Carbon Markets and Reforestation Projects: an opportunity

for the recovery of the Brazilian Atlantic Forest

Luis Alberto da Cunha Saporta1 and Carlos Eduardo Frickmann Young2

1
MSc Student, Escola de Pós-Graduação em Economia, Fundação Getúlio Vargas
(EPGE/FGV) – Rio de Janeiro, Brazil. Email: lsaporta@gmail.com
2
Associate Professor, Instituto de Economia, Universidade Federal do Rio de Janeiro
(IE/UFRJ) – Rio de Janeiro, Brazil. Email: young@ie.ufrj.br

ABSTRACT

In this article, we studied the feasibility of reforestation projects with native species
financed by the selling of certified emissions reductions, or other carbon credits. Thus, land
owners would have financial incentives to develop private reforestation projects, contributing
to the sustainable development of their regions. The gains from reforestation exceed the
carbon sink, as it also increases air and soil qualities, hydrographic regulations, and
biodiversity protection in the areas where it is established. The positive externalities
associated with these projects are so important socially and environmentally that it should not
wait for governments’ money (trifle and rare in developing countries) to be implemented. A
case study is presented to illustrate these possibilities, based on a hypothetical project of
reforesting pasture land around the Biological Reservation of Poço das Antas (state of Rio de
Janeiro, Brazil).
The case study uses information from previous studies in order to estimate the net
present value of the reforestation project. Secondary data was gathered for carbon sink
characteristics of native Atlantic Forest species, and revenues and costs of reforestation
projects in the same region (Rambaldi et al. 2003), including implementations costs
(reforestations costs, inscriptions fees and procedures costs) and opertation costs (verification
and monitoring costs, fire control brigade, and management’s costs).
Two different functions (logarithmical and linear) are used for estimating the carbon
sink after 20 and 40 years from native species re-growth. Then, we calculated the net present
value of the project after forty years, assuming different scenarios for carbon prices and
discount rates. The present value of the opportunity cost of land is also considered, using data
from IBGE (1996) for cattle ranching industry in the region.

KEYWORDS:

Carbon market, reforestation, conservancy unit, golden lion tamarin, Leontopithecus rosalia.
1. Introduction

This work examines the economic viability of reforestation projects that sell carbon
credits to finance the restoration of biologically important areas such as endangered species
habitats and river banks. As public funding is difficult for this kind of project, one of the
biggest questions is how to involve landowners in conservation efforts. In order to have their
support, this type of project must generate a greater income than their current economic
activity; that means that the net present value of the project, including opportunity cost of
land, should be positive. Environmental service payments are becoming popular as a form of
incentive to conservation projects, and this article analyzes the sale of carbon credits, as
growing forests capture carbon from the atmosphere, contributing to the efforts of global
warming mitigation.
We present the case study of REBIO Poço das Antas, in the state of Rio de Janeiro,
Brazil. This biological reserve is the last habitat of the golden lion tamarin and a rare example
of Atlantic Forest in the São João River basin. We used data of Atlantic Forest species carbon
sink, implementation and operation costs of a project in CDM framework, established by the
Kyoto Protocol, and opportunity costs of land around Poço das Antas reserve, estimated by
the income generated by cattle ranching in the region, to create an hypothetical project for
that area. We defined the area of this hypothetical project as that necessary to reduce the risks
of the golden lion tamarin extinction (the area necessary to support around 2,000 tamarins).
The present value of the project’s costs was compared to the income that such project could
generate by selling carbon credits in the CDM market. As a result, we found that income
from carbon credits is insufficient to fully finance a reforestation project of native species in
the Atlantic Forest. However, it could be an additional source of funding that might allow the
development of this type of project in association with other incentives.
Finally, we also indicate other incentives and opportunities that could increase the
feasibility of reforestation projects. We concluded that despite the insufficient income
generated by the sale of carbon credits (as forest projects are under valued by the CDM
carbon market), these projects could help, partially financing the restoration of the Atlantic
Forest.
The work is divided in four sections. In the first, we write about the relationship of
carbon credits and forestry projects in tropical areas from the 1980s to the beginning of the
Kyoto Protocol, and the discussions for Kyoto’s second commitment period (after 2012). The
second section describes the REBIO Poço das Antas and the São João River basin, including
their characteristics, such as geography and soil occupation. The third section analyzes the
feasibility of a reforestation project developed by land owners near REBIO Poço das Antas.
We conclude our work indicating different forms of additional funding that could make this
type of project economically viable.

