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ACTIVITIES IMPLEMENTED JOINTLY(AIJ)

List of Projects

1. Project Description

1. Title of Project Costa Rica / Norway Reforestation and Forest Conservation AIJ

   Pilot Project.

2. Host country: Costa Rica
3. Brief project description:
   • The project will be developed in the Virilla river basin, in Costa Rica, where four thousand hectares (ha) of reforestation and forest conservation/regeneration will take place. One thousand ha will be reforested and 3,000 ha of existing forest area will be conserved, 2,000 ha in a natural primary forest area and 1,000 ha in a secondary forest area. The implementation period will be ten years in successive and overlapping stages covering the micro-basins in the zone. A 25-year active life of the project is estimated.

     The project will sequester or avoid emissions of carbon (C) through reforestation and forest conservation activities. The "cumulative effect" or net benefit of this forestry project is 230,842 metric ton of Carbon (mt C) In addition, it will displace fossil fuel emissions from the Costa Rican energy system, due to increased output from the several hydroelectric projects located in the Virilla river basin.

     This project is part of the "Private Forestry Project" (PFP), a national scope forestry project designed to use AIJ foreign investments to compensate farmers for their conservation and reforestation efforts. The PFP will allow for the expansion of privately held conservation areas, through expanded and long-term use of the state’s forestry incentives. Under PFP, such incentives would change from governmental subsidy to a payment for environmental services.

4. Participants:
   • The foreign investors are: a Norwegian Consortium (NC) of three companies, Eeg-Henriksen Anlegg A.S., one of the Norway’s leading construction companies, Kvaerner Energy A.S., a world leader in production of turbines and ABB Kraft A.S, a Norwegian subsidiary of the multinational company ABB, producing generators and electrical control systems, and the Royal Norwegian Ministry of Foreign Affairs (RNMFA), Department of Natural Resources and Environmental Affairs, responsible for Government financing of AIJ projects.

     The host investor is the National Power and Light Company (CNFL), a private enterprise established to produce and distribute electricity in the San José metropolitan area, both produced by CNFL and by the Costa Rican Electrical Institute (ICE), the major national utility. CNFL will have the responsibility for the execution of the project and the Costa Rican Office on Joint Implementation (OCIC), a host participant, is the authorized office for the promotion of AIJ/JI policy and activities. OCIC will be responsible to issue, certificate and guarantee the greenhouse gas (GHG) emissions offsets, known as Certifiable Tradable Offset (CTO), to foreign parties who invest on AIJ projects in Costa Rica, as proof of the CO₂ emissions sequestered or avoided through their investment.

Foreign Contact:

• Host Contact:

