| European
Tropical Forest Research Network |
This section focuses on market mechanisms that contribute to payment for multiple environmental services, and policy and other measures that enable or facilitate them. On the basis of a large number of cases, Natasha Landell-Mills and co-authors review the experiences with the development of market mechanisms, and their role with regard to poverty alleviation (see also Section VII on sustainable livelihoods and poverty alleviation). Vag-Lan Borges analyses the potential for further development of green markets for non-timber forest products in the Brazilian Amazon. Aurelio Ramos describes the Biocomercio programme, a facilitating mechanism in support of the development of green enterprises in Colombia. Jyrki Salmi who has been involved in the formulation of National Forest Programs and forest sector financing strategies in various countries, reviews the lessons learnt in creating enabling environments to increase private investments and the use of market-based instruments. Carmenza Robledo describes a pilot project in Colombia involving different partners, which is aimed at the development of the financing mechanism of environmental shares to enhance private investment in sustainable forest management. Finally, Sections IV, V and VI of this issue also present examples of market mechanisms, which are restricted to the delivery of specific environmental services
By Natasha Landell-Mills, Ina Porras & Joshua Bishop
Market approaches to environmental management are increasingly common in all sectors of the economy. Forestry is no exception. As forestry sectors around the world have opened their doors to the private sector, governments have been increasingly attracted to market-based instruments as tools for guiding private investment. Of the many instruments available to policy-makers, by far the most ambitious to date is the development of markets for forest environmental services, such as carbon sequestration, biodiversity conservation, watershed protection, and landscape values. Markets are thought to offer an efficient mechanism for promoting and financing forest protection and sustainable forest management.
Gaps
in knowledge on market development
However, policy-makers' enthusiasm for market development is not matched by
practical understanding. Very little guidance is available on the mechanics
of market evolution, or on the impacts of markets for human welfare. Of particular
concern is the lack of knowledge related to what market creation means for
the poor. This is both a moral and a practical concern, as governments are
charged not only with protecting the environment but also reducing poverty.
By undertaking a global review of emerging markets for carbon sequestration, biodiversity conservation, watershed protection and landscape beauty, a forthcoming review paper seeks to shed light on five key questions relating to market development:
In total, 287 cases are reviewed from a range of developed and developing countries in the Americas, Caribbean, Europe, Africa, Asia and the Pacific. While experiences vary, the review points to several key lessons:
Defining
commodities is fraught
While commodities in existing markets are easily identified, this is often
one of the most challenging aspects of market creation. It is also one of
the most important steps for determining whether or not the market will take
off and be sustained. In the case of environmental services, commodities must
overcome the hurdles of non-excludability and non-rivalry to make the service
marketable. They must also move in line with services such that payments for
the commodity translate into payments for the service. Achieving these twin
goals is extremely difficult.
Markets
are multi-stakeholder affairs
While the private sector tends to be the main player, local NGOs, communities,
governments, international NGOs and donors also play key roles as buyers,
sellers, intermediaries and suppliers of ancillary services.
Markets
remain immature, but momentum is growing
In the majority of situations markets remain nascent affairs characterised
by unsophisticated payment mechanisms, low levels of price discovery, high
transaction costs and thin trading. Yet, the picture is changing. Growth in
pooled transactions has given the market a boost as more and more buyers come
together to spread risks and the emergence of ‘over-the-counter' trades reflects
a growing confidence amongst suppliers. Gradually, case-specific negotiations
are being replaced by trading systems that seek to promote a greater volume
of payments at lower costs.
Global
services do not require global markets
The extent of the market depends on the nature of the service and on market
design. Given the difficulties of defining property rights and regulatory
oversight, local level markets for global services may offer the best starting
point for market development.
Markets
are nested
Markets do not exist in isolation, but are moulded to fit existing institutional
landscapes. Successful markets often depend on the emergence of supporting
regulatory and co-operative arrangements. The promotion of markets without
reference to their broader institutional context is likely to fail.
Market
drivers evolve
Just as markets develop, the factors driving their emergence alter over time.
While demand-side drivers are most closely associated with market creation
to date (e.g. based on a growing appreciation of benefits, awareness of threats
to supply or company public relations exercises), suppliers are becoming increasingly
forthright in demanding payment, often supported by government environmental
regulations.
