and time consuming method of assessing economic values, and therefore not feasible within the scope of this project. Instead, a benefit transfer of the results of a contingent valuation study conducted in Benut, Malaysia will be applied to the estimation of AAB non-use values (Bann, 1999). The contingent valuation in Benut, Malaysia surveyed households’ WTP to protect 1,650 hectares of mangrove forest, revealing an average 12 RM/household/year WTP. This converted to $24/ha/year, of which an estimated 40% is represented as non-use value (Bann, 1999). Adjusting for inflation and using the PPP GNI benefit transfer conversion, a non-use value of $ 1.65/ha/year or a total of $ 19,105/year for the entire AAB mangrove area (Table 18).

48 Table 18. AAB Non-Use Value Non-Use Value 17.16 WTP (per household) USD/yr

1,690 Benut Mangroves ha

WTP (per household per 0.01 USD/ha/yr ha) 1,400 PPP GNP Madagascar USD

24,770 PPP GNP Malyasia USD

1 Elasticity

7,177 AAB Households

$1.65 AAB Non-Use Value USD/ha/yr

49 Chapter 5: Risk Management

5.1 Major Risks Throughout the project financial analysis and economic valuation of co-benefits, potential risks have been identified. Points of concern include: • Project sustainability from the community perspective due to the 14-year payback period • Heavy reliance on carbon credit income for project profitability from the community perspective • Reliance on donor funding to break even from the project developer perspective. Although these are points of concern for the long-term sustainability of project funding and compliance, there are strategic management actions that can be taken to mitigate these risks. These management actions include project refinancing, potential development of an additional project income generating activity, and diversification of donor funding sources.

5.2 Project Re-financing The project model shows that carbon income cash flow only begins to accrue starting in year 10, occurring in various intervals and in high volumes until the end of the 30-year project duration (refer back to Figure 2). These characteristics cause the project scenario from the community perspective to have a 14-year payback period (refer back to Figure 10). This long payback period poses a risk to economic development of the communities and their compliance with project management rules. Many of the people within the communities that will impacted by the forgone benefits incurred due to project in the initial years will not see compensation for many years, possibly not even within their lifetimes. Lack of governance in these more remote areas of a developing country makes adherence to the restricted resource use especially challenging. Coupled with a risky project that only provides moderate economic gains in the distant future, there is little incentive for community members to abide by the conservation rules. It is important that these communities are directly incentivized for their compliance to ensure the conservation goals of this project.

50 To mitigate this, I suggest that the project developers design a financing scheme that will distribute the estimated income to be generated from the carbon credits to be distributed evenly throughout the lifetime of the project. Ideally, this would come in the form of a low interest loan from the government of Madagascar, a stakeholder that has much to gain from the implementation of this project (refer back to Table 6). Redistributing the (undiscounted) $3.4 million in carbon income to the communities over the entire 30-years, rather than in the last 15 years of the project, will reinforce community compliance with the project conservation activities.

5.3 Additional Project Income Generating Activities In the financial analysis from the community perspective, it was shown that the project is only beneficial with the carbon payments. Previous case studies of REDD projects have shown that reliance on these payments increases the project risk due to volatility and uncertainty of voluntary carbon market (Zaballa Romero, 2013). The voluntary carbon market is a very young market, one that is still developing stable demand and pricing. Average prices have ranged from a high of $7.8 USD in 2008 to a recent low of $3.8 in 2014. This price drop has been attributed to a lack of new buyer demand, with many credits going un-sold (Hamrick, 2015). Although conservative market assumptions were used in this analysis, additional measures should be taken to reduce dependence on this highly variable income source. In order to mitigate this risk, I propose that the project developers continue to access the opportunities for implementing additional sustainable income generating activities under the project scenario. Gazi Bay, Kenya, a mangrove ecosystem similar to that of Ambaro- Ambanja Bay, has implemented pro-mangrove aquaculture activities that do not threaten mangrove habitat as an additional income source to communities. In Kenya, this pro-mangrove aquaculture generated $4.8 /ha/yr (USD), a providing a modest, but still impactful, additional income source for local communities (UNEP, 2011). This additional stream of income will further promote the project sustainability by providing alternative avenues for communities to utilize the ecosystem services provided by the AAB mangroves without destroying or degrading the area.

51 5.4 Diversification of Donor Funding Sources The project developer bears the majority of costs of the project, but with aid from $21.2 million of donor funding (Table 6 and Figure 4). This funding covers the upfront implementation costs of the project in the first 10 years, with the carbon credit income covering additional monitoring costs later in the project. The heavy reliance on this funding to get the project running means that there is little room for any unexpected increases in implementation costs or reductions in funds. In order to mitigate the risk of these uncertainties, I propose that the project developer diversify the sources from which this donor funding comes from. By doing this, the project developer can reduce the impact of unexpected increases in costs or reductions in funds have on the sustainability of the project since it will be less reliant on a single source. Being able to tap into other funds that are more secure or flexible than others will allow for more adaptability to these potential risks.

