1

A Case Study of the Potential of Carbon Credits to Generate Sustainable Income from
Reforestation in Brazil

Abstract

This article examines the possible economic transactions from reforestation activity. Among
these, carbon credits trading stands out for its potential to generate sustained income. The
carbon credits market is an alternative for companies that need to compensate for the
pollution generated by their operations. The factors behind the creation of carbon credits
come from pressures from international organizations for companies to adopt sustainable
development models. To analyze the feasibility of this new institutional framework, we study
the case of an agribusiness located in the Brazilian state of Mato Grosso do Sul. According to
the results, reforestation activities present significant potential for returns, ranging from
5.22% to 49.41% a year, when compared with other business opportunities.

Authors:

Amaury Jos Rezende amauryj@usp.br

Flvia Zboli Dalmcio flaviazd@usp.br ou flavia@fucape.br
Maisa de Souza Ribeiro maisorib@usp.br
Marcelo Pires Rosas pequi@pequiflorestal.com.br
Valmor Slomski valmor@usp.br

1. Introduction

The increased emission of greenhouse gases (GHG) from human activities has been
the topic of intense and growing discussions in the political, social and economic spheres.
This problem led the countries of the United Nations to establish an agreement called the
Kyoto Protocol to regulate and control human activities that affect the climate. This treaty
imposes obligatory goals on countries of Western Europe, along with Canada and Japan
(Annex I countries), to reduce their GHG emissions by an average of 5.2% relative to the
levels in 1990, over the period from 2008 to 2012.
The Kyoto Protocol, signed in Geneva by most of the worlds countries (although not
later ratified by all, conspicuously the United States), established a new paradigm for
companies that pollute the environment. To achieve its objectives of reducing the
environmental effects of GHG emissions, chiefly global warming, the Protocol established a
system whereby industrial firms whose operations pollute the environment can in counterpart,
as a way to minimize this pollution, own forested or reforested areas that act as carbon sinks,
or acquire so-called carbon credits.
Brazil has huge potential to benefit from this context and become a major player
among the worlds nations in the effort for sustainable and clean development. For
example, despite its high rates of deforestation through logging and burning, particularly in
the Amazon region, the country still is considered to have a mainly clean energy matrix,
obtaining most of its electricity from hydropower, unlike its two main counterparts as
developing giants, China and India, which rely mainly on non-renewable sources.
The opportunities created by the Kyoto accord are growing, particularly for
developing countries that can take advantage of their geographic and climatic characteristics
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to foster the creation of biomass energy, allowing them to become regular suppliers of
renewable fuels and important participants in the new carbon credit trading market that is
rapidly emerging.
The carbon market, according to the Brazilian Commodities and Futures Exchange
(BM&F, 2006), is:
a popular term used to denominate the systems of trading GHG emission reduction
units. Under the aegis of the Kyoto Protocol, there are two types of carbon markets:
markets based on credits generated by emission reduction projects (Clean
Development Mechanism and Joint Implementation Projects), and allowance
markets.
This new reality established by the Kyoto treaty has obliged companies to rethink their
operational, financial and economic structures, aiming to harmonize their activities to the new
requirements for reducing harm to the environment.
Forestry plays a key role in this new scenario, and a host of new financial and
economic operations have emerged linked to the sustainable development model. Among
these are financing of reforestation; sale of firewood, sawn lumber and cured wood;
reforestation; stock raising; apiculture from planted forests; financial revenues from carbon
credits and reforestation credits (an industry pays a certain amount for a forest quota for a
determined period); along with the ability to trade the preferential right to purchase the wood
when it is ready for harvest.
In this context, the specific question investigated here is: What are the implications
and contributions of the carbon credits market in improving the prospects of Brazilian
agribusinesses?
To respond to this question, this article examines the possible economic transactions
involved in reforestation activity, highlighting the carbon credits market as a potential source
of sustainable revenue along the chain of Brazilian agribusiness. More specifically, it includes
a case study of the potential of this new market for one representative agribusiness.
Investigation of the potential benefits of carbon trading is important because of the
growing pressures on companies to meet good environmental standards, demanding that they
change their posture because of the unsustainably high levels of pollution they generate. The
area of forestry specifically stands out because the demand for wood, for household or
commercial consumption, is currently rising faster than forest stocks can be replaced.
This work is organized in five sections, including this introduction. The second section
discusses the general aspects of sustainable economic development and the conceptual and
financial aspects of the carbon credits market. The third section explains the research
methodology, and the fourth section presents the results of the case study. The fifth section
brings some concluding remarks.

