Report No: AUS0001069 . Review on Sustainable Forest Management and Financing in China July 2019 October 2019 ENVIRONMENT AND NATURAL RESOURCES GLOBAL PRACTICE EAST ASIA AND PACIFIC REGION THE WORLD BANK © 2017 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. All queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. TABLE OF CONTENTS ACKNOWLEDGEMENT ............................................................................................................ 2 EXECUTIVE SUMMARY .......................................................................................................... 3 I. BACKGROUND .............................................................................................................. 10 A. Review Objective: Knowledge Sharing on Sustainable Forest Management ................ 10 B. Forestry’s Role in Safeguarding Terrestrial Ecosystem Stability .................................. 11 C. Forest Resources Management and Challenges in China .............................................. 12 II. REVIEW APPROACH AND METHODOLOGIES .................................................... 15 III. CASE STUDIES ON SUSTAINABLE FOREST MANAGEMENT .......................... 15 A. World Bank-Financed Forestry Projects ........................................................................ 16 B. Sino-German Forestry Projects ...................................................................................... 30 C. China Government-Financed Forestry Programs ........................................................... 37 D. Research Program .......................................................................................................... 42 IV. CONTRIBUTION OF SUSTAINABLE FOREST MANAGEMENT TO NDC ....... 43 V. FORESTRY FINANCING REVIEW ............................................................................ 45 A. Government Financing Policies on Forest Management ............................................... 45 B. Evaluation of Forest Carbon Financing ......................................................................... 47 C. Forestry Credit Policies .................................................................................................. 51 D. Forestry Public-Private Partnership (PPP) Financing .................................................... 54 E. Issues Concerning Forestry Financing ........................................................................... 55 VI. LESSONS LEARNED AND POLICY RECOMMENDATIONS ............................... 56 A. Adopt Close-to-Nature Forest Management Regimes ................................................... 56 B. Improve the System of Forest Classification ................................................................. 58 C. Amend Harvesting and Quota-Based Prescriptions and Relax the Logging Ban .......... 59 D. Draw Social and Environmental Considerations into Forest Management ................... 59 E. Diversify Funding Sources and Recalibrate Subsidy Policy .......................................... 61 Box 1. Lishui County Experience and Approaches Promoting Compensation Usufruct Pledge Loans for Ecological Forests ............................................................................................. 52 Figure 1. SEAP Water Storage and Soil Loss Reduction of Afforestation Models ................. 24 Figure 2.HFRDP Pest Occurrence Rate of Forest Restoration and Rehabilitation Model .... 25 Figure 3. SEAP Carbon Sequestration of Afforestation Model ................................................ 26 Figure 4. The Evaluation Index System of Forest Status ........................................................... 35 Table 1. IFDP Benefits of Farmland Protection Shelterbelts .................................................... 27 Table 2. Economic and Financial Analysis by Project ............................................................... 27 Table 3. Subsidies for the Forestry Reform and Development Programs ................................ 46 Table 4. Summary of Types of Forest Carbon Transactions, 2009–2016* ............................... 48 Table 5. Loans Issued by CBD and CADB, 2016–2018 .............................................................. 53 Table 6. Loan Model Guangxi National Timber Reserve Forest Development Project ......... 54 ABBREVIATIONS CADB China Agricultural Development Bank CCB Climate, Community and Biodiversity CCERs China Certified Emission Reductions CDB China Development Bank CDM Clean Development Mechanism CERs Certified Emissions Reduction Certificates CO2 carbon dioxide CO2e carbon dioxide equivalent COP3 The Third Conference of the Parties EIRR economic internal rate of return ERR economic rate of return FIRR financial internal rate of return FRML Forest Rights Mortgage Loan GEF Global Environment Facility GIZ German Corporation for International Cooperation GoC Government of China ha hectare HFRDP Hunan Forest Restoration and Development Project ICR Implementation Completion and Results Report IFDP Integrated Forestry Development Project KfW Kreditanstalt Fur Wiederaufbeau m3 cubic meter NDCs Nationally Determined Contributions NPV net present value O2 oxygen PDO Project Development Objective PES payments for environmental services PPP public-private partnership RMB renminbi SEAP Shandong Ecological Afforestation Project SFA State Forestry Administration SFM sustainable forest management SPV special purpose vehicle tCO2e tons carbon dioxide equivalent UNFCCC United Nations Framework Convention on Climate Change 1 Acknowledgement This synthesis report represents the culmination of joint analytical work conducted by the World Bank (the Bank) team and the National Forest Economic and Development Research Centre (FEDRC) of China building on a long history of cooperation and collaboration. It was funded by the Fund of Forestry Program (PROFOR), a multi-donor trust fund managed by the Bank. The synthesis report including field work on case studies were jointly undertaken by the expert team including Jin Liu, Sr. Environmental specialist, Rama Chandra Reddy, Sr. Carbon Financing Specialist (the Bank); Richard Owen, Sr. Forestry Specialist and Xueming Liu, Senior Economists (FAO/CP); FEDRC term with Xincheng Zhao, Sr. Forestry Economist, Xiang Li, Forestry Ecologist and Yaru Chen, Sr. Forestry Engineer as core contributors; Hong Wang, Professor and Gangying Hui, Professor (Forestry Academy of China), Jingrong Yuan, Sr. Forestry Engineer (China Forestry Carbon Fund), and Tao Qin, Professor (Beijing Forestry University). The team benefited from comments and discussions with colleagues with in the Bank, officials from the government agencies of China, and representative from non-governmental organizations, universities and research institutions work on forest management. In particular, the team benefited greatly from the Bank peer reviewers Gregor V. Wolf, Program Leader, Katharina Siegmann, Environmental Specialist, and Anis Wan, Sr. Operations Officer. Special thanks go to Ann Jeannette Glauber, the practice manager of Environment, Natural Resources and Blue Economy for East Asia and Pacific (EAP) region and Garo Batmanian, lead environmental specialist (the Bank), who have provided strategic guidance and comments on the analytic work. All of their valuable comments and suggestions are incorporated in the final report. The authors also acknowledges the support from Jieli Bai, Program Assistant (the Bank) for her timely assistance to the report preparation throughout. Their contributions have helped to enhance the quality of this report. 2 Executive Summary The purpose of this report is to review and disseminate lessons learned from domestically financed forestry programs in China and from those programs financed by international organizations, and to recommend best practices on sustainable forest management. Projects covered by the review include those supported by the World Bank (the Bank), the German Corporation for International Cooperation (GIZ), Kreditanstalt Fur Wiederaufbeau (KfW), and those financed by the Government of China. In addition to conclusions on the most promising models for sustainable forest management (SFM), the review presents an overview of the main sources of financing for SFM and recommendations on what needs to be done to strengthen financial support for SFM. Forests play a key role in the conservation and protection of a wide range of ecosystems, including water courses, watersheds, wetlands, drylands, and deserts.