Methodological and Technological issues in Technology Transfer

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12.5.8 Financial Mechanisms2

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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