2. Theoretical References
2.1 General Aspects of Sustainable Economic Development

As a consequence of world economic growth, new sources of energy are needed. This
has caused growing concern, especially regarding finding potential alternative energy sources.
According to the agro-energy guidelines from the Brazilian Agriculture Ministry:
Interest in steelmaking using charcoal has been revitalized with the perspectives for
use of clean development mechanisms (CDM), (...) with the search for cleaner and
more efficient technologies, including use of byproducts (...). It is estimated that
 3

current pig iron output (27 million tons1) requires 17.5 million t of charcoal,
produced by a planted area of 3.3 million hectares. Brazil can be one of the
beneficiaries of this opportunity to use wood for energy purposes, considering its
comparative advantages of large landmass, suitable climate, plentiful labor and
experience in the field. There is a need to invest in technology to satisfy
environmental, economic, business and logistics questions (BRAZIL -
MINISTRIO DA AGRICULTURA, PECURIA E ABASTECIMENTO, 2005).
This worldwide concern acts to guide future studies, since the need for new energy
sources provides agribusiness with matchless opportunities in many areas, such as: a)
developing crops that provide greater physical production per planted area and greater yield
per weight unit; b) developing new crop varieties that generate the least possible volume of
toxic wastes; and c) finding opportunities for new uses of byproducts.
Agribusiness already accounts for 33% of Brazils gross domestic product (GDP), of
which the wood segment only takes a back seat to soybeans in terms of value
(MURAUSKAS, 2004). The rising demand for wood, mainly from planted forests of Pinus
spp and Eucalyptus spp,2 comes from expanded use for building material, fuel and pulp (to
make paper), among other uses. At the same time, supply is becoming restricted because of
the shortage of non-verticalized forests, meaning forests already owned or leased by
industries. The final effect of the supply shortfall is higher wood prices.
The prices of pine and eucalyptus logs at sawmills and plywood plants doubled
between 2000 and 2005 (SBS SOCIEDADE BRASILEIRA DE SILVICULTURA, 2005).
Another relevant aspect, pointed out by Schuchovski (2005), is that forests planted with fast-
growing species have taken on increasing importance for environmental conservation.
This scenario has started to awaken the interest of investors from other economic
areas, attracted by new opportunities for return on their capital. This potential for profits from
new investments is the main focus of this study. More specifically, it examines how attractive
reforestation with eucalyptus is.
It should be stressed that besides helping to reduce the destruction of remaining native
forests, reforestation is aimed at
(...) the production of wood or other products, such as essential oils, resins, etc., as
well as ecotourism. Commercial forests, criticized for creating monocultures, recall
sugarcane plantations, coffee plantations and soybean farms, etc., all of which
produce commodities, jobs, taxes, etc. They obey rigid rules established by the
environmental authorities, related to care for headwaters and watersheds, native
forests and corridors for fauna. (ROCHA, 2003).
According to SBS SOCIEDADE BRASILEIRA DE SILVICULTURA (2005),
Brazilian forestry productivity can be up to ten time s that of competing countries. While a
pine tree in the Northern Hemisphere takes 40 years to be ready for logging, in Brazil it takes
only 14 years. For eucalyptus the period is even less (as fast as 7 years), not to mention the
development of techniques to enable use of degraded land. The availability of labor, ease of
access to seagoing transport and other factors have been attracting international industrial
groups to reforestation activities.

1
All mentions of tons (t) in this work refer to metric tons (1000 kg).
2
This does not include illegal logging of native forests, a widespread problem beyond the scope of this paper.
 4

2.2 Forestry Projects and Carbon Sequestration

Forests act to sequester carbon, thus keeping it out of the atmosphere, where it
produces global warming through the greenhouse effect. There are three main forestry
strategies for sequestering carbon: (a) conservation of carbon in existing forests; (b)
expansion of forested areas; and (c) sustainability by substitution of biological products
(IPCC, 2003).
Simpson and Botkin, cited in Caldeira et al. (2003), explain that the removal of carbon
from the atmosphere by forests occurs by means of photosynthesis and its release in the
process of respiration, with part of the carbon stored in the various parts of the plants.
According to Martins (2004), carbon enters and leaves plants by diffusion, in the form
of CO2, through the stomata present in the epidermis of the leaves. The entering CO2 serves as
raw material for making organic compounds during photosynthesis. The exiting CO2 is one of
the final products of the plant respiration. Animals, in contrast, only realize respiration,
releasing CO2 into the atmosphere, and obtain the carbon they need directly, if herbivores, or
indirectly if carnivores.
Reforestation is an important way to capture CO2, and besides this offers economic
advantages to rural producers. Replanting with pine and eucalyptus can be an alternative
source of long-term income for smallholders, with the advantage that it has relative low labor
and input needs. (GONALVES, 2004). This author, in comparing revenue alternatives for
small producers, concludes that cultivation of pine is a good option to generate income in the
medium and long term, a form of green savings.
The stock of carbon that can be sequestered by forested areas is dynamic. BATISTA et
al. (2003) explain that the ability of plants to store carbon over time depends on their
changing maturity and classification, with each class having different abilities to store carbon
and rates of carbon intake and release, so the type of plant cover implies the net release or
sequestration of carbon.
Plants have the ability to capture and fix carbon, which in association with other
elements results in complex substances, among them cellulose, particularly wood. Forests are
unique in that they can capture and fix carbon for decades, storing it in their wood.
A tree can live for decades, even centuries, although after reaching maturity the
growth increments generally decrease. Thus, trees have the permanent capacity to fix carbon
while they are alive, whence comes the importance of constituting forests as a way to store
carbon for long periods (MCT, 2002).
The constitution of these forests is propitious for trading a portion of the CO2
sequestered. To engage in transactions with carbon credits, reforestation projects must meet
the requirements of a clean development mechanism (CDM) project and be certified by
competent entities.