2. The Kyoto Protocol and the tropical forests

The first initiatives of carbon sinking in a forestry project precede the Kyoto Protocol.
As far back as the 1980s, when there were no legal restrictions for GHG emissions,
companies in the energy sector such as the American AES and the Dutch SEP already
financed such projects voluntarily with the intention of demonstrating better corporate
practices. At that time, consumers in developed countries started to be concerned about
environmental issues. Therefore, polluting companies were questioned about their
responsibilities regarding the environmental degradation provoked by their operations. The
companies' strategy to improve their image with consumers was to reduce net emissions in
their operations. As examples of activities in this period, we can mention the AES projects in
Guatemala, Peru, Bolivia and Ecuador and the SEP project in Malaysia. The price paid per
ton of carbon was very low (between US$0.20 to 0.33) reflecting the fact that most of the
projects consisted in the preservation of forests, i.e. avoided deforestation (Moura Costa and
Stuart, 1999).
When UNFCCC was signed in 1992, there was a significant change in forestry
projects. According to the Convention, developed countries listed in the Appendix I agreed
that their GHG emission were contributing to global climate change. Thus, voluntary actions
took place, contributing to a great expansion of projects, this time financed by investors
interested in the possible emission credits they could sell in the future. In that period, the
payments reached US$ 1.97 per ton of carbon, almost ten times more than in the previous
projects (Moura Costa and Stuart, 1999).
It still lacked the consolidation of carbon market to grow more, however, since
investors had to engage from the beginning to the end of the process, and there were not
places to sell and buy these permits.
With the beginning of the annual meetings of the Conference of the Parties (COP) of
the UNFCCC, the negotiations among countries turned explicitly to the impediments for a
wider agreement for reducing GHG emissions. As a consequence, forestry projects for carbon
sinking suffered reductions in quantities and value. Many uncertainties regarding the progress
of negotiations, mainly between the USA, Japan, and the EU (concerning flexibilization
mechanisms), but also between developed and developing countries (that would like to be
included as a destination for mitigation and adaptation investments) resulted in the drastic fall
of investments in the scope of this project. Between 1995 and 1996, the projects had a total
annual budget of US$6 million, well bellow the amount invested in previous year, US$50
millions. The price for ton of carbon also fell to an average of US$0.59 (Moura Costa and
Stuart, 1999).
Finally, in 1997, during COP-3, emission quotas were established for countries in the
Appendix I of UNFCCC, as countries signed the Kyoto Protocol. Despite the fact that USA
and other countries latter rejected the implementation of the Protocol, at that time it was
considered great progress in the attempt to mitigate the emissions of GHG, and consequently,
the effects of global warming. As a result, the number of forestry projects increased
significantly.
The third article of the Protocol made possible the use of afforestation, reforestation
and conservation projects to reduce net emissions. However, in the same article, the
additionality criteria was established creating dubious interpretations about the possibilities
of using conservation projects as generator of carbon credits. After COP-7, in 2001,
conservation projects were definitively left out of the first phase of the Kyoto Protocol (from
2008 to 2012).

TABLE 1: Evolution of forestry projects (up to July 1999)

