-,    - 353
2
René Castro-Salazar
Chief Technical Adviser, u n d p
Sarah Cordero Pinchansky
Instituto Centroamericano de Administracion de Empresas ( i n c a e
), Costa Rica
José A. Gómez-Ibáñez
Harvard University, Cambridge, Massachusetts, u s a
Abstract
Under the United Nations Framework Convention on Climate Change, the countries of the world have been debating climate change mitigation strategies for the past decade. In 1997, the strategy discussion was still ongoing. However, that year, at the
Third Conference of Parties ( c o p
-3) in Kyoto, a Protocol was agreed to (still in the ratification process at the time of this writing) that included provisions to allow countries to meet their reduction commitments by buying credits from other countries.
Costa Rica has been a pioneer in developing and selling emission reduction credits. Deforestation is the second largest source of CO
2 emissions to the atmosphere and forest growth absorbs carbon dioxide gases (CO
2
), which contribute to global warming. Costa Rica’s carbon credits come primarily from the conversion of cultivated fields and pastures into forests, as well as from the reduction of deforestation. In 1996 the country sold its first 200,000 tons of carbon emission reduction credits to Norway for u s
$10 per ton. However, in late 1997 when it tried to auction an additional 1,000,000 tons of carbon credits with a floor price of u s
$20 per ton, it received no bids. The country is currently evaluating its strategy. Preliminary results show that, depending on the final rules, regulations, and carbon prices, carbon trading is likely to promote the expansion of national park areas and to induce some farmers to switch from traditional agricultural to forest plantations and private forest conservation.
These conclusions are very important for two reasons. First, more than 75% of the projects with CO
2 mitigation potential from Latin American and African countries are forest-related. Second, forest projects constitute the least cost option of the emerging u s
$9 billion per annum carbon market between industrialized and developing countries. However, if the Intergovernmental Panel on Climate Change ( i p cc
) does not clearly recommend including forest projects in the overall climate change mitigation strategy, these projects are likely to be rejected by the Convention or remain

354     in limbo. Moreover, if forest projects are excluded, then fuel-switching projects in large developing countries like China and India will become the least cost options and will capture the bulk of the market, effectively limiting the participation of Latin
American and African countries in climate change mitigation activities.
1 Estimates of annual global emissions from deforestation range from 0.6 to 2.8 billion tons, compared to around 6.0
billion tons from fossil fuel combustion (Houghton 1991;
Smith et al. 1993).
Some background on global warming
During the last decade, many scientists and policymakers became convinced that increased emissions of carbon dioxide or other “greenhouse gases” (methane, nitrous oxide, and related synthetic compounds) were contributing to the warming of the planet. These emissions had grown with industrialization, particularly from the burning of fossil fuels, such as coal and petroleum, to power industry; to heat, cool, and light homes and offices; and to transport goods and passengers.
Deforestation is the second largest source of carbon dioxide emissions to the atmosphere after fossil fuel combustion.
1
Several factors have made it difficult to reach an agreement on a global warming mitigation strategy.
First, there is still substantial scientific uncertainty about the link between global warming and the so-called greenhouse gases. To many it seems obvious that the planet is warming. Proof comes in the form of receding polar ice caps and the
14 warmest years in recorded history all happening within the last two decades
(temperatures have been recorded since 1866). However, it is still unclear whether warming is a long-term trend and to what extent the build up of greenhouse gases is contributing to it. The scientific models of climate change are so complex and sensitive that small and plausible differences in assumptions could significantly alter predictions about future temperatures.
Second, the benefits of preventing global warming are in dispute. Concerned scientists forecast that rising temperatures will lead to massive coastal flooding, dramatic changes in crop yields, more violent storms, the extinction of species due to habitat loss, and other terrible results. Yet others argue that the world may adapt to rising temperatures without enormous suffering or cost, particularly if the temperature increase is not too extreme. Some models also indicate that global warming might help many parts of the world by increasing rainfall and extending growing seasons.
Third, there is disagreement about how the burden of reducing greenhouse gas emissions should be shared among the countries of the world. Historically, industrialized countries have emitted the lion’s share of greenhouse gases; the United
States alone has accounted for nearly 25%. However, the “business-as-usual” forecasts show that the proportion of emissions from developing countries will rise rapidly as they industrialize (see Table 1). Developing countries argue that they should not have to reduce their emissions below their current modest levels, and should be allowed some margin for growth. Industrialized nations are reluctant to bear the burden alone, however, or to make sacrifices that might encourage profligate emissions by others.
The strategy debate has been further complicated by uncertainty as to how much it will cost to reduce emissions. Pessimists point out that sources of energy with low or no greenhouse gas emissions tend to be either fairly expensive (such as solar or wind power) or to present other environmental risks (such as nuclear power). Optimists argue that the costs of alternative energy sources and cleaner