2.3 The Carbon Credits Market and CDM Projects

The carbon credits market has emerged as an instrument to help Annex I countries to
meet the targets stipulated in the Kyoto Protocol. In this context, flexibilization mechanisms
were created, among them the clean development mechanism (CDM), whose objective is to
provide for allowances trading so that governments or companies of Annex I countries that
have surpassed their GHG emission reduction targets can acquire carbon credits from
.projects located in other countries.
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According to the Brazilian Ministry of Agriculture, (BRASIL MINISTRIO DA

AGRICULTURA, PECURIA E ABASTECIMENTO, 2005, pp. 28-29), the Clean
Development Mechanism (CDM) evolved out of a Brazilian proposal at the United Nations
Framework Convention on Climate Change. Trading in carbon credits based on projects for
sequestration or mitigation must satisfy a series of criteria, such as alignment with the
sustainable development premises of the host country, as defined by a Designated National
Authority (DNA), which in Brazil is the Interministerial Commission on Climate Change.
Cenamo (2005, p. 2) affirms that:
Among the main activities of the CDM projects realized in Brazil are: electricity
cogeneration using biomass; treatment of solid urban waste and use of biogas from
sanitary landfills; substitution of fuels and/or increased energy efficiency of
industrial processes; installation of biodigesters to capture methane in confined
stock-raising installations (particularly hog breeding); construction of small
hydroelectric plants; and reforestation projects (our emphasis).
In this context, Brazilian efforts have shown significant results, and the country has
assumed a leading position in proposing CDM projects. According to Cenamo (2005, p. 3), as
of September 2005, there were 87 Brazilian projects in the CDM approval cycle, which all
told corresponded to a potential reduction of roughly 165 million tCO2eq (tons of CO2
equivalent).
Among the transactions completed, agribusiness stands out, where the greatest volume
of projects is related to use of waste to produce electricity, particularly burning sugarcane
bagasse in the sugar-alcohol industry, representing in number of projects (28) 30% of the total
CDM projects submitted by Brazil (CEMANO, 2005, p. 3). Chart 1 shows the perspective for
generating revenue from the carbon credits market based on power generation from wastes
from hog raising.

Power Number
Gas Total
Generation of Project Location (State)
Emissions Revenue
Source Projects
Hog raising Santa Catarina, Paran, So Paulo, Minas 8.3 million R$ 110
10
wastes Gerais, Gois and Bahia. t.CO2eq million
Chart 1: Perspective for Generating Revenue with the Carbon Credits Market.
Source: Adapted from Cenamo (2005).

For the 2013-2017 period (second commitment period according to the protocol), the
uncertainties are very large, which hampers projects and deals more. Chart 2 below shows a
summary of the potential CDM projects in Brazil.

Generation
of
Solid
Type of Electricity Energy Renewable
Urban Forests Total
Transaction from Efficiency Liquid Fuels
Wastes
Renewable
Sources
1.75 to 4.2 6.5 to 12.2 13.5 to 21.6
2.3 million 2.92 million
million t million t - million t
t CO2/year t CO2/year
Potential of initiative CO2/year CO2/year CO2/year
already in progress US$ 8.75 to US$ 33.1 to Us$ 58.6 to
US$ 11.4 US$ 5.4
21 61.2 - 99.0
million/year million/year
million/year million/year million/year
Potential of initiatives 10.0 to 19.6 1.5 to 12.1 0.154 5.5 to 6.2 27.2 to 38.1
that are technically million t million t million t million t million t
feasible in the CO2/year CO2/year CO2/year CO2/year CO2/year
 6

