The World Bank Emission Reductions Program to Combat Climate Change and Poverty in the Caribbean Coast, the BOSAWAS and the Indio Maiz Reserves (P167434) Public Disclosure Authorized For Official Use Only Public Disclosure Authorized Appraisal Environmental and Social Review Summary Appraisal Stage (ESRS Appraisal Stage) Date Prepared/Updated: 01/12/2021 | Report No: ESRSA01155 Public Disclosure Public Disclosure Authorized Public Disclosure Authorized Jan 12, 2021 Page 1 of 24 The World Bank Emission Reductions Program to Combat Climate Change and Poverty in the Caribbean Coast, the BOSAWAS and the Indio Maiz Reserves (P167434) BASIC INFORMATION A. Basic Project Data Country Region Project ID Parent Project ID (if any) Nicaragua LATIN AMERICA AND P167434 CARIBBEAN Project Name Emission Reductions Program to Combat Climate Change and Poverty in the Caribbean Coast, the BOSAWAS and the Indio Maiz Reserves Practice Area (Lead) Financing Instrument Estimated Appraisal Date Estimated Board Date For Official Use Only Environment, Natural Investment Project 1/12/2021 4/2/2021 Resources & the Blue Financing Economy Borrower(s) Implementing Agency(ies) Ministry of Finance and Ministry of the Environment Public Credit and Natural Resources (MARENA) Proposed Development Objective To make payments to the Program Entity for measured, reported and verified Emissions Reductions (ER) from Public Disclosure reduced deforestation and forest degradation, as well as the enhancement of forest carbon stocks (REDD+) in targeted areas of Nicaragua, and to ensure that paid amounts are distributed according to an agreed benefit sharing plan. Financing (in USD Million) Amount Total Project Cost 47.50 B. Is the project being prepared in a Situation of Urgent Need of Assistance or Capacity Constraints, as per Bank IPF Policy, para. 12? No C. Summary Description of Proposed Project [including overview of Country, Sectoral & Institutional Contexts and Relationship to CPF] Jan 12, 2021 Page 2 of 24 The World Bank Emission Reductions Program to Combat Climate Change and Poverty in the Caribbean Coast, the BOSAWAS and the Indio Maiz Reserves (P167434) Country Context: Nicaragua’s economic and poverty outlook has been jeopardized by the political crisis that began in April 2018. Social and political unrest and a protracted political crisis have affected economic activity and eroded confidence. Real Gross Domestic Product (GDP) contracted by -4.0 and -3.9 percent in 2018 and 2019, respectively. According to the latest forecasts, for 2020 growth is expected to fall to -6.3 percent, and would recover slowly to 0.7 percent by 2021. The COVID-19 (Coronavirus) pandemic plus the violence that has prevailed in the last years, job losses, a fall in consumer and business confidence, and a decline in labor intensive sectors have taken a social and economic toll, further halting progress achieved in poverty reduction since 2005. Nicaragua is one of Latin America’s least developed countries. Poverty (with income below USD 3.2 per person per day in 2011 Purchasing Power Parity – increased to 13.1 percent in 2019 (from 9.5 percent in 2017). Currently, the pandemic is expected to adversely affect Nicaragua through declined remittance inflows, reduced trade, paralyzed tourism, and increased risk premiums, partially offset by lower oil prices. The gender equality index in Nicaragua was is 0.65 in 2019 (Classification 55 of 129 countries) reflecting considerable inequalities in health, empowerment, and For Official Use Only education. Indigenous and Afro-descendants’ women and youth tend to be disproportionally affected by poverty. Agriculture and livestock have continued to grow despite the political crisis and the COVID19 pandemic. Local demand for agricultural products has remained stable. In international markets, the agri-export sector has fared well. Historically, increases in agricultural and livestock production have not been accompanied by significant intensification, and yields for Nicaraguan commodities are among the lowest (USD717/hectare) among its regional peers. This extensive production model, in concert with the development of roads and other infrastructure, has caused serious threats to forest ecosystems. Nicaragua is highly vulnerable to natural disasters and climatic variability, including droughts, hurricanes, floods and landslides (particularly in the coastal zones), in addition to geological events, earthquakes, and volcanic eruptions. Tropical cyclones currently appear on the increase and heavy rainfalls, combined with unsustainable land use Public Disclosure management, make communities more vulnerable to landslides. A strong warming trend across the country has been reported, manifesting through diurnal temperature increases (+0.40 degrees