CC:INFO/AIJ: Costa Rica / Norway Reforestation and Forest Conservation AIJ Pilot

Costa Rica - Norway Second Report on Activities Implemented Jointly June 1998

Project Description:

Title of Project: Costa Rica / Norway Reforestation and Forest Conservation AIJ Pilot

Project

The project has been developed in the Virilla river basin, in Costa Rica, where four thousand hectares (ha) of reforestation and forest conservation/regeneration is taking 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 years 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’s foreign investments to compensate small and medium landowners for their forestry activities. 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 given by the forest.

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., 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 to the promotion of AIJ/JI policy and activities. OCIC is 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 :

Name of organization	Norwegian Consortium (NC)
Function within activity	Project foreign investor
Country	Norway
Contact Person	Bjorn Nordby
Job title	NC Representative
Post Code	Drammensveien 20A 0255 Oslo, Norway
Telephone	+47-22 54 04 00
Fax	+47-22 55 53 30

Name of organization	Royal Norwegian Ministry of Foreign Affairs (RNMFA)
Function within activity	Foreign investor - AIJ
Country	Norway
Contact Person	Jostein Leiro
Job title	Head of Division
Post Code	JuniPlassen/Victoria Terrace PO Box 8114 Dep., N-0032 Oslo
Telephone	+47-22 24 36 00
Fax	+47-22 24 95 80

Host Contact:

Name of organization	National Power and Light Company (CNFL)
Function within activity	Local investor and developer
Country	Costa Rica
Contact Person	Pablo Cob
Job title	General manager
Post Code	Apartado 10026-1000 San José
Telephone	(506)223 44 33
Fax	(506)221 46 01

Name of organization	Costa Rican Office on Joint Implementation (OCIC)
Function within activity	Designated national authority on AIJ
Country	Costa Rica
Contact Person	Adalberto Gorbitz
Job title	Manager
Post Code	PO Box 7170-1000
Telephone	(506)290 12 83
Fax	(506)290 12 38
E-mail	crocic@sol.racsa.co.cr

3) Activity :

General description: General description: : (continue)	The objective is to conserve and rehabilitate the forest in the upper Virilla river basin, to produce among others environmental benefits, the reduction of atmospheric GHG emissions through biomass growth and avoidance of future emissions. The forestry activities will improve the existing hydrological resources of the watershed, increasing the efficiency of the hydroelectric plants and enhancing the displacement of fossil fuel use in the national electricity system. The Virilla river is location for several hydroelectric projects. The Virilla river basin was selected as priority at a national level, because it serves as an aquifer recharge zone for the main aqueducts from the Greater Metropolitan Area of San José, and due to its value and vulnerability as a protected area in the midst of the most populated zone of the country. In addition, the conservation of the forest area as a carbon sink, will provide payments to private small and medium landholders for the environmental service of managing their lands, consistent with the objectives of the new Costa Rican Forest Law Nº 7575.
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 is 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 has been 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 ninth of the 15% sales tax revenue on fossil fuels used to compensate private forest owners for environmental services provided by forestry activities. The definition of environmental services includes: reductions of GHG emissions, protection of biodiversity, 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 emissions reductions, 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. OCIC is 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. Each CTO will be guaranteed against offsets which have 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 forestry 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.

4) Cost:

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$0.3 million from NC. The price of a CTO was determined by OCIC based on project development and implementation costs. The average price for the metric ton of carbon was US$ 10 or US$ 2.72/mt of CO₂.

