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Economic Analysis of Afforestation Projects for Carbon Sequestration:A Case Study in Patagonia, ArgentinaTable of ContentsTable of contentsTABLE OF CONTENTSLIST OF TABLESLIST OF FIGURESLIST OF ABBREVIATIONSSUMMARYRESUMENIIIIIVVIIVIIIIX1. INTRODUCTION 11.1 Problem definition 31.2 Hypothesis and objectives of research 42. LITERATURE REVIEW 52.1 CDM market characteristics 52.1.1 Global carbon dioxide market 52.1.1.1 Potential sellers 82.1.1.2 Potential buyers 92.1.2 Latin American perspective 112.1.3 Carbon price trends 112.2 Modalities and rules of CDM projects 132.2.1 Definitions 132.2.2 Addressing non-permanence of afforestation projects 152.2.3 Transaction costs 172.3 Carbon sequestration costs in forest 192.3.1 Profitability and costs of afforestation projects in Patagonia 192.3.2 Carbon sequestration costs 203. MATERIALS AND METHODS 223.1 Study area 233.1.1 Environment characteristics of the Andean Patagonia 243.1.2 Patagonia forestry sector features 243.2. Data collection 263.2.1 Data source 263.2.2 Interview characteristics 263.3 Data processing 273.4 Forestry analysis 283.4.1 Silvicultural analysis and management 283.4.2 Forest products 293.4.3 Biomass and carbon sequestration 303.4.4 Baseline assumptions 313.5 Arrangements and assumptions 31I

Economic Analysis of Afforestation Projects for Carbon Sequestration:A Case Study in Patagonia, ArgentinaTable of Contents3.5.1 CDM arrangements 313.5.1.1 Transaction costs 313.5.1.2 Carbon prices 323.5.1.3 Calculation of CERs 333.5.1.4 Project area 343.5.2 Economic assumptions 353.5.2.1 Decision maker scenarios 353.5.2.2 Discount rate and inflation 353.5.2.3 Opportunity costs 373.5.2.3 Land price 373.5.3 Risk assumptions 383.6 Economic calculations 383.6.1 Profitability indicators 383.6.2 Critic points 393.6.3 Carbon sequestration costs 393.7 Materials and methods’ summary 404. RESULTS 414.1. Profitability of ponderosa pine afforestation based on timber sales 414.2 Certified emission reduction analysis 424.3. Transaction costs 434.4 Effect of accounting methods 454.5 Minimum profitable project area 504.6 Carbon sequestration costs 514.7 Sensitivity analysis 524.7.1 Changes in the discount rate 524.7.2 Changes in input and output prices 534.7.3 Changes in the project scale 555. DISCUSSION AND CONCLUSIONS 575.1 Limitations of the present research 575.2 Economic analysis of afforestation projects for carbon sequestration 585.2.1 Impact of CER accounting methods 585.2.2 Scale of CDM forestry projects 605.2.3 Carbon sequestration costs 605.2.4 Sensitivity analysis 615.3 Final conclusions 626. REFERENCES 677. APPENDIX 71II

Economic Analysis of Afforestation Projects for Carbon Sequestration:A Case Study in Patagonia, ArgentinaList of FiguresList of figuresFigure 1Figure 2Figure 3Figure 4Figure 5Figure 6Figure 7Supply and demand curves in the global carbon marketunder different scenarios.Distribution of potential suppliers of sink and non-sinkCDM projectsMain buyers and type of projects financed from 1996 to2000Comparison between abatement costs in €/t CO 2 , carbonprices paid and carbon price forecastsExamples of issuance: TCERs (a) and LCERs (b) on acurve of net anthropogenic GHG removal by sinks(carbon stock-curve discounted baseline and leakage).Beginning of the certification is year 10.Maximum, minimum, and average transaction costs ofCDM projects.Distribution of capitalized expenditures and income in anafforestation project –turnover 35 years- in Patagonia891012161819Figure 8 Conceptual framework of the research. 22Figure 9 Map of the research area. Forest Region in Patagonia 23Figure 10 Example of a graphic outcome using @RISK software. 27Figure 11Figure 12Carbon sequestration in trunks, branches, needles androots of Ponderosa pine plantation –35 years project- inPatagonia.Land price for properties in the NW of Chubut accordingto the interviews.3037IV