short/medium term US$ 49.9 to US$ 57.7 to US$ 27.2 to US$ 135.6
US$ 0.771
98.1 60.1 30.7 to 189.7
million/year
million/year million/year million/yearmillion/year
47.7 million 47.7 million
Theoretical potential of t CO2/year t CO2/year
forestation/reforestation US$ 47.7 to US$ 47.7 to
projects 242.5 242.5
million/year million/year
88.3 to
11.75 to 13.8 to 14.4 6.7 to 12.4 5.5 to 6.2
50.6 million 107.4
23.8 million million t million t million t
t CO2/year million t
t CO2/year CO2/year CO2/year CO2/year
Total CO2/year
US$ 58.7 to US$ 69.1 to US$ 33.9 to US$ 53.1 to US$ 27.2 to US$ 241.9
119.1 71.5 62.0 247.9 30.7 to 531.2
million/year million/year million/year million/year million/year million/year
Chart 2: Consolidated Matrix of CDM Project Opportunities Electricity, Solid Waste, Energy Efficiency
and Forests.
Source: Strategic Affairs Unit of the Presidency of the Republic, 2005.

It should not be forgotten that before carrying out any project and trading the
respective carbon credits, there must be an authorization and certification process. This
involves a series of steps, among them: (a) approval of the proposed methodology by the
CDM Executive Board; (b) validation of the project by a verifier accredited by the Executive
Board; (c) approval by the Brazilian government, through the Interministerial Commission;
(d) acceptance and registration of the project by the Executive Board; (e) verification and
certification, once again by an accredited verifier; and (f) issuance of the Certified Emission
Reductions (CERs) by the Executive Board (AUKLAND et al., 2002).
The process of trading the carbon credits does not necessarily depend on final approval
of the project. In other words, agents that are interested in this type of transaction do not need
to wait for the issuance of the CERs to buy and sell the credits.
Among the projects belonging to the CDM category, Auckland et al. (2002) highlight
afforestation and reforestation activities, which can be implemented in large or small scales,
making use of various forest species and involving forested areas or agricultural systems, such
as: plantings in community areas; reforestation in marginal areas with native species, such as
in riparian areas, hillsides, surrounding areas and between native forest fragments (by planting
and natural regeneration); new industrial scale plantings (afforestation); establishment of
planted areas to produce biomass and generate electricity to substitute fossil fuels; small-scale
plantings by smallholders; introduction of trees in existing croplands (agrosilviculture); and
reclamation of degraded areas by planting trees and assisted natural regeneration.
In the international scenario, the figures on CDM-related transactions show that the
Certified Emissions Reductions (expressed in tCO2eq) amounted to around 4 to 6 euros ()
(CENAMO, 2005, p. 3).

2.4 The Over-the-Counter Carbon Credits Market

The creation of CDM projects for reduction of GHG emissions, has enabled the
development of an over-the-counter3 market for trading the respective carbon credits for

3
According to Downes and Goodman (1993), over-the-counter markets are markets in which securities trading
is carried out by means of a network of telephones and computers instead of a trading floor.
 7

Annex I countries. This emissions market, according to Rocha, Mello and Manfrinato (2001),
is configured into a primary, secondary and derivatives market.
In the primary market there will be distribution by the government of
allowances, perhaps by means of auctions;
The secondary market basically will consist of operations to buy and sell the
allowances;
The derivatives or future market will be composed of the buying and selling of
financial instruments derived from the primary and secondary markets.
Future allowance contracts are examples of derivatives. Agents can use them to hedge
the risks of price volatility in the primary and secondary markets. According to Rocha, Mello
and Manfrinato (2001),
The creation of an emissions market is similar to the establishment of any other
commodities market. However, it requires special attention to the correct and
complete definition of property rights. Furthermore, it requires careful monitoring
and enforcement of the rules to ensure that the parties (governments, companies and
others) that sell the right to emit gases will indeed be reducing their emissions to the
stipulated levels.
The development of this new market starts with the government of each country
defining the amount of emissions that can be traded. A corresponding number of allowances
are then made available to the agents. Each allowance contains a definition of the right to
emit a determined quantity of GHG in a given period of time.
The trading in this over-the-counter carbon credits market, however, has no specific
regulation yet in Brazil, so it can be said to still be in a gray market stage. There are
currently critical factors to its further development, because the process of legitimizing the
rights relative to the allowances or credits coming from the projects (sequestration or
reduction) is still not complete. These factors, imbued with uncertainties, impact the prices of
carbon transactions.
In this context, Rocha, Mello and Manfrinato (2001) argue that the low prices can be
justified because of the still incipient nature of the mechanism, with the agents learning by
doing in the markets formation, some of them taking a proactive stance, looking for new
business opportunities and competitive advantages, while others are speculating on what the
market will become or hedging risks.
On a worldwide level, there have still been some significant transactions under the
carbon credits trading system, as shown in Chart 3.