4. Description of AIJ project activities:

   Type of project:	Forest Preservation, Restoration and Reforestation
   Location:	The project is located partially outside the Greater Metropolitan Area of San José, and will be executed in the upper part of the Virilla river basin, which is located in the Central Plateau of the country, covering from the source of the river to the point where it merges with the Tibás river, an extension of 142 km2. Maximum elevation is 2,950 m above sea level and minimum 1,100 m. The area is located northeast of the city of San José. The northern boundary is the Central Volcanic Range Forest Reserve, the eastern boundary the Braulio Carrillo National Park, the southern boundary includes districts belonging to the Province of San José and the western boundary is the city of Santo Domingo, in the Heredia Province. This location allows for the potential to protect the watershed.
   Activity starting date:	March, 1997
   Expected activity ending date:	The year 2006
   Life time of activity if different from the ending date:	Under the Forestry Environmental Services Payment (FESP) program, the legally binding contracts are for 20 years. However the life horizon of the project has been set for 25 years for purposes of quantification of benefits, costs and monitoring. Therefore, the project is expected to end by the year 2022.
   Technical data:	Approximately 1,000 ha of pasture will be dedicated to tree plantation, consisting of native high altitude species to preserve the biological diversity of the area. Since a significant part of the project is within the buffer zone of Braulio Carrillo National Park, it will be possible to establish biological corridors along the rivers. Furthermore, by using native species, it will also be possible to accumulate more information on their reproduction in plantations. The incorporation of farms within forest areas or lands to be reforested will take place along a period of ten years, starting in 1997 with protection of 200 ha of primary forest, 100 ha of secondary forest and 100 ha of commercial reforestation. According to 1992 data on land-use, in the upper part of the basin there are 3,617 ha of primary forest and 1,961 ha of secondary forest. With this project, at least 50% of this area will be protected.
   Institutional arrangements:	The project will be developed within the Costa Rica legal and institutional framework of the Forestry Environmental Services Payment (FESP) program. This program is based on the 1996 Forestry Law, which determines one-third of the 15% sales tax revenue on fossil fuels will be used to compensate private forest owners for the environmental services provided by forest protection and plantations. The definition of environmental services includes: the reductions of GHG emissions, the protection of biodiversity, the protection of aquifers and the scenic view for tourism attraction. The Law authorizes the Ministry of Environment and Energy (MINAE) to find international partners to the FESP program, so that the cost of producing global environmental services, like CO2 reduction, can be shared with the international community. To make use of external AIJ investments, the Specific Fund for the Conservation and Development of Greenhouse Gas Sinks and Deposits, was established by the Executive Decree Nº 25067-MINAE of April 22.
   Institutional arrangements: (continue)	OCIC will be responsible to receive the contributions and disburse these funds to the National Forestry Financing Fund (FONAFIFO), upon satisfactorily proof of successful sequestration or avoidance of emissions of CO2 through the FESP program. In addition, OCIC will issue to foreign AIJ investors the CTOs as proof of the offsets. The proof of effective sequestration or emissions avoidance can be made anywhere in the country, as long as it is part of the FESP program that began in October 1995. This mean that each CTO issued is guarantee against CO2 offsets that has already taken place through the FESP program. OCIC will document these facts. These CTOs will be transferred by OCIC to the Norwegian investors in return for their financial contributions to the project. FONAFIFO will execute the financial administration of the FESP Program by subscribing legally binding contracts with individual farmers, by means of which they get yearly payments against proof of effective conservation of forest or reforestation actions. MINAE through FONAFIFO, committed itself to make available the necessary quota of FESP contracts for up to 4,000 ha to farmers of the upper Virilla river basin willing to reforest or conserve forest and to subscribe legally binding contracts with MINAE in this regard. The CNFL executing unit and MINAE local authorities, will be responsible for the technical promotion and implementation of the FESP program in the upper Virilla river basin for 1,000 ha of reforestation and 2,000 ha of natural forest conservation and 1,000 ha of natural forest regeneration. The Costa Rica / Norway AIJ Pilot Project was the first international financing of the FESP program. The FESP program is the financial mechanism of the PFP.

5. Cost:

• a) Explanation of methodology for calculating cost data.

  The project has a total cost of US$ 3,395,243. In accordance with the Costa Rican legal framework for AIJ forestry projects, the investment capital contribution from the Norwegian partners, equivalent to 200,000 mt of carbon, is US$2 million, consisting of US$1.7 million from RNMFA and US$0.3 million from NC. While the price of a CTO is that determined by OCIC, based on project development and implementation costs, the average rate of Carbon for this project was US$ 10/mt of C or US$ 2.72/mt of CO₂.

  (b) Costa data-Project implementation and AIJ Investment

7. Monitoring and verification of AIJ project activities and results

• As any project using the Costa Rican framework for FESP, FONAFIFO will be responsible for the monitoring of the reforestation and forest conservation activities.

  This project has been designed and will be implemented in a manner that guarantees maximum transparency and access for qualified analysts and project verification entities during all stages of project implementation, including full access to project data, methodology and verification of carbon sequestration and avoidance of emissions resulting from the project.

  A monitoring plan using satellite imagery for three-year periods will be put in place. In addition, a model will be used to analyze the satellite imageries, which compares actual land use with respect to previous years. Besides remote imagery, ground-verification of the project’s status will also take place, i.e. to estimate the volume and the rate of growth of the trees, the height and diameter of random samples will be measured. Monitoring will take place after 1998 to determine the deforestation rate for each period. This rate should decrease as the project is implemented. OCIC will certify the amount of carbon sequestered and avoided by the correct execution of the project.