Before 1992 1992-1995 1995-1996 1997 Jan.-Jul. 1998
Number of
0,5 3,3 1,5 4 14
Projects
Area (ha) 93,000 628,467 501,740 893,000 2,002,082
Investments
1 49.25 6.05 4.48 347
(M US$)
US$
Price of ton. C US$ 0.19 US$ 1.97 US$ 0.59 > US$ 12.00
11.07
Source: Moura Costa and Stuart (1999)
 There were many disagreements concerning land-use and forestry projects as
flexibilization mechanisms under the Kyoto framework. Those projects carried some
uncertainties regarding their efficiency in the effort of global warming mitigation as in
measurement methodologies, validation rules and commercialization of temporary credits. In
the end, COP established that Appendix I countries could not acquire more than 1% of their
emission quotas from credits originated by land-use and forestry projects (COP-7, Draft
Decision/ CMP-1). As we previously stated, only reforestation and afforestation projects
were permitted after COP-7.
The following meetings of the COP (COP-8 and COP-9) created the rules that
permitted the implementation of forestry projects by developing methodologies and designs
for them. Especially, the decision 19/COP-9 in 2004 defined relevant aspects for forestry
projects, among them non-permanence, additionality criteria, leakage, evaluation of risks, and
socioeconomic and environmental impacts. This decision also reiterated the Conference’s
desire to only consider conservation projects in the second phase agreements. In practical
terms, the decision 19 halted the demand for forestry projects in the Kyoto carbon market, as
they became expensive and hard to implement. Nonetheless, in voluntary carbon markets
such as the Chicago Climate Exchange (CCX), forestry projects began to have a strategic
role, becoming an important part of voluntary emission reductions.
In the other hand, the importance of reducing the deforestation and stimulating the
recomposition of forests became increasingly evident, especially in tropical countries, as the
most efficient means to mitigate emission. Therefore, carbon credits from avoided
deforestation projects held a significant place in the negotiation that took place in Bali (COP-
13), in 2007. By the initiative of small tropical countries (New Papua Guinea, Costa Rica),
this subject was included again in the negotiations of the second period of commitments for
the Kyoto Protocol.
In order to establish the limits of the debate, thematic meetings have been held
periodically. In March 2007, in Cairns, Australia, a workshop gathered countries with
different ideas of how to include those projects in Kyoto’s second phase. By the end of the
meeting, no consensus was reached, and among the main existing obstacles for the
development of a common proposal are the following (Cenamo, 2007):
a) Early actions: despite the fact that all countries agreed that early actions must be taken
(as training less capable countries in accounting their avoided emissions or starting
pilot projects), there is no consensus about selling credits generated before 2012.
b) Baseline scenario: three different methodologies were proposed for the establishment
of projects’ baseline. The Brazilian proposal determines a Deforestation Reference
Rate, obtained by the calculation of an average of deforestation rates in the past years.
However, this methodology created controversy among the participants, because in
addition to the perverse incentive generated (rewarding the countries that had
destroyed more forested areas), it would also reduce the participation of countries
where the deforestation rates are low such as Chile and Costa Rica, or countries with
small but important forested areas such as India and China. Then, other countries
proposed a baseline scenario calculated with projection models of deforestation based
in regional and national drivers, as public policies, roads construction, demographic
expansion, agricultural frontier dynamic, etc., besides an adjustment factor for
countries with low deforestation rates. Finally, it was proposed to use the estimated
stock of carbon from tropical forests as baseline, when countries do not have available
data to make their own calculations. There was no agreement on the methodology for
baseline estimations.
c) Definitions: there was an argument for the need to establish common definitions for
keywords such as forest (national or international definition?), deforestation (can it
 include degradation?), project scales and emission due to deforestation (which gases
should be considered?).
d) Mechanism Design: on one hand, Brazil proposed the creation of an international fund
to avoid deforestation, financed by voluntary contributions from governments and
NGOs, besides the existent Special Climate Change Fund from UNFCCC, and the
creation of taxes on commodities and international services that are high GHG
emitters (international aviation, coal mining, etc.). On the other hand, some countries
proposed a market-based mechanism that could operate in the modes of CDM, selling
carbon credits from avoided deforestation. There was also a suggestion to create an
exchange market for avoided deforestation and international benefits such as
cancellation of debts, trade preferences, reduction in tariffs, etc. There was no
consensus on the best mechanism.
e) Permanence and Leakage: we can mention temporary credits, “prevention funds”
(financed by credit sellers in order to buy carbon credits in case of forest fires or
plagues), or credit banking mechanisms as potential approaches suggested to solve
permanence and leakage problems related with forestry projects. All members agreed
that this subject must be discussed more thoroughly.
Hence, we can conclude that, in spite of the consensus on the importance of
conservation project as an instrument against global warming, agents disagree in the best way
to deal with it. The excessive bureaucratization of CDM projects implementation (due to a
large number of requirements and validations) generate a great disadvantage of these projects
in relation to other flexibilization mechanisms, such as Emission Trading. For this reason, the
price paid for carbon credits generated by CDM project are significantly lower than those
traded within developed nations. The situation is even worse for forestry projects as they
need extra validations with greater risks. It is worthwhile to mention that forestry projects are
the kind of project for which Brazil has a comparative advantage in relation to other
important developing countries, such as China and India.
Thus, avoided deforestation projects could stay out of Kyoto’s second phase (after
2012) as disagreements increase between countries. This implies that voluntary markets
should continue to be the main destination of carbon credits from conservation projects. On
the other hand, CDM could still provide an enormous incentive to reforestation projects in
tropical regions. This kind of project associates carbon sink, environmental protection, social
development, and economic growth and it can have a positive externality, particularly in
degraded areas, endangered species habitats, river banks, and lands with low commercial
value. That is exactly the case of the region around REBIO Poço das Antas, in São João
River basin.

3. REBIO Poço das Antas and its region

The Biological Reservation of Poço das Antas is located in the São João river basin,
in the Rio de Janeiro State. The topography of that area is well diversified, with mountains
(21%), plateaus (13%), hills (32%) and great slopes (30%). The vegetation of the area is that
of the Atlantic Forest, one of the ecosystems with largest biodiversity in the world. The land
has been used in agricultural activities for centuries, as the State of Rio de Janeiro was one of
the first areas colonized in Brazil. In that State, the Atlantic Forest that remained is found
inside conservation areas or in places with difficult access, such as slopes of hills. Despite
being protected, these areas correspond to a tiny fraction of the original (pre-colonization)
area of forested land.
Many native species of this region are threatened seriously with extinction, since their
habitat was destroyed to make space for farms and urban occupation (Illustration 1). The
productivity of the soil is low, with great incidence of peat. Nowadays, the farms are mostly
occupied by pastures for extensive cattle ranching. Clear signs of erosion exist in several
farms in the region. This fact helps to explain the growth of exposed soil areas and the
decrease of the economic output in the last several decades.
The REBIO Poço das Antas is managed by IBAMA, with support of the “Mico Leão
Dourado Association”. The Association is an NGO that works against the extinction of the
golden lion tamarin (Leontopithecus rosalia), an endemic primate of the State of Rio de
Janeiro and flag species for the conservation of the biodiversity of the Atlantic Forest for the
whole world. The goal of the Association is to reach the number of two thousand free animals
in nature. Thus, around 25,000 hectares of Atlantic Forest, habitat of the golden lion tamarin,
is necessary to preserve the species.

