Economic potential of land-use change and forestry for carbon sequestration and poverty reduction

This study was motivated by the possibility that markets for greenhouse gas emissions may benefit smallholders in developing countries, by compensating them for adopting agroforestry systems that capture more carbon dioxide (CO 2) from the atmosphere than traditional cropping systems. The research project (PLIA/2002/066) was based in Indonesia, but the principles identified and the techniques developed have application to other countries and, indeed, to environmental services other than carbon sequestration. Tree-based systems are a convenient way of reducing net carbon emissions by sequestering CO 2 from the atmosphere. Through the process of photosynthesis, trees absorb CO 2 which remains fixed in wood and other organic matter in forests for long periods. This is important for tropical countries such as Indonesia that have large areas of rainforest as well as deforested, degraded land. The global-warming problem creates a demand for carbon credits, and tropical countries are in a position to supply these credits while reducing problems of deforestation, land degradation and poverty. Carbon sequestration can be an attractive activity for smallholders in remote areas because the 'product' does not need to be transported and there are no quality differences between carbon molecules; they have the same effect on climate regardless of where they are emitted or absorbed. Landholders who supply carbon credits will incur different abatement costs (the costs per unit of uncertified emission reductions) and transaction costs (the costs of converting those emission reductions into a tradeable commodity). Obviously, smallholders cannot participate directly in the international carbon market, but they could participate in carbon-sequestration projects designed by intermediaries. A possible obstacle to the participation of smallholders in carbon markets is the need for monitoring, verification and enforcement of project activities, and their associated transaction costs. The analysis in this report focuses on the Clean Development Mechanism (CDM), Article 12 of the Kyoto Protocol, but the analytical techniques can be applied to the exchange of carbon credits under other schemes, such as the Prototype Carbon Fund of the World Bank. The medium of exchange under the CDM is the Certified Emission Reduction (CER), measured in tonnes of CO 2 equivalents (CO 2 e), which takes the global-warming potential of other greenhouse gases into account to provide a standard tradeable unit for the carbon market.