Year Place and Type of Transaction

1996 Niagara Mohawk and Arizona Public Service, both power companies, swap carbon credits for SO2
emission allowances.
1996 A consortium involving Norwegian companies and that countrys government buy carbon credits from
Costa Rica originating from private forestry projects.
1997 Environmental Financial Products Limited buys carbon credits from Costa Rica originating from
private forestry projects.
1997 Ontario Hydro agrees to buy carbon credits from Southern California Edison originating from projects
to improve energy efficiency.
1998 Tesco, a service station chain headquartered in the United Kingdom announces it intends to offer
carbon credits originating from carbon sequestration forestry projects in Uganda.
1998 Sumitomo announces a plan to convert coal-fired power plants to natural gas in Russia, and generate
carbon credits.
1998 Suncor Energy (Canada) buys carbon credits from Niagara Mohawk.
1998 The government of Costa Rica offers carbon credits on the Chicago exchange originating from
 8

sequestration projects in national parks.

Chart 3: Examples of Carbon Credits Transactions.
Source: Sandor and Walsh (2000).

These authors add that the evolution of the carbon trading market in the international
arena depends on following some requirements, presented in Chart 4:

Allocate allowances and monitor emissions;

Establish uniform and non-segmented allowances;
Steps of the
Create an international clearing house;
international
Use existing exchanges;
carbon credits
Develop auctions;
market created
Refine the documentation on the transactions;
by the private
Foster harmonization among the transaction venues;
sector
Formulate accounting procedures; and

Launch an international effort so that participants from emerging markets can transact as
soon as possible.
Chart 4: Steps, Evolution of Trading in the Carbon Credits Market.
Source: Adapted from Sandor and Walsh (2000).

Based on the above, there still needs to be a good deal of research for this market to
reach maturity and efficiency.

2.5 The Options Market and Carbon Credit Transactions in Brazil

The market for carbon credits futures and options in Brazil, as in the rest of the world,
is still in its formative phase, requiring further regulation. As things stand now, intentions to
purchase Certified Emissions Reductions (CERs) by government bodies, multilateral entities,
NGOs and private companies, besides other categories of investors, must be announced in the
Project Bank of the BM&F, by registration and submission of an electronic form (BM&F,
2006).
In the first step there will be CER trading on the BM&F/BVRJ (Rio de Janeiro
Exchange) in the forward and options markets, by means of electronic registration of the
emissions reduction purchase and sale contracts (BM&F, 2006).
The trades carried out involving CERs in the BM&F futures market must satisfy the
general principles of transparency and fair market practices. The other details will be
announced opportunely, by means of specific Operations Regulations, at the BM&F site.
Trading in the carbon credits market shows a strong growth trend. Estimates are that the rate
of return on CDM projects can reach roughly 15% to 20% (JOSHUA, cited in
MICHAHELLES, 2005).

3. Case Study Methodology

In light of the theory of finance, carbon credits can be characterized as a financial

instrument of the future options market. Due to the fact this market is still in its formative
stages, study in the field can be useful to shed light on the implications and contributions of
carbon credits transactions. But before describing the specific case studied, it will be helpful
to give some brief explanation of the means and instruments used to obtain the research data.
The methodology used was first to study the methods employed in the sciences to
investigate the behavior of certain phenomena, seeking to validate them and ascertain their
relation with scientific theories (LAKATOS; MARCONI, 1991, pp. 18-20).
 9

According to Trujillo, quoted in Lakatos and Marconi (1991, p. 39), [...] method is
the way to proceed along a path. In science, methods are the basic instruments that initially
order the thinking about systems and trace out the way to proceed to reach an objective.
Lakatos and Marconi (2003, p. 83) define that [...] a method is a set of rational
activities that, with greater security and economy, permit attaining the objective valid and
true knowledge tracing out the path to be followed, detecting errors and helping reach
scientific conclusions.
In the first step of this work, the method used to support the study was hypothetical-
deductive, by which, according to Kaplan (1972, p. 12), [...] the scientist, through a
combination of careful observations, artful insights and scientific intuition, formulates a set of
postulates about the workings of phenomena of interest, and from there deduces the
observable consequences; followed by verification of these consequences by experimentation
to confirm or refute postulates and replace them with others when indicated, with the process
then repeating.
The second step of the present work consisted of a field study, which according to
Martins (1992, p. 26), [...] is an approach that commonly represents the use of the technique
of collection, treatment and analysis of markedly quantitative data. For Yin (2001, p. 35),
case study is a research strategy like any other [...] that represents a way of investigating an
empirical topic by following a set of prespeficied procedures.