Market
development takes time and effort
A number of steps are involved in establishing payment mechanisms. Services
need to be identified and clearly linked to forestry activities that ensure
delivery, willingness to pay established, commodities defined and the trading
infrastructure set up. Time is also needed for feedback and gradual improvement.
The process can be long and may involve setbacks.
Market
benefits are widely applauded, while costs are poorly recorded
Very few thorough
assessments of the costs and benefits of emerging markets exist. For the most
part, market descriptions are general, ad hoc and vague. Moreover, because
literature tends to be written by proponents of markets, there is a heavy
emphasis on benefits, and little critical analysis of costs.
Markets
may or may not benefit the poor
The lack of critical analysis is particularly prevalent when it comes to impacts
for the poor. There are a number of reasons for concern. Because the poor
often lack property rights, they are likely to struggle not just for a share
of business, but they will have to fight to retain control over, and access
to, the resources on which they depend. The poor also lack the requisite skills
and resources to participate in emerging markets. Transaction costs, which
are already high, are even higher for poorer players. Ultimately, however,
the poor lack power. Where poor groups have little voice there is a real risk
that they are marginalised from market benefits. Yet risks that markets will
further entrench existing inequities must be set against possibilities that
markets will provide a catalyst for change. By helping poor groups transform
natural capital embodied in forests into financial flows, markets provide
local people with greater flexibility in exploiting their natural assets and
help to reduce vulnerability by diversifying income base. Guidance on how
to ensure markets enhance rather than detract from, poor peoples' welfare
is urgently needed.
As with any desk study, the review is restricted in what it can achieve by the availability and quality of written material. Nevertheless, by providing a comprehensive review of existing material on emerging markets, it provides a sound basis for drawing out preliminary insights and identifying gaps for more detailed investigation.
Natasha
Landell-Mills
International Institute for Environment and Development (IIED)
3 Endsleigh St. London, WC1H 0DD United Kingdom
Tel: +44 (0)207 388 2117, Fax: +44 (0)207 388 2826
Email: natasha.landell-mills@iied.org
By Vag-Lan Borges
Since 1996, this research in the Amazon tropical rainforest of Brazil has focused on the analysis of the dynamics of the economy of forest products, particularly non-timber forest products (NTFPs), and its institutional arrangements. During the nineties, foreign aid was a dominant instrument in financing the livelihood of forest dwellers and forest management in the Amazon. However, in the same period the economic and social living conditions of forest people became worse and the depletion of forest resources continued. The conclusion of the research is that the institutionalisation and strengthening of markets and household economy for the trade in sustainable forest products represents a simpler, cheaper and more efficient way to promote human development, self-reliance, and biodiversity conservation in the Amazon. This institutionalisation should include the definition and enforcement of property rights, technological innovation, technical training, standardisation of processes and products, and better information diffusion to reduce market asymmetries and imperfections.
Economic
importance of NTFPs
Although all theoretical approaches agree on the high ecological and economic
values of forests and also on the necessity to plan and assure their multiple
use, this tacit agreement is not the case for the strict economic issue of the
NTFPs. On the one hand, neoclassical economists and their followers postulate
that non-timber extraction is a primitive and transitory economic activity.
According to them, it will give way to species domestication and large-scale
cultivation or will be substituted by similar products, for the reason of its
supply rigidity and increasing shortage in view of demand growth. On the other
hand, Brazilian environmentalists recognise the economic importance of this
kind of forest extraction, which involves about 16% of rural inhabitants of
the Brazilian Amazon, and the low impact and non-exclusive character of this
activity. They therefore defend a new type of governmental intervention through
fiscal and credit subsidies that privilege this economic sector, thus contributing
to the conservation of forest resources. This article presents a third approach
for the analysis of this issue, by postulating that the ecologically important
NTFPs are also economically viable. Therefore, the better way to finance trade
in sustainable forest products is by implementing and using market mechanisms
and instruments.
Competition
by substitute products
On the basis of time series data of production of several NTFPs of the Amazon
and field-research evidence, one perceives that after the beginning of competition
by a ‘substitute product', the production of the NTFP does not finish completely.
This means that a non-timber product cannot be entirely substituted. If substitute
products respond to expectations of some demand segments, this does not hold
true for others, thus evidencing the existence of diverse demand segments.
