FINANCIAL AND OTHER INCENTIVES FOR PLANTATION ESTABLISHMENT

Dr. Jeremy Williams

Dr. Jeremy Williams, R.P.F. is one of the two principals
of Arbor Vitae Environmental Services, Ltd., a company he
and Mr. Chris Wedeles founded three years ago. He holds
a B.Sc.F (1979) and a Ph.D. in Forest Economics (1986)
from the University of Toronto. He has ten years of consulting
experience in the forest sector, with expertise in forest sector,
with expertise in forest economics and management,
wood supplies analysis, sustainable forest management
criteria and indicators and auditing. He is a Registered
Professional Forester in Ontario.

1. Introduction

There are a variety of reasons why countries offer incentives for plantation establishment. However, it is difficult to design a subsidy program that creates the intended effects without undue negative impacts. Subsidies have always been heavily scrutinized, since they inevitably disadvantage competing investments and distort the market. Scrutiny is intensifying as the processes of eliminating trade barriers and investment distortions continue apace.

This paper will begin with a brief review of the reasons why a government might decide to provide incentives for plantation establishment. Incentive programs in Chile, India, and Indonesia will be described, including their structure, intended objectives, and actual impacts. The final section will synthesize the experiences of the countries sampled and develop conclusions.

Gregersen (1984) defined incentives as "public subsidies given in various forms to the private sector to encourage socially desirable actions by private entities." Direct incentives include cost sharing, subsidized credit, fiscal incentives, reduction of uncertainty through loan guarantees, insurance, forest protection agreements, and provision of land tenure (Gregersen and Houghtaling 1978). Indirect incentives include provision of market information, extension and education, and research. (Keipi 1997). The incentive programs discussed here are provided by governments; projects funded by development banks and other foreign aid organizations are excluded.

2. Roles of Plantations and Reasons for Financial Assistance Packages

Why plantations? The traditional reason for plantation establishment is to provide fibre and other products such as latex, nuts, fruits, fuelwood, or fodder. Many plantation species provide multiple products during their lifespan. Plantations have been used to support forest industry expansion and this objective has often been twinned with the intention of reducing harvesting pressure on native forests.

Another traditional rationale for establishing plantations is to stabilize poor sites and reclaim sites depleted by logging, fire, or other agents. More recently, plantations are being viewed as precursors to the re-establishment of natural forests on degraded areas and as sinks for carbon dioxide. Utilities have been establishing plantations to offset their emissions and many countries are considering using plantations to help meet their Kyoto commitments. These ecological values can be very significant but are rarely considered by investors since they are difficult to quantify and compare with monetary values (Kengen 1997). Also, a private investor is unlikely to capture many of the social and ecological benefits from plantations.

Thus, a prime justification for offering incentives is to raise the private return to encourage a more socially desirable level of plantation investment. Incentives are appropriate when the private net returns are lower but the returns including externalities are greater than the returns from alternative land uses. In this situation, incentives could be effective by creating a more socially desirable land-use pattern. Incentives may not be needed if the private returns from forestry exceed those from other land uses or if the addition of incentives will still not provide an attractive private return. In selecting an appropriate level of assistance, rates of return not only have to be compared with those from alternate land uses but also with investments in other sectors.

Incentives may also be used to help investors overcome barriers such as the high capital cost of establishment and the relatively long waiting period for a return. Sometimes, investors, including local farmers, have a cultural bias against investing in plantations or they do not appreciate the advantages (Keipi 1997; Kengen 1997). Incentives may draw their attention to this sector.

In addition to these economic arguments for incentives, there may be strategic reasons. Countries such as Indonesia and Chile have used incentive programs to jump-start the initial development of national forest industries, in part, to generate foreign exchange. Incentives may attract investment away from other countries, states/provinces or regions. However, the validity of this rationale depends on the competitive advantage of the forest sector with respect to forest production in other countries and relative to activities in other domestic sectors (Keipi 1997). There is also the risk of competitors retaliating by offering their own subsidies.

Incentives can be used to encourage economic development and generate employment in specific, less developed regions. If a large processing plant can be attracted to an area, it may act as a catalyst for infrastructure development as well as providing employment (often relatively highly paid) and attendant benefits. Incentives may also be a tool to diversify the economy in regions that are, for example, primarily agricultural, or to shift resources away from a sector with limited economic potential (again, agriculture is the most likely candidate).

Sometimes it has been claimed that forest incentives are self-financing in the sense that a substantial income may be generated over time and, if taxed, the government may at least partly recover its contribution. Chile's plantation subsidies are reported to have profited the state (Beattie 1995; Keipi 1997).

Macroeconomic and structural factors can have profound impacts on the attractiveness of plantation investments and the effectiveness of subsidies (Kaimowitz et al. 1998). For example, many African countries cited a shortage of capital as a major impediment to plantation investments (Blanchez and Dube 1997; Chipeta 1997). Other constraints include a lack of economic planning and project development expertise, unsupportive government policies, institutional limitations; inadequate infrastructure, the small size of domestic markets and currency devaluation (Blanchez and Dube 1997). In addition, land-use policies and tenure rights are often weak and poorly designed.

Recent economic policy favours the direct elimination of distortions existing elsewhere in the economy rather than using subsidies as offsetting measures. Stewart and Gibson (1995) recommend: i) the removal of forest products export bans and tariff and non-tariff barriers to international trade of all products; ii) the elimination of export subsidies; iii) the removal of all forest product consumption taxes other than the general sales tax. They argue that once these reforms are in place, direct incentives for forestry are unnecessary.

3. National Case Studies

3.1 Chile

In 1973, the Chilean government initiated a structural adjustment program that reduced the role of government and provided leeway for the private sector to operate. Privatization was a key element of the reforms, which created a dynamic, export-led, market-based economy. As described by Venezian and Muchnik (1997), its main elements included:

i) return of land and industries seized by the previous government to their original owners;

ii) privatization of public enterprises, banks, state-held lands, and the national pension fund;

iii) elimination of non-tariff barriers to trade and a reduction of import duties from an average rate of 105 percent in 1973 to 10 percent in 1979;

iv) a reduction in public spending and tax reform (resulting in a balanced budget in 1977);

v) elimination of interest rate and credit allocation controls; and

vi) introduction of a crawling peg and then a fixed exchange rate to help stabilize domestic prices.

As part of this reform package, a timber plantation subsidy program was initiated in 1974 as part of Decreto Ley 701 (DL701), a forestry law. "The primary intent of DL701 was to persuade the private sector to assume the task of reforestation. The decree maintained some of the tax exemptions established in 1931 and added direct payments to the tax incentives. The key provision reimbursed 75 percent of the costs of reforestation." (Clapp 1996). Further payments were available for additional silvicultural activities. The Chilean government also granted exemptions on property and inheritance taxes on reforested land and established a special Central Bank line of credit for reforestation (Brown 1999). In 1975, the government began to sell its state-owned plantations, along with land, nurseries and machinery. This divestiture took four years to complete.