-,    - ta b l e
1 t o ta l c a r b o n e m i s s i o n s b y r e g i o n ,
1995 a n d
2000
( m i l l i o n s o f m e t r i c to n s ) a c t ua l
1995 p r o j e c t e d
2020
Regions
North America
Western Europe
Industrialized Asia
Eastern Europe and former Soviet Union
Developing Asia
Middle East
Africa
Central and
South America
World total
1,629
925
379
866
1,427
229
192
194
5,841
3,313
1,239
415
1,223
3,835
409
341
574
10,447
Selected countries
United States
Canada
Japan
Mexico
China
India
Brazil
1,411
135
82
281
792
222
64
1,956
198
159
385
2.340
523
208
Source: Energy Information Administration, International Energy Outlook, 1998 a n n ua l % c h a n g e
1995-2000
1.4 %
1.2
1.2%
1.4%
4.0%
2.3%
2.3%
4.4%
2.4%
1.3%
1.5%
2.7%
1.3%
4.4%
3.5%
4.9%
355 technologies would decline rapidly once businesses and households were given incentives.
The potentially high costs of reducing emissions make tradable emissions credits more attractive. The basic idea is that every country will agree to reduce emissions by a certain amount and if countries that can reduce emissions at a relatively low cost are able to exceed their reduction commitments, they would be allowed to sell “credits” for the excess to countries where emissions reduction is more expensive. The United States successfully established a domestic market for emissions credits to help reduce sulfur dioxide emissions from power plants in the
1990s. The hope is that a similar market for greenhouse gas emission credits could reduce the cost of slowing global warming.
International conventions on climate change
The countries of the world took a key step toward a global agreement on climate change in 1988 when they established the Intergovernmental Panel on Climate
Change (  ) to assess the scientific, technical, and socioeconomic research on climate change. The  ’  work helped convince many in the world community that the risk of global warming was serious enough to warrant action. This led to the United Nations’ Earth Summit in Rio de Janeiro in 1992. The Parties to the Rio summit approved the United Nations Convention on Climate Change, which called for the rollback of greenhouse gas emissions to 1990 levels and was later ratified by 165 countries. The Convention set no specific targets for individual countries, however, so its effect was more symbolic than practical. A subsequent summit in Berlin in 1994 also saw only limited progress.
By 1997, however, concern about global warming had increased to the point that at the third Conference of Parties in Kyoto more specific measures were

2 Argentina actually committed to a specific target,
Kazakhstan has only promised to do so.
3 The two that can be used among Annex I countries are
“international permit trading” (under Article 17) and
“joint implementation”
(under Article 6). The Clean
Development Mechanism is described in Article 12.
356     approved. In Annex I of the Kyoto Protocol the industrialized nations and many of the transition-economy countries of Eastern Europe committed to specific emissions reduction targets that averaged a 5.2% rollback from 1990 emissions levels. These targets were to be achieved by the year 2008 and sustained through
2012. The developing countries did not commit to specific reduction targets at
Kyoto because they were reluctant to incur expenses and they wanted to see whether technological progress would reduce the costs of cleaner technologies and development. Because of this, the Annex I countries hedged their commitments by specifying that the Protocol would not be binding until it was ratified by at least 55 Annex I countries that were responsible for at least 55% of the Annex I greenhouse gas emissions. Since Kyoto, only two developing countries—
Argentina and Kazakhstan—have agreed to emissions reduction targets.
2
The process of ratification among the Annex I countries is also proceeding slowly, and many observers are of the opinion that the major emitters, such as the United
States, are unlikely to ratify the Protocol until the rest of the developing countries have also committed to specific reduction targets.
The Kyoto Protocol includes three provisions for trading emissions credits.
Two apply only to trades between Annex I countries, but the third, the Clean
Development Mechanism (

), may be used for trades between Annex I countries and developing countries.
3
To qualify for a
 trade, a developing country must demonstrate that the emissions credits it intends to sell are “additional” to emissions reductions it might be expected to achieve under a business-as-usual scenario. Through the

, Annex I countries can offset their commitments by financing projects in developing countries.
Costa Rica’s economy and its forests
Costa Rica is a Central American country with a population of 3.7 million and a landmass of 5.2 million hectares. It is one of the most stable democracies in Latin
America, and has not suffered from the civil wars or unrest that have plagued many of its neighbors in recent decades. Perhaps as a result, Costa Rica has the highest per capita income in Central America and one of the highest in Latin America.
Throughout most of the 1980s, Costa Rica’s economy was largely dependent on exports of coffee, bananas, and cattle and its domestic industry and farmers were protected by high tariffs. These policies led to slow economic growth, however, and the government began to run fiscal deficits in an effort to meet the popular demand for improved standards of living. By 1988, the financial situation had become so precarious that the government had to appeal to the International
Monetary Fund (

) for loans. As a condition of the loans, the IMF required that
Costa Rica reduce its import barriers and open its economy to foreign investment.
These reforms helped to transform the Costa Rican economy over the next decade.
Tourism to Costa Rica’s beautiful beaches and tropical forests increased and soon overtook agriculture as the leading source of foreign exchange. Foreign companies invested so much in local assembly plants that in 1998 electronics overtook tourism as the number one foreign exchange earner. With the opening of a new
Intel computer chip plant, electronics is expected to be the primary foreign exchange source for the next decade.
The 1990s also brought increased efforts by the Costa Rican government to protect its forests and wildlife (see Table 2). During the decades when agriculture was the primary export earner, thousands of hectares of forest were chopped down for