3.1 Research Strategies

Research strategies are essential to any research project, because the entire
development and results depend on them. Put another way, it is at the moment of setting
strategies that the researcher will have to use his or her inherent abilities to obtain the greatest
possible amount of evidence about the subject matter under study. Only with well-chosen
strategies can the study offer an understanding of phenomena, their variables and
interrelations.
Turning to Yin (2001, p. 129) again,
[...] the case study investigator must have a methodological versatility not
necessarily required for using other strategies and must follow certain formal
procedures to ensure quality control during the data collection process. [...] so that
the final results the data that have been collected reflect a concern for construct
validity and for reliability, thereby becoming worthy of further analysis.

3.2 Methodological Aspects of the Case Study

All research in general is based on questions to be investigated. Hence, these must be

clear. If not, important leads may be lost and the investigator may fail to identify possible
ways to change the course of the study or new routes to follow. More specifically, the
question investigated in this work is: What are the implications and contributions of the
carbon credits market in improving the prospects of Brazilian agribusinesses?
To analyze the economic impacts of the carbon credits market and the benefits
provided to agribusiness by the implementation of clean development mechanisms (CDMs),
we conducted a case study in the southern Brazilian state of Mato Grosso do Sul, particularly
looking at how reforestation may be of interest to investors.
Figure 1 shows the process of encouraging forestry activities and a summary of the
economic transactions motivated by the Kyoto Protocol. As can be seen, the environmental
projects can have three configurations: energy, agribusiness and wastes. In the present study,
 10

the analyses are based on reforestation projects, looking at the economic options of these
projects as well as the implications and contributions to agribusiness in Brazil.
To analyze the impacts of these options, we ran simulations using data from 2005. We
also investigated the expected levels regarding the advantages and disadvantages of this new
investment possibility. In this sense, Yin (2001, p. 78) points out that as the investigator
conducts a field study, he should constantly ask why events have occurred or are occurring.
For this purpose, we analyzed the levels of investor expectation, in the agribusiness
segment, by estimating the potential revenues and calculating the expected returns with
carbon credits trading, considering the parameters shown in Table 1.

Table 1: CO2 Sequestration by Nature of Activity

Nature of Activity Carbon removed (tons/hectare/year)
Reforestation 10 to 14
Agro-forests 6 to 9
Reclamation 8 to 12
Source: Rocha, 2003.

Among the activities listed in Table 1, we only studied reforestation with eucalyptus,
considering a level of 10 metric tons of carbon sequestered per hectare / year. For the
economic analyses, we assumed a reforested area of 25 hectares (ha.), with the amount of the
initial investment per hectare being R$2,479.34, or US$1,126.97.
The economic alternatives identified in the theoretical analyses and by means of
interviews, associated with reforestation were:
a) trading of carbon credits;
b) trading of reforestation credits. This alternative refers to companies that need to
acquire wood (charcoal) for their operations, but are obliged by environmental
legislation to replace an equivalent to the amount extracted or purchases. These
firms (steelmakers) can acquire credits from private (third party) projects or
perform the reforestation themselves directly; and
c) commercialization of the forest at the end of the cycle, (destination of the wood)
for firewood, pulp, fencing, charcoal or treated wood.
Upon completion of the eucalyptus cultivation period, the producer has various
alternatives for sale of the product: household scale production (firewood, pulp and fencing)
and commercial scale production (wood used to produce charcoal and treated wood).
In the analyses, we considered that the total eucalyptus cycle takes seven years. For
revenues and costs in the simulations, we used values obtained from interviewing
professionals specialized in implementing and maintaining reforestation projects and
companies that sell products coming from eucalyptus cultivation.
 11

Polluting Kyoto Protocol Developing

Countries Countries

Reduction of CO2 emission levels

Environmental Projects

ENERGY: SOLID
Alcohol, biodiesel and biomass AGRIBUSINESS: WASTES
in general, wind, solar, hydro Agriculture, forestry,
and energy efficiency utilization of biomass

SALE OF
WOOD Reforestation
(final cycle) Projects

Option to sell Forestry carbon Credits for

the wood (start credits reforestation
of the cycle)
SALE OF WOOD
Firewood, pulp,
fencing, charcoal and CONCEPTUAL ASPECTS:
treated wood Accounting recognition, measurement and
accounting
OWNERSHIP RIGHTS:
Aspects of carbon credits options and
trading options on the right to sell wood

Financial Market
(Stock Exchange and BM&F)

PRIVATE
PRIVATE
COMPANIES INVESTORS COMPANIES
(Consumers)
(Steelmakers)

Figure 1: How the Kyoto Protocol Can Foster Brazilian Agribusiness.