The incentive program had an immediate impact, as private sector planting accelerated. The average annual reforestation level was 11,373 ha between 1940 through 1974 (Clapp 1995), and there were about 300,000 ha of forest plantations in 1974, established largely by the state. In 1990, the plantation area had risen to 1.45 million ha, mostly established by the private sector (Pandey and Ball, 1998). Plantation establishment rates averaged almost 80,000 ha annually from 1974 to 1990 and the proportion of reforestation performed by the state fell from a high of 91 percent in 1973 to almost zero in 1979 (Clapp 1995).

The planting subsidy was removed in 1994. Since then, plantation area has continued to increase but at a slower pace. In 1995, Chile had an estimated 1,747,000 ha of plantations, with 96% or 1,680,000 ha being intended to supply industrial fibre. The annual establishment rate was 100,000 ha. By the year 2000, the plantation area was expected to be almost 2 million ha, of which 80% would be Pinus radiata (Williams, 1998).

3.1.2 Assessment of Effectiveness

Despite the massive rise in plantation area, many observers have questioned the importance of incentives in creating this outcome. Beattie (1995) argues that the availability of incentives for forest plantations was a minor factor contributing to forest industry growth, once a critical initial mass of plantations was established. Wunder (1994) claims that subsidies had only a secondary impact in promoting plantations, with more important factors being a comparative advantage and a favorable general economic environment.

By 1994, there was evidence that the subsidies had served their purpose and were no longer necessary. At that time, many Chilean forest companies were foregoing the incentives to avoid government requirements, including long-term allocation of land to forestry and restrictions on the management and harvesting of the plantations. There was also widespread criticism that they favored large landowners and companies (Keipi 1997) and that plantations were being created on natural forestland. Dasgupta et al. (1998) reported that the conversion of land and native forests to tree plantations had become an ecological problem.

A second reason why it is suggested that plantation establishment incentives were not required is that while many plantations were established on degraded lands, some have been established on prime agricultural land. This is evidence of the inherent profitability of plantations in Chile. Haltia and Keipi (1997) calculated that Eucalyptus globulus and Pinus radiata plantations are both more profitable in Chile than the next best land use, cattle ranching, at all interest rates considered (i.e., between 2 to 20%). In contrast, in Brazil, a cattle ranching was more attractive than establishing Pinus taeda at discount rates of 12% and higher but was less attractive at interest rates of 8% or less. Eucalyptus grandis plantations were more profitable in Brazil at all interest rates.

Conversely, Clapp (1995) felt that the reforestation incentive was "stunningly successful", creating one of the world's most competitive forest resources in a generation and supplying 95% of the fibre used by the domestic forest products industry. While subsidy payments are estimated to have totalled approximately US$50 million, Clapp concludes that the Chilean government achieved its purpose but may have paid more than necessary. The planting program has been so successful that land prices have risen significantly and there is reputed to be less land remaining available for plantation establishment than in Brazil or Argentina (Williams 1998). If imitation is an endorsement, then further evidence of the value placed on the successful outcome is provided by Colombia and Ecuador, which have adopted the Chilean model for their own incentive programs.

3.2 India

Indian government has promulgated forest policy since the Arthasashtra Indica was issued in the third century B.C. The most recent National Forest Policy (NFP), passed in 1988, sets the highest priority on environmental protection (FAO 2000). Its significance also lies in the formal recognition of communities as partners in forest management. Management planning shared by the state and local communities, or Joint Forest Management (JFM) was legalized in 1990.

The Federal Government has primary responsibility for forest management and most forests are under its control, but day-to-day tasks are overseen by the state forest departments. A small but increasing proportion of area is under site-specific Village Forest Management Plans developed through JFM. These incorporate management objectives and assign rights and responsibilities based on community-wide consultation. As of 1 January 2000, JFM has been implemented on more than 10.25 million hectares of degraded forests through 36,075 Village Forest Committees (India MoEF 2000).

The NFP remained consistent with its predecessor Act by maintaining a target of putting one-third of the national land area under forest. The country is far from meeting this target. Nearly 23% of the land base (76 million ha) is recorded as forest but only 19.5% (64 million ha) actually has tree cover (Ahmed 1997). Furthermore, 35% of the forest is badly degraded and the general trend is downwards, due to population and grazing pressures.

To achieve the target set in the NFP, roughly 33 million ha need to be afforested and 31 million ha of degraded and open forest need restocking, presuming no further deforestation. During the late 1990's, already low afforestation levels declined further, mainly due to funding reductions. In 1996-97, only 1.3 million ha were afforested, which was below the average of 1.5 million ha in previous three years (Ahmed 1997). Of this, roughly 1 million ha or 70 percent of plantation establishment was carried out by the State.

It was clear that the objectives of the new Forest Policy would not be achieved without a new investment strategy and so in 1999, the Government of India and the federal Ministry of Environment and Forests developed a National Forest Action Programme (NFAP). The NFAP outlines a 20-year forest management strategy, including a major afforestation programme and continued regeneration of degraded natural forests through JFM. A reforestation rate of 3 million ha/year is required for twenty years to meet the national forest area target (FAO 2000).

3.2.1 Financial Incentive Programs

The key incentive in the JFM programme is the sharing of benefits between the MoEF and participating communities. India established a National Afforestation and Eco-Development Board in 1992 to promote afforestation, tree-planting and ecological restoration. The majority of new planting is on public lands under the "20 Points Programme for Afforestation", which provides free seedlings for planting on private lands (Brown 1999). In addition, direct government planting continues.

There are other programmes that provide incentives for plantation establishment. A federally sponsored "Integrated Afforestation & Eco-Development Projects" Scheme was initiated in 1989-90 to fund local reforestation projects, especially on ecologically fragile watersheds in mountainous areas. To address problems related to seed sourcing and quality, a "Seed Development Scheme" was initiated. Under this programme, the federal government funds state government efforts to develop facilities for seed collection, testing, certification, storage and distribution.

3.2.2 Assessment of Effectiveness

To date, the impacts of the seed distribution and reforestation programmes have been undermined by widespread use of inappropriate and low quality seeds. This has led to plantation failures and poor growth, which in the long run will discourage forest establishment. Recent measures described above are intended to correct these problems. Where improved seed has been used, eucalyptus yields have been raised from 7 to 20 m3/ha/year and superior clones of poplar are even more productive.