-,    - 357 plantations and ranches. This destruction prompted the government to expand its system of national parks and to create a national network of Wildlife Conservation Areas (WCAs) which covered 15% of the country’s land area. The WCAs were intended ta b l e
2 l a n d u s e i n c o sta r i c a ,
1998 to preserve habitats for sensitive forest species and consisted either of publicly owned lands h e c ta r e s or private lands where, for a fee, the owner had agreed to limit logging to levels that would not harm wildlife. The national parks and WCAs helped to establish Costa Rica as one of the premier destinations for ecotourism in the 1980s and 1990s.
In 1994, however, ecologists from various governmental and non-governmental conservation agencies determined that the WCAs should be expanded to cover an additional
10% of the country’s land area in order to adequately protect Costa Rica’s wildlife.
4
Agriculture and forestry
Coffee, banana, and other export crops
Beef cattle
Dairy and mixed use
Private forest
Abandoned cropland
Subtotal for agriculture and forest
Parks and Wildlife Conservation Areas
Other
Urban
Miscellaneous other
Subtotal for ‘other’
Total
( m i l l i o n s ) p e r c e n ta g e
Costa Rica has several different types of tropical forest and, as a result, is home to an
Source: René Castro Salazar,“Valuing the Environmental Service of Permanent Forest Stands to the Global Climate:The Case of Costa Rica,” unpublished doctoral dissertation, Harvard University, June 1999.
unusually large number of species. Some of these species are rare and endangered, including many that are thought to be unique to the forests of Costa Rica, and not as yet studied by scientists. In arguing for expansion of the protected areas, Costa Rican environmentalists stressed that the nation had an obligation to the world to preserve this biodiversity. Moreover, many of the sylvan species had potential economic value as the source of new
0.2
1.0
1.0
0.8
0.5
3.5
1.3
0.3
0.1
0.4
5.2
7
100
5
2
10
68
25
4
19
20
15
4 The expanded area is called the Protected Areas
Project. For the sake of simplicity, it is referred to here as the WCAs expansion.
medicines, food, and cosmetics. In the early 1990s, for example, Costa Rica signed contracts with two international pharmaceutical companies to share in the profits from medicines that might be developed from rare Costa Rican species.
Expanding the WCAs would also protect the quality of Costa Rica’s drinking water.
The desire to expand the
 stimulated Costa Rica’s effort to develop carbon emissions reduction credits. Without the revenue from selling credits, the government would have been hard pressed to find the funds either to purchase land outright or to pay landowners not to develop all the additional hectares that it wanted to add to the

. Reforesting neighboring plantations and cattle ranches had the added benefit of carbon dioxide sequestration, however, and thus offset greenhouse gas emissions. This meant that if the government could sell the credits for sequestering the carbon to Annex I countries, it could use the proceeds to buy or protect the hectares it wanted.
The reforestation scheme was politically advantageous as well because it helped rural residents. The rural areas had been fairly much excluded from the country’s growing prosperity because most of the factories and other new economic activities were located around San José, the nation’s capital. Traditional rural agriculture was declining because world prices for coffee, bananas, and beef remained low and because young people were finding better jobs in San José. Expanding the
WCAs provided new sources of income for rural communities.

358     ta b l e
3 e st i m at e s o f t h e m a r g i n a l c o st o f a b at e m e n t w i t h a n d w i t h o u t t r a d i n g ta b l e 3 ( i n 1995 d o l l a r s p e r to n o f c a r b o n ) m o d e l o r r e s e a r c h e r u n i t e d stat e s t r a d i n g e u r o p e j a pa n n o t r a d i n g a n n e x i c o u n t r i e s g l o b a l s g m m e r e g e
G-cubed p o l e s g t e m
WorldScan g r e e n a i m
375
38
149
166
163
274
63
82
167
130-140
773
78
196
214
252
249
751
87
77
253
123
20
67
65
76
114
37
112
27
80
13
33
25
43
28 Average 164 260 277 80
Source: Table 1 in Richard Baron, "The Kyoto Mechanisms: How Much Flexibility do they Provide?" in Richard
Baron, Maratina Bosi, and Alessandro Lanza, Emissions Trading and the Clean Development Mechanism:
Resource Transfers, Project Costs and Investment Incentives, report by the International Energy Agency for the
Fifth Conference of the Parties, Bonn, October-November 1999.
ta b l e
4 a g g r e g at e e c o n o m i c c o st o f k yo t o c o m m i t m e n t s w i t h a n d w i t h o u t t r a d i n g ta b l e
4 ( i n 2020 a s a p e r c e n ta g e r e d u c t i o n i n g r o s s n at i o n a l o r d o m e st i c p r o d u c t ) m o d e l o r r e s e a r c h e r c o u n t r y t r a d i n g a m o n g n o t r a d i n g t r a d i n g a m o n g g l o b a l a n n e x i c o u n t r i e s t r a d i n g s g m m e r g e
G-cubed g t e m g r e e n a i m
United States
United States
United States
Japan
Other OECD
All industrialized
All industrialized
United States
Japan
European Union
0.4 %
1%
0.3%
0.8%
1.4%
1.2%
0.5%
0.45%
0.25%
0.3%
0.28 %
0.2%
0.2%
0.5%
0.3%
0.1%
0.3%
0.15%
0.17%
0.12 %
0.25%
0.2%
0%
0.07%
Source:Table 2 in Richard Baron, "The Kyoto Mechanisms: How Much Flexibility do They Provide?" in Richard
Baron, Maratina Bosi, and Alessandro Lanza, Emissions Trading and the Clean Development Mechanism:
Resource Transfers, Project Costs and Investment Incentives, report by the International Energy Agency for the Fifth Conference of the Parties, Bonn, October-November 1999.
5 The information and tables in this section are drawn from Richard Baron,
“The Kyoto Mechanisms:
How Much Flexibility do They
Provide?” in Richard Baron,
Maratina Bosi, and Alessandro Lanza, Emissions Trading and the Clean Development
Mechanism: Resource Transfers, Project Costs and Investment Incentives, report by the International Energy
Agency for the Fifth Conference of the Parties, Bonn,
October-November 1999.
The potential for emissions trading 5
Research suggests that, at least in theory, emissions trading could substantially reduce the cost of rolling back greenhouse gas emissions. Table 3 summarizes cost estimates for achieving Kyoto Protocol commitments based on eight economic models produced by researchers who were selected by the International Energy
Agency from several countries. The results vary somewhat because of differing model assumptions about, for example, the rates at which the costs of cleaner technologies will decline. Nevertheless, the eight models are fairly consistent in predicting that trading can significantly reduce costs. For example, using the average results from the eight models, without trading, the marginal cost of a ton of carbon emissions reductions would be us$164 in the United States,