Illustration 1: Location of the Vegetation in São João River Basin

Source: Laboratory of Geo-processing - AMLD (RJ) 2006.

Even adding the areas of the biological reservations Poço das Antas and União with
the private areas of conservation (RPPN) of the region, there would still be short of about
16,300 hectares to guarantee enough space for the two thousand monkeys. Then, the number
of 16,300 hectares will be used as potential (theoretical) area for reforestation seeking carbon
credits. That area would be around REBIO Poço das Antas and REBIO União reservations, in
private properties. An important premise for our calculations is that the necessary land should
not be bought. The idea is to attract farmers interested in reforesting parts of their farms,
creating live fences and ecological corridors, shifting from agricultural use when receiving
income from carbon credits sale, or restoring degraded areas with an opportunity cost close to
zero.
Farmers could establish a cooperative in order to gather all of their activities in one
single project, unifying their expenses and incomes, optimizing their costs. It is worthwhile to
emphasize the good relationship between some farmers and the Mico Leão Dourado
Association and, therefore, with the Biological Reservation of Poço das Antas (Steffen 2005).
An understanding of the importance of the Atlantic Forest by part of the farmers (some have
already created independently protection areas in the remaining forests in their properties)
increases the viability of the project proposed in this paper.
It can be easily observed that the hypothetical project around the REBIO of Poço das
Antas perfectly fulfills the requirements needed for CDM reforestation projects. This is a
project that would seek to protect one of the richest and most threatened ecosystems of the
planet, thus it follows the premise that the project should help in the sustainable development
of the area where it is implemented. Shifting from pastures to reforested areas with native
species, the farmers, besides receiving an income from the carbon credits, would contribute
to improving the quality of the soil, saving the biodiversity and protecting the São João River
basin.
The São João River is responsible for the water supply of an important area of the
State of Rio de Janeiro and its preservation is vital for the future development of the State. It
would be necessary the commitment of farmers in protecting the new reforested areas,
guaranteeing their maintenance in the long run. This prerequisite might be an obstacle to the
fulfillment of the project, because many farmers will allege that although their earnings end
when the forest is mature, their expenses in maintaining it will persist. We should bear in
remind, however, that besides possible earnings with ecotourism and a sustainable lumber
industry, the farmers could count on the help of several NGOs that will persist with their
work on the preservation of those forests. Besides this, once the forest covering has been
restored, the dynamics of the forest itself guarantee its maintenance in the long run, imposing
small expenses to the proprietors, mainly in fire brigades. There still exists the possibility,
depending on the extension and of the purpose of reforestation, to use the funds for
environmental conservation, resulting from the new environmental legislation on investments
(Geluda and Young 2004). However, since there is not a law on this specific subject, that
possibility remains uncertain.
The case of REBIO Poço das Antas is also framed in the additionality criteria.
According to data from Rambaldi et al. (2003), the forest area of São João River basin has
suffered a deforestation process for many years (Tables 2 and 3). Starting in the 1950s, the
situation has worsened considerably. Hydraulic works, such as canalization of rivers,
drainage of flooded areas and the Jutumaíba Dam, destroyed enormous forested areas that
were either converted into pasture or flooded by the dam.

Table 2: Rate of Deforestation and Reforestation in the São João River Basin and
Região dos Lagos (projection for the next 40 years)
Annual Forest % Deforested land
Deforestation Cover after 40 years
Rate (%) Loss (Ha
/Year)

Deforestation 1.20% 2,137 38

Reforestation 0.41% 1,285 -

Source: Rambaldi et al., 2003, p.36
 Table 3: Evolution in the land use in São João River Basin (1986 -2002)

Land use 1986 1990 2002

Area (ha) % (*) Area (ha) % (*) Area (ha) % (*)
Forests 100,746.27 37.63 88,358.94 33.00 79,746.66 29.79
Crop Fields / Pastures 99,852.57 37.30 101,922.84 38.07 81,079.74 30.28
Exposed soil 64,262.43 24.00 73,101.51 27.30 102,838.95 38.41
Water bodies 2,874.87 1.07 4,352.85 1.63 4,070.79 1.52
Total 267,736.14 100 267,736.14 100 267,736.14 100
(*) total area of 267.736,14 ha
Source: Rambaldi et al., 2003, p.37.