Within the context of markets, NTFPs have specific qualities that distinguish them from substitute products, whether cultivated, synthesised or industrially processed. Although supply rigidity of NTFPs implies the substitutability for some demand segments, other segments remain able to buy them, since these products respond to market expectations of quality, quantity, supply normality and price. The corresponding market segments are the "green markets" and the "organic markets". The "green markets" represent the group of consumers who will pay more for products that contribute to conservation and ecological sustainability, whereas the "organic markets" represent those consumers (both firms and individuals) who demand products from native source, with a high genetic variability, and produced without using toxic inputs. These two market segments are distinct niches that are willing to pay more for specific qualities of non-timber products, whether or not substitute products are available. These observations lead to the deduction that for these markets a non-timber product does not compete with substitutes. This also implies that if the production of a non-timber product initially falls when the competition of a substitute product starts, suppliers can search for specific niches.
Improving
market mechanisms
Thus, within this economic environment, the improvement and perfecting of markets
networks is the better and most important strategy to finance sustainable development
and forest management including biodiversity conservation. This requires changes
in four interrelated dimensions of forest economy:
Poor access to information is an important bottleneck in the development of the trade in NTFPs. It constrains the capacity of extractors to obtain optimal prices for their products. Often, rural credit is expensive and technology does not develop at the necessary pace. While improving information flow, governmental initiatives to organise this sector need to promote the creation and implementation of new technologies to improve market acceptability. New regulations are also necessary to ensure that each NTFP attains acceptable standards of quality and that the management of the resource is sustainable. Finally, government must provide security in the area of property rights, concessions and tenure over natural resource allocations.
Conclusion
This theoretical framework has been used and implemented by programs and projects
financed by the Brazilian government and ENGO in the Amazon, aimed at promoting
rural development and sustainable forest management, based on trade in non-timber
forest products. The framework may also be a true policy alternative to stimulate
revival of an economic sector that meets objectives of income and wellbeing
of extractive populations and international expectations to conserve biodiversity.
Contact details:
Vag-Lan Borges
Prof. of Contemporary economy at IESB, and Consultant of Brazilian Government
for Environment and Development in the Amazonia
Qd. 2, Conjunto D 15, Bl. C, Apto. 205
73015-020 Sobradinho, DF, Brazil
E-mail: vaglan@uol.com.br.
http://www.iesb.br
By Aurelio Ramos
Colombia is endowed with many of the richest ecosystems in the world. The country has a high overall species diversity as well as many endemic species. In biological richness, the country is surpassed only by Brazil, a nation seven times the size of Colombia. The geographical position and the variety of ecosystems, which include tropical rainforests, savannahs, wetlands, tropical islands, Andean forests and high mountain grasslands, contribute to the country's immense biological diversity.
Biodiversity
loss
This abundance is being lost at a high rate. At a national scale, more than
400,000 ha are annually deforested. Water supplies are also being contaminated,
erosion is threatening the agricultural productivity and forest conversion is
the principal cause of the problem of biodiversity loss. The cultivation of
illicit crops contributes in an important way to this negative process, which
has become a problem in about 80% of the departments of Colombia. New economic
alternatives need to be developed in these areas of conflict.
Biocomercio
Sostenible at work
The objective of the programme Biocomercio Sostenible is to create and promote
mechanisms that enhance the investment and trade of products and services derived
from the country's biodiversity, according to ecological and social sustainability
criteria. Biocomercio Sostenible ("Sustainable Bio-commerce") works as a facilitating
mechanism that gives commercial and market information; it provides technical
assistance to entrepreneurs and companies; and supports companies to define
adequate sustainability criteria for their production systems. Biocomercio is
a programme of the Biological Research Institute "Alexander von Humboldt" and
operates in co-ordination with the Colombian Ministries of the Environment and
Foreign Trade and the BIOTRADE Initiative of UNCTAD. It is a mechanism that
can be used in areas producing illicit drugs in order to help the coca growers
to find new economic alternatives. The products and services on which Biocomercio
currently focuses are agricultural products, wood products, non-timber forest
products, and ecotourism.
Areas
of Biocomercio
The programme is
divided into six areas:
1. Biocomercio
Information System
An information system has been designed particularly for entrepreneurs and other
organisations interested in "bio-businesses." and is currently available online.