$260 in

-,    - 359
Europe, and

$277 in Japan. If trading were allowed among the
Annex I countries, the marginal cost could drop to us$80 per ton.
If trading were allowed with the developing countries as well, the marginal cost would drop even further, to

$28 per ton.
6
Table 4 translates the results of these forecasts into effects on
Gross National Product (

).
The “G-cubed” model is a fairly ta b l e
5 e m i s s i o n s r e d u c t i o n c o m m i t m e n t s a n d s h a r e p o t e n t i a l ly a c q u i r e d ta b l e
5 t h r o u g h t r a d i n g a m o n g i n d u st r i a l i z e d a n d t r a n s i t i o n e c o n o m i e s
Europe
Japan (or o e c d
Pacific)
North America
Total e m i s s i o n s r e d u c t i o n
( m i l l i o n s o f to n s o f c a r b o n )
338
126
567
1,031 e m i s s i o n s r e d u c t i o n f r o m t r a d i n g
( m i l l i o n s o f to n s o f c a r b o n )
213
83
221
517 e m i s s i o n s r e d u c t i o n f r o m t r a d i n g a s a p e r c e n ta g e o f tota l r e d u c t i o n
63%
66%
39%
50% typical analysis. It predicts that without emissions trading, control measures would absorb the equivalent of 0.3% of the
 
,
0.8% of the
 in Japan, and
1.4% in the other industrialized
Source: Adapted from Table 3 in Richard Baron, "The Kyoto Mechanisms: How Much Flexibility do
They Provide?" in Richard Baron, Maratina Bosi, and Alessandro Lanza, Emissions Trading and the
Clean Development Mechanism: Resource Transfers, Project Costs and Investment Incentives, report by the International Energy Agency for the Fifth Conference of the Parties, Bonn, October-
November 1999.
countries that belong to the Organization for Economic Cooperation and Development (

).
7
With trading, emissions control would only absorb between 0.2 and
0.5% of the
 in those same countries (see Table 5).
Some researchers suspect, however, that the cost estimates represented in the
6 The simulations assumed that developing countries would be able to sell credits for any emissions reductions beyond their business-as-usual forecasts.
models are optimistic, for two reasons. First, the models all assume that each country will choose the most cost-effective domestic emissions control strategy. If policymakers chose to protect politically sensitive domestic industries and regions from adopting even low-cost measures, however, then the costs of abatement without trading might be much higher than estimated.
Second, the models assume fully fluid markets for emissions credits with no significant barriers or transaction costs. In practice, however, the fact that the developing countries have not committed to specific emissions targets is a source of concern among Annex I countries. In particular, they are concerned about leakage and slippage. The Convention uses these terms to refer to the possibility that
7 The members of the o e c d include Australia, Austria, Belgium, Canada, Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway,
Poland, Portugal, Spain,
Sweden, Switzerland, Turkey,
United Kingdom, and the
United States.
the net benefits of a carbon sequestration project will be reduced if, for instance, landowners take the money earned from forest conservation and use it to convert forest to cropland in another area (leakage); or if they increase their CO
2 emissions by, for example, buying more vehicles (slippage). These potential situations might prove to be major impediments to carbon reduction trading. At the very least it would mean that some neutral party would have to ensure that the additionality requirement was met—i.e., that the emissions reduction would not have occurred anyway in the absence of the project. Germany has emerged as the spokesperson for a number of industrialized countries that are opposed to allowing significant trading with developing countries until they commit to emissions reduction targets. Germany has argued that without emissions commitments, additionality would be difficult to determine and could be easily evaded.
Even if developing countries do commit to specific emissions targets, some observers wonder whether the trade flows involved are realistic. Trading among the Annex I countries would involve payments of roughly

$42 billion per year to the transition economies of Eastern Europe from Europe, Japan, and North
America. If global trading were allowed, it is projected that industrialized coun-