As noted by Rambaldi et al. (2003, p.30), "the sanitation system, roads construction,
gas pipelines, oil pipelines and energy transmission lines in addition to the already existent
railroad, promoted an intense occupation of the region, followed by urban expansion." A
compilation done in the 1990s revealed that only 2% of the habitat of the golden lion tamarin
still existed. All those facts prove the additionality of the project that would allow the
reforestation of areas threatened by a definitive devastation. The baseline described in the
report was done based on satellite images and socioeconomic data of the region. The study
was made taking into account the loss and gains of forest area between 1990 and 2001. The
total area of forest devastated in that period was of 23,689 hectares. This means an annual
average loss of 1.2% of the forested area, representing a devastation of 38% of the total forest
at the end of the forty years of the project:

[ There is ] a clear tendency of: 1) destruction of the forest remainders in

the basin; 2) decadence of the agricultural activity and 3) increase of
degraded areas. It is the perverse cycle for land degradation: the forest is
removed, an agricultural activity with low investments is put in its place,
the lack of appropriate technologies and little diversification turns it into a
non-profitable activity and it is abandoned, shifting to pastures for cattle
ranching that, for the same reasons, ends up demanding the enlargement
of the cultivated area, pressuring for new deforestations. The cycle is
closed with the abandonment of the cattle ranching industry, leaving
behind immense portions of degraded and eroded lands.

(Rambaldi et al., 2003, p.37)

However, this picture of devastation can be reversed in the region with the
implementation of a reforestation project. The project, with the use of native species, protects
the remaining forests, connecting fragmented forested areas (corridors), reducing the risk of
fire, expanding the habitat of numerous species of animals (including the golden lion
tamarin), and preserving the local biodiversity.
The report from AMLD made the calculation of the carbon sink, along forty years, for
a neighboring farm to the REBIO Poço das Antas. We will use those data to calculate the
potential income for the theoretical project’s area. It is worth noting that the property studied
is composed mostly by different types of pastures and for that reason it can serve as an
average soil type of the region. This carbon sink calculation (of an area of 2,442.55 hectares)
used already approved methods and is described in Rambaldi et al. (2003).
Regarding the subject of leakage, meaning the possibility of growth in net GHG
emission for reasons related to the project (fires or irregular felling, inside or outside the
project’s boundaries), the study of AMLD says that the probability that activities previously
performed at the place (agriculture and cattle ranching) being transferred to another forested
area is small. They argue that the soil quality in the region is very low and the agricultural
activities already were being abandoned little by little by farmers anyway. It was also
considered in the project costs the recruiting of fire brigades, reducing leakage risks.

4. Reforestation Project for the region around REBIO Poço das Antas

In this section, the potential income and costs of a hypothetical project in the area of
Poços das Antas will be calculated. For this purpose, we should consider some realistic
assumptions, considering the availability of reliable data.
First of all, we will consider that the farmers have interest in reforesting open areas or
pastures due to the low productivity or advanced degradation of the soil; that is, the cost of
opportunity of land is close to zero (areas without interest for the agricultural sector). By
doing so, we will eliminate the acquisition and registration expenses of the land that will stay
under farmers' ownership. On the other hand, farmers will be indefinitely committed to the
preservation of reforested areas, either as conservation area or as a sustainable wood
extraction property.
It is important to remember that only native species will be used for the reforestation.
In this way, it is guaranteed that there will not be any negative impact in local biodiversity
and, on the contrary, there will be a considerable increase in the habitat of countless native
species in risk of extinction.
The area destined for the reforestation in this hypothetical project will be of 16.300
hectares. This area, taken together with the remaining forests of the region, should be enough
to liberate the gold lion tamarin from the danger of becoming extinct. Another important
consideration is the fact that we will be using the average total cost of the project from
Rambaldi et al. (2003), without considering the expected marginal gains. That simplification
will increase the total costs of the hypothetical project, counterbalancing any optimistic
supposition.
The results of this calculation should be seen as an indication of the great opportunity
that opens up for reforestation projects connected to the Kyoto Protocol more than a precise
estimation of the expected profits. The result indicates the amount of capital related to a
project of this magnitude along forty years of its execution. The reforestation projects using
native species won't be an investment of great financial profitability. The great opportunity is
the (total or partial) financing of the recovery of previously valuable areas (considering the
biological value of the Atlantic forest) that are degraded today.
Regarding costs, they are calculated for the same area studied in the carbon sink
analysis (2,442.44 hectares). We will use the values presented in Rambaldi et al. (2003) for
the calculation of the present value cost of the proposed project and will compare it to the
present value income. It is known, however, that there is room for cost falls due to gains of
scale, as seen in relation to the acquisition of seeds and equipments, and spending associated
with the validation, monitoring and verification related CDM rules.
The table below discriminates the implementation and operation costs of the
reforestation project of 2,442.44 hectares, in forty years of execution. In contrast to the study
of Rambaldi et al. (2003), in this work we did not include costs related to the purchase,
registration and maintenance of the properties. As previously stated, the proposed project has
as assumption the land owners’ participation, justifying the exclusion of these expenses. We
also hypothesize that there is no or very little opportunity cost for this land due to its
advanced state of degradation. The maintenance expenses of the farms will not be included in
the costs of the project since such expenses would take place even without the project, not
being necessarily altered by its presence. We included, however, the expenses with the
reforestation process itself and those related to its adaptation to CDM standards.