5.6 Conclusions Overall, this case study has proven that some financial aspects of conservation do not exactly align with maintaining the livelihoods of communities, especially those that are risk- averse. Identifying those specific aspects are key to understanding the potential impacts a project can have on those people, and developing strategies to mitigate those impacts. Although these cash flows paint a picture of the potential future of these mangroves and communities, it is especially critical to address what might not be captured in that representation. Those unknown values could be much greater than we estimate them to be, and their impacts undervalued in the long run. Management decisions should take all of these into consideration when determining the optimal path for the future of Ambaro-Ambanja Bay.

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54 Development. Department of Management Engineering. Technical University of Denmark (DTU).

55 Appendices

Appendix 1. Beekeeping Profit Calculation

Beekeeping Start year years 3 End year years 10 Exploitable trees per ha of mangrove trees/ha 60 Number of trees required/hive trees/hive 100 Target number of producers trained producers 150 Number of hives per producers hive/producer 5 Target number of hives hives 750 Number of producers trained per year of implementation producers 19 Annual production growth rate during implementation % 13% Annual Honey Yield per hive litres/hive 20 Honey liter to kg conversion liter/kg 0.69 Honey produced per year after implementation phase tons/year 10

Revenues (for one producer with 5 hives) Area of mangrove used for production ha 8.27 Honey Price per litre Ar/litre 5,000 Honey produced per year after implementation phase litres/year 100 Ratio wax/honey kg/L 0.02 Wax Produced per year after implementation phase kg/year 2 Wax Price per kg Ar/kg 6,000

Annual revenue of beekeeping per ha Ar/ha 61,588

Costs (for one producer with 5 hives) Area of mangrove used for production ha 8.27 Wood & Other materials (CAPEX) Ar 1,440,000 Other (CAPEX) Ar 36,000 Useful Life Years 5 Annual Amortization Cost Ar/year 295,200

Annual revenue of beekeeping per ha Ar/ha 35,693

Annual profit of beekeeping per ha of total PAA Ar/ha 2,771

56 Appendix 2. Mud Crab Fishing Profit Calculation

Mud Crab Fishing Average VAB of mud crab fishing HH in PAA Ar/year 1,727,520 % of households fishing for crabs in mangrove % 1.8% # of crab fishing households 128

Revenues Total annual crab revenue in the PAA Ar/year 221,977,495

Costs Pirogue Cost Ar 420,000 Useful Life Years 5 Annual Amortization Ar/year 84,000 Bait & Nets Cost Ar 3,000 Useful Life Years 1 Annual Amortization Ar/year 6,000

Total annual crab cost in the PAA Ar/year 11,564,540

Area of mangrove fished for crab within PAA ha 11,593

Annual profit per ha of mangrove Ar/ha 18,150

57 Timber Harvest

Revenues Price per Pole 2m Ar/Pole 1,000 Price per Pole 3m Ar/Pole 2,000 Price per Large stick (roof rafter) Ar/Stick 200 Price per Small stick Ar/Stick 100 Number of 2m Poles consumed per person #/year 0.2 Number of 3m Poles consumed per person #/year 0.1 Number of Large sticks consumed per person #/year 0.3 Number of small sticks consumed per person #/year 14.6 Quantity Pole 2m #/year 2,983 Quantity Pole 3m #/year 5,635 Quantity Large sticks (roof rafter) #/year 11,270 Quantity Small sticks #/year 482,957

Total annual revenue of timber harvesting Ar/year 62,151,259

Costs Ax Cost Ar 10,000 Useful Life Years 10 Annual Amortization Ar/year 1,000 Saw Cost Ar 6,000 Useful Life Years 10 Annual Amortization Ar/year 600

Percent of Households Harvesting Timber # 100%

Annual Cost for Tools Ar/year 11,483,772

Taxes to CLBs Price per Pole 2m Ar/Pole 500 Price per Pole 3m Ar/Pole 1,000 Price per Large stick (roof rafter) Ar/Stick 100 Price per Small stick Ar/Stick 50

Total taxes 32,401,523

Area of mangrove where timber is harvested within PAA ha 11,593

Annual profit of timber harvesting per ha of mangrove Ar/ha 1,576

58 Appendix 4. Charcoal Profit Calculation

Charcoal Production Revenues Exploitable biomass per ha of mangrove tDW/ha 30 Charcoal production yield tcharc/tDW 15% Charcoal produced per ha tcharc/ha 5 Price of charcoal Ar/t 114,167

Annual revenue of charcoal production per ha of mangrove Ar/ha 519,733

Costs (for an average producer) Average annual production t/year 7 Taxes Ar/year 6,508 Annual equipment amortization Ar/year 174,190

Annual cost per ton of charcoal Ar/t 25,814

Annual cost per ha of mangrove Ar/ha 117,515

Annual profit of charcoal per ha of mangrove Ar/ha 402,218

59