53194 No. 121 /December 2009 Sharing Benefits from Carbon Finance: Lessons from the Guangxi CDM project Carbon Finance and Development which often depends on a mix of property rights, contracts and social capital. These three Carbon finance projects are often intended to be components are not independent. Contracts both a payment for an environmental service operate within a regime of property rights and (PES) and an instrument to facilitate sustainable social capital can determine individuals' ability to development in developing countries. To enforce contracts through social structures. Thus, enhance livelihood objectives, these projects to design a successful forest carbon project, we should benefit rural land users, provided they need to understand the important roles played by are willing and able to participate. This holds social capital, property rights and contractual particularly true for forest carbon initiatives. rules in facilitating participation. However, high transaction costs and large uncertainties often bar local communities from making what are inherently long-term and often The Guangxi Project1 expensive investments. Uncertainties arise from ambiguous property rights, vague or rapidly The Guangxi Project is designed to reforest 4,000 changing government policies and unknown ha of multiple-use forests on seriously degraded carbon market prices. Additionally, there are and remote lands in Cangwu and Huanjiang risks from human-induced and natural disasters. Counties in Chinas Southern Province of Since many small-scale poor land users in Guangxi. It aims to achieve multiple developing countries have only small plots of environmental and developmental objectives, land and serious cash-flow or liquidity including carbon sequestration, biodiversity constraints, they cannot easily absorb negative enhancement, soil erosion control and the shocks. Thus, risk acts as a formidable barrier to improvement of local livelihoods. The multiple- project participation. use forests have been established using a combination of six tree species, and the estimated Pooling individual activities and signing total amount of carbon to be sequestered is 0.77 collective contracts with groups of smallholders megatons (Mt) of CO2 equivalent (CO2e) over a spreads both benefits and transaction costs over a 30-year crediting period (2006-2035). Developed large group and can be a practical means for in early 2005, the project became the world first small-scale land users to participate. Nonetheless, registered CDM forest project in 2006. pooling requires collective action, the success of 1 The full name of the project is "Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin" Figure 1: Benefit-Sharing in the Guangxi Project Benefit-Sharing System 2) Local land users will receive 40% of the income from the future sales of timber, Design pine resin and 60% of the income from Key features of the Guangxi Project are the sales of carbon credits.To pool the carbon pooling arrangement and the share-holding credits and reduce transaction costs, system: The pooling arrangement bundles barren collective contractual arrangements are lands from 27 villages from Cangwu and 12 from signed between buyers and sellers. The Huanjiang, to form the total project size of 4,000 collective contracts were signed in three ha. The share-holding system was created stages: between the local land users and three local forest companies, and has two components: First, the buyer, the World Bank's BioCarbon Fund, signed a contract with 1) The local forest companies are fully Luhuan Forestry Development Company responsible for paying project from Huanjiang County, who acts as an development and monitoring costs, intermediary, and represents all sellers production costs (including capital and under the share-holding system. labor) needed for reforestation and forest Next, the Luhuan Forestry Development management, and take all responsibility Company signed individual contracts for harvest and product sales, and with the other two forest companies, provide necessary technical support and Kuangyuan and Fuyuan Forest Farms training to the local land users regarding from Cangwu County. the carbon project. Local land users only need to contribute their individually Finally, for communal lands, all three managed or communal barren lands. forest companies signed contracts with village leaders, who determined how revenue from the communal lands would be shared among their community communal barren lands, some other village members. For individual lands, the forest members, who have few outside options, are companies signed the contracts directly motivated to regenerate the communal barren with household heads. lands but they were frequently opposed by villagers who saw no benefits, and were afraid of The agreements follow a commodity model rather losing their implicit property rights. The law in than an investment model: The BioCarbon Fund China specifies that "whoever plants trees can pays a price of US$4.5/ton of CO2e to the sellers own the trees". Thus, there was a concern that the at the time of purchase of certified emission village members who plant trees on communal reductions (CERs). This payment method does lands could possibly claim property rights on not differentiate among designated lands that planted trees and all future revenues from tree have heterogeneous site qualities and plantings. establishment costs. No upfront payment is made to the sellers, who carry all risks until CER Despite its achievements the Guangxi purchase. shareholding system faced a number of challenges during project implementation: First, Implementation the standardized contract could not always The Guangxi Project's benefit-sharing system address the heterogeneity of local circumstances. facilitated local participation in two ways: First, Thus, in the remote high-cost areas, this made it it spread the benefits and risks through the difficult for some land owners to participate, pooling mechanism. Without such a system, especially given the lack of an upfront payment. individual communities or households would Second, while the majority of lands in the project not have been able to afford the cost associated area have clear tenure the prospect of project with the reforestation and related investments. benefits triggered a number of land claims. Third, The Guangxi Project also promoted a more Guangxi demonstrated that those communities equitable distribution of benefits by including with low social capital require special incentives some of the most marginalized communities in for participation, increasing the level of remote areas. In addition, over 1,600 bargaining costs again. households from four ethnic minority groups, who have few alternative economic Conclusions opportunities, are involved in the project. Their participation not only brings economic benefits The Guangxi Project has some innovative to them, but also empowers them in their attributes that attempt to lower bargaining costs. interactions with other stakeholders. The share-holding system is an important mechanism to make the project accessible to Second, the project also reduced transaction costs small land users. As the project involves associated with participation by providing an interactions among agents, it inherently is institutional framework to overcome barriers affected by social capital, property rights and such as high bargaining cost, low social capital contractual rules. While the project can be and uncertain property rights. These factors were improved through stronger financial incentives, present in many communities such as Xinlong reducing risk of payment and using the contracts and Datong villages in Cangwu County. There, to strengthen property rights, and build trust farmers' traditional practices of burning crop between intermediaries appears to be a critical stalk for fertilization led to high risks of fire corollary, particularly where formal institutions incidences and discouraged reforestation are weak. activities. Weak norms of mutual reciprocity and the lack of village groups had prevented attempts Sources to regenerate communal lands. While some Yazhen Gong, Gary Bull, and Kathy Baylis. 2009. village members have their family members "Participation in the First CDM Project: The role working in cities or earning off-farm incomes and of property rights, social capital and contractual have little use of and low labor supply for rules" regeneration of the barren lands, especially the 3 CDM Executive Board 2006, Project Design Document for facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin. This note was prepared by Gernot Brodnig, Senior Social Development Specialist, Social Dimensions of Climate Change Team, SDV, based on a commissioned paper by Yazhen Gong, Gary Bull, and Kathy Baylis. Additional copies can also be requested via e-mail: socialdevelopment@worldbank.org