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ACTIVITIES IMPLEMENTED JOINTLY(AIJ)
 

Uniform Reporting Format:

Activities Implemented Jointly Under the Pilot Phase

List of Projects

  • A. Description of the AIJ project

    1. Title of project: SIF Carbon Sequestration Project

    2. Host country: Chile

    3. Brief project description:

    • The SIF Carbon Sequestration Project ("Project") will bring about the afforestation and sustainable management of approximately 7000 hectares in regions VII and VIII of Chile. The Project expects to sequester up to 385,280 tons of additional carbon during the life of the Project by expanding the total area of carbon sinks in the country. The Project will result in a net addition of approximately 55.04 tons of carbon storage per hectare on lands included in the Project. The Project seeks to generate cultivation alternatives for small and medium farmers by converting approximately 7000 hectares of marginal agricultural land to forest plantations. The structure of the Project minimizes the forestry risks to farmers by efficiently managing the planted hectares. The average plot size per farmer is expected to be 60-100 hectares. This shift in land-use will provide additional annual income to small and medium farmers, providing liquidity while allowing them to maintain their property rights.

    4. Participants:

Name of Organization or Individual Country

Sociedad Inversora Forestal S.A.

Chile

CFix LLC

U.S.A.

Forestal Mininco S.A.

Chile

Forestal Millalemu S.A.

Chile

SGS International Certification Services

The Netherlands
Item
Organization

Name of organization (original language)

or

Name of individual if unaffiliated with any organization

Sociedad Inversora Forestal S.A.

Name of organization (English)

Forestry Investment Company

Acronym (original language)

SIF

Acronym (English)

SIF

Department

Function(s) within the AIJ project activities

Project Development, Administration, Government Oversight, Financing, Monitoring/Verification

Street

Parque Antonio Rabat Sur 6165

City

Vitacura, Santiago

State

Post code

Country

Chile

Telephone

562-240-0374

Fax

562-241-9383

E-mail

mgolodet@fundch.cl

World Wide Web-URL address

Administrative Officer Responsible for the Project

Surname

Golodetz

First name, middle name

Michele

Job title

Gerente General (CEO)

Direct telephone

562-240-0374

Direct fax

562-241-9383

Direct e-mail

mgolodet@fundch.cl

Contact Person for AIJ Activities (if different from the Administrative Officer)

Surname

First name, middle name

Job title

Direct telephone

Direct fax

Direct e-mail

  • 5. Description of AIJ project activities
Item
Type of Project

Sector(s)

Land-use Change and Forestry

Primary activity(ies)

Afforestation of marginal pasturelands

Project Location

Country

Chile

Exact location (city, state, region)

Regions VII and VIII

Key Dates and Current Stage of Project

Project starting date (month/year)

June 1999

Project ending date (month/year)

May 2050

Project lifetime (years)

51 years

Current stage of project(e)

Mutually Agreed

General Project Description and Technical Data(f)

Project description: Sociedad Inversora Forestal S.A.("SIF") was formed to promote the planting of forests on marginal agricultural land and reduce poverty among small and medium farmers in regions VII and VIII of Chile by planting up to 7000 ha. of Radiata pine. The Project will act as a model for similar projects elsewhere in Chile and the region.

This Project is designed to be financially self-sustaining by creating an innovative long-term bond instrument backed by the forest assets to be sold in the Chilean capital markets. The bond will provide the main source of funding for the planting activities, produce sufficient cash flow to cover the expenses of the 24 year growing cycle, and reforest the properties prior to returning the land use rights to the original owners. Incentives are in place to promote reforestation for subsequent growing cycles.

Rather than buy land from the owners, SIF will enter into land use contracts, which give SIF rights to the use of the land for a defined period of time. This structure allows farmers to retain land ownership and participate in the economic benefits of the Project on an ongoing basis by receiving an annual payment and a percentage of each harvest. The farmers can continue undertaking their traditional activities on their better lands not be dedicated to forestry. The farmers will not assume the costs and risks associated with ongoing forest management.

On marginal, bare agricultural lands converted to forest uses, SIF will plant Radiata pine (Pinus radiata) and limited amounts of eucalyptus (Eucalyptus globulus). SIF will harvest pine at 24 years and eucalyptus at 12 years, and replant both species within 2 years of harvest.