2. Entreprise
development
This area facilitates the creation and conversion of firms that want their production
process to meet ecological and social sustainability criteria. The area is divided
into three sub-components of ecological, social, and economic principles and
criteria. Special projects include incentives to entrepreneurs and firms wishing
to apply the sustainability criteria, such as the partial coverage of technical
assistance costs, seed capital investment and soft loans. Five local offices
have been created in support of this area.
3. Market
research
The area of market research defines and focuses on products and services that
are strategic for the development of the country. Much of the research is done
in response to the specific needs of enterprises. The international market research
is done in co-ordination with Proexport (the Trade Promotion Office of Colombia),
CBI and the International Trade Center OMC/UNCTAD. National market research
is developed with local universities and experts. Research also focuses on topics
relevant to Biocomercio, such as intellectual property rights, certification,
legislation, sustainability criteria, and available investment tools. The results
are presented to the public through the information system.
4. Pilot
projects
Pilot projects on topics relevant to Biocomercio are developed together with
entrepreneurs.
5. Investment
and financial tools
This area facilitates the access of entrepreneurs to traditional and new investment
tools. It has the task of designing a fund and searching for investors in order
to help entrepreneurs develop their business plans and obtain seed capital to
start the company.
6. Networks
To this area belong different networks operating in Colombia, each involving
more than 30 institutions. They specialised in a type of product or service
such as non-timber forest products, certified wood, organic agriculture and
ecotourism. Biocomercio works closely with these networks and tries to enhance
their social and ecological impact.
Current
projects
These projects are designed for different geographical areas or productive sectors.
The following examples of current projects illustrate the Biocomercio approach.
Natural
ingredients for the pharmaceutical and cosmetics sector
This is project is developed by CBI, Proexport and the Humboldt Institute. Its
objective is to assist at least 30 Colombian enterprises in their trade promotion
activities by giving them technical assistance in biological and social sustainability
criteria, marketing and trading facilities, and economic incentives. Since the
start in February 2001, six enterprises have been selected already and are participating
in the process.
Enterprise
development in the Colombian Amazon Region
This project developed by Biotrade-UNCTAD, 12 institutions of Bolsa Amazonia
Colombia and the Humboldt Institute, aims to provide technical assistance to
the private and communal enterprises in the Colombian Amazon. It started in
January 2001 and 30 entrepreneurs have been selected for a capacity building
course of three months starting in January 2002. The two best projects will
be provided with seed capital, while Bolsa Amazonia Colombia will support the
other projects.
Andes project
The Humboldt Institute and other national institutions are developing the Andes
project, with financial support from GEF, the government of The Netherlands,
and several Colombian institutions. It is a six-year project that will help
to expand the tools developed by Biocomercio in several locations of the Colombian
Andean Region.
Biocomercio's
national contest
Corporación Andina de Fomento (CAF) and the Humboldt Institute took the initiative
to organise a national contest. Business plans are being developed by more than
100 entities. The aim is to give special soft loans to the best three Biocomercio
projects. The winners will be identified in February 2002.
Aurelio Ramos
Biocomercio, Instituto von Humboldt
Calle 37 #8-40, Mezanine
Bogota, Colombia
By Jyrki Salmi
The IPF(Intergovernmental Panel on Forests)/IFF (Intergovernmental Forum on Forests) processes identified the National Forest Programs (nfps) as a major framework for channelling, prioritising and increasing financing to the forest sector with special reference to sustainable forest management (SFM). The International Forest Advisors Group recommended that the nfp exercises should include the preparation of a specific forest sector financing strategy. Such strategies or related studies have now been prepared in Vietnam, Malawi, Costa Rica, Tanzania and Guyana. The present article summarises the lessons learnt from these country-level exercises. The objective of the article is to disseminate these lessons, and to encourage the inclusion of specific financing strategy elements into ongoing and planned nfp processes in other countries.
National
financing strategies
In the past, the planning of funding of national sectoral development programmes
was essentially based on gap analysis. Comparing the quantitative estimates
of resource needs with actual funding levels identified funding gaps. ODA was
usually resorted to fill the gaps, with varying degrees of success. With the
evolution of thinking on aid, the international policy dialogues on forest-related
issues, and the work of different public and private organisations, this mechanistic
approach has been questioned. It is progressively replaced by increased emphasis
on the creation of frame conditions conducive to investment, based on the qualitative
characterisation of the needs. The role of private investments, market-based
instruments, resource ownership and policy reforms is increasingly recognised
as entry point, often beyond the forest sector itself, which determines the
financing of SFM.