  RNMFA will have the right to monitor the execution of the project, and will have full access to project data, methodology and verification of carbon sequestration and avoidance of emissions. Review missions will, unless otherwise agreed, be organized every two years during the AIJ Pilot Phase to evaluate progress made in the project implementation and experience gained of relevance to the AIJ Pilot Phase. The participants in the review missions will be designated by MINAE, through OCIC, and RNMFA.

B. Governmental Acceptance, Approval or Endorsement:

(a) In the case of joint reporting, the report is submitted by the designated national authority of one participating Party with the concurrence of all other participating Parties as evidenced by attached letters issued by relevant national authorities;

1. For the activity:

Intermediate and joint report: please add copies of letters of endorsement by each designated national authority of Parties involved in the activity.

As evidenced by the attached letter, this integrated project has been endorsed by the following involved participants: Costa Rican Ministry of Environment and Energy, the Royal Norwegian Ministry of Foreign Affairs, the National Power and Light Company of Costa Rica and the Norwegian Consortium, under an agreement signed on October 26, 1996.

2. This report is a joint report:

Please find enclosed a copy of the agreement/endorsement by the RNMFA, the Norwegian designated national authority.

C. Compatibility with supportiveness of national economic development and socio-economic and environment priorities and strategies:

This project is designed to be fully-integrated and are totally consistent with the goals of the government of Costa Rica, that is to: augment the country’s renewable energy supply, internalize costs of environmental services, and sell nontraditional goods and services in which Costa Rica has a natural comparative advantage, such as the service of cost-effective greenhouse gas emissions reductions.

The Certifiable Tradable Offset (CTO) financing mechanism for the forestry component has been developed, as the first worldwide of its kind, in order to gain practical experience with such a mechanism explicitly designed with pilot phase objectives in mind, i.e. to contribute to the information base needed for evaluations of the pilot phase without preempting its outcome. This mechanism will not only assure that individual farmers receive compensation for the environmental services that their forest provides, but it will also assure to AIJ investors that the farmers commitments are legally binding for at least 20 years. Without AJI funding, it is certain that the FESP program, a component of the new Forestry Law, will not be applied to this pilot project, along with the environmental, economic and social benefits associated with it.

This project represents a full integration of public and private participation through the production of environmental services, such as GHG emissions reductions. In addition, demonstrated that sustainable development can be good business for all participants and that the CTOs are highly cost-effective and economically viable in terms of real costs of emissions reduction when subject to mutually beneficial incentive structures.

D. Benefits derived from the AIJ project:

E. Greenhouse gas impacts of the AIJ Project

With this project, the CNFL’s goal of GHG emissions reduction will be realized through the carbon sequestration due to enhanced biomass growth and carbon storage through forest conservation. The project will provide a total cumulative greenhouse gas reductions estimated at 230,842 mt C (see next Table). This estimate was determined based upon the assumption of 25 years life for the project.

For this proposal, the project "cumulative effect" scenario is given by the accumulation of the annual "project effect". For the primary forest conservation, it was assumed that in the absence of the project, the current land-use pattern would continue along with decline in carbon stocks. Therefore, the "project effect" estimation was based upon the emissions avoided by halting deforestation.

The methodology used for the estimation of the biomass was based upon the "Life Zones System", developed by Holdridge from the Scientific Tropical Center, based in Costa Rica. It permits to map forest types not only in terms of bioclimate or life zones, but also in terms of local forest and soil ecosystem type or plant association, within each distinctive life zone.