Implementation Cost and AIJ Investment

Item	1997	1998	1999	2000	2001	2002
Project cost (US$)	2,137,092	114,174	114,174	114,947	117,625	169,107
AIJ investment (US$)	2,000,000
US$ / mt CO₂:	2.72	2.72	2.72	2.72	2.72	2.72

Item	2003	2004	2005	2006	Total
Project cost (US$)	157,262	156,490	157,880	156,490	3,395,243
AIJ investment (US$)					2,000,000
US$ / mt CO₂:	2.72	2.72	2.72	2.72

Mutually Agreed Assessment Procedures:

As any project using the Costa Rican framework for FESP, FONAFIFO is responsible for the monitoring of forestry activities. This project has been designed and implemented in a manner that guarantees maximum transparency and access for qualified analysts and project verification entities during all stages of the project implementation, including full access to project data, methodology and verification of the 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 the 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 the progress made in the project implementation and the 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:

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

This report is a joint report:

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

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 of the project has been developed as the first worldwide of its kind 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 AIJ investors that the farmers commitments are legally binding for at least 20 years. Without AJI funding, 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:

Environmental Benefits (EB):	The conservation and rehabilitation of the forest in the upper Virilla river basin will produce global and local environmental benefits. Global benefits include mitigation of GHG and the protection of the biodiversity. Among others local benefits include protection of the aquifers, reduced erosion of soils, improvement of the water quality and the stabilization of hydrological regime in the watershed.
Do quantitative data exist for evaluation of EB:	The carbon dioxide emissions reductions amounts a total of 230,842 mt C during the 25 years life time of the forestry actions.
Social Benefits (SB):	The involvement of local small and medium size landowners in forestry activities, through individuals legally biding contracts, will improve the income and the living conditions for the residents in the watershed area.
Do quantitative data exist for evaluation of SB:	With the total US$2 million Norwegian AIJ additional investment an additional number of small and medium landowners has been compensated, under the framework of the FESP program for the environmental services provided by their forestry efforts.
Economical Benefits (EB):	The CNFL’s four hydroelectric plants in the Virilla river basin cascade are highly dependent upon the hydrological conditions found in the upper river basin, precisely where the forestry project will have its area of influence. Therefore, the reforestation and forest conservation of the upper-river portion of the basin will improve the existing hydrological resources and the quality of the water, increasing the efficiency of the hydroelectric generation. As a result, the dependence on fossil fuels consumption for electricity generation in the national electric system will be reduced and the cost of electricity generation will decrease. Furthermore, the provided scenic beauty will promote ecological tourism attraction in the area.
Do quantitative data exist for evaluation of EB:	The hydrological regime in the Virilla basin has changed dramatically over the past 20 years, specially regarding the volume of water and the mean and minimum flow during the dry season. During the rainy season, reservoirs experience almost instantaneous point rises in the volume carried by the river and often leads to a plugging of the conduction systems when large quantities of sediments are carried, which in turn diminishes the useful capacity of the reservoirs. The maximum expected benefit of the project for the upper Virilla river basin’s hydrological regime is a 2% of improvement in the annual plant factor. It can be demonstrated that an effective improvement in the quality of the water can also improve the generation of power by prolonging the useful life of the equipment and reducing downtime for maintenance and non-schedule shutdowns caused by excessive solid materials in the water. The benefits of water quality can be quantified with aid of records which differentiate shut downs by type. It is estimated that a production capacity may be increased from 5 to 7% through the improved water quality alone. This statistic is based upon the experience of plant administrators and operators.

E) Calculations of the Contributions of AIJ Projects to Mitigation of Climate Change

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 emissions 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 Centre, 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 ecosystems types or plant association, within each distinctive life zone.

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. 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 primary forest 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 the Life Zone System. 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).

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, 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 lifespan, 1997 through 2021, was estimated to be 74,925 mt of C (see next Table).

