Carbon Sequestration and Cocoa Production: Financing Sustainable Development by Trading Carbon Emission Credits

Tammy E. Newmark
Environmental Enterprises & Investment Specialist
TechnoServe, Inc.

Introduction

On the heels of the conference on global warming held in Kyoto, Japan last December, TechnoServe is developing a way for low-income farmers to be included in the international market for carbon emission credits. Participating nations at the conference agreed that investment in carbon-absorbing environmental practices which offset harmful "greenhouse gas" emissions could be converted into credits. TechnoServe is investigating the use of these traded credits to support environmentally sensitive agriculture cultivation by small-scale producers in developing countries.

For 30 years, TechnoServe, a non-profit organization, has been using private enterprise to meet the needs of the rural poor through the cost-effective creation and development of sustainable businesses and organizations. Spurred by the desire to increase environmentally sensitive agricultural practices, TechnoServe promotes innovative approaches to the sustainable production of agricultural commodities. TechnoServe has targeted coffee in Central America as the first commodity to focus on, given coffee's importance as a globally traded product and position as a major crop for small agricultural producers in the region. Cocoa demands equal consideration because of its importance to small producers in developing countries.

Climate Change and Carbon Sequestration

Carbon dioxide emissions are the principal component of the "so-called" greenhouse gases. Industrial processes account for over 75 percent of the carbon dioxide emissions, roughly 21.8 billion metric tons annually. The United States is the most significant contributor to the total, but, economic growth in China, India and Russia is increasingly contributing to the escalation of emissions. Due to continued forest burning and demands for agricultural lands, deforestation is the other main culprit responsible for 6.4 billion metric tons of emissions annually. Trees contain stored carbon and when they are cut down, carbon dioxide is released.

As concern over global warming continues to grow, it becomes imperative to explore options to stabilize and/or reduce the build-up of carbon. Forests are seen as part of the solution since they store carbon at a rate 20 to 100 times more per hectare than pastures and croplands. Tree plantations or agroforestry projects capture "new" carbon, while forest preservation efforts protect valuable areas of carbon "sinks" in existing forests. Other strategies which have been pursued include renewable energy and energy efficiency projects.

Through an international dialogue on environmental policy, numerous countries have endorsed efforts to offset carbon emissions through "joint implementation" projects between business, government and the NGO community in both developing countries and the industrialized world. However, some non-profit organizations and developing countries have reservations about the projects. They argue that industrialized countries are avoiding managing fossil fuel consumption by using investment in forestry projects as the panacea. In contrast, other developing nations, including Costa Rica, view such opportunities as a way to attract foreign capital and funding for rural development and conservation projects.

Many carbon sequestration programs are already being implemented with the approval of in-country joint implementation certifying committees. These programs involve investment by utility companies in industrialized countries in projects generated by international and local non-profit environmental organizations.

One reason for the interest in carbon sequestration programs in the United States is the anticipation of a carbon tax on fossil fuel emissions. Under section 1605 (b) of the Energy Policy Act of 1992, utilities and other entities engaging in carbon reduction or sequestration activities are able to register their carbon offsets, which may be recognized in the event of a carbon tax or limit on greenhouse gas emissions.

Trading Carbon Emissions

At the Kyoto conference, the United States put forth a strategy to curb the build-up of greenhouse gases through the creation of an international market in emissions credits. This concept of emissions trading originates from its domestic experience with other market-based approaches to environmental amelioration. The United States sees its success with the Acid Rain allowance trading system for sulfur dioxide emissions control as particularly relevant.

In the Acid Rain system, total number of emission allowances are capped ensuring that emissions will not increase over time. This creates a market for those companies and organizations which have an interest in purchasing such allowances. For instance, a utility company needs an allotment for a new power plant, an industrial processor has excess credits because of an investment in upgraded machinery and/or an environmental group wants to "retire" allowances. Presently, allowances are being auctioned, traded as part of power purchase agreements, donated and swapped. This mechanism is seen as the most cost-effective and efficient way to achieve emission reduction goals .

Similarly for carbon dioxide emission control, the first step to trading would be to establish equitable nation by nation emissions limits based on population, potential economic growth and past emissions history. Within these limits each government would allocate emissions allowances to accommodate various business and community needs. Offsets would then be tradeable across industrial and eventually, national lines. Credits will be generated by the companies which invest in renewable energy, energy efficiency, improved land use, forestry and agricultural practices and methane control programs.