The carbon was estimated considering a proportion of green biomass/dry biomass of 0.5 and the fraction of carbon in the dry biomass used was 0.45. This calculation was done by Life Zone system and an average of 67 mt C/ha was obtained. On the other hand, the deforestation rate or risk of change in the use of the land in the area was estimated in 7.5%-weighted average. This value was obtained based on the Model of the Critical Areas developed by FUNDECOR. Landsat images from 1986 and 1992 were used to validate the model. Therefore, considering the area of 2,000 ha to be protected by the project, the avoided emission for the first year, 1997, was 10,050 mt C (=2,000 ha * 0.075 * 67 mt C/ha) and for 1998 , 9,296 mt C (=1,850 ha * 0.075 * 67 mt C/ha). Thus, the "cumulative effect" of the project or the emissions avoided by the net storage of Carbon in the protected primary forest during the project life span, 1997 trough 2021, was estimated to be 41,000 mt C. (see next Table).

To determine the "project effect" or the carbon sequestration in the secondary forest, the estimation of biomass was based on studies done in Costa Rica by the " Centro Agronómico Tropical" (CATIE), a worldwide recognized institution that for many years has developed forestry investigations with native species of the tropics. For the carbon estimate, a proportion of green biomass/dry biomass of 0.5 was used and the fraction of carbon in the dry biomass used was 0.45. This calculation was done using the Life Zone Systems and an average of 2 mt C/ha was obtained. The area to be protected by the project is 1,000 ha and to accomplish this, the annual incorporation of 100 ha will take place along a period of 10 years, starting in 1997. For 1997, the Carbon sequestered was estimated to be 200 mt C (= 100 ha * 2 mt C/ha). Thus, the "cumulative effect" of the project or the amount of Carbon sequestered in the secondary forest during the project’s life, 1997 through 2021, was estimated to be 114,917 mt C. (see next Table).

For the reforestation component, the estimation of biomass was based on studies done by CATIE, the "Instituto Tecnológico de Costa Rica" and the "Universidad Nacional". To determine the Carbon sequestration, a green biomass/dry biomass proportion of 0.45 was used and the carbon fraction in dry biomass used was 0.45. The annual increase rate for the species to be planted was estimated to be 20 m³ /ha/year and the rotation for the species 25 years. The new plantation to be established is 1,000 ha, and to accomplish this, an annual incorporation of 100 ha will take place along a period of 10 years, starting in 1997. For 1999, the Carbon sequestered was estimated to be 405 mt C (= 100 ha * 20 m³ /ha/year * 0.45 * 0.45) and for the year 2000 810 mt C (= 200 ha * 20 m³ /ha-year * 0.45 * 0.45). Thus, the "cumulative effect" of the project or the amount of Carbon sequestered in the plantations during the project’s life, 1997 through 2021, was estimated to be 74,925 mt of C. (see next Table).

Estimated amount ( annual "effect" and "cumulative effect")

of Carbon stored in forest and fixed by plantations

F. Additionality to the financial obligations of Parties included in Annex II to the Convention,

within the framework of financial mechanism as well as to current Official Development Assistance flows.

The AIJ funding will be made available by the Norwegian Ministry of Foreign Affairs and the Norwegian Consortium. The contribution of the RNMFA is provided from a separate budget line, the Norwegian Climate Fund, which has been established in addition to the Norway’s Development Assistance Budget and will not be reported as part of Norway’s Official Development Aid (ODA). This contribution is provided in addition to Norway’s financial commitments under UNFCCC. The contribution from the Norwegian Consortium is a private sector contribution provided specifically as an AIJ investment. CNFL contribution is for the project development.

Sources of project funding.

As above-mention, the forestry activities will take place under the FESP program. Among the incentives, it provides an annual payment of about US$ 58/ha/year, against proof of effective conservation of forests or US$ 48/ha/year for reforestation. These contracts will be legally binding for at least 20 years. On the other hand, as proof of the CO₂ emissions sequestered or avoided through the investment, the foreign AIJ investors will receive CTOs in return for their financial contributions on AIJ. The rate at which the CTO is issued to the investors is US$ 10/mt C or US$ 2.72/mt CO₂ . Although the Norwegian AIJ additional investment is part of the project, consistent with Decision 5/CP/1 of the Conference of the Parties to the UNFCCC, no GHG emissions reductions credits will be claimed by Norway during the pilot phase. Without the AIJ additional funding, it is certain that the FESP program will not be applied to this project, along with the environmental, economic and social benefits associated with it.