Approximately 385,280 tons (net) of additional carbon will be stored during the life of the Project. The estimate is based on an average of approximately 55.04 tons of average net carbon storage per hectare for the 7,000 hectares targeted in this Project. Carbon stores will be created over the growing cycle. Emissions from the harvest are explicitly netted out in the model of carbon capture in this Project, as are emissions caused by the conversion from pasture to forest.

The targeted 7,000 hectares to be converted to forestland by SIF is currently utilized primarily as pastureland for sheep and goats. This Project will provide an improved income source to the small landowners and reverse the erosion process of these soils.

Monitoring Activities: As part of its ongoing silviculture activities, SIF will measure the inventory of the Project plantations every three or four years.

Project Location: Regions VII and VII in Chile, from Curico to Mulchen.

  • 6. Cost
  • (a) Explanation of methodology for calculating cost data
Methodology for Calculating Cost Data

Funding requirements for the Project are estimated at $21 million and include the following initial startup costs:

  • $15 million for the purchase of land use contracts of young forests which at harvest time will provide sufficient cash flow to repay bond investors and finance the costs of the forestry management on newly planted lands.
  • $1 million for Project design and implementation.
  • $3 million for afforestation activities on 7000 hectares
  • $2 million for working capital costs.

The Financing structure of the project uses the funding sources to cover initial expenses and create future revenue streams for the ongoing expenses of the anticipated Project activities during the first growing cycle of the newly planted forests. These expenses include afforestation as well as the overhead, silviculture and financing costs of the Project.

In order to achieve the objective of sufficient income to cover costs in subsequent years, standing forests are being acquired to facilitate the cash flow timing needs of the Project. The operational model of SIF strives to balance cash flow produced from harvesting mature forest assets, with the cash flow required for bond payments and managing newly planted and existing forests. The standing forests in the Project are not included in the application to USIJI for carbon capture credits, as they do not meet the additionality criteria.

Item (c) Cost data–Project implementation, lists all the Project costs and revenues including standing forests and newly planted forests. The standing forest assets are, in effect, subsidizing the cash requirements of the afforestation activities.

The Annual Implementation Cost Spread Sheet requested is not included in this report. The cash requirements of the SIF Project are extremely high in the first few years where practically no carbon is sequestered. In later years the expenses are low and sequestration is substantial. Therefore the annual cost of Tons sequestered would not be a meaningful number and has not been calculated here.

While the Project is projected to be profitable, no proceeds are expected to be distributed to SIF, the Project originator, until 2026.

  1. Cost data–Project development
Itemized Project Development Costs
Year(s) Type of Cost Incurred Amount

(US$)

1999-2001

Technical Assistance with Project design

$400,000

1999-2000

Preparation of Project Proposal for USIJI

$40,000

Total

$440,000

  • (c) Cost data–Project implementation
Year(s) Item Projected Amount

(US$ thousands)

Project Costs
2001-2002

Project Preparation

400

2002-2026

Afforestation

2.900

2002-2026

Annual Payments to Land owners

6.720

2002-2026

Overhead

5.000

2002-2026

Silviculture Expenses

3.000

2002-2026

Monitoring

300

2006-2011

Bond Repayments with Interest

28.320

2026

CORFO Loan Repayment

14.443

2026

% of Harvest Paid to Land Owners

6.700

Subtotal

67.783

Project Revenues
2000

CORFO

3.000

1999

Fundación Chile/Ministry of Agriculture

1.000

2002

Bond Issue

15.000

2006-2026

Net Proceeds from Harvests of existing Forests

46.000

2026

Proceeds from Harvests of Afforestation

23.000

Subtotal

88.000

Net Project Cost (Project Costs-Project Revenues)

  • 7. Monitoring and verification of AIJ project activities and results
Item Please Complete

Party(ies) that will be monitoring project activities

Sociedad Inversora Forestal S.A., Forestal Mininco S.A., Forestal Millalemu S.A.