Table 4: Costs of the Project (in 40 years)

Costs
Reforestation US$ 2,076,395.00
Leakage control US$ 197,766.00
Monitoring and verification US$ 311,635.00
Project development US$ 135,000.00
Sustainable rural activity* US$ 263,688.00
Local management US$ 1,360,706.00
Indirect costs US$ 1,200,785.00
TOTAL US$ 5,545,975.00
(*) Expenses related to the conversion of current rural activities to more sustainable
practices. Source: Rambaldi et al., 2003, p.27.

The total costs would add up to US$ 5,545,975.00 over the forty years of the project
(Table 4).
As in Rambaldi et al. (2003), the costs are not discriminated along the years. To
calculate the present value cost, we made the following assumptions:
a) The expenses with reforestation were divided equally by the first five years of the project.
b) Other expenses were divided equally by the forty years of the project.
With a discount rate of 5% a year, we reached a total of US $ 1,345.44 per hectare for
the current cost of the project. For a discount rate of 8% a year, the result was US$ 1,102.30
per hectare. Total present value costs, considering the 16,000 ha of the project, would be
US$21,930,717.65 (5 % discount rate) or US$ 17,967,495.10 (8 % discount rate).
Besides the financial income (which will be calculated later) this project allows other
types of earnings, in the social and environmental plan. In the social plan, the reforestation
activity put an end to the domain, almost exclusive, of the semi-extensive cattle ranching in
the local job market. This low productive activity generates few and badly remunerated jobs.
In contrast, according to data from the Fundação S.O.S. Mata Atlântica, for each reforested
hectare, 4 direct jobs are created. Other jobs associated with environmental protection, like
fire brigades, are also foreseen. On the other hand, the deforestation in remaining areas of
Atlantic forest is not associated with generation of jobs, as seen in Young (2004, 2006).
This project also has the potential to stimulate the production of goods and services
related to the forest, like production of seedlings of native species, ecotourism and production
of sustainable and certified lumber (Rambaldi et al. 2003). Those activities can generate new
incomes in the future, exactly when the generation of carbon credits will be close to an end,
stimulating the maintenance of the forest in the long run.
Regarding the production of seeds and seedlings of native species, it is worth to point
out the potential use of that genetic information for income generation. The small
communities of MST (a social movement that fights for land reform) that surround the area
can take advantage of the new demand, making their small unproductive properties
economically viable. As for ecotourism, it is important to remember that the Poços das Antas
region is located between Rio de Janeiro, the main hub for foreign tourists arriving in Brazil,
and Região dos Lagos, another region in the state of Rio de Janeiro, that receives a great
number of national and international tourists.
 In the environmental plan, this reforestation project would protect the supply of water
and the regulation of water flow in the São João River basin:

...[the rivers of the area are] responsible for the maintenance of the water
supply for a high populated area like Barra de São João, Cabo Frio and
Armação de Búzios. Regulating the water flow in the small canals and
restoring the forest covering along Aldeia Velha and São João rivers, the
project will contribute to improve the water quality, to reduce the seasonal
variations in the water flow, to ease the effects of the tides, and to contain
the soil salinization...
(Rambaldi et al., 2003, p.42)

Another possible source of income for farmers that choose to reforest is the earnings
from environmental services. These services are provided by the forested lands (as
regularization of water flows, soil protection against erosion, and biodiversity protection) and
every city in the region benefit from them. Then, it is fair that farmers receive some money as
an incentive to keep their forests intact. It is worth telling that the Committee of São João
River is organizing itself, and there is a real possibility for payments of water use by the
municipalities inside the river basin.
Proceeding with the environmental benefits of the reforestation project, its location
around two conservation units (Poço das Antas e União) contributes to the preservation of the
biodiversity in the Atlantic Forest. Poço das Antas is home of the largest wild population of
golden lion tamarin, besides other endangered species. In REBIO União, scientists identified
17 threatened species of birds, the highest concentration in the Americas.
Those social and environmental benefits, despite their immateriality, have concrete
repercussions on the people’s welfare. We can not underestimate those impacts when
evaluating a project of this nature. These gains are long run benefits, as they protect the soil
quality, guarantee the water supply and quality, and protect biodiversity from the rich
ecosystem of Atlantic Forest to future generations.
From now on, we will make the calculations for the present value income of the
hypothetical project. First of all, the carbon sink per hectare will be estimated for the forty
years of the project. Each ton of carbon captured by the forest can generate a CER (Certified
Emission Reductions) by CDM rules. These CERs can be sold in carbon markets, becoming
the only source of income of our study case. As in Rambaldi et al. (2003), this hectare of land
is an average land type, a combination of different types of pasture and open lands that exist
in the region. For this purpose we shall use the total carbon sink calculated for an area of
2,442.55 hectares (table 5).

Table 5: Average Carbon Sink

Total Carbon Sink
(ton C in 20 years) 205,363.64
(ton C in 40 years) 357,342.82
Total Area (hectares) 2,442.55
Average Carbon Sink
(ton C/hectare in 20 years) 84.08
(ton C/hectare in 40 years) 146.30
Source: Authors, based on Rambaldi et al. (2003).