These developments led to the emergence of the concept of financing strategy. Despite significant conceptual development, the financing issues remain politically sensitive, and the mobilisation of financing and the operationalisation of financing instruments technically complex. A national financing strategy is a tool for informed decision making in this regard. It should be linked with a nfp process, and needs to be country-specific and flexible. It identifies and coordinates interventions from global, regional, national and local levels. The goal of the financing strategy is to raise the necessary resources for the implementation of a nfp. The objectives are to mobilise new and additional resources, and to use existing sources and instruments more efficiently through the creation of enabling conditions.
Lessons
learnt
Country level experience on financing strategies available from Vietnam, Malawi,
Costa Rica, Tanzania and Guyana confirm the importance of addressing financing
issues at the same time as a national forest programme is being formulated.
Declining public sector financing to forestry has been a general trend in all
of these countries, mainly due to constant budget deficits and subsequent public
sector retrenchment. Similarly, ODA has been declining. Although the information
is very scarce, it is estimated that the private sector is presently the only
growing source of financing for the forest sector. Consequently, the national
level financing strategies are focusing on:
Vietnam
The main conclusion of the study in Vietnam was that the government forest financing
strategy has focussed too heavily on subsidies. Instead, more attention should
be given to removing barriers for investments in profitable sustainable forestry.
Such barriers include:
These issues are presently being developed further under the joint government-multi-donor Forest Sector Support Program, which can eventually lead to a Sector Wide Approach (SWAp).
Costa
Rica
The Costa Rican case is characterised by various schemes and projects based
on innovative instruments (also see Reyes et al., this issue). This has provided
a "critical mass" of information, knowledge and expertise. Various important
instruments and mechanisms developed include:
Malawi
In Malawi the key recommendations included:
Tanzania
In Tanzania the financing study found that the establishment of a retention
scheme had been a major achievement. It enabled the gradual development of the
sectoral self-financing. The study made detailed recommendations in the following
areas:
Regarding the last point, the study proposed the introduction of SWAp, which is presently being discussed by the government and key donors.
Guyana
In Guyana, the liberalisation of the economy and the removal of trade barriers
and obstacles have significantly improved the business environment. Similarly
it was assessed that the Guyana Forestry Commission should be significantly
strengthened. The narrow human resource base remains the major bottleneck. The
private forest sector has been facing adjustment to open and more competitive
business environment, which has been painful to many companies. On the other
hand, the new situation provides opportunities for well managed companies. The
study proposed further work on the following topics:
Conclusion
In all the above cases, the preparation of a financing strategy or related study
has contributed towards breaking with the tradition of relying on aid as the
only solution for improving the sectoral financing. A wider selection of solutions
is being introduced, including various national financing mechanisms and instruments.
This is an important development, which may lead towards increasing self-financing.
At the same time, the financing strategies are providing a basis for forest
sector SWAps that are expected to increase also the impact of external assistance.
Jyrki Salmi
Indufor Oy, Kulmakatu 15 E
FIN-00100 Helsinki, Finland
Tel: +358-9-6840 1110, Fax: + 358-9-135 2552
E-mail: jyrki.salmi@indufor.fi
By Carmenza Robledo A.
Sustainable forest management does not only imply sustained yield forestry and sustaining a wider array of forest functions, but furthermore a high degree of economic feasibility and social acceptance. With this challenge in mind, the Swiss Federal Laboratories for Materials Testing and Research (EMPA) and the forest group of the Worldwide Fund for Nature developed a project idea in 1998 with the aim to explore options for long-term financing of sustainable forest management in tropical regions (Robledo, 2000).