Source: Prepared by the authors.

4. Analysis of the Results

Based on the parameters mentioned and the data collected in the field, we undertook
the following analyses: a) estimation of the revenues and returns from carbon credits trading;
b) estimation of the benefit from forest replacement reforestation credits; c) simulated
income statements under various eucalyptus cultivation alternatives; and d) comparative
analysis of the returns on the investment.
Table 2 shows the estimated revenues and returns from trading the carbon credits from
cultivating eucalyptus. It can be seen that this type of trading provides the producer (investor)
additional revenue and an anticipated return of roughly 37%, besides the revenues and returns
 12

provided by selling the products from a 25-hectare area. This return averages out to 5.32% per
year on the initial investment.
It should be remembered that the revenues from selling the carbon credits were
estimated based on a constant parameter of carbon sequestered per hectare / year (10 t. CO2),
and did not consider the plants development stages and capacity to capture CO2 for the
various eucalyptus cultivation alternatives (in practice, these estimates may change).
Table 2: Estimated Revenues from Carbon Credits
STATMENT OF INCOME (CARBON CREDIT) in US$
Destination of the Wood Firewood Pulp Fencing Charcoal Treated Wood
Revenue from Carbon Credits 10,500.00 10,500.00 10,500.00 10,500.00 10,500.00
Amount of the Investment 28,174.31 28,174.31 28,174.31 28,174.31 28,174.31
Anticipated Return 37% 37% 37% 37% 37%
Anticipated Annual Return (7 years) 5.32% 5.32% 5.32% 5.32% 5.32%
Source: Prepared by the authors.

One hundred and eighty days after implementing the reforestation project, the
producer acquires the right to trade the so-called reforestation credits, upon authorization of
the competent bodies. Hence, we analyzed the economic returns from this trading of
reforestation credits. This business option does not require expenditures (costs and expenses).
The estimates of the revenues and returns are shown in Table 3.
Table 3: Reforestation Credits
Statement of Income Reforestation Credits in US$
Destination of the Wood Firewood Pulp Fencing Charcoal Treated Wood
Planted Area (ha) 25 25 25 25 25
Output Volume (per ha in m3) 5,000 5,000 5,000 5,000 5,000
Revenue per Hectare* 22,727.27 22,727.27 22,727.27 22,727.27 22,727.27
Operating Profit 22,727.27 22,727.27 22,727.27 22,727.27 22,727.27
Amount of the Investment 28,174.31 28,174.31 28,174.31 28,174.31 28,174.31
Total Return (7 years) 80.67% 80.67% 80.67% 80.67% 80.67%
Annual Return 11.52% 11.52% 11.52% 11.52% 11.52%
* Price: R$ 10.00/m3 or US$ 4.55/m3.
Source: Prepared by the authors.

According to the data in Table 3, the investor has the possibility of subsidizing the
process of implementing the reforested area, by means of financing obtained by trading the
reforestation credits (200 cubic meters per hectare at a price of US$ 4.55 per m3). This
demonstrates that this type of agribusiness investment is an option that provides the producer
with significant returns when compared with other agribusiness activities.
To check the expectation levels, regarding the advantages and disadvantages of a
reforestation investment (production of wood), considering the possible destination of the
wood, we prepared a statement of income spreadsheet (Table 4) in which the revenues were
discounted at a nominal average rate obtainable on financial investments of 14.64% a year,
and the costs were discounted at an average nominal funding rate of 26.76% a year.
As this table shows, the amounts of the estimated potential revenues obey economic
criteria, i.e., from the moment the products are transformed, they tend to aggregate more
value. The revenues provided by selling the products on a household scale differ significantly
among themselves. For example, the commercial value of wood earmarked to make pulp is
42% higher than that of firewood. These same criteria can be seen in the commercial scale
 13

products (charcoal and treated wood), which are the products that aggregate the most value in
the silviculture chain.
Table 4: Statement of Income of Eucalyptus Cultivation Alternatives
Statement of Income in US$
Destination of the Wood Firewood Pulp Fencing Charcoal Treated Wood
Gross Revenue per Hectare 2,200.00 3,125.00 3,750.00 4,600.00 9,000.00
Total Revenues* 21,135.35 30,021.80 36,026.17 44,192.10 86,462.80
Implementation Cost** 7,297.25 7,297.25 7,297.25 13,843.12 11,636.16
Maintenance Cost** 3,552.85 3,552.85 3,552.85 5,665.36 9,206.21
Treatment Costs** (wood) 1.402,45
Operating Income 10,285.24 19,171.70 25,176.06 24,683.61 64,217.97
Amount of the Investment (planted area) 28,174.31 28,174.31 28,174.31 28,174.31 28,174.31
Total Return (7 years) 36.51% 68.05% 89.36% 87.61% 227.93%
Annual Return 5.22% 9.72% 12.77% 12.52% 32.56%
Return per Hectare Year in US$ 58.77 109.55 143.86 141.05 366.96
* The total revenues were brought to present value by the nominal investment rate.
**The costs were discounted by the nominal funding rate.
Source: Prepared by the authors.

