Ruling on the "crunch issues" of land use, land-use change and forestry: impacts on project viability

Carbon sequestration in forests is undoubtedly one of the most controversial issues of the Kyoto Protocol. Whilst there is agreement that temporary carbon storage in forests contributes to delaying climate change, there is still much controversy about the rules and procedures that should be implemented to give credits to afforestation and reforestation activities under the Clean Development Mechanism (CDM). This paper analyses the viability of two reforestation projects in Nicaragua and Honduras under different scenarios of carbon accounting methodologies, prices for Certified Emission Reductions (CERs), and levels of leakage and risks associated with the projects. Analysis of the scenarios shows that the financial viability of the projects is a function of the carbon accounting methodology used. The current price of CO<SUB align="right"><SMALL>2</SMALL></SUB> and the rules that are being proposed to address the "crunch issues" of Land Use, Land-Use Change and Forestry (LULUCF) will inevitably exclude small scale projects from the CDM.