Party(ies) that will be externally verifying project results

SGS International Certification Services

Date when the monitoring plan became (or will become) operational (month/year)

January 2003

Types of data that will be collected

Inventory reports, Maps, Biomass Expansion Factors, density figures

Description of Monitoring and Verification Activities and Schedule for Implementation

The carbon (C) benefits of the project are due to sequestration (afforestation). In the absence of the Project, the without-project case, the marginal lands will remain as degraded pastureland. With the Project, 7000 hectares of these lands will be afforested.

The goal of the monitoring plan is to quantify the changes in the C pools based on data from periodic inventories taken on each of the afforested lands. Data from the inventory will be used to estimate the differences between the with- and without carbon benefits.

For the with-project case, an initial estimation will be made to quantify the amount of carbon on the lands in the project that will be disturbed by the planting activities.

During the growing cycle, regular inventories will be made to quantify biomass growth over time. As a general management practice, the forestry companies responsible for the silviculture activities of the SIF Project inventory one parcel in every four hectares every three to four years.

Biomass density and carbon content will be taken from studies performed on Radiata Pine and Eucalyptus at the University Austral in Chile. Proxies for biomass expansion factors will be obtained from peer approved studies. An empiracle study is underway in Chile to measure the biomass expansion factors for Radiata pine. When the study is completed then this local data will substitute the proxies.

Subtracting the initial carbon emission from the amounts annually sequestered during the growing cycle will provide the carbon credits that result from afforestation on the SIF Project lands.

Until standards are established for long term carbon storage from wood products, SIF will not account for the benefits from this carbon pool.

  • B. Government approval
Item Please Complete

Please check one of the following.

This report is a first report.

or

This report is an intermediate report.

or

This report is a final report.

Please check one of the following:

This report is a joint report. Letter(s) of approval of this report from the designated national authority of the other Party(ies) involved in the activity is(are) attached in Section J, Annex.

or

This report is a separate report.

Additional comments (if any):

  • C. Compatibility with, and supportiveness of, national economic development and socioeconomic and environmental priorities and strategies

Compatibility with Economic Development and Socioeconomic and Environmental Priorities

In the last 20 years, the Chilean forestry industry has created more than 100,000 jobs for professionals, technicians, operators and forestry workers. The planted forests have also stimulated the progress of rural communities where health and education facilities have allowed the rural areas to establish populated centers and alleviate their marginality and poverty.

The SIF Project will bring more participants into the forestry sector and will diversify and strengthen the income opportunities of small and medium farmers in regions VII and VIII. A typical profile of a small farmer in regions VII and VIII is a farmer who owns 50-70 hectares of land, owns 5 cows for milking, grows wheat and barley on 5-10 hectares, allocates up to 12 hectares for firewood, and keeps a small personal garden. The average income of these farmers is US$120 per month. There are occasional opportunities for day labor which pay US$6-US$8 per day. By afforesting 30 hectares through the SIF program, farmers would be able to increase their annual income by US$1200 and receive a percentage of the value of the forests at harvest while maintaining their traditional activities.

In addition, forestry jobs for planting, thinning, pruning and harvesting will be created on up to 7000 hectares of afforested lands in this Project. This estimate translates to approximately 850 person years of work.

  • D. Environmental, social/cultural, and economic impacts of the AIJ project
Non-Greenhouse-Gas Environmental Impacts of the Project

Reversal of Soil Erosion: The soils subject to erosion in Chile constitute approximately 34.5 million hectares which represents 45.5% of the national territory and approximately 75% of the productive soils in Chile. Of this area, approximately 27 million hectares have moderate to serious levels of erosion where the soils have lost 40% to 100% of the total soil depth.

Two long-reaching programs have existed in Chile to mitigate erosion: the planting of vineyards through Program Point IV of CORFO/USDA, and the forestry plantations of Decree Law 701. The planting of forests has had the greatest impact on the control of soil erosion, especially in coastal areas. Not only have the plantings been extensive but they have adapted well to the great diversity of climatic conditions covering the degraded areas between regions IV and XI in Chile. In addition afforested lands will reduce wind erosion and trap water run-off.

Habitat Creation: Single species, even-aged stands are not biologically diverse by definition, whether they are native (e.g., managed eucalyptus forests in Australia and managed coniferous forests in Scandinavia, Canada and Northwest US) or exotic forests.