Pilot Project

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

of Carbon emissions avoided in primary forest and fixed by secondary forest and plantations

	Primary Forest		Secondary Forest		Plantations			"Cumulative Effect"
	Deforestation (ha)	Emissions Avoided (mtC/year)	Accumulate Hectares	Carbon Sequestration (mt C/year)		Accumulate Hectares	Carbon Sequestration (mt C/year)		Total Carbon with Project (mt C/year)
1996	2,000	0	0	0		0	0		0
1997	1,850	200	100	10,050		100	0		10,250
1998	1,711	400	200	9,296		200	0		9,696
1999	1,583	600	300	8,599		300	405		9,604
2000	1,464	800	400	7,954		400	810		9,564
2001	1,354	1,000	500	7,358		500	1,215		9,573
2002	1,253	1,200	600	6,806		600	1,620		9,626
2003	1,159	1,400	700	6,295		700	2,025		9,720
2004	1,072	1,600	800	5,823		800	2,430		9,853
2005	992	1,800	900	5,386		900	2,835		10,021
2006	917	2,000	1,000	4,982		1,000	3,240		10,222
2007	848	2,000	1,000	4,609		1,000	3,645		10,254
2008	785	2,000	1,000	4,263		1,000	4,050		10,313
2009	726	2,000	1,000	3,943		1,000	4,050		9,993
2010	671	2,000	1,000	3,648		1,000	4,050		9,698
2011	621	2,000	1,000	3,374		1,000	4,050		9,424
2012	575	2,000	1,000	3,121		1,000	4,050		9,171
2013	531	2,000	1,000	2,887		1,000	4,050		8,937
2014	492	2,000	1,000	2,670		1,000	4,050		8,720
2015	455	2,000	1,000	2,470		1,000	4,050		8,520
2016	421	2,000	1,000	2,285		1,000	4,050		8,335
2017	389	2,000	1,000	2,113		1,000	4,050		8,163
2018	360	2,000	1,000	1,955		1,000	4,050		8,005
2019	333	2,000	1,000	1,808		1,000	4,050		7,858
2020	308	2,000	1,000	1,673		1,000	4,050		7,723
2021	285	2,000	1,000	1,547		1,000	4,050		7,597
Total				114,917					230,842

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.

In this project, the AIJ additional funding for implementation was made available by the Norwegian Ministry of Foreign Affairs and the Norwegian Consortium, a private sector participant. 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 the Norwegian 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.

Category of funding	Amount (US$ million)
CNFL	1.39
RNMFA	1.7
NC	0.3

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.

One of the tenets of Costa Rica's official commitment to sustainable development is exploring the use of the market-oriented initiatives to mitigate climate change. The CTOs with a commodity approach is a cornerstone of the strategy. This project, which is partially banked on CTOs revenues, is consistent with the legal and institutional framework for Costa Rica's market-oriented approach to drive the sustainable development agenda. Furthermore, as the first application of this new legal procedure, will contribute to develop endogenous capacity. In this way, the CTO will function as the financial instrument through which Costa Rica may fulfill its national priorities of mitigation of climate change, biodiversity conservation, and also the 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

Recent project developments:

The financial structure of the Costa Rica/Norway AIJ Pilot Project is the first application of the CTO as a new legal procedure officially established to democratize AIJ initiatives in Costa Rica. On the basis of the FESP program, in February 1997, the Government of Costa Rica, through OCIC, issued CTOs to the Norwegian AIJ investors regarding the first disbursement of US$1 million to compensate the first 100,000 mt of C. This emission was guaranteed against an equivalent amount of 137,775 mt of C "not emitted" during 1995, generated by forestry conservation actions financed by means of the fossil fuel tax revenues used as the capital seed. This action comprises a total of 20,856 ha, corresponding to 382 legally binding contracts with small and medium landowners in different regions of the country.

During last January (1998), OCIC issued to the Norwegian AIJ investors the second tranche of CTOs for the additional 100,000 mt of C, according with the agreement signed in October 1996 by the national designated parties. Consistent with the Costa Rica/Norway Agreement, the total US$ 2 million AIJ investment was channeled to FONAFIFO to continue the FESP program in different regions of the country.

Additional to the AIJ foreign investments on CTOs, the FESP program is financed by part of the revenues of a neutral fiscal tax on fossil fuel. Local private hydroel

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