8 Now British-Amoco.
360    
If global trading were allowed, it is projected that industrialized countries would pay developing countries roughly us $9 billion per year for emissions credits. The amounts involved would be substantially larger than the foreign aid payments that many developing and transition-economy countries are currently receiving.
Understandably, some developing and transition economies want assurances that industrialized countries will not simply cut their foreign aid budgets to compensate.
tries would pay developing countries roughly

$9 billion per year for emissions credits. The amounts involved would be substantially larger than the foreign aid payments that many developing and transition-economy countries are currently receiving. Understandably, some developing and transition economies want assurances that industrialized countries will not simply cut their foreign aid budgets to compensate. Skeptics also wonder whether or not the emissions reductions implied for the transition and developing countries are realistic. If trade occurs at the scale predicted by the models, transition economies would be emitting roughly 50% less than under the business-as-usual scenario, while developing countries would be emitting only 20% to 30% less.
Despite these concerns, trading emissions credits with developing countries is proceeding on a limited basis. The 1992 Rio Convention encouraged experimental trading in order to determine how such a system might work. The 1997 Kyoto
Protocol approved the Clean Development Mechanism (

), although it never defined how the additionality test would be met. This ambiguity exists, in part, due to differences between developing countries and the German-led critics. Some countries and large multinational businesses with high emissions control costs were interested in buying credits, however, even though the credits’ ultimate legal status was ambiguous. British Petroleum,
8 a major international energy company, set up an experimental system to trade emissions credits among its plants in industrialized and developing countries. Through this trial the company discovered that even with inter-plant trading, its marginal costs of abatement were likely to be close to

$70 per ton. As such, buying some low-cost credits from other sources might be worthwhile as a method for BP to hedge its bets for future commitments. It also does not hurt that purchasing credits generates favorable corporate publicity.
Most of the proposed emission credit trades are for electric power generating projects. For example, a credit might be issued for installing wind turbines that generate electricity with no greenhouse gas emissions, or for converting a coalfired generating station to using cleaner-burning natural gas. However, there is also growing interest in credits for other types of emission reduction measures, including reforestation. Reforestation credits are typically offered for a limited period of time, say 20 years, with the idea that at the end the forest might be logged and replanted. This causes some environmental groups to oppose reforestation credits. Greenpeace, the international environmental group, has labeled credits for reforestation a “time bomb” that will cause serious problems when they expire.
Environmentalists are also wary because the reforestation credits would have to be replaced when the forest was logged. Yet advocates of reforestation have pointed out that other credits are for limited periods also- a wind turbine, for example, can be expected to last just 20 years. Moreover, after 20 years technological progress

-,    - may have reduced the costs of emissions abatement significantly.
Many models have been used to estimate an order of magnitude for sequestration and mitigation potentials. Early models calculated that around 500 million hectares were necessary (Sedjo and Solomon 1989) or available (Nordhaus 1991b) at the global level for carbon sequestration. All of the early models for Latin American and African countries consistently showed that they could provide at least
50% of the needed land, with low preparation costs and high forest growth rates.
These combined factors offered, especially to tropical countries, a highly competitive position in any carbon market that includes forest projects. More recent studies, such as the Harvard University study for Central America and the National
Autonomous University of Mexico (

) study for Mexico, compared carbon and fossil fuel options.
9
The Harvard study calculated the carbon reduction from forests in Central America (via conservation, forest management, and reforestation) to be 54 million tons per year, compared to 6 million coming from potential fossil fuel emissions reduction. The
 study estimated that the forest represents 87% of the 40 million tons of carbon available in Mexico for the year 2000.
In economic terms, carbon sequestration through forestry or reduced deforestation may be a cost-effective approach to reducing global atmospheric concentrations of CO
2
.
10
However, the countries participating in the United Nations
Framework Convention on Climate Change (

) are still debating whether reducing carbon emission through projects that reduce deforestation will be an acceptable option for emissions reduction and trade under the treaty. This unresolved legality is likely to affect the carbon trade more than scientific concerns. If the
 excludes the preservation of natural forests, it would encourage forest plantations, which do not constitute very rich ecosystems. A second effect is a bias toward options in countries that use CO
2
-intensive energy sources. For example, big developing countries like China and India that mainly use fossil fuels will benefit because they will be able to provide cheaper and larger volumes of carbon emission reductions as a result of fuel switching or using cleaner energy sources.
At the same time, countries like Costa Rica and Brazil, which are currently using mainly renewable energy sources, will not be able to participate as fully in the emerging carbon market.
Costa Rica’s emissions credit program
Costa Rica’s emissions credit program has gone through three stages. In the first stage, which lasted from 1994 to 1995, the government tried to facilitate trades between individual Costa Rican landowners and businesses and foreign governments or corporations. Although one trade was almost consummated, the government soon realized that individual emissions reduction projects would have to be consolidated if trading was to be viable. Negotiating a deal for a small reforestation project was almost as costly—in terms of translators, lawyers, and airfare—as negotiating a deal for a large one.
During the second stage, from 1995 to 1997, the Ministry of Environment and
Energy assumed responsibility for consolidating small projects and offering credits for sale. This effort resulted in the first-ever sale of an emission credit based on reforestation. Two hundred and thirty eight individual reforestation projects, many bordering the existing WCAs, were consolidated to provide a credit for
200,000 tons of carbon for 20 years. This credit was sold to the Norwegian government in 1996 for