In the case of planted forest, the manager has the ability to enhance conditions for biodiversity, both at the stand and at the landscape level. In the case of SIF, the relatively open structure of the planted stands will create habitat for small mammals and nesting birds. At a landscape level, SIF’s afforestation activities will create a patchwork of planted forests intermingled with natural forest stands and bushes. Special care will be taken not to disturb patches of native vegetation while establishing the plantations. This patchwork provides habitat to a wider range of birds and mammals than is found in agricultural land or in extensive plantations.

Social/Cultural Impacts of the Project

The cultural impact of the Project is an educational one. The owners of land participating in the afforestation Project generally do not have forestry experience. In addition to reforesting their properties, following the first harvest, SIF has agreed to deliver technical manuals for managing silviculture procedures following replanting.

Economic Impacts of the Project

It is expected that the Project will make several important economic contributions to Chile.

The Project is designed to receive funding principally from the local financial markets with no further ongoing government assistance. This aspect makes the project replicable within Chile and adaptable to other countries in the region.

Planting new forests is a long-term investment. Small and medium farmers in Chile generally lack the capital necessary to sustain the investment requirements over the lifetime of the growing cycle and need current income from their lands. Access to loans is limited due to many factors including: the long-term nature of the loans required, the lack of cash flow from the investment during the growing cycle to cover current interest expenses, and the ongoing needs for cash over time to cover the direct management expenses of the forests. For these reasons they have preferred rotational crops in order to receive an annual income. Plus the owners of land participating in the project generally do not have the technical skills to establish forests on their lands.

The SIF Project provides the capital and technical assistance required and makes an annual payment to the owners for the use of their land during the growing cycle. The farmers will not assume the costs and risks associated with ongoing forest management. At harvest, the owners receive a percentage of the harvest and the land is returned to them in a reforested state. At that point they become owners of 100% of the proceeds from future harvests.

Furthermore, the Chilean forestry industry has become less competitive in recent years and the rate of afforestation has declined. In 1992, out of 130,000 hectares of forested land in Chile, 95,000 hectares were newly planted; in 1997, out of 80,000 forested hectares, newly planted hectares declined to 43,000. One of the most important factors contributing to the decline in investment is that land values rose to between $750-$2500 per hectare. Large forestry companies are moving to other countries where lower land prices facilitate higher returns.

The targeted 7,000 hectares to be converted to forestland by SIF is currently utilized as pastureland for sheep and goats. This Project will provide an improved income source to the small land owners and reverse the erosion process of these soils.

  • E. Greenhouse gas impacts of the AIJ project

    1. Scenario description

Item Please Complete for Each Site
Site Designation

Site number (order of presentation in this report)

1

Site name/designation

Regions VII and VIII in Chile

Project sector

Land-use change and forestry

Reference Scenario

Primary activity(ies)

Active or idle pastureland

Has the reference scenario changed since the last report? (If yes, explain any changes below.)

Yes

No

This is the first project report.

Description:

The sites selected for afforestation are located in rural areas and are primarily grasslands. At present, the land-use based sources or sinks of greenhouse gases are insignificant because the groundcover consists of grasses and sparse shrubs.

This analysis assumes that land owners would not have undertaken new activities that increase carbon storage over the course of the project. We believe that to be a safe assumption, for three reasons:

1) Soil quality on the selected sites is too poor for uses other than low-intensity grazing.

  • 2) Even if soil fertilization were available, landholders lack financial and technical resources to undertake any large scale land-use change, and lack market access for new products.

    3) Chile has recently lowered its import tariffs and expects increasing competition from Argentina in cattle and agricultural products over the next decade. This will likely depress prices, which will make it even harder for small landowners to invest in new activities.

Predicted Project Scenario

Primary activity(ies)

Afforestation

Description:

The SIF Carbon Sequestration Project will cause the establishment of up to 7000 has of forest plantations on marginal agricultural lands. The Project will capture up to 385,280 tons of net average carbon storage during the life of the Project.

Actual Project

Primary activity(ies)

Description:

  • 2. GHG emission/sequestration calculation methodology

GHG Emission/Sequestration Calculation Methodology

Site number

1

Project sector

Land Use Change and Forestry

Description of Calculation Methodology for the Reference Scenario

This analysis assumes that without this Project, land owners would not have undertaken new activities that increase carbon storage over the course of the project.

