[Senate Hearing 110-652]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-652
 
             INTERNATIONAL DEFORESTATION AND CLIMATE CHANGE

=======================================================================

                                HEARING

                               BEFORE THE

             SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT AND
               FOREIGN ASSISTANCE, ECONOMIC AFFAIRS, AND
                 INTERNATIONAL ENVIRONMENTAL PROTECTION

                                 OF THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 22, 2008

                               __________

       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 GEORGE V. VOINOVICH, Ohio
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT MENENDEZ, New Jersey          JIM DeMINT, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
JIM WEBB, Virginia                   JOHN BARRASSO, Wyoming
                   Antony J. Blinken, Staff Director
            Kenneth A. Myers, Jr., Republican Staff Director

                                 ------                                

   SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT AND FOREIGN ASSISTANCE, 
      ECONOMIC AFFAIRS, AND INTERNATIONAL ENVIRONMENTAL PROTECTION

                 ROBERT MENENDEZ, New Jersey, Chairman

JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
BARBARA BOXER