C) in deforested areas. Sectoral and Institutional Context Nicaragua’s diverse forests are essential to sustain the livelihoods of Indigenous peoples and Afrodescendant communities and the economy. Most of the Nicaragua’s forest area (82%) lies in the Caribbean Coast, which contains 3.2 million hectares of relatively well-conserved sub-tropical forests. Forest ecosystems are home to approximately 20,000 flora and fauna species. Forests contribute to regulate hydrology and precipitation, conserve water sources, biodiversity, and soil fertility, critical functions to maintaining regional and local agricultural productivity. They are often a primary source of income and wealth for forest dwellers (including the extreme poor), who in the Caribbean Coast are approximately 1.1 million people. Forest also sustain the cultures and spiritual values of Indigenous peoples and Afro-descendent communities. However, forests are threatened by deforestation and forest degradation. The forest cover has been reduced by more than half during the last 35 years in Nicaragua. The country has experienced forest loss of approximately 147,200 hectares per year since 2005 (2.3% per year). Over time, the Caribbean area has become the primary source of deforestation (97% of the national deforestation between 2010 and 2015), with expansion of extensive livestock and Jan 12, 2021 Page 3 of 24 The World Bank Emission Reductions Program to Combat Climate Change and Poverty in the Caribbean Coast, the BOSAWAS and the Indio Maiz Reserves (P167434) agriculture mirroring forest cover loss – and with a significant share happening in the two largest protected areas. The annual reforestation is insufficient (4,000 ha/year) to counterbalance forest loss. Increasing pressure on forests, mainly due to the growing migration to the Caribbean Coast, often leads to land speculation, affecting the IATs. Weak forest sector governance is also a major underlying driver of forest degradation. The Indigenous peoples and Afrodescendent communities often lack the necessary capital, equipment, technical knowledge, infrastructure and commercial contacts for sustainable forest management. This lack of opportunity together with the lengthy, time- consuming and costly processes for obtaining permits incentivizes small-scale but widespread illegal forest extractive activities such as logging, firewood harvest and charcoal production. Forest fires also have a great incidence. Deforestation and forest degradation are responsible for a large share of the country’s Greenhouse Gases (GHG) emissions. Under the business-as-usual scenario used in Nicaragua’s Nationally Determined Contribution (NDC) on climate change, the Agriculture, Forestry, and Land Use sector was responsible for 67 percent of the country’s total GHG emissions. Projections indicate that the national GHG emissions could grow by 33 to 55 percent between 2010 For Official Use Only and 2030. In this context, Nicaragua developed an Emission Reductions (ER) Program focused on two large political jurisdictions in the Caribbean Coast, the country’s main agriculture frontier. The ER Program area covers approximately 7 million hectares, of which about 45 percent are covered by forests. The ER Program area is culturally diverse and has high poverty levels and incidence of extreme poverty. The ER Program represents the investment phase of the Reduction from Deforestation and forest Degradation (REDD+) financing strategy. The proposed Emission Reductions Payment Agreement (ERPA) forms the actual results- based payment mechanisms for the ERs. The ER Program contributes to national development priorities and operationalizing the National REDD+ Strategy (known as ENDE-REDD+). It also contributes to the World Bank Group’s corporate goals of ending extreme poverty and boosting shared prosperity sustainably. The ER Program is aligned with Nicaragua’s FY18-22 Country Partnership Public Disclosure Framework. Particularly, the Project will contribute to achieving Objective 6 on improved natural resource management (water, forests, and land) and reduced vulnerability to natural hazards, under the third pillar, “Improving Institutions for Resilience and Sustainability.” Operation Description The proposed Emission Reductions Crediting (ERC) operation consists of a transaction through an Emission Reduction Payment Agreement (ERPA) for the delivery of, and payment for Emission Reductions (ERs) and subsequent distribution of payments according to a Benefit Sharing Plan (BSP). The financing for this operation is provided by the FCPF Carbon Fund and will not cover the investment costs associated with ER Program implementation. The ERs generated will be measured as tCO2e against a previously determined Forest Reference Emissions Level