Environmental
share-issuing company
As a result, the project proposes the creation of a Sustainable Management Entity
(SME) that operates as an environmental share-issuing company. Within its area
of influence, the SME is responsible for the conservation of natural forests
and for the sustainable management of degraded forests and forest plantations,
as well as for improving the living conditions of the population. In order to
address this goal the SME will implement an integrated financing method that
combines three financing sources:
Environmental
Shares
Environmental Shares are shares issued by the SME. A maximum of 49% of the shares
are tradable at the international stock exchange. The remaining 51% of the shares
represent the tenure rights and stay in the hands of the local landowners. The
international business community and other interested parties can buy Environmental
Shares. The acquisition of shares allows shareholders to obtain an "Environmental
Acknowledgment" - issued by an internationally recognized organization - which
can be used for advertising and promotional campaigns. At present it is advantageous
for investors, especially from the industry community, to be committed to sustainable
management of natural resources. The possibility of using an Environmental Acknowledgment
in advertising is widely recognized as an excellent investment.
Currently, there are various approaches to monetarize forest services. A new opportunity is provided by the recognition of forest sinks by the UN Convention on Climate Change (also see Skutsch in this issue). Afforestation and reforestation have been recognized as accountable for projects under the Clean Development Mechanism (CDM). The project includes Certified Emission Reductions (CER) as a core element in financing a SME. Other possible payments for forest services, such as those for watershed management or biodiversity conservation can be considered depending on the specific conditions of a SME.
Pilot
project in Colombia
In early 1999, four partners engaged in the formulation of a pilot project:
the World Bank's forest team, the International Tropical Timber Organization
(ITTO), EMPA and CORNARE, a Colombian institution in charge of sustainable development
at the regional level. The initial project of 18 months titled "Alternative
Financing Model for the Sustainable Development of the Area of San Nicolás"
was financed through the ITTO project cycle in November 1999 (ITTO, 1999). The
main objective of this project is to further develop the concept and to test
the feasibility of the financing method at field level.
The project was implemented in an Andean mountain area in Central Colombia. The total project area comprises 72,000 ha, including 30,000 ha for conservation and 42,000 ha of multiple-use forest. The pilot project has three specific objectives: (i) to develop an investment and financing plan for the SME; (ii) to formulate a forest management plan with participation of the local community; and (iii) to ensure the basic social and institutional conditions required for the implementation of the pilot project.
Current
situation
The socio-economic conditions in the region are characterized by intensive land-use
changes, deterioration of the living conditions of the local population and
the existence of a violent conflict that has deeply affected civil society.
These problems have also resulted in forest degradation and deforestation, as
well as in a reduction of the hydrological potential in the region. In addition,
a decline of prices has influenced wood processing and marketing of wood products
in recent years.
A positive factor is the high degree of organization of the local community. Furthermore, a CORNARE (Corporacion Autonoma Regional del Reinegro-Nare) inventory indicated that there are important forest assets in the region, comprising areas with high potential for sustainable forestry and substantial water resources. With these assets in mind, SFM activities are planned, based on the participation of different sectors. The activities will include forest management (for conservation and multiple-use) and social development, for example through generation of local employment, and equitable distribution of benefits. In order to promote meaningful participation, a Regional Forum has been established. This Forum steers the creation of the SME and is composed of local stakeholder representatives, as well as national and international experts in charge of the technical aspects.
The pilot project relies on a number of technical, social and institutional conditions:
Future
development
The main output of the current project phase will be the business plan of the
SME. This plan will include the results of a comprehensive forest inventory,
a forest management plan, the definition of the baseline and the project scenario,
a program in capacity building, a monitoring system (for both SFM and carbon
forestry), as well as the identification of investments opportunities, costs
and benefits. The project partners are optimistic about the implementation of
the pilot project. A follow-up phase to further develop the investment plan
is under consideration. The project welcomes new partners that are interested
in the proposed innovative approach to put sustainable forest management into
practice.
Dr. Carmenza
Robledo A.
Wood Department EMPA Duebendorf
CH 8006 Duebendorf, Switzerland
Tel: +41 1 823 43 21
E-mail: carmenza.robledo@empa.ch
References:
ITTO, 1999. Alternative financing model for Sustainable forest management in
San Nicolás, Project proposal to ITTO PD 54/99 Rev.2 (F), International Tropical
Timber Organization (ITTO),Yokohama.
Robledo A., C., 2000. Environmental shares and carbon bonds for sustainable forest management in tropical regions. EMPA, St. Galo, 35 pp.
1. Due to the fact that the role of avoiding deforestation for following commitment periods is not yet clear the potential emission reductions for conservation will be accounted separately in the pilot project