India is caught in a dilemma over timber pricing - higher prices make plantation establishment more attractive yet also increases pressure on existing forests. There is abundant unfulfilled domestic demand for wood since the forest products sector faces raw material shortages and operates well below its rated capacity (Ahmed 1997). He estimated that 15% of the national timber harvest is consumed industrially, which is low relative to many other countries but still reflects the expansionary impacts of now discontinued policies that priced wood at very low rates and restricted imports. As of 1991, there were 276 mills producing paper and newsprint, pulp, plywood, and matches, as well as 23,000 sawmills (Ahmed 1997). A variety of recent policy changes will cause a contraction of capacity. These include major reductions of import duties on wood products, particularly logs (FAO 2000), a total ban on export of timber from India, a ban on harvesting in natural forests, and reductions in tariffs for forest products to make wood products more affordable.

The impacts of land reform policies on plantation investment are also mixed. While restrictions imposed by some states prohibit any individual or company from owning more than 20 ha, forest products companies are contracting with small farmers, through buy-back arrangements, to meet their requirements for timber (Byron 1997). This provides a financial incentive for tree farming.

There are even broader issues. High population levels and poverty are the two main causes of destructive pressure on forests and meeting the needs of the rural poor and tribal people has been given high priority. The effectiveness of forest establishment incentives will depend on the rate at which these pressures continue and the government's assessment of priorities.

3.3 Indonesia

The utilisation and management of forests are governed by the Indonesian Constitution of 1945 (FAO 2000). All natural forests are owned and administered by the State, which may temporarily assign property rights (e.g. as a timber concession) or irrevocably transfer land to private parties (Hammond 1997). Forestry policies are linked to national development objectives defined under 25-year National Development Plans. Indonesia is now in its second development plan, running from 1994 to 2019 (FAO 2000). These plans are subdivided into five-year economic plans (Repelitas). From Repelita I through IV (1969-1989), the long-term national goals were to increase forestry development and establish large-scale forest-based industries.

Aggressive exploitation is being replaced with emphasis on environmental protection and sustainable management. Repelita V (1989-1994) limited log extraction, froze the issuance of new mill licenses, increased reforestation taxes by 150%, added an export tax on sawn timber (which has forced inefficient mills to close), encouraged public participation and improved training and monitoring. Repelita VI (1995-1999) has more strongly emphasized sustainable forest management.

The Industrial Timber Estate (Hutan Tanaman Industri - HTI) development programme was initiated in 1983 to establish industrial timber plantations. These were intended to supply wood for the burgeoning forest products sector and to reduce pressure on natural forests (Potter and Lee 1998). Initially, there were separate HTI programmes for the pulp and plywood sectors. HTI agreement holders are granted 35-year concessions, which may be extended by another 35 years.

A critical aspect of forest planning is the categorization of the forest estate, which is the basis for designating areas for natural forest concessions (Hak Pengusahaan Hutan - HPH), timber plantation concessions, and tree crop plantations (e.g. oil palm). "Unproductive" production (natural) forestlands are designated as sites for the development of timber plantations under HTIs. "Unproductive" land is forest with a low available commercial species volume (Hammond 1997).

3.3.1 Financial Incentive Programs

The government has offered companies willing to establish HTIs interest-free loans drawn from a reforestation fund supplied by a reforestation tax levied on HPH concessionaires (Potter and Lee 1998). These loans cover 32.5% of establishment costs and must be repaid in seven years. The government has also supported companies borrowing establishment capital and has allowed some to further lower establishment costs by cooperating with a state forestry company. Other incentives include low land taxes and, critically, the right to cut and sell any remnant vegetation on concessions (Potter and Lee 1998).

In 1992, to accelerate the establishment of plantations and at the same time provide employment for transmigrants, HTI-Trans was developed (Indonesian Ministry of Forests 1998; Potter and Lee 1998). Under this program, the Government will provide 40% of the investment while the remaining 60% are contributed by the private sector in a joint venture.

The government's objective was to establish 1.8 million ha by 1995, 2.3 million ha by 2000 and 10.5 million ha by 2030 (Sunderlin and Resosudarmo 1996). By 1995, HTI development programmes had accepted proposals for 1.75 million hectares. Kartodihardjo and Supriono (2000) reported that as of June 1998, 4.7 million ha has been allocated to create HTI plantations. Indonesia's Ministry of Forests (1997) reported that HTI programmes are targeted to have achieved about 6.4 million ha TE by the year 2000.

3.3.2 Assessment of Effectiveness

Indonesia is successfully established as a world leader in tropical plywood production and has an emerging pulp and paper industry. However, it is unclear how much the HTI program and associated incentives contributed to these achievements. Actual HTI planting rates are considerably less than expected. As of December 1995, only 520,000 ha of HTI timber plantations had been established (Sunderlin and Resosudarmo 1996). Between 1990 and July 1997, actual planting was only 23.1% of the planned level (Potter and Lee, 1998). These authors cite government reports that 320,000 ha were planted in 1996/97 and an additional 311,000 ha was planned for 1998/99. This may bring the total HTI area to 1.15 million ha by the year 2000.

Kartodihardjo and Supriono (2000) report that there are 22 companies managing 1.2 million ha of HTI that have not taken advantage of the subsidy from the reforestation fund. The director of one of these companies stated that receiving subsidies from the Reforestation Fund requires inclusion of state-owned companies in corporate management, which raises management and other costs. Thus, at this time, the timber plantation subsidy has no real benefit for some companies because the transaction costs are excessive. However, this situation may reflect only the current strength of Indonesia's export market, and not the prior attractiveness of subsidies.

The HTI program is also reported to have been abused by HTI proponents who harvested the remaining natural forest on their concessions but had no intention of establishing plantations afterwards. These proponents also apply for and receive funds for reforestation which, it is asserted, they divert to higher-yielding investments (Potter and Lee 1998; Kartodihardjo and Supriono 2000). This behavior has contributed to the gap between planned and actual HTI area (Potter and Lee 1998; Kartodihardjo and Supriono 2000). On some HTI areas, which are supposedly unforested, there may be a substantial amount of natural forest remaining, which may be understated to authorities. Kartodihardjo and Supriono (2000) cite one analysis that found, on average, 22% of the total area managed as HTI was actually productive natural forest prior to its establishment. This suggests that on the 4.7 million ha allocated for HTI as of June 1998, 1 million ha of natural forest may be cleared and converted. Thus, the HTI program can contribute to loss of the natural forest, which is precisely the opposite of what was intended (Sunderlin and Resosudarmo 1996; Hammond 1997; Potter and Lee 1998). A further consequence of the gap between planned and actual HTI planting is that industrial users are being forced to draw on the natural forest for wood fibre that was supposed to have been produced by plantations (Kartodihardjo and Supriono 2000; World Bank 2000).