Although carbon sequestration industry is evolving and discussions about trading credits are in its infancy, TechnoServe believes it is timely to begin positioning small producers to take advantage of the potential market. TechnoServe believes there is an opportunity to work with the cocoa industry, financial institutions and utilities to push forward the agenda of monetizing carbon emissions. Carbon credits that can be traded or developed into a more formal financial instrument (i.e., bonds, guarantees, credit lines, funds) may enable small cocoa producers to expand their production, retain greater shade coverage and use more environmentally sensitive and organic production systems.

Carbon Quantification

For carbon credit trading to be a useful tool for nations trying to meet obligations under climate treaties, measurement of carbon reduction and storage needs to be certifiable. Despite imperfections in scientific analysis and data collection in estimating long term conditions and factors, such as biomass growth and retention and leakage, technologies such as GPS and GIS and the advent of new approaches are increasingly making the systems more accurate and practical. The carbon inventory process involves baseline determination of pre-project carbon pools, establishment of permanent sample plots, periodic surveys of vegetation in project and non-project areas, and the use of satellite images to gauge land-use changes.

For specific agricultural commodities such as cocoa, given the greater conformity of growing conditions and regional concentration, measurement may be able to be standardized. As techniques become more adaptive, they can be used on small producer land. Cost-effective and reliable methods will lead to greater demand for carbon certification especially in light of the increased attention and interest in trading schemes.

Environmental certification and social-cause marketing schemes are already quite developed in the sustainable forestry and organic food industries, and are being applied increasingly to cocoa production. Supplementing this "labeling" with carbon sequestration benefits represents a powerful way to market a product. Since sustainable cocoa growing techniques and eventually organic production can increase economic and environmental benefits for small producers, it will be increasingly important to insure that small-producers participate in these certification programs.

TechnoServe is undertaking a project, supported by The Ford Foundation and U.S. Agency for International Development, which investigates the use of carbon trading to promote sustainable coffee cultivation by small producers in Central America. Using a Guatemalan coffee cooperative as a model for carbon measurement, TechnoServe is compiling data to determine a range of prices for sequestered carbon to be used in the delineation of the carbon trading and financing instrument. The plan is to extrapolate and apply the findings to other coffee growing areas in the region. From this initiative, TechnoServe will gain an understanding of the process and costs to undertake carbon quantification which is essential in the replication of the effort to other agricultural commodities, such as a cocoa.

Small-Scale Producers and Carbon Sequestration

Throughout the developing world, population growth and the related economic and farming activities put tremendous pressure on forested areas. To reduce the stress on natural habitats, long-term sustainability must be reconciled with medium- and short-term gains. In rural areas where agriculture and forests compete for land, the forest is at greater risk because farmers will not protect and preserve the environment unless they have an economic incentive to do so.

For this reason, tree crops such as cocoa offer significant economic and environmental benefits. Small producers can plant cocoa under tree canopies to provide continuous cash income from fruit harvesting; thereby, preventing the burning of forested areas and destruction of biodiversity habitats. Protection of these standing forests offers an immediate solution to sequester carbon. In denuded regions, tree crops are planted which in addition to improving soil filtration and reducing soil erosion, offset carbon. Substitution of composting and other organic techniques for fertilizers and pesticides also allows for increased carbon storage. Sequestration can become an additional crop for farmers.

Conclusion

Investigating the relationship between carbon sequestration, sustainable agricultural production and carbon credit trading is quite new. It is not known if carbon credit trading will be a viable long term strategy to improve the livelihood of the rural poor while also maintaining environmental integrity. However, the momentum generated by the Kyoto conference, and work TechnoServe is undertaking in the coffee industry, provides a basis to prove what may work. Whether it is implementing a pilot initiative or establishing consultative groups in several countries, examining the issues surrounding emissions trading and sustainable cocoa production is an important next step.

Carbon sequestration and emissions trading offers an innovative approach toward rural economic development and environmental conservation. It could potentially transform the manner in which certain agricultural transactions are undertaken. TechnoServe's aim is to present private sector solutions which offer a persuasive means to address the environmental challenges faced today. For rural producers who do not have a "voice" in the world economic markets, TechnoServe hopes that its endeavors in this area will provide for them a means to maximize economic value from growing crops in a environmentally sensitive manner.