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The existing and emerging financial mechanisms may have to be strengthened
and reoriented to promote forestry mitigation projects. The traditional funding
sources for forestry are domestic official, multilateral, external developmental
assistance and commercial (private). In developing countries, large domestic
financial gaps will make increasing internal funding for the forestry sector
difficult, and alternate sources will be required (FAO, 1997). Post-UNCED international
opinion is that forests warrant preferential allocation of funds. Estimates
suggest that forestry accounts for only 1.6% of combined 1993 official and private
funding transfers to developing countries. In 1993 bilateral aid accounted for
60% of developmental assistance flows to the forestry sector followed by multilateral
banks (27%). An FAO survey revealed that 60% of responding countries relied
on foreign sources for the greater part of their forestry sector funding (FAO,
1997). Thus, external funding is critical to the forestry sector. The private
sector is increasingly becoming an important source of such funding. There are
a number of domestic sources of funding to the forestry sector, particularly
industries and farmers. Multilateral and private agencies may prefer funding
private sector institutions in developing countries. However, bilateral developmental
assistance may largely concentrate on forest conservation and protected areas
that come under the control of state forest departments. Significant additional
investment is required for R&D institutions in developing countries as currently,
only 5% of developmental assistance is channelled to forestry research compared
with about 10% to agriculture.
GEF. GEF is an institutional arrangement for supporting climate change
mitigation programmes through providing incremental costs and supporting capacity
building programmes. GEF needs to re-orient its operational programmes to incorporate
forestry mitigation, which is being currently attempted through the new operational
programme-12 and adaptation programmes. GEF could reorient and intensify support
to programmes for capacity building (as suggested by FCCC/CP/1998/ADD1) for:
The new operational programme, which is currently being finalised, is likely
to facilitate a systematic and widespread implementation of viable carbon sequestration
opportunities. It may finance information and advisory and capacity building
services to public or private decision-makers, provide exposure to policy and
business concepts, provide access to mainstream sources of financing. Furthermore,
GEF may consider investment financing and risk management services through various
forms of innovative financing including contingent financing or risk guarantee
schemes. Investment in the majority of climate mitigation projects in the forestry
sector also leads to conservation of biodiversity, a major area of concern to
GEF.
Flexibility mechanisms. CDM, if approved by the UNFCCC inclusive of forestry
activities, along with JI, could be viewed as potential investment opportunities
when they become operational. The Kyoto Protocol restricts JI to activities
between Annex B countries. Some forestry sector JI projects may be undertaken
between the present members of Annex B, such as two projects
now underway between the US and Russia, but the potential might increase substantially
if some developing countries in tropical forest areas join Annex
B in the future. The lessons from JI-like projects begun in tropical countries
under such programmes as the US initiative on Joint Implementation (US-IJI)
could be valuable both in the context of possible future JI activities if more
countries join Annex B, and, potentially, for similar activities under the CDM.
If some tropical countries join Annex B, the potential for emissions trading
under Article 17 of the Kyoto Protocol would offer substantial opportunities
for these countries to capture carbon benefits by reducing their emissions from
deforestation. Because such trading is based on national-level carbon accounts,
these benefits are not affected by problems of leakage and boundary definition
that are common in project-based initiatives such as those under JI and the
CDM. Decisions by the governments of these countries on policies that affect
deforestation would require reliable scenarios to predict the results of possible
policy changes on deforestation and other measures. This could often benefit
from technology transfer of analytical tools and experience from elsewhere.
A good example of using a mix of financial incentives for forest conservation
and reforestation programmes is Costa Rica (Castro and Arias, 1998).
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