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World Bank Document Report No. PID7678 Project Name Costa Rica-Ecomarkets (GEF)(@) Region Latin America and the Caribbean Sector Environment Project ID CRPE52009 Public Disclosure Authorized GEF Supplement ID CRGE61314 Borrower(s) Republic of Costa Rica Implementing Agency Ministry of Environment and Energy Environment Category F Date this PID was prepared May 23, 2000 Project Appraisal Date April 15, 2000 Project Board Date June 6, 2000 Public Disclosure Authorized 1. Country and Sector Background Costa Rica is one of the world's leading proponents of environmentally sustainable development, pursuing social and economic growth in conjunction with a strong and healthy environment. The environmental policy of the government has been progressive, including use of economic instruments such as electricity surcharges and reforestation credits which are targeted at protecting forest ecosystems throughout the country. Conservation areas comprise 25t of the national territory, half of which are national parks or areas under strict protection. Although it is not a large country, Costa Rica holds five percent of the world's tropical forest species. As such, Costa Rica's natural assets have led to the development of a thriving Public Disclosure Authorized ecotourism industry, which earned revenues of $700 million in 1994. Nonetheless, Costa Rica experienced one of the highest rates of deforestation worldwide during the 1970s and 1980s. In 1950, forests covered more than one-half of Costa Rica; by 1995, forest cover declined to approximately twenty-five percent of the national territory. World Bank estimates indicate that eighty percent of deforested areas were converted to pastures and agriculture, principally due to inappropriate Government policies including cheap credit for cattle, land titling laws that rewarded deforestation, and rapid expansion of the road system. Costa Rica's efforts to internalize environmental values provided by forest ecosystems date back to 1979, with the passage of the first Forestry Law and the establishment of economic incentives for reforestation. Subsequent laws strengthened incentives for reforestation, broadening opportunities for Public Disclosure Authorized landowners to participate in reforestation programs and making the program accessible to small landowners within rural areas. In 1996, Costa Rica adopted Forestry Law No. 7575, which explicitly recognized four environmental services provided by forest ecosystems: (i) mitigation of GHG emissions; (ii) hydrological services, including provision of water for human consumption, irrigation, and energy production; (iii) biodiversity conservation; and (iv) provision of scenic beauty for recreation and ecotourism. The law: (a) delegates responsibilities and duties inter alia to licensed foresters, the Ministry of Environment and Energy (MINAE), the National Forestry Financing Fund (FONAFIFO), the National System of Conservation Areas (SINAC), and the Costa Rican Office for Joint Implementation (OCIC); (b) provides the legal and regulatory basis to contract with landowners for environmental services provided by their lands and establishes a financing mechanism for this purpose; and (c) empowers FONAFIFO to issue such contracts for the environmental services provided by privately-owned forest ecosystems. With the passage of Forestry Law No. 7575, the forestry sector has established a modern legal framework, which (i) recognizes environmental services provided by forest ecosystems; (ii) defines the role of the State in protecting forests as well as in promoting and facilitating private sector activities; (iii) decentralizes duties and responsibilities to local actors; and (iv) establishes that forests may only be harvested if there exists a forestry management plan that complies with the criteria for sustainable forestry as approved by the State. Regulations within Forestry Law No. 7575 establish the conditions for and levels of environmental service payments (ESPs) through FONAFIFO to small- and medium-sized landowners. At present (The levels of the payments changed in 1998 to adjust them due to inflation (1US$ = 303 Colones), there are four different types of ESP contracts. They are: Forest conservation easements: US$200 per hectare (equivalent to $40 per year per hectare) disbursed evenly over a five-year period. Eighty-six percent of environmental service contracts in the ESP program to date support forest conservation easements, which in large part are targeted at minimizing disturbance of vegetative cover in primary and mature secondary growth forest areas (see Map 4). Sustainable forest management: US$313 per hectare disbursed over a five-year period. Nine percent of contracts in the ESP program support sustainable forest management. Landowners must make a commitment to maintain forested areas for a period of 15 years. Reforestation A: US$513 per hectare disbursed over a five-year period. Landowners must make a commitment to maintain reforested areas for a period of fifteen to twenty years, depending upon tree species. Five percent of contracts in the ESP program support reforestation of degraded and abandoned agricultural lands. Reforestation B: US$200 per hectare distributed evenly over a five-year period. This type of contracts started in 1998, and only landowners that establish forest plantations with their own resources can applied for payments under this type of contract. Less than one percent of contracts in the ESP program support these activities. In all cases, participants must present a sustainable forest management plan certified by a licensed forester, as well as carry out sustainable forest management activities throughout the life of individual contracts. Management plans include inter alia information on land cadastre, cartography, and physical access; description of topography, soils, climate, drainage, actual land use, and carrying capacity with respect to land use; plans for prevention of forest fires, illegal hunting, illegal harvesting; and - 2 - monitoring schedules. Commitments associated with the environmental service contracts are registered with the deed to the property, such that contractual obligations transfer as a legal easement to subsequent owners for the life of the contract. Furthermore, landowners cede their rights to sequestered carbon to FONAFIFO to sell on the international market. It should be noted that the ESP program sets different regulations for indigenous territories. Experience indicates that indigenous territories have clear land boundaries but they do not always hold titles to their land nor have legally established associations as representative of the territory. As a result, FONAFIFO exempts indigenous territories from complying with land ownership regulations. From a conservation perspective, the ESP program provides market-based incentives to conserve natural forest ecosystems. As such, these incentives help maintain habitats that are critical to a rich, globally-important biodiversity, as well as help maintain biological corridors linking protected areas (Coincidentally, the Government of Costa Rica's Protected Areas Project aims to consolidate approximately 530,000 hectares within the borders of national parks and biological reserves which have been declared as protected areas but which have not been purchased and/or registered in the National Property Registry as part of the forest patrimony of the State. Through the sale of Certified Tradable Offsets, the Government of Costa Rica hopes to purchase and legally transfer these lands from their current ownership to the forest patrimony of the State, thereby guaranteeing the integrity of state- owned protected areas). Approaching biodiversity conservation through the FONAFIFO mechanism is akin to the sophisticated system of easement payments that are widely used in the United States and several European countries. By rewarding private landowners that maintain forest cover, the ESP program acts as a market where incentives are provided to investors who "produce" and "sell" ecological services and values that are important at local, national, and global levels. In 1997 and 1998, US$15 million were annually disbursed by the ESP for the conservation and sustainable use of privately-owned forests; since nearly 220,000 hectares of forests have been incorporated into the ESP program at a cost of approximately US$57 million. In conclusion, with the introduction of a variety of forest incentives in recent years, Costa Rica has slowed the rapid pace of deforestation witnessed in the 1970s and 1980s. In terms of overall land cover, the gross area of deforestation has been counterbalanced by regrowth equivalent to approximately 75t of the deforested area. Some of this regrowth represents the establishment of forest plantations; other parts represent spontaneous regeneration of abandoned pasture on poor terrain, especially in the Pacific slopes. While this regrowth may provide valuable environmental and economic services, it should be noted that, in terms of biodiversity values, it is not equivalent to lost primary forest. 2. Project Objectives The development objective of the proposed project is to increase forest conservation in Costa Rica by supporting the development of markets and private sector providers for environmental services supplied by privately owned forests. As such, the project directly supports the implementation of Forestry Law No. 7575: providing market-based incentives to forest owners in buffer zones and interconnecting biological corridors contiguous to
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