Key Financial Arrangements

With forestry alone, without CERs, the project generates an internal rate of return (IRR) of 8.53 percent, which is lower than the rate of return required for projects by the Chinese government. The application of the additionality test indicates a substantial increase in the IRR with CERs to between 13 percent and 17 percent, even after sensitivity analysis with lower output and prices and increases in costs. Investment is facilitated by the decision of the Chinese government that any sponsor may invest in and implement a CDM project. A significant barrier to investment in forestry by local villages and farmers is the long lead time between planting trees and receiving income from timber harvesting and non-timber products, together with the uncertainty of future timber prices and high transport costs.

Carbon credits, at a guaranteed price of $4 per tonne of CO2e purchased by the BioCarbon Fund, will begin to flow four years after the inception of the project. Commercial banks and the Chinese government are willing to commit funds, given the increased income potential and certainty. Four private forestry companies are interested in investing in the project, given that they would share in the income from the sale of CERs and timber and non-timber products.

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