The estimated returns, according to Table 5, for each cultivation alternative, show the
economic potential of this type of culture for sustainable development of Brazilian
agribusiness. This economic potential can be seen in the total annual returns, which range
from 22.06% to 49.41%.
Table 5: Comparison of Total Returns
Statement of Income in US$ (average annual)
Treated
Firewood Pulp Fencing Charcoal
Destination of the Wood Wood
Annual Return from Carbon Credits 5.32% 5.32% 5.32% 5.32% 5.32%
Annual Return from Reforestation 11.52% 11.52% 11.52% 11.52% 11.52%
Annual Return on Investment 5.22% 9.72% 12.77% 12.52% 32.56%
Total Annual Return 22.06% 26.57% 29.61% 29.36% 49.41%
Source: Prepared by the authors.

To check whether the implementation of these activities has potential to create value
for the agribusiness or investors, we used the concept of economic value added (EVA), in
which the cost of capital is subtracted from the operating profit of an investment. The cost of
capital used considered the parameters in Table 6.
Table 6: Opportunity Cost of Capital
Opportunity Cost of Capital
Rate / Period Month Year
Cost of Capital Nominal (CDI* Rate Risk Free) 1.22% 14.64%
Rate of Return Effective 0.60% 7.14%
* CDI = Interbank Deposit Rate, the rate paid on most government bonds.
Source: Prepared by the authors.

Table 7 presents the amounts of gross returns and returns net of the cost of capital, for
various options. As can be seen, after deducting the cost of capital (effective financial return),
without considering the carbon credits, the value creation of the eucalyptus cultivation
alternatives is between 1.92% and 25.42% a year. Nevertheless, when the calculation
 14

includes the revenues from carbon credits, the percentages of return vary from 3.40% to
30.75% a year, and when considering all the business options (carbon credits, reforestation
credits and sale of the wood), the returns range from 14.92% to 42.27%.

Table 7: Comparative Analysis of Returns

Analysis of Returns
Revenue with Carbon
Revenue w/o Carbon Revenue with Carbon
Credits and
Credits Credits
Reforestation Credits
Eucalyptus Culture
Gross Return Net of Gross Return Net of Gross Return Net of
Return Cost of Capital Return Cost of Capital Return Cost of Capital

Firewood 5.2% -1.92% 10.54% 3.40% 22.06% 14.92%

Pulp 9.7% 2.58% 15.04% 7.90% 26.57% 19.43%
Fencing 12.8% 5.63% 18.09% 10.95% 29.61% 22.47%
Charcoal 12.5% 5.38% 17.84% 10.70% 29.36% 22.22%
Treated Wood 32.6% 25.42% 37.89% 30.75% 49.41% 42.27%
Source: Prepared by the authors.

It should be stressed that the returns offered from this type of investment surpass those
obtainable in the financial market or agribusiness market in general.

5. Final Considerations

The Kyoto Protocol is providing exciting opportunities for Brazilian agribusiness,

specifically for rural producers. For example, reforestation activities provide products with
significant added value, due to growing demand. However, some restrictions are present, such
as the need for initial capital and the relatively long wait (in comparison to other crops) for
trees to mature (delayed future cash flow).
Among the positive points observed, the standouts are the revenues from reforestation
credits, which enable the investor to receive some return in advance, easing the burden of
financing the project (start-up / maintenance costs).
Reforestation projects can be realized in various formats: reforestation combined with
other activities (for example, allied with other forest crops; apiculture and pasturage for stock
raising). All of these can lower the cost of maintenance, but also can involve a longer rotation
period and smaller wood output.
In general, this activity leads the investor to a multiple use of the forest, with products
with greater added value, generating additional jobs and income.
This study has some limitations. For example, we did not analyze the economic
standpoint of the returns from a producers choice of direct trading of the wood in the
future. The simulated returns with sale of carbon credits are only speculative, because this
market is still in the process of regulation.
Nevertheless, this work shows that the carbon credits market can provide significant
advantages to agribusinesses, because the returns are attractive when compared to other
investment opportunities.
Some questions for future studies are:
What are tax effects on the operations described in this study?
What are the economic and financial returns of trading the option to buy the wood
in the future?
 15

What are the accounting procedures for recognizing, measuring and evidencing
carbon credits transactions?

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