$10 per ton, a price the Ministry had calculated would
361
9 The Harvard study was financed by the Central
American Bank and is forthcoming; the UNAM study was partially financed by the
Inter-American Development
Bank and was presented at the Bank’s annual governor’s meeting in March 2000.
10 This is the conclusion for
Costa Rica in the Costa Rican
Dilemma (Castro and Cordero
1999). Omar Masera reached the same conclusion for Mexico in his presentation at the Inter-
American Development Bank meeting, held in New Orleans,
March 2000. A similar conclusion was reached for the United
States in an article called “Climate Change and Forest Sinks:
Factors Affecting the Costs of
Carbon Sequestration,” (Harvard University, November
1998) prepared by Professors
Robert Stavins and Richard
Newell. This article stated,
“...even for highly industrialized countries such as the United
States, carbon sequestration through land-use changes could arguably be part of a cost-effective portfolio of short term strategies” (p.24).

362    
11 The firm, Société Générale de
Surveillance Group, has established a special Forestry Offset
Carbon Verification Service.
recover the payments that it expected to make to cattle ranchers to induce them to convert their ranches into plantation forests. Despite its success, however, the
Ministry was criticized by the Inspector General, a government watchdog agency, for having sold the credits at cost. The Inspector General argued that the Ministry could have gotten a much higher price.
In the third stage, from 1997 to 1998, the Ministry of Environment and Energy decided to address the Inspector General’s concerns by auctioning credits to the highest bidder. This time it assembled enough projects to sequester 1,000,000 tons of carbon and offered them at a floor price of

$20 per ton. Although a number of governments and multinational firms expressed interest in the auction, in the end there were no bidders. The Ministry was told privately by some bidders that the floor price had been too high. The Ministry also suspected that uncertainty about the new additionality requirements that had just been established under the
Kyoto Protocol might have been a factor. To help address the additionality question, in March 1998 the Ministry hired a well known French technical certification firm to audit the project and attest that the reforestation would take place as promised.
11
However, following this, the Ministry opted to delay offering the credits for auction again until after the national elections later that year.
The new government
The left-of-center Social Democrats lost the presidency to the right-of-center
Christian Democrats in the 1998 elections. In his inauguration speech, incoming
President Miguel Angel Rodriguez singled out emission credits as one of the few of his predecessor’s programs that he intended to retain. President Rodriguez has a doctorate in economics, which may have made him sympathetic to the rationale for the program. In addition, environmental protection has always been popular in Costa Rica, and part of the reason the Christian Democrats won the election was because of appeals to voters in the disaffected rural areas.
When the new government assumed responsibility for the emissions credit program, it faced two decisions: (1) whether to offer the 1,000,000 tons for sale again soon or to wait; and (2) if they were to sell, what minimum price to set.

200
150
100
50
-,    - figure
2 estimate of the marginal cost of forest carbon sequestration and energy carbon emissions reduction projects in the united states
363 margi nal cost
($/ton)
250
0
0 100 200 300 400 500 600 700 800 900 carbon reduction ( million tons per year
) note:
The carbon squestration lines are estimates of marginal costs for reforestation in the United States. The carbon abatement points are estimates of the marginal costs for emissions reductions from U.S. power plants.
Source: Robert N. Stavins, “The Cost of Carbon Sequestration: A Revealed Preference Approach,”
American Economic Review, vol. 89, no. 4 (September 1999), p. 1004
It was tempting for the new government to delay the offering until the next major international conference on global warming, in hopes of some clarification of some of the uncertainties regarding emissions commitments and trading.
However, the conference in Bonn in November 1999 saw little progress on these issues, and the next conference in The Hague in November 2000 is not expected to make much advancement either—partly due to the unlikelihood that the U.S.
political ambivalence towards the Protocol will be resolved during its presidential elections. Should the Costa Rican government choose to wait, however, it might lose its position as a reforestation credit pioneer. Bolivia recently offered approximately 4,000,000 tons of credits from reforestation projects, and Brazil and several other countries are expected to follow suit.
With regard to pricing, the Costa Rican Ministry of the Environment had new estimates of how much it would have to pay farmers to switch to forests. The new figures confirmed that the cost would be about  $10 per ton for the first five million tons, but would rise steadily thereafter due to increasing marginal cost when more expensive land was planted (see Figure 1) Bolivia was rumored to have potential buyers at  $15 to  $20 per ton for its new credits. New studies also suggested that forest projects might be feasible in the United States at  $20 per ton, only slightly more than the cost of emissions abatement from some U.S. powergenerating projects (see Figure 2). In July 1999, the World Bank Prototype Carbon
Fund announced a price range of  $20 to  $30 per ton.
To contribute to the ongoing Costa Rican evaluation, a study was developed to analyze the implications of different price scenarios on forest conservation and agriculture.