A more basic reason why the HTI programme has missed its establishment targets is that even the subsidized returns from fast-growing plantations are relatively unattractive. Kartodihardjo and Supriono (2000) state that HTIs have never been regarded as financially feasible as independent and self-sufficient enterprises - even with fast growing species, HTIs do not produce a return for 5 - 8 years (Potter and Lee 1998). In contrast, oil palm plantations are much more profitable and are also heavily subsidized. Between 1986 and 1997, the area under oil palm increased from 0.6 to 2.25 million ha. Since the economic crisis of 1997 increased the incentive to earn foreign exchange, oil palm development has accelerated. Thus, timber plantations cannot compete with other investments and are undermined by the government's oil palm subsidies.

Higher log prices would increase the financial attractiveness of timber plantations (Sunderlin and Resosudarmo 1996). Several factors dampen domestic log prices. One of these is the log export ban, recently reintroduced to help reduce illegal logging (FAO 2000). Pervasive illegal logging is, itself, a second factor that suppresses prices. The World Bank (2000) reports that currently almost all domestic log consumption is met from illegal logging, with official concessions accounting only for processed exports. Timber supply is also inflated by other factors that increase harvesting pressure on the natural forest. Poor mapping and inventory work, and sometimes corruption, have led to encroachments by plantations in several conservation and protection areas, where a change in function was not permitted.

Poorly defined tenure is another factor that is beginning to reduce the attractiveness of timber plantation establishment. New plantations are being established in areas where local residents often have small plots and utilize the forest to obtain products. Some new HTIs have met resistance from local people who are being displaced (Hammond 1997). Kartodihardjo and Supriono (2000) report that thousands of farmers occupied an area licensed to one HTI company and cut trees, piled them at roadside and then sold them. Potter and Lee (1998) reported that the failure of another HTI company to keep a promise to build villagers a road, the commencement of work without consultation, intimidation by soldiers, and the felling of trees and high quality forest generated resentment that eventually led villagers to burn down the company's base camp and plantation. In response to these reactions, community forest schemes are being developed by HTIs as a compromise.

Due to macroeconomic events, foreign exchange earnings from processed timber exports, especially plywood, have to be maintained. To do this, the government feels compelled to emphasize plantation establishment to make up for shortfalls in wood supply due to degradation of the natural forest, disappointing rates of plantation development. The government has also counted on plantations to provide employment (Kartodihardjo and Supriono 2000).

4. Assessment of Effectiveness

Chile, India and Indonesia offer three contrasting examples of the usefulness and effectiveness of financial incentives for establishing plantations. Chile and Indonesia intended their plantations to supply fibre for an export-oriented forest products industry, which was also supported in its development. In both cases, powerful industrial sectors have been established, however the Indonesian industry depends heavily on the natural forest to provide domestic wood because plantation development has not been synchronized with industrial capacity growth.

In contrast, India's main objectives for establishing plantations are providing ecological and social benefits associated with having a reasonable amount of healthy forests. Plantations are judged to be the fastest way to provide these benefits.

In all three countries, plantations were intended to take pressure off native forests, but they have so far been most successful in Chile in achieving this goal. In both India and Indonesia, plantation establishment has been inadequate to substantially reduce native timber use. Note that these two countries have the greatest population pressures, which suggests that it will require a disproportionately greater effort to relieve the pressure on the native forest.

Overall, the Chilean program appears to have achieved its objectives while causing the least negative impacts. Because the opportunity costs are very difficult to calculate, it will be almost impossible to conclusively argue that the plantations and forest industries would have developed without subsidies. The Indonesian program has been successful in the short-term, but the longer term outlook is uncertain due to the inability of plantations to satisfy combined industrial and personal demand. If the present level of pressure continues on the natural forest, there may be a timber shortage in the country unless wood prices rise in anticipation and stimulate an accelerated rate of plantation establishment. If wood prices rise too much, it will create problems for industry. The Indian program appears to have been handicapped by poor quality seed and stock, and by insufficient technical capacity. However, these gaps are being addressed and an appropriate framework for longer term success appears to have been developed.

It is interesting that none of the subsidy programs described above is widely viewed as a success. Brown (1999) astutely remarks that in most major plantation countries, the majority of plantation establishment has been carried out either by the government, or in tandem with government incentives. The evidence available from both Chile and Indonesia suggests that while timber plantation establishment may not require subsidies to entice investors today, the financial incentives played a major role in alerting investors to the potential of these investments. More importantly, simultaneous efforts to create a thriving forest products industry provided a long-term stimulus for plantation establishment that was initially necessary but is no longer so. While India's objectives differ somewhat from those of Chile and Indonesia, it is apparent that private sector funding will not provide adequate levels of plantation establishment. In that case, policies, which suppressed the prices paid by industry for timber, appear to have been a contributing factor.

One of the crucial differences between the Chilean and Indonesian experiences is that plantations are presently the highest yielding land use in many regions of Chile whereas oil palm is much more lucrative in Indonesia. Subsidies provided to oil palm growers further discouraged timber plantation development. It is important to support plantation development with policies that provide for a fair price for wood. This has not happened in Indonesia (due to high levels of illegal logging) or, until recently, in India (industrial timber prices were artificially suppressed). However, log exports into India remain restricted and wood product prices are reduced for consumers; both of these measures appear likely to depress wood prices. In contrast, Chile's plantation establishment program was initiated at the same time that numerous market reforms were instituted, removing constraints on wood pricing. These reforms also created perceptions that the investment climate had become more favourable.

A second critical difference is that the Chilean government sold the land for plantations whereas Indonesia retained state ownership and there is even conflict between traditional rights and the rights of concessionaires. The uncertain tenure in Indonesia could not have helped persuade investors to establish timber plantations there. In contrast, rising land prices have provided a source of financial gain to Chilean plantation owners that few may have anticipated. Thirdly, the Chilean subsidies were more generous than those offered by Indonesia, which may also account for the greater level of success in the former country.

From a social perspective, the Indian incentives support efforts to create community-owned plantations. One of the shortcomings of the Chilean and Indonesian programmes is that they appear to have primarily benefited people and corporations who were already wealthy. While there is nothing wrong with supporting corporations per se, ignoring traditional land uses or customary rights is likely to lead to difficulties in the long-term, if not sooner. Indonesian plantation owners are already experiencing problems for this reason but are responding by offering joint ventures with local communities.

5. Conclusions

Financial incentives for plantation establishment have proven to be effective but they require supporting policies and conditions to be successful. In particular, secure tenure and other conditions that make the investment at least somewhat attractive without the subsidy are important. Adequate technical support is also required. Finally, the program has to be sufficiently attractive if the uptake is to be sufficient to reduce pressure on native forests. Indeed, one measure of success appears to be a diminishing need for continued subsidization; Chile, as well as Australia and New Zealand (Byron 1997), no longer offer extensive subsidies now that their forest industries are globally competitive.