As historical data on carbon content are not available for the areas where SIF will plant, SIF has used data from similar ecosystems to estimate carbon stocks and flows in the grasslands that will be replaced with plantations (i.e., in the baseline situation).

These data fall into two basic categories: annual increase in carbon storage (flows) and total carbon storage (stocks). Data for both variables was obtained from the Oak Ridge Net Primary Production (NPP) Database, which includes field measurements from grasslands study sites worldwide.

Without this Project, the carbon storage on these lands is expected to remain constant, at 4.44 tons carbon per hectare which considers the carbon content of above ground biomass, dead organic matter and roots. This baseline figure is deducted from the average net carbon storage per hectare of the Radiata pine plantations to arrive at the additional Tons of carbon storage resulting from Project measures.

Description of Calculation Methodology for the Project Scenario

Estimates of Sequestration of Greenhouse Gases by Sinks over the Lifetime of the Project are based on four basic inputs for Radiata Pine: Growth models, Rotation length, Biomass expansion factors, and wood-to-carbon conversion factors.

Growth models: Forest growth was predicted using the "Simulation Model of Growth and Utilization of Radiata Pine Forests" developed by Fundación Chile and a consortium of Chile’s largest forestry companies. The Model characterizes south-central Chile by 8 strata according to soil type, precipitation, initial spacing, and variable management routines. Growth estimates for each strata are based on 40 years worth of permanent plot data. The growth database also reflects all the silviculture treatments applied to the forest (thinning, pruning, weed control, etc.). The growth model that draws on this database allows the user to estimate future growth with a high degree of accuracy (within 10%), given soil type, precipitation, planned silviculture, and other relevant parameters.

Rotation length: Harvest of Radiata pine is scheduled at 24 years of age. Average carbon storage is calculated over two growing cycles, or 48 years and reforestation is planned to occur every 24 years over subsequent cycles. Procedures are in place to enforce reforestation.

Biomass expansion factors: To calculate total living biomass in the plantations, a biomass expansion factor is applied to the commercial volumes predicted by the growth model. The biomass expansion factor draws on two data sets. First, the relationship between commercial volume (as predicted by the growth model) and total above ground biomass was calculated using data from the same consortium that developed the growth simulator model. These data draw on destructive analysis performed on trees across a range of diameter classes and site parameters. Second, below ground estimates of root biomass are drawn from root:shoot ratios (Cairns et al. 1997 ). Biomass measurements from representative sites are adjusted by the root:shoot biomass ratio to arrive at the expansion factor of 1.528 for Radiata pine that will be used in the SIF Project.

Wood – to - Carbon Conversion Factors: use the density of Radiata pine (0.43 g/cm3 (Corma 1971)) and the estimated carbon content of the dry matter, 50% (IPCC 1996).

Description of Calculation Methodology for the Actual Project

3. GHG emission/sequestration data

  • (b) Additional information on GHG emissions/sequestration
Indirect or Secondary GHG Impacts (Positive and Negative)

SIF expects that the management and financing techniques of the Project will encourage small property owners to convert marginal agricultural lands to forestry purposes on an increasing basis. By accessing the local capital markets, the SIF project will overcome many of the financing obstacles facing the establishment of new plantations on lands owned by small and medium land owners. The financing structure, the management system, contractual arrangements and financial incentives are all replicable elements that will encourage increased afforestation activities in Chile and other countries in Latin America.

Factors That Could Cause the Future Loss or Reversal of GHG Benefits

As the lands in the SIF Project are privately owned, it is difficult to guarantee that all the hectares will be kept in forests with a one-time Carbon capture remaining intact. If owners of participating lands choose to harvest the second rotation before the end of the projected 24 year growing cycle, some of the GHG benefits of the project will be lost. Another source of Project benefit leakage is fire. Should an area that has been afforested by the Project burn due to an uncontrollable fire; Project benefits would be lost involuntarily.

Strategy for Reducing the Risk of Future Loss or Reversal of GHG Benefits

While SIF does not own the lands in the Project, legal, organizational, and contractual considerations should assure that Greenhouse Gases will be sequestered in perpetuity.