12 René Castro Salazar,“Valuing the Environment Service of
Permanent Forest Stands to the
Global Climate: The Case of
Costa Rica,” unpublished doctoral dissertation, Harvard University, June 1999.
364    
The impact of the emerging CO
2 market on forested and agricultural areas
During 1998 and 1999 René Castro, the former Costa Rican Minister of Environment and Energy, conducted a study (partially financed by the  ) of the value of forest stands to the global climate. The focus of the study was Costa Rica’s forested areas.
12 The results strongly suggest that including forest options for tropical countries like Costa Rica would further reduce mitigation costs. For example,
Castro calculated the amount of carbon generated on 260,000 hectares in Costa
Rica. To compare this with the amounts for other countries and regions, he estimated the total amount of carbon produced at different prices. The results illustrate the importance of trade. If the carbon price is set at us$10 per ton, the Costa
Rican  would be willing to sell 15% of their annual tons of carbon, the state of Wisconsin 9%, the Delta region 8%, and the United States as a whole 22%. When
The study also suggests that considering carbon sequestration benefits will lead to larger areas of forest being protected than if only the need to protect biodiversity or fragile ecosystems were considered. … Additionally, the study demonstrated that if Costa Rican landowners were paid for carbon sequestration, many of them might switch from crops to planting forests.
the carbon price increases to us$50 per ton, the Costa Rican  would sell 88%, while the landowners surveyed in the Delta study would sell only 42%, and those in the U.S. study 74%. As the price increases, each supplier would be willing to offer a larger percentage of its carbon, with the Costa Rican  offering proportionally more carbon than all the domestic U.S. options at any given price because
Costa Rica usually has a lower marginal cost.
The study also suggests that considering carbon sequestration benefits will lead to larger areas of forest being protected than if only the need to protect biodiversity or fragile ecosystems were considered. For example, at prices between  $50 and  $100 per ton the Costa Rican protected areas of La Amistad, Barbilla, and
Palo Verde might expand further than proposed. Moreover, with prices closer to
 $100, the objective of consolidating and expanding protected areas to up to 25% of the national territory seems feasible.
Additionally, the study demonstrated that if Costa Rican landowners were paid for carbon sequestration, many of them might switch from crops to planting forests. For example, if the carbon price was at least  $83 per ton, a farmer producing, or with potential to produce, the average agricultural mix for Costa Rica, might switch to a pine plantation ( Pinus patula ). Forest projects would probably first replace traditional activities, such as raising cattle and rice, which require considerable land. Forests are less likely to replace the more profitable export-oriented crops such as coffee, bananas, and pineapples.
Finally, carbon sequestration payments would also induce landowners to protect their natural forests outside the protected areas. For example, if a private owner of natural forest were considering whether to preserve a natural forest or to use it to raise beef cattle or rice, he would find that preserving the natural forest was the more profitable option if the price were set at  $20 per ton (see Table 6).
On the other hand, if that same owner had natural forestland that was suitable for growing export-oriented crops, he might well use it for those crops unless the carbon price were to exceed  $100 per ton.

-,    - ta b l e
6 c a r b o n i n d i f f e r e n c e p r i c e b e t w e e n p r i v at e n at u r a l ta b l e
6 f o r e st p r o t e c t i o n a n d c o m p e t i n g a g r i c u lt u r a l a c t i v i t i e s c r o p s o r a c t i v i t y
Coffee
Pineapples
Watermelons
Yams
Avocados
Plantains
Tiquisque*
Passion Fruit
Tomatoes
Forest plantations
Bananas
Hearts of palm
Yucca*
Coconuts
Dairy cattle
African palms
Oranges
Sugar cane
Beef and dairy cattle
Lemons
Beans
Melons
Potatoes
Rice
Beef cattle
Mangoes
Managed forestry r e g i o n o r p r i vat e n at u r a l f o r e st (c o st e st i m at e s i n $ / to n )
La Rincón de
Amistad la Vieja
Palo Piedras Barra GuanaCarara Barbilla
27
23
22
12
63
61
51
35
11
3
3
91
73
66
63
170
124
102
98
386
372
309
251
245
244
198
189
25
20
19
6
71
68
55
35
6
<0
<0
204
35
118
114
106
82
74
70
219
458
378
305
298
297
240
228
35
30
29
14
86
83
68
46
13
1
2
236
71
140
135
126
99
90
85
275
522
432
350
342
341
277
263
20
15
14
<0
74
70
55
32
<0
<0
<0
228
14
129
124
114
87
77
72
168
524
431
346
338
337
270
256
7
<0
<0
28
23
22
8
78
75
61
39
224
51
130
125
116
91
81
77
228
502
415
335
327
326
263
250
9
<0
<0
29
24
23
10
76
73
59
39
111
87
79
74
211
50
124
119
226
469
389
314
307
306
248
235
36
31
30
14
90
87
71
48
13
<0
1
248
54
147
142
132
104
94
89
211
549
455
368
360
359
291
276
33
28
27
14
81
78
64
44
13
1
2
118
93
84
80
221
62
131
126
227
487
403
327
320
319
258
245
* Tiquisque and yucca are roots similar to cassava.
Source: René Castro Salazar, "Valuing the Environment Service of Permanent Forest Stands to the Global Climate:The Case of Costa Rica," unpublished doctoral dissertation, Harvard University, June 1999.
Conclusions
Most researchers and policymakers agree that the overall cost of mitigating CO
2 and other greenhouse gases could be reduced if the carbon trading options proposed in the Kyoto Protocol were implemented. For example, in the short run, the cost of carbon abatement could easily exceed us$100 per ton for energy projects in industrialized countries. However, if the forestry sector is included, the cost of reducing carbon emissions and sequestering carbon could be reduced to a range between us$10 and us$100 per ton of carbon.
The findings for Costa Rica might also be relevant for other tropical countries in Latin America and Africa. For example, the World Bank and the United Nations
Development Programme are financing the development of a network of protected areas called the Mesoamerican Corridor that will encompass 8 million hectares in Central America and 2 million in southern Mexico. This project is based on the idea that the eight participating countries share between 60% and
80% of the same living species, which will be more likely to survive within large interconnected protected areas. It is reasonable to expect that the figures projected in the Castro study, both in terms of carbon productivity and land opportunity cost, are relevant to the much larger Mesoamerican protected areas network. The study’s estimates for the marginal cost of carbon might also apply to this larger
365