Countries that are embarking on plantation incentive schemes intended to support industrial development now face strong competitors in the form of Chile, Indonesia and other countries that have already moved decisively into these areas. This suggests that future incentive programs will either become more expensive if they are organized along traditional lines, or they will have to be modified in order to make them successful. Many countries, including Indonesia (Potter and Lee, 1998), are redirecting their assistance programs to small scale and community level forestry. The use of direct government subsidies is becoming less desirable and privatization is now viewed as an essential part of economic development (Keipi 1997). Indirect incentives such as support for research, training, extension and possibly providing market information may be where government can make cost-effective contributions to promote privately funded forestation (Keipi 1997). Crossley et al. (1997) examined more innovative financing proposals, including the creation and development of entirely new financing mechanisms and instruments such as debt-for-nature swaps. These authors suggested that financial innovation might encompass the adaptation and application of well-established financial vehicles, such as bonds, to emerging investment areas such as sustainable forest management, biological diversity protection and conservation.

The foregoing has paid slight attention to beneficial externalities, which can be very valuable and are likely to increase in value over time. For example, Haltia and Keipi (1997) calculated that the ecological benefits (carbon sequestration and watershed protection) of Eucalyptus globulus and Pinus radiata plantations in Chile were $US 451/ha and $US 510/ha, respectively. Until markets develop for these types of benefits and private interests are able to capture some of their value (or internalize them, as is the case with community forests), creating a supply of external ecological and social benefits will be the major justification for providing financial incentives for plantation establishment.

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IMPLICATIONS OF THE KYOTO PROTOCOL FOR PLANTATION DEVELOPMENT

Rodney Keenan and Allen Grant

Mr. Allen Grant is the General Manager of the Greenhouse,
Agriculture Fisheries and Forestry in Australia. As a manager,
he is in charge of the climate change (greenhouse) team,
including a focus on both international developments and
domestic greenhouse response measures. Mr. Grant obtained
his Bachelor of Science in Chemistry and Mathematics and
Bachelor of Economics-Economics and Statistics from the
Australian National University, Canberra, A.C.T.

Abstract

The Kyoto Protocol sets out legally binding commitments for developed countries to reduce greenhouse gas emissions. Under Article 3.3 greenhouse gas emissions and removals due to afforestation, reforestation and deforestation can be used to meet emission reduction targets. Because the total area that might be converted to plantations is limited, increased carbon storage in forest plantations is generally regarded as a part of transitional strategy to reduce atmospheric concentrations of greenhouse gases over the next 50 years or so. Inclusion of `sinks' in the Protocol has created expectations of increased investment in forest plantation development for carbon storage. The Protocol is yet to be ratified, and negotiations are progressing with significant decisions on important elements expected at COP6 in November 2000. Ratification is a critical step for greenhouse to become a significant driver in global plantation development. However, other commercial and market driven activities are resulting in plantation investment for carbon offsets.

This paper describes the current state of international negotiations on greenhouse sinks, plantation development activity and recent experience with investment for greenhouse gas emission offsets in Australia. Issues requiring resolution for carbon related investments to become a significant factor in plantation development, such as risks, technical, environmental and social considerations are discussed.

Introduction

Since the adoption of the Kyoto Protocol in December 1997 by Parties to the United Nations Framework Convention on Climate Change (UNFCCC) there has been growing interest in Australia and internationally about the role carbon sequestration activities (sinks) may play in assisting countries to meet greenhouse gas emissions targets. Article 3.3 of the Protocol allows for net changes in greenhouse gas emissions from sources and removal by sinks due to afforestation, reforestation or deforestation since 1990 to be used in meeting emission reduction commitments. The Protocol also provides for emissions trading and credits generated by the sequestration of carbon in plantation forests may also become available for sale within an emissions trading market. This has created expectations of an increased investment funding for forest plantations as greenhouse gas emissions offsets but, to date, this investment has been relatively limited. International negotiations on greenhouse sinks and emissions trading under the Kyoto Protocol are at a critical stage with major decisions expected for the sixth Conference of the Parties (COP6) in The Hague in November 2000.

In Australia, the area of forest plantations is currently expanding rapidly, largely to meet expected future demand for wood products, with carbon offset investment currently only a minor driver. However, Australia is at the forefront of forest carbon related investment developments, and this experience provides some examples of alternative approaches that might be applied for this activity. In order for the Kyoto Protocol to act as a driver for the international trade of carbon credits, issues such as risk, measurement and verification, and the environmental and social implications of large scale revegetation will probably need to be addressed. This paper discusses the background to these issues and their implications for plantation development in Australia.

International Situation

The Kyoto Protocol was adopted after a protracted series of negotiations by Parties to the UNFCCC in 1997. It sets out legally binding commitments for `Annex I' countries (those in the OECD, excluding Mexico and Korea, plus Eastern European economies in transition). Under the Protocol, these countries commit themselves to an aspirational target of reducing emissions of greenhouse gas by at least 5.2 percent below 1990 levels in the first commitment period (2008-2012). Emission reduction targets are differentiated between countries, for example Australia's target allows for an 8 percent increase over 1990 emission levels compared with projected increases under a business-as-usual scenario of around 40 percent.

Vegetation plays an important role in global cycling of carbon dioxide (CO₂ Figure 1). Large amounts of CO₂ are exchanged annually between terrestrial vegetation and associated carbon pools (such as litter and organic soil carbon). CO₂ is absorbed by plants in the process of photosynthesis. Some of this carbon is stored in the plant, and some is released during respiration and decomposition of plant remains.

Figure 1.

During negotiation of the Kyoto Protocol a number of concerns were raised about the inclusion of vegetation sinks including:

• concern that countries would try to use action to enhance sinks as a way of avoiding action to reduce emissions in their energy and transport sectors;
• uncertainties in measuring emissions and sequestrations from vegetation;
• concerns that sequestration in carbon sinks is potentially reversible; and
• the possible impedance to economic development of some developing countries who argued they needed to continue conversion of some forest areas to satisfy the food production and other economic and social requirements of growing populations.

Inclusion of vegetation was supported because it offered important options for flexible, low-cost abatement of greenhouse gasses and was in line with the UNFCCC requirement to preserve and enhance sinks. At Kyoto, pro-sinks countries argued that unless sinks were included in the Protocol, there would be little incentive for countries to improve methodologies to measure them, and no requirement for countries to take action to reduce emissions from loss of sinks. There was also recognition of the importance of sink activity in the global carbon cycle and a belief inclusion would help to stem the ongoing loss of forests in some countries.