G. Contribution to capacity building, transfer of environmentally sound technologies, and know-how to other Parties, particularly developing country Parties, to enable them to implement the provisions of the Convention. In this process, the developed country Parties shall support the development and enhancement of endogenous capacities and technologies of developing country Parties.

Because the forestry component involves education and outreach activities, information about proper silviculture techniques will be passed on to individual farmers and community organizations, contributing in this way to local know-how capacity building. Furthermore, the implementation of the financial structure of the AIJ component, as one of the first application of this new legal procedure, will contribute to develop endogenous capacity in this field. In this way, one of the tenets of Costa Rica’s official commitment to sustainable development is the use of market oriented initiatives to mitigate climate change. The designation of CTOs as market instruments designed to attract foreign investments for carbon mitigation is a cornerstone of this approach. The CTO will function as the financial instrument through which Costa Rica may fulfill its national priorities of biodiversity conservation, mitigation of climate change, production of local environmental services, such as protection of aquifers and low-impact ecotourism, and direct participation of small landholders in all these activities.

H. Additional comments, if any, including any practical experience gained or technical difficulties, effects, negative impacts or other obstacles encountered

Norwegian comment:

The Government of Norway and the Norwegian Consortium, the investors, found the cooperation with the Costa Rican side to benefit significantly from the fact that know-how and capacity for AIJ cooperation is in place.

Costa Rican comment:

In February 1997, the Government of Costa Rica, through OCIC, issued CTOs to Norwegian AIJ investors in exchange for the first disbursement of US$1 million corresponding to the first tranche of 100,000 mt of C. In 1997, the final disbursement of US$1 million was channeled to FONAFIFO in exchange for the second tranche of 100,000 mt of C .

The issued CTOs for the 200,000 mt of C, corresponds to an equivalent amount of carbon "not emitted" during 1996 and 1997, attributed to private forestry conservation activities financed by the Government of Costa Rica under the FESP program. Those activities comprise a total of 20,856 ha, corresponding to 382 legally binding contracts for private forestry conservation in different regions of the country.

With the total US$2 million AIJ fund, an expected additional 900 private forest landowners will be compensated, under the framework of legally binding contracts, for the environmental services provided by their forestry efforts, such as conservation and reforestation of a minimum 10,000 ha of natural and secondary forest in Costa Rica. During the execution of the FESP program, priority will be given to the 4,000 ha comprising the watershed of the Virilla upper-river basin. Without the AIJ additional funding, it is certain that the FESP program will not be applied to this project, along with the environmental, economic and social benefits associated with it.

During the period from 1997 to 1999, the FESP program allows for a total of 203,434 ha under legally binding contracts conservation in different regions of the country, according different forestry activities as shown in the following Table. The total investment was US$ 23,976,972.

Concomitantly, according the terms of the bilateral agreement for the Costa Rica / Norway Reforestation and Forest Conservation AIJ Pilot Project, the commitments stated in section E of this report has been fully accomplished by Government of Costa Rica (see next Table).

During the period 1996 to 1999, a total of 2,387 ha in the Virilla upper-river basin have been incorporated to the FESP program. This area corresponds to about 60% of the total 4,000 ha referred by the project agreement (see next Table).

Implementation 1996-1999

FONAFIFO and CNFL have executed the project implementation, supported by FUNDECOR (Central Mountain Range Development Foundation). Satellite images, ground-truething data, and independent audits ensured that the submitted information reflects the reality.

This AIJ Pilot Project constitutes a groundbreaking precedent of using the CTO financial mechanism, with a "commodity approach", to clean the atmosphere and, in this way, contributes on the basis of "learning by doing", to further develop AIJ. Such scheme could be promoted on a global scale as a financial mean to transfer additional finance resources to developing countries in order to promote the international effort to abate emissions of greenhouse gases to combat the global warming.