We came to the result of 84.08 tons of carbon captured by each hectare of reforested
area after twenty years. As the rhythm of carbon sink falls in the same rate that the forest
grows, at the end of forty years, we calculated that 146.30 tons of carbon per hectare would be
captured.
Comparing these results with the Brazilian National Inventory of GHG Emissions data
(MCT, 2004), the carbon sink of these areas was larger than expected. According to that
study, Atlantic Forest regeneration capture 2.4 ton. C / ha each year. However, the data from
Rambaldi et al. (2003) points out an annual average capture of 3.66 ton. C / ha. It should be
emphasized that the Inventory was quite criticized at the time of its publication, exactly
because its numbers were considered very conservatives.
The next step to calculate the present value income of the project is to define the price
of the CERs. We will use three different scenarios for the price. Each scenario considers the
price constant over time to simplify our calculations. The first scenario estimates an average
price of CER at US$ 5.00, considering the low value of forestry project under the CDM
market. In the second one, the price is US$ 15.00, the median of price estimations published
by PriceWaterHouseCoppers for CDM projects. At last, we give the price of US$ 25.00 per
CER as a ceiling price as the project generate a “charismatic carbon credit” in face of its
environmental positive externalities and the important image that golden lion tamarin has in
the world media. International institutions and companies might be interested in financing a
project that could improve their image. We know that the price of US$ 25.00 per CER is high,
clearly above market standards.
After that, two projections for the distribution of carbon credits along the project’s
period were made with the purpose of calculating the present value income. Using data from
Rambaldi et al. (2003) for the total carbon sink in 20 and 40 years, we estimated a logarithmic
function and a linear function that represents carbon sink year by year. The logarithmic
function concavity seems to better represent the natural evolution of the carbon sink by the
forest – faster in the beginning and slower in the end. These characteristic gives a higher
present value income since the credits would suffer less with the discount rate. So, this could
be considered the upper boundary of the present value income.
The linear function gives the average carbon sink per year, and it could be consider the
lower bound of the present value income, as forests carbon sink function really has a concave
form.
First, we estimated the present value income (table 6) with the logarithmic function
(Graphic 1) in the three possible scenarios for CER price.

Graphic 1: Projection of Carbon Sink with Logarithmic Function

400000
y = 88400Ln(x) - 9405,4
350000

300000

250000

200000

150000 Total carbon sink in

20 and 40 years
100000
Log. Function
50000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
-50000

Source: Authors, based on Rambaldi et al. (2003).

 Table 6: Results for Present Value Income with the Logarithmic Function
Price of ton. C Discount Rate Present Value Income per Total Present Value
hectare (16,000 ha)
US$ 5.00 5% US$ 412.62 US$ 6,725,773.63
US$ 5.00 8% US$ 339.70 US$ 5,537,174.45
US$ 15.00 5% US$ 1,237.85 US$ 20,177,320.88
US$ 15.00 8% US$ 1,019.11 US$ 16,611,523.35
US$ 25.00 5% US$ 2,063.12 US$ 33,628,868.13
US$ 25.00 8% US$ 1,698.52 US$ 27,685,872.25
Source: Authors, based on Rambaldi et al. (2003).

Table 7: Present Value of Implementation and Operation Costs

Discount Rate Present Value Costs per Total Present Value Cost
hectare (16,000 ha)
5% US$ 1,345.44 US$ 21,930,717.65
6% US$ 1,102.44 US$ 17,967,495.10
Source: Authors, based on Rambaldi et al. (2003).

Then, we made the same calculations (table 8) with the linear function (Graphic 2).

Graphic 2: Projection of Carbon Sink with Linear Function

400000
y = 9148,9x + 1540,5
350000

300000

250000

200000 Total carbon sink in

20 and 40 years
150000
Linear Function
100000

50000

0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

Source: Authors, based on Rambaldi et al. (2003).

Table 8: Results for Present Value Income with the Linear Function
Price of ton. C Discount Rate Present Value Income per Total Present Value
hectare (16,000 ha)
US$ 5.00 5% US$ 317.65 US$ 5,177,673.93
US$ 5.00 8% US$ 219.34 US$ 3,575,211.45
US$ 15.00 5% US$ 952.95 US$ 15,533,021.80
US$ 15.00 8% US$ 658.01 US$ 10,725,634.36
US$ 25.00 5% US$ 1,588.24 US$ 25,888,369.67
US$ 25.00 8% US$ 1,096.69 US$ 17,876,057.26
Source: Authors, based on Rambaldi et al. (2003).
 Table 7: Present Value of Implementation and Operation Costs
Discount Rate Present Value Costs per Total Present Value Cost
hectare (16,000 ha)
5% US$ 1,345.44 US$ 21,930,717.65
6% US$ 1,102.44 US$ 17,967,495.10
Source: Authors, based on Rambaldi et al. (2003).