366     region. A second example is that cattle ranchers in many tropical African countries are currently earning less than

$50 per hectare per year. If the carbon price were to reach at least

$10 per ton, these ranchers would find it economically advantageous to switch to forest-friendly activities. At the same time, the environment would be used in a more sustainable way.
References and recommended readings
Baron, R., October-November 1999. “The Kyoto Mechanisms: How Much Flexibility Do They Provide?” In Richard Baron, Maratina Bosi, and Alessandro
Lanza, Emissions Trading and the Clean Development Mechanism: Resource
Transfers, Project Costs and Investment Incentives, report by the International
Energy Agency for the Fifth Conference of the Parties, Bonn.
Castro Salazar, R., 1999. “Valuing the Environment Service of Permanent Forest
Stands to the Global Climate: The Case of Costa Rica,” unpublished doctoral dissertation, Harvard University (June).
Castro Salazar, R. and S. Cordero, 1999.“The Emerging Global Market for Carbon:
The Costa Rican Dilemma,”
 case study.
Constantino, L.F. and N.M. Kishor, 1993. Forest Management and Competing
Land Uses: An Economic Analysis for Costa Rica. Washington, DC, The World
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Filho, B.A. Callender, N. Harris, A. Kattenberg, and K. Maskell (eds), University
Press, Cambridge,

.
Houghton, R.A., 1991.“Tropical Deforestation and Atmospheric Carbon Dioxide,”
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
Working Group I, 1997: Climate Change 1995. Stabilization of Atmospheric
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G.. Meira Filho, D. J. Griggs, and K. Maskell (eds). Cambridge University Press,
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
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
Working Group III, 1996: Climate Change 1995. Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second
Assessment Report of the Intergovernmental Panel on Climate Change. J. Bruce,
H. Lee, and E. Haites (eds). Cambridge University Press, Cambridge,

.
Jepma, C. and M. Mohan. 1998. Climate Change Policy: Facts, Issues, and Analyses. Cambridge University Press, Cambridge,

.
Nordhaus, W., 1991. “The Cost of Slowing Climate Change: A Survey.” The Energy
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Gases.” Science 258: 1315-1319.
Nordhaus, W., 1994. Managing the Global Commons: The Economics of Climate
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
.
Sedjo, R.A. and A. M. Solomon, 1989.“Climate and Forests.”In Greenhouse Warm-

-,    - ing: Abatement and Adaptation, N. J. Rosenberg, W.E. Easterling III, P. R.
Crosson, and J. Darmstadter, eds., Resources for the Future, Washington,

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
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Smith, J.B., S. Ragland, and E. Trabka, December 1993. “Standardized estimates of climate change damages for the United States,” mimeo,
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/Hagler Bailly,
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Affecting the Cost of Carbon Sequestration,” Harvard University, Cambridge,
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
.
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.
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.
367

368    
René Castro-Salazar is currently an international consultant for the United Nations
Development Programme ( u n d p
). He has worked as consultant for the World Bank, the International Development Bank, the Harvard Institute for International Development, the Canadian Development Agency, and public and private entities in Central America. Dr. Castro has held several public offices in Costa Rica, including Minister of Environment and Energy, Vice-Minister of the Interior, National Director of
Transportation, and President of the Municipal City Council of San José. He holds a
Doctor of Design from Harvard University as well as a Master in Public Administration. He has written and co-written numerous books, articles, and case studies.
P.O Box 117-1000
San José, Costa Rica
(506) 2933001 castro_rene@post.harvard.edu
Sarah Cordero Pinchansky is on leave from i n c a e where she is a professor and academic director of the International Program on Project Evaluation ( p e i p
), jointly offered by Harvard and i n c a e
. She is currently a Ph.D candidate at m i t
. Professor
Cordero Pinchansky has worked in Nicaragua, Guatemala, Mexico, Bolivia, Paraguay and The Dominican Republic. She has participated and lectured at executive courses in Harvard University and at international conferences in Mexico, Canada, Belgium,
Italy, United States, and Costa Rica. She has published numerous articles and case studies and has co-authored two books: Project Evaluation and Environmental
Impact Assessment (1995) and Environmental Impact Evaluation and Sustainability of Development (1998).
corderos@mit.edu
José A. Gómez-Ibáñez is a Professor in the Graduate School of Design ( g s d
) and the
Kennedy School of Government ( k s g
) at Harvard University. He has served as a research consultant to U.S. government agencies, foreign governments, and private firms. He has written, co-written, and edited numerous books, articles, and case studies.