Final agreement resulted in the inclusion in the Protocol of the limited set of sink activities set out in Article 3.3 and continued negotiation over the inclusion of additional sink activities under Article 3.4. Enhancing carbon storage in vegetation through sustainable forest and vegetation management is now an important part of greenhouse response for a number of countries, including Australia (Commonwealth of Australia 1998).

The Protocol provides for trading of emission reduction units between parties and for joint emission reduction and sink enhancement projects between developed countries through Joint Implementation (JI) and between developed and developing countries through the Clean Development Mechanism (CDM), although the rules about how these mechanisms will operate are still to be negotiated. It has been argued that emission reduction units should be fully `fungible' and that CO₂ sequestered in vegetation (a carbon credit) is directly equivalent to CO₂ emissions from fossil fuel burning. Whether vegetation-related projects will be included in the CDM is still to be decided, but a number of pilot projects have been conducted to gather experience in this area (Stuart and Moura-Costa 1998). One key difference between CDM and JI or other emissions trading activities is that credits from CDM and JI projects undertaken from the year 2000 onwards can be used to assist in achieving compliance in the first commitment period.

Substantive international negotiations on sinks issues were effectively on hold until finalization of the Special Report on Land Use, Land Use Change and Forestry prepared by the Inter-governmental Panel on Climate Change in May 2000 (Watson et al. 2000). Decisions on major issues in sinks, mechanisms (such as emissions trading and the CDM) compliance and reporting are expected for the sixth Conference of the Parties in November 2000. For sinks, these include definitions of forest, afforestation, reforestation and deforestation under Articles 3.3, the inclusion of additional activities under Article 3.4, and progress on measurement and accounting issues for the land use change and forestry sector.

Factors shaping the market for carbon credits

The market price for carbon credits will depend on demand and supply, and the nature of an emissions trading market (Hinchy et al. 1998; Tulpulé et al. 1998; AGO 1999a, 1999b, 1999c and 1999d). The potential for carbon credits from plantations to compete against alternative abatement options will depend on the cost of generating plantation-based credits. Key factors in determining this cost are the extent, availability and cost of suitable land, tree growth rates, commercial and legal infrastructure arrangements and the nature of supportive government policies, risk factors and transaction costs associated with selling carbon credits.

Cost of plantation based carbon credits relative to other abatement options

The cost of carbon credits from a forest plantation is a function of land price, establishment and maintenance costs, the cost of borrowing funds for establishment, transaction costs associated with trading carbon credits for forestry acts, revenues from other products and carbon accumulation rates. Plantations accumulate carbon at an average rate of 0.4 to 8 tonnes ha^-1 yr^-1 over a rotation length or until mean annual increment peaks (Schlamadinger and Karjalainen 2000). This rate varies with site and climatic conditions, species and management inputs. Forest plantations can be managed for conservation or production purposes. Those managed for production of wood products or carbon, generally receive high management inputs, and often yields have been improved through tree breeding or silvicultural research. For conservation forests management inputs will generally be lower, and growth is likely to be slower. If these conservation forests are maintained in perpetuity and natural regeneration processes can be re-established, the amount of carbon stored on the site can remain at an equilibrium level. In forests harvested for wood production, the storage is temporary and carbon is released during harvest and subsequent decay of detritus or wood products. If a larger forest estate is managed on a sustainable basis, the overall pool of carbon will remain higher than that previously available in a series of separate plantings. An estate manager may prefer to trade the carbon accumulating in this pool rather than trade the carbon in an individual stand (Brand 2000).

There are a number of factors that will influence the cost of growing plantations for carbon credits, including land costs, establishment and maintenance costs and whether the plantation is grown to supply products other than carbon credits. The effect of these factors on the cost of supplying carbon credits from plantations can result in a wide range of cost estimates. Several studies have attempted to estimate the cost of supplying a tonne of carbon from plantations established purely for carbon credits. These estimates vary widely, ranging between A$3.09 to A$92.66 per tonne of carbon (Andrasko et al. 1991; Dixon et al. 1993). However, comparison across these studies is difficult because assumptions for land value, establishment costs, species and purpose vary.

Various models have been used to estimate the costs of other abatement options. These studies have simulated carbon equivalent permit prices in 2010 under various Kyoto-consistent scenarios, ranging from A$36 to A$403 per tonne of carbon¹, assuming competitive trading of emission permits between Annex B developed countries (Weyant and Hill 1999).

Due to the `land linked' nature of plantations, as demand for carbon sequestered from plantation increases, the marginal cost of plantation development will increase, due to increased land and other plantation costs. This increase will result in the price of carbon sequestered by plantations increasing until it equates with the cost of carbon reductions through other abatement options. In cases where the value of carbon does not reach a level to cover all costs associated with sequestering carbon in vegetation, investments will depend on supplementary returns from other products such as wood, or possible subsidy by government for environmental, industrial or regional development purposes.

Global potential for plantation offsets

There have been a number of estimates on the area potentially available for future forest plantations that could contribute to carbon sequestration. Estimates have generally been constrained by the quality of biophysical data. Grainger (1991) estimated that 420-450 million hectares (encompassing degraded drylands and deforested watersheds and the most degraded forest fallows) could be available for afforestation worldwide. However, even without consideration of other physical requirements for growing plantations (such as climate, rainfall and soil), expansion of plantations for carbon credits is likely to be constrained by the social and political factors which define current land use (Grainger 1991; Nilsson and Schopfhauser 1995). (Brown et al. 1996) suggested that maintaining existing forests and increasing the area under forest vegetation could absorb the equivalent of 12-15 percent of future greenhouse gas emissions.

Recent estimates suggest that carbon stocks in developed countries could increase by 7 to 46 Mt C yr^-1 due to afforestation and reforestation after 1990 (using the `IPCC' definition) in the first commitment period of the Protocol. Estimates of the global sequestration potential are between 197 to 584 Mt C yr^-1 (Watson et al. 2000). In comparison, reduction in carbon stock due to deforestation is about 90 Mt C yr^-1 in developed countries and 1788 Mt C yr^-1 globally. These estimates cover a wide range with uncertainty about growth rates and about reported rates of plantation establishment, but indicate the current losses due to deforestation are much greater than potential gains from afforestation or reforestation.

Accounting for carbon credits

Traditionally forest inventory has focused on obtaining estimates of timber volume in the bole of the tree. Carbon generally makes up about 50 percent of the mass of most plant material, and carbon is estimated from an inventory of total biomass. In plantations this requires assessment of the biomass stored in other components of an ecosystem, including:

• stems, branches, leaves and roots of the living trees and understorey vegetation,
• dead coarse (woody) and fine litter in the forest floor; and
• highly decomposed and transformed plant material incorporated within the mineral soil, generally described as soil organic matter.