The legal procedures in Chile affecting afforestation activities are primarily dictated by Decree Law 701. All felling or exploitation of forest shall oblige the owner of the respective lands to reforest or recover an equal area, at least to that felled or exploited under the conditions of the plan approved by the corporation. Non-compliance with these obligations within a period of three years after felling will be subject to the fines which as of December 1, 1999 ranged from US$487 to US$1461 per hectare and are inflation adjusted. At current values, the fine is more than double the cost of reforestation. The land use alternatives in the region, in terms of profitability, are expected to decline due to soil quality and competition from imports. Although SIF does not own the afforested lands in this project, the obligations for reforestation remain with the land owners. The fines are enforceable and of significant amounts.

The contractual arrangements that will be followed by SIF further reduce the risk of future loss. For all land afforested, SIF will have a land use contract that will exceed the harvest cycle by two to three years. During that period, SIF has the contractual obligation to assure that the land is reforested or regenerated according to the legal requirements of DL701 before it is returned to the original owner. This obligation guarantees that property will be returned to the owner in a regenerated or reforested condition. This management procedure not only guarantees renovation of the forest after the first cycle but also provides strong economic incentives for reforesting after subsequent harvests. In the initial growing cycle, the owner receives an annual payment and only a small percentage of the harvest proceeds. Once the reforested property is returned to the land owner they will have complete ownership of future potential profits from the reforested land. At subsequent harvests, profits will be more than sufficient to create substantial per hectare income and continue a regimen of reforestation or regeneration as required by law. The profit potential, in combination with the imposition of fines for not reforesting creates strong incentives for ongoing reforestation. The law also applies to a change of ownership.

While legal procedures and the management procedures of SIF cannot guarantee reforestation in perpetuity, in combination they provide important economic incentives for continued economic activity.

  • F. Funding of the AIJ project

    1. Identification of funding sources

    • (a) Funding sources for project development

Funding Source Country of Funding Source Amount ($US) Percent of Total Funding (%)

Ministry of Agriculture

Chile $400,000

Total

$400.000 100
  • (b) Funding sources for project implementation

Funding Source Country of Funding Source Amount ($US) Percent of Total Funding (%) Is This Funding Assured? (Y/N)

CORFO

Chile $3.0 million Y

Fundación Chile/ Ministry of Agriculture

Chile $700,000 Y

Capital Markets

Chile $15 million N

Planting Subsidies

Chile 1.5 million N

Proceeds from the sale of Carbon Credits

? ? N

Total

$20.2 million + 100
  • 2. Assessment of additional funding needs:

Current or Planned Activities to Obtain Additional Funding

SIF is currently acquiring land use contracts and options on land use contracts with owners of young forests and owners of land to be afforested. These assets will be used as collateral for the long-term bond to be sold in the Chilean Capital Markets. As accounting rules for CERs are clarified, SIF will attempt to market the Carbon Credits resulting from the project in order to maximize the number of hectares planted.

  • G. Contribution to capacity building and technology transfer

Contribution to Capacity Building and Technology Transfer

An important element of the Project will be the design and implementation of a financial and management model for afforestation activities in developing countries. Funding has always been a serious limitation to Projects of this nature that are targeted at small and medium land owners. The design of the SIF Project overcomes many of these obstacles and is adaptable and transferable to other developing countries.

  • H. Recent developments, technical difficulties, and obstacles encountered
Recent Project Developments

SIF has signed various land use contracts and options on land use contracts in recent months. Once the accumulation of contracts is completed, SIF will seek to raise funding from a bond issue in the local capital markets. SIF is currently working with two risk classification companies to have the bond issue receive industrial grade risk ratings.

Technical Difficulties and Other Obstacles Encountered
  • I. Additional information

Additional Information

J. Annex

  • 1. Host country acceptance of the AIJ project

Country/Project Title Name, Title, and Government Agency of the Designated National Authority Date of Approval (day/month/year)

The SIF Carbon Sequestration Project

Ambajador Rolando Stein
Ministerio de Relaciones Exteriores

June 25, 1999
  • 2. Letters of approval of this AIJ project report:

    • See attached letter of concurrence.

(concurrence letter)


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