As we can see, only three out of 12 scenarios showed income greater than costs. All of
these scenarios have the higher price for ton of carbon. Despite that, the earnings originated
from carbon credits cannot be neglected, since they might finance, even if partially,
reforestation projects that have positive externalities. Therefore, they can contribute to the
sustainable development of the State of Rio de Janeiro.
We also tried to estimate the opportunity cost of land in the region. We searched data
from IBGE (Federal Census Bureau) for the cattle ranching activity in the districts around the
REBIO Poço das Antas, in the São João River basin in order to do that. As we could not find
information about this activity’s cost and profitability, the value of output was the best proxy
available.
The last census of the agricultural sector in Brazil was made by IBGE in 1996. There,
we were able to find information about the value of milk production, cattle selling and buying,
meat production, and the total area used by the industry in the region. Table 9 illustrates the
information gathered from IBGE Agricultural Census. We converted R$ 1.00 to US$ 1.00.
That was the exchange rate from 1994 to 2002, when Brazilian government established a
currency peg to fight inflation.

Table 8: Value of the Annual Cattle Ranching Production in the São João River basin

Area 62,720.34 ha
Annual Value of Meat Production US$ 132,200.00
Annual Value of selling Cattle US$ 2,943,555.00
Annual Value of buying Cattle US$ 1,233,508.00
Annual Value of Milk Production US$ 4,654,663.00
NET Value of
US$ 6,496,910.00
Cattle Ranching Industry
Source: Authors, based IBGE (1996).

The total annual value of the cattle ranching industry in the region was
US$6,496,910.00. The average annual value of output per hectare was US$ 103.58, as the
total area occupied by this activity reached 62,720.34 ha.
Finally, we calculated the present value opportunity cost for 40 years. As results, we
found:
a) Present Value Opportunity cost of US$ 1,777.34 / ha, with a 5 % annual discount
rate; or Total Present Value Opportunity cost of US$ 28,970,642.00.
b) Present Value Opportunity cost of US$ 1,235.15 / ha, with an 8 % annual discount
rate; or Total Present Value Opportunity cost of US$ 20,132,945.00.
As we can see, these results are smaller than the income generated by carbon credits in
the more optimistic scenario for carbon prices. In either case, we considered the costs of the
activity, but it is easy to assume that semi-extensive cattle ranching activities have lower costs
than reforestation. Adding all costs (implementation, operation and opportunity costs), there is
no scenario for credit prices that could fully finance the hypothetical project.
 Nonetheless, it is worth telling that these numbers confirms the information that the
cattle ranching industry in this region is a very low productive activity. Also, it seems to get
even worse with time, as soil degradation continues to increase. In addition to that, we can
presume that there are already areas so degraded that no commercial activity can take place,
therefore their opportunity costs are practically zero.

5. Conclusion

Regarding the reforestation project of Atlantic Forest with native species around the
REBIO Poço das Antas and the REBIO União, the following conclusions can be made:

1) Since the expenses of the project’s implementation appear before in time than any income,
and given the current discount rate in Brazil, it will be difficult for a project of this scope to
be completely self-financed. Adding all costs and considering the discount rate, a very high
price would be necessary for the carbon credit to make the project economic feasible. This
price is outside of today’s market standards. However, the sale of carbon credits may
perform a partial role in financing reforestation projects.
2) If there were any market development for environmental services as water supply and
quality, climate regulation, biodiversity protection, etc., the project could be possibly
viable. It is important that the property rights of these services be given to farmers,
proportionally to the forest cover of their proprieties. The cities that receive the benefits
from the forested lands should pay for their use of natural resources (Young, 2005).
3) To execute the reforestation only in degraded lands, with opportunity costs near zero, can
also be a form to implement this project. Without competition with other activities,
reforestation projects would be feasible if they could finance implementation and operation
costs. Even so, the price must be higher than the market standards. As we estimated in
section 5, only one forth of the scenarios did that (those with higher prices).
4) Reducing the project’s cost can make it more attractive. There are some ways to do this:
cost reduction with reforestation through donations of seedlings and voluntary work; costs
reduction with local administration thanks to gains of scale; donations from NGOs
interested in biodiversity preservation; donations from companies or international
institutions that want to engage in corporate sustainability activities; and campaigns for
individual donations (Rambaldi et al., 2003). The law that forces paper and cellulose
manufacturing companies to plant native species in a proportion of their commercial
reforestation (State law 4063/2003) can also reduce project costs (Oliveira, 2007).
5) The government has an important role in the development of reforestation projects. It could
give incentives to farmers, granting tax reductions to land owners that decided to reforest
with native species part of their lands. Also, the government is responsible for the
development of markets for environmental services, and it must provide land owners the
property rights over these services.

Finally, reforestation projects with native species are not easy to finance, since they do
not bring economic return to the investments needed. However, the social and
environmental benefits generated are enormous and vital to society. The ratification of the
Kyoto Protocol and the development of a carbon market can be great incentives for
reforestation of important areas, such as rivers banks, endangered species habitats, and
areas with advanced soil erosion.
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