Forestry-based Greenhouse Gas Mitigation: a short story of market evolution 1 Pedro Moura-Costa and Marc D. Stuart EcoSecurities Ltd. 45 Raleigh Park Road, Oxford OX2 9AZ, UK E-mail:forestry@ecosecurities.com Summary Concern about rising atmospheric concentrations of greenhouse gases has prompted the search for methods for reducing greenhouse gas emissions or ways of sequestering carbon in plant biomass. For reasons of cost effectiveness, high potential rates of carbon uptake, and associated environmental and social benefits, much attention has focused on promoting forestry as a means of offsetting carbon emissions. During the last ten years, forestry-based carbon offsets have evolved from a theoretical idea towards being a market-based instrument for accomplishing global environmental objectives. This paper provides an overview of the evolution of the market and transaction mechanism for carbon offsets and greenhouse gas emission reduction projects. Although many of the concepts and ideas presented here are generic and applicable to any type of greenhouse gas mitigation option, the paper emphasises issues related to forestry-based carbon offsets. Keywords: carbon sequestration, carbon offset projects, carbon offset costs, Joint Implementation, emission reduction markets, flexibility instruments, clean development mechanism. 1) Introduction: The notion of compensating for rising atmospheric carbon dioxide (CO 2 ) concentrations through global scale afforestation was first put forward in the late 1970's (Dyson 1977). During the last ten years, forestry-based carbon offsets have evolved from a theoretical idea towards being a market-based instrument for accomplishing the global environmental objectives of the United Nations Framework Convention on Climate Change (FCCC), signed in Rio in 1992 during the United Nations Conference on Environment and Development (UNCED). While we are still a long way from an organised market with prices defined according to supply and demand forces, the initial voluntary schemes and bartering transactions common in the early 90’s have already given way to more sophisticated market mechanisms. If this trend continues, it seems very likely that forestry offsets will play a part in accomplishing the legally-binding emission reduction commitments agreed in 1997 in the Kyoto Protocol of the FCCC. It is estimated that, once fully operational, the international market for carbon projects, credits and allowances will reach tens of billions of dollars each year (World Bank 1997), a sizeable proportion of which could flow to developing countries if the trading regime is properly structured. For countries rich in forest resources, altering non-sustainable land-use patterns is likely to be a prized greenhouse gas mitigation opportunity. Forestry carbon offsets encompass a range of project-level interventions, including direct preservation of existing forests, reforestation, and reduction of the negative impacts of forest management and harvesting (Moura-Costa 1996a, Brown et al. 1996). There is also the possibility of increasing the production efficiency of swidden agricultural systems or the end-use efficiency of fuelwood resources, both of which help take pressure off of standing forests, with accompanying GHG benefits. Considering the wider perspective, forestry carbon offset projects can provide support for the other convention signed at UNCED -- the Convention on Biodiversity. While a variety of financial mechanisms are being explored to support biodiversity conservation, initiatives like trust funds and pharmaceutical prospecting rights have yet to demonstrate that they are fully accepted by either policy-makers or the marketplace. Forestry-based carbon offsets -- whether they promote direct preservation, sustainable forestry practices or reforestation -- all have the potential to positively support the goals of the Biodiversity Convention. 2) Forestry and calculation of the costs of greenhouse gas sequestration