The rate of accumulation of carbon in a plantation established on cleared land generally follows a logistic (sigmoidal) curve, with initial emissions from soils following establishment, slow initial growth, more rapid accumulation after the site is occupied followed by a decline as the trees mature. Changes in carbon stocks in vegetation and soil removed or affected by plantation establishment need to be accounted. Reduction in carbon stocks due to harvest or other natural disturbances will also need to be accounted. Ongoing storage of carbon in wood products can only be accounted to a limited extent because of the IPCC inventory rules required under Article 5.2 of the Kyoto Protocol.

Plantation development in Australia

The total commercial forest plantation estate at the end of 1999 was 1,337,000 ha (Wood and Allison 2000). Of this, an estimated 328,000 ha established since 1990 is considered compliant with the current IPCC definition of reforestation. Based on the analysis of Booth and Jovanovic (1989), there is an estimated 18.5 million hectares of cleared agricultural land in Australia with sufficient rainfall to grow commercial timber plantations. Other studies suggest a smaller area is biologically suitable (Stephens et al. 1998). Only a proportion of this land is likely to shift from agricultural to forest-based uses, with the change depending on management decisions of individual landowners. Burns et al. (1999) suggested that just over 1 million hectares is both biologically and economically suitable for plantation establishment, based on comparative financial returns to land owners and assumed industry development options.

The rate of plantation establishment has risen rapidly in the last five years, from 30,000 ha^-1 yr^-1 in 1995 to almost 95,000 ha^-1 yr^-1 in 1999. Future rates of planting are uncertain but Commonwealth and State governments have collectively agreed to a goal of trebling the plantation area to 3 million hectares by 2020 (Commonwealth of Australia 1997). This would result in almost 2 million hectares of new plantations since 1990.

Drivers of plantation development

Direct government investment, other policy actions, and private investment, are the main drivers of plantation development in Australia. Government policy has been a significant factor in plantation development since the 1960's. Most of the plantation estate planted prior to 1995 was established directly by governments or with government funding assistance. However, direct government investment in plantation establishment is now relatively low. Governments now aim to facilitate expansion of state plantations in other ways, such as joint ventures with private landowners, taxation incentives, loans at subsidised rates or grants. Governments continue to play a significant role in setting an institutional framework that allows for the development of an efficient plantation sector and competitive markets for plantation based products (ABARE - Jaakko Pöyry 1999). Other government policies and initiatives that influence Australia's competitiveness in the establishment of plantations and the supply of plantation based carbon credits are listed in Tables 1 and 2.

Table 1: Government initiatives influencing plantations and carbon sinks in Australia

Sources: Commonwealth of Australia 1998, AGO 1999e, Brand 1999, NRE 1999.

Table 2. Government policy initiatives specifically aimed at facilitating carbon related investments.

Private Investment.

Recent expansion of the plantation estate has largely been financed by private investment. Direct investment by larger foreign companies has occurred in Western Australia, Tasmania, the Murray Valley, and the Green Triangle area of South Australia and Victoria. Smaller Australian based investment companies have also become active in plantation establishment, using funding from private investors to purchase or rent cleared agricultural land to develop plantations. These have largely been short rotation hardwood plantations to produce product for sale in the international pulpwood market.

To meet the `2020 Vision' target estate of 3 million hectares the following conditions would need to be satisfied:

• Continued flow of private investment.
• Maintained global demand for timber products particularly in the Asian region.
• Maintenance of positive Federal, State and local government policies on plantation development.
• Maintenance and expansion of current levels of government investment in plantations for industry development or environmental benefits.
• Development of market mechanisms for carbon offsets and emissions trading.

Environmental benefits may also become a significant new driver for government or private investments. For example, increasing dryland and stream salinity resulting from past deforestation and current farming practices could affect significant areas in Australia. Establishment of plantations to restore the hydrological balance in recharge areas catchments at risk is proposed as a partial solution to this problem (PMSEIC 1999). However, much of the land that is likely to produce salinity benefits from plantation establishment is in lower rainfall, lower productivity areas where traditional pine and eucalypt species perform poorly. Therefore, new species and alternate options for plantation management may be required if this development is to become a reality.

Carbon as a driver in plantation development

Australia is leading the development and implementation of institutional and legal mechanisms aimed at allowing efficient trade in carbon credits. Some government programs are indicated in Table 2. NSW State Forests have been particularly active. After negotiation of the Kyoto Protocol, this state-owned forest management agency decided to become an innovator in the area of climate change business opportunities. As a learning exercise, a financial trade was undertaken with Pacific Power (also a state owned corporation) purchasing the rights to carbon being sequestered in 1,000 ha of new planted forests, initially for one year, and subsequently for ten years. Concurrently, another trade was set up with Delta Electricity, where the right of State Forests to grow trees on land owned by Delta was exchanged for the rights to the carbon sequestered during the rotation. These trades were based on independent verification, including confirmation that the land was non-forested at the time of plantation establishment and assessment of the methods used for estimating carbon sequestration (Brand 1999).

As a result of these initial trades, it was determined that legislation by the New South Wales government would be beneficial to the further legal recognition of carbon offsets and future establishment of carbon offset trading. Accordingly, the Carbon Rights Legislation Amendment Act was passed by the NSW Parliament in November 1998. This Act includes amendments to the Conveyancing Act, the Electricity (Pacific Power) Act, the Energy Services Corporations Act and the Forestry Act.

Under this arrangement, NSW State Forests has designed investment packages combining carbon sequestration and timber production. In February 2000, the Tokyo Electric Power Company signed a contract for the carbon rights to 40,000 ha of new plantations over the next decade (Brand 1999). Plantation growers in other states, such as North Forest Products in Tasmania, the Western Australia Department of Conservation and Land Management, and Greenfield Resources Options and the Queensland Government have entered into arrangement for plantations carbon rights with petroleum producers or energy generators.

The `Replanting Victoria' program provides a different model, with the Victorian Government providing a subsidy of A$600 per hectare to small scale plantation growers in return for the rights to carbon sequestered in the plantations. This could be an effective way for government to foster plantation development for regional development or environmental benefits and reduce the transaction costs associated with carbon measurement in small-scale planting.

In 1999, the Sydney Futures Exchange began developing a new product based on increased carbon stocks in post-1990 forests. The SFE initiative was the result of a perceived market demand for risk management products to hedge the effects of the Kyoto Protocol. Trading carbon sequestration credits (CSC's) could help companies manage future permit price uncertainties by enabling them to trade future credits at a price agreed at the time of trade. Suppliers of carbon to the market will have to use an agreed standard and adhere to the conditions of a carbon deed. This Deed included requirements to have in place appropriate risk management, including insurance and demonstration of sound prudential assets and financial liquidity.

