Land Use, Land-Use Change and Forestry

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5.2.3. Financial Analysis of LULUCF Project Activities

Financial analyses of GHG reductions by projects are rarely comparable because no standard method of evaluation has emerged and come into wide use. Financial analysis of direct, indirect, initial, and recurring costs, as well as the stream of revenues, varies across projects. Available cost estimates for LULUCF projects often include direct costs incurred by the project developers: land purchase or rental costs, if necessary; land clearing and site preparation; initial planting or other activity costs; annual, recurring costs of project maintenance and management-including, for example, periodic thinning or other stand improvement or weed control in agricultural soil management; and sometimes the establishment of monitoring data collection and evaluation systems.
Opportunity costs of land (i.e., the present value of alternative opportunities or uses of the land, at the margin) are often not included in financial analyses of projects. Other costs often overlooked are infrastructure costs (e.g., road development), monitoring data collection and interpretation costs, and maintenance or other recurring costs that will be incurred in the future (Mulongoy et al., 1998; Witthoeft-Muehlmann, 1998). The stream of revenues is not widely reported for projects to date, in part because few revenues have accrued in their early stages of implementation. Revenues may be generated by the sale of logs or value-added products from timber harvest, sale of fuelwood or non-timber products such as medicinal plants, usage fees for access, government or NGO grants for subsidies, in-kind contributions, and sale of emissions reductions.

Project-level financial analysis methods are widely used and fairly standardized in development assistance and private investment projects. They have yet to be consistently applied to and reported for LULUCF projects, however-in part because of the highly varied expertise of early actors in such projects (Mulongoy et al., 1998). A standard approach for comparing the economic attractiveness of different projects would compare the time flow of revenues-including the sale of emissions reductions and crediting rules applying to them-with the time flow of expenditures, applying appropriate discount rates. Detailed financial data are not available for most LULUCF projects, however, so the economic indicators often are obtained simply by dividing a project's total carbon sequestration or emissions avoidance over time by total expenditures (e.g., Witthoeft-Muehlmann, 1998). A further complication relates to how emissions reductions are allocated between the sellers and investors. The unit cost of reduction will vary directly with the percentage of total reductions that accrue to the investor.

Cost and investment estimates are available for virtually all of the projects in Table 5-2; because of the different methods used in the estimates, however, only summary ranges are reported in Table 5-3. The costs of GHG benefits in these projects range from $0.1-28 per t C, simply dividing project costs by their total reported carbon benefits. Most of the cost estimates are in the range of $1-15 per t C, with a higher range for reforestation and afforestation projects (reflecting the inclusion of temperate and boreal projects). Mulgonoy et al. (1998) reviewed cost estimates for LULUCF carbon projects and found that most estimates for the tropics fall in the range of $2-25 per t C. Two other reviews reported costs of sets of projects in temperate and tropical biomes ranging from $4-26 (Swisher and Masters, 1992) and $2-12 per t C (Witthoeft-Muehlmann, 1998). Other studies are consistent with these results (Dixon et al., 1993; Brown et al., 1996; Stuart and Moura-Costa, 1998).

Table 5-3: Undiscounted cost and carbon mitigation over project lifetime of selected AIJ Pilot Phase and other LULUCF projects in some level of implementation.a

Project Type (number of projects) Land Area
Total Carbon
Mitigation (Mt C)
($/t C)
Total Carbon Mitigation
per Unit Area (t C ha-1)

Emissions Avoidance via Conservation:
Forest Protection (7) 2.8 41-48 0.1-15 4-252
Forest Management (3) 0.06 5.3 0.3-8 41-102
Carbon Sequestration
Reforestation and Afforestation (7) 0.10 10-10.4 1-28 26-328
Agroforestry (2) 0.2 10.5-10.8 0.2-10 26-56
Multi-Component and Community Forestry (2) 0.35 9.7 0.2-15 0.2-129

a Figures taken from project reports and published project reviews. Cost and carbon mitigation figures have been estimated using different methodologies, may not be comparable, and have not been independently reviewed. Cost values are estimated by dividing undiscounted costs and investment by estimated total carbon mitigation.

Other methodological issues include the absence of discounting in most of the available cost estimates, to reflect the time value of the investment and the production of GHG benefits. The choice of accounting approach also is important. If the ton-year approach (Section 5.4.2.) were used, these costs would tend to rise from about 50 percent to several times that, because fewer GHG benefits could be credited over a similar time frame.
Estimated total investment committed to date in projects in Table 5-3 is about $160 million; this amount could grow to about $330 million if these projects were fully funded and implemented, although these estimates are provisional (EPA/USIJI, 1998; Stuart and Moura-Costa, 1998; Witthoeft-Muehlmann, 1998). Developers' project costs per ton of carbon are likely to change from these initial estimates over time. The price and supply of certified emissions reductions will be revealed if a market for them develops and as the eventual eligibility and requirements for various articles of the Kyoto Protocol become known. Costs may tend to decrease if economies of scale and technology transfer become widely available, potentially via development of portfolios of projects by entities transferring common, state-of-the-art methods to countries and projects. The Costa Rican Government's PAP, for example, undertook land-use data collection, baseline development, and establishment of monitoring systems for virtually all public lands in the country. The parallel Private Forest Program (PFP) provided some of the same services for private forest lands. In both cases, the goal was to reduce barriers to investment for carbon benefits (Tattenbach, 1996; Subak, 2000).

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