Economic Analysis of Afforestation Projects for Carbon Sequestration:A Case Study in Patagonia, ArgentinaList of FiguresFigure 13Figure 14Figure 15Figure 16Figure 17Figure 18Figure 19Figure 20Figure 21Profitability distributions of Ponderosa pine afforestationbased on timber product sales when different scenariosare considered with 8% discount rate.Curve of carbon sequestration in a pine plantation andcomparison of certified emission reductions generatedwith ‘TCER’ and ‘LCER’ approach.Baseline determination costs and monitoring costs fordifferent scale of projects estimated in Patagonia.Present value of unitary transaction costs ($/CER)utilising ‘TCER’ and ‘LCER’ approaches for differentplantation project sizes (i = 8%, 8,2 €/ CER).Comparison between three sources of income scenariosand four decision maker points of view for 600 ha pineplantation project (i = 8% and 8,2 €/t CO 2 ).Cash Flow of ‘TCER’ approach on 35 years afforestationproject. Only transaction costs and revenues from carboncredit sales were taken into account (600 ha project).Cash Flow of an afforestation project applying the‘LCER’ approach. Only transaction costs and revenuesfrom carbon credit sales were considered (600 ha project).Maximum annual increment in carbon stocks in absenceof the afforestation project according to ‘TCER’ and‘LCER’ method at three CER prices.Minimum project area using TCER and LCER approachfor different CER prices (8% discount rate).424344454748484950V

Economic Analysis of Afforestation Projects for Carbon Sequestration:A Case Study in Patagonia, ArgentinaList of FiguresFigure 22Figure 23Figure 24Figure 25Present value of carbon sequestration per CER (a) and perhectare (b). And, present value of sequestering andemitting TCERs and LCER per hectare and per CER atdifferent project sizes. (It includes land price, 8%discount rate, and 8,2 €/CER)NPV ($/ha) for the scenarios ‘Investor without subsidies’(a) and ‘Farmer without subsidies’ (b) under differentdiscount rates and source of income (size 600 ha and 8,2€/CER).Comparison of NPV using long term and temporary CERat different CER prices and decision maker scenarios (8%discount rate and project area 600 ha)Temporary credits (left) and Long-term credits (right) at8,2 €/CER, and 8% discount rate, with 200, 400, 600, 800and 1000 ha afforestation project area.51535556Figure 26 Comparison between the profitability of 35 years and 40years afforestation project in Patagonia (8,2 €/CER, 8%discount rate, and 600 ha).56Figure 27Figure 28Comparison between the cash flow considering timbersales, TCER sales and LCER sales(I+S scenario, scale = 300 ha, i = 8% and 8,2 €/t CO 2 )Example of the proposed financial scheme for projectportfolios.5965VI

Economic Analysis of Afforestation Projects for Carbon Sequestration:A Case Study in Patagonia, ArgentinaList of AbbreviationsList of abbreviationsAAUsAssigned Amount of UnitsCDMClean Development MechanismCERs or CER Certified Emission ReductionsCIEFAP Patagonian Andes Forest Research and Extension CentreCO 2Carbon dioxideDGByP Dirección General de Bosques y ParquesEAIExpected Annual IncomeERsEmission ReductionsERUsEmission Reduction UnitsETEmission TradingEU ETS European Union Emission Trading SchemeF – SFarmer without state subsidies scenarioF + SFarmer with state subsidies scenarioGHGGreenhouse gasesGTZGerman Technical CooperationhaHectareiDiscount rateI - SInvestor without state subsidies scenarioI + SInvestor with state subsidies scenarioIETAInternational Emission Trading AssociationINTAInstituto Nacional de Tecnología AgropecuariaJIJoint ImplementationKPKyoto ProtocolLCERLong-term Certified Emission ReductionsLULUCF Land Use, Land Use Change and ForestryNPVNet Present ValueOECD Organisation for Economic Co-operation and DevelopmentPCFPrototype Carbon FundPVPresent ValueSAGPyA Secretaria de Agricultura, Ganadería, Pesca y Alimentaciónt CO 2Metric tonne of carbon dioxidet/haMetric tonne per hectareTCERTemporary Certified Emission ReductionsUNFCCC United Nations Framework Convention on Climate Change$ Argentinean PesosVII