Potential benefits from this early trading in sinks included:

• Providing for early risk management;
• realization of the potential for vegetation sinks as a low cost emissions abatement option and in providing other environmental benefits;
• providing early price discovery, and
• demonstration that financial market participants can make an emissions trading system work.

Recently the SFE decided not to proceed with the development of this product, but other significant market activity is developing in this area.

Issues requiring resolution for carbon to be a significant driver in plantation development

Risks

Institutional and natural risks will affect decisions to invest in plantations for carbon credits. Major institutional risks include ratification of the Kyoto Protocol and associated decisions regarding the inclusion of sinks and their potential contribution to emission reduction targets. Shifts in the price of carbon also represent a risk; particularly to small growers who may sell carbon credits in one market, but have to purchase them in another when they intend to harvest for timber. There are also risks related to shifts in government policies such as pricing and allocation policies for timber, plantation related regulations such as environmental requirements and forest ownership rights, and taxation provisions. All these sources of risk could add to transaction costs (Burns, Walker and Hansard 1999). Natural risks include drought, pests, or fire.

Risks might be covered in a sales contract but this may add to transaction costs. For instance, a buyer may want compensation for the loss of the carbon credit if a fire occurs or if carbon credit regulations change. Financial risks in developing plantations for carbon credits can be hedged if the plantations also produce wood products. Most plantations have been developed to supply wood products with the creation of carbon credits as a potential additional benefit, but some investments are occurring with the creation of carbon credits as a primary financial driver. Risk could also be managed through the formation of carbon `pool managers' who keep a certain proportion of stored carbon in reserve to allow for losses associated with unforeseen circumstances.

Transactions costs

Marketing and selling a product involves transaction costs. For carbon credits derived from plantations, transaction costs include the costs associated with measuring, verifying and certifying the carbon sequestered. Depending on the nature of the market, transaction costs can be borne by the buyer or seller.

Transactions costs will raise the costs (and lower the benefit) to each participant in the trade, and reduce the volume of exchanges. As there have been few sales of plantation based carbon credits the cost of marketing and selling carbon credits is largely unknown, and it is difficult to compare the transaction costs associated with plantation based carbon credits with other forms of carbon credits or abatement options. Transaction costs will be determined in part by the rules and regulations established for certifying, verifying and trading credits and other costs associated with accessing and trading in an emissions trading market. In the case of the CDM and possibly for the other mechanisms, there may be other costs, such as the proposed `adaptation tax' on CDM projects which could also affect the volume of trade.

Measurement and verification issues

All plantation based carbon sequestration activities will require monitoring systems that enable quantification and independent verification of carbon stock changes. Measurement standards and requirements for both national and project level accounting are still to be decided. Annex 1 Parties generally have the basic technical capacity to measure carbon stocks and net greenhouse gas emissions in terrestrial ecosystems. However, few if any, countries perform all these measurements routinely, particularly soil inventories (Watson et al. 2000). Most countries are likely to adopt a combination of modeling and direct measurement as part of a comprehensive accounting system. Uncertainty in measurement could be dealt with by extending the application of good practice guidance that has been developed by the IPCC for other inventory categories (Watson et al. 2000). For plantation projects developed under joint implementation or the CDM, other issues need to be addressed (Brown et al. 2000). For example, a project would need to demonstrate that increased carbon storage resulting from the project is additional to that which would occur with out it, and a baseline would need to be developed to quantify these additional sequestration benefits.

Social and community concerns

A variety of concerns have been raised relating to social and economic impacts of plantation based carbon-offsets projects on smaller rural communities, and the environmental implications of large scale forestation projects (Bass et al. 2000).

Concerns for rural communities include impeding or removing access to land for traditional uses and sources of livelihood for rural communities, and the inability of small community-based projects to compete with large-scale reforestation activities. In Australia, communities are also reacting to the rapid expansion of plantations onto agricultural land, and perceived impacts on community structure and employment (Petheram 2000). However, this structural adjustment is occurring for a range of reasons and the reality is that the proportion of agricultural land in Australia that is likely to be converted to forest plantations is relatively small (Burns et al. 1999). For example, in Australia the national target is 2 million hectares of new plantation by 2020 compared with 18 million hectares of agricultural land that is potentially suitable.

Article 12 of the Kyoto Protocol states that projects under the Clean Development Mechanism shall be used to assist developing country parties in achieving sustainable development. However, individual host countries are likely to be best placed to assess whether prospective CDM projects will assist them with sustainable development. Other solutions to potential community impacts include social and environmental impact assessment of projects, providing incentives for projects with multiple benefits, and reducing transaction costs for community based projects (CIFOR 2000). In general, as the area of plantations increases, there are likely to be increasing political limitations placed on the use of agricultural land for plantation development. Economic considerations such as the ability of plantation forestry to provide a return not less than that from competing land uses will also constrain plantation expansion.

Environmental concerns

Concerns have been raised about the potential impacts of forestation on water yield and quality, biodiversity. For example, increasing water utilisation by trees in new plantations may have unintended consequences, such as reduction in downstream water flows and decreased aquifer recharge (Vertessy 1999). Therefore, while plantations have the potential to provide significant salinity or other water quality benefits, reductions in flow may result in increased salt concentrations in streams and reduced water availability to irrigators. This will require careful planning of plantation location based on a sound understanding of landscape topography, soils and hydrology.

Biodiversity impacts of plantations can be moderated by using native species where possible, retaining and enhancing areas of native vegetation within the plantation development, and incorporating more compositional and structural diversity in the plantation by maintaining a mix of age classes and plantation species (Keenan et al. 1999), (Lindenmayer 2000).

Conclusions

The Kyoto Protocol, including its provisions for emissions trading and other market-based mechanisms for carbon trading, represents a considerable opportunity for increased private sector funding for plantation development and improved forest management. Governments will need to be strategic in securing maximum benefit from these developments and effectively integrating them into policies and programs to meet domestic industry, regional development and environmental objectives. However, potential sellers of carbon credits will need to take into account risks associated with trading carbon and governments will need to address community and environmental concerns about large scale plantation development. There is an ongoing need for national and international research in greenhouse science, carbon cycling in vegetation, measurement of carbon stocks and social and economic implications of greenhouse gas abatement options.

Acknowledgments

We would like to thank Volker Aeuckens, Des Alfreds, Phil Townsend staff from the Australian Greenhouse Office for review of this manuscript and Ian Noble for supplying Figure 1.

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Notes:

1 To convert from 1995 US$ to A$, an exchange rate of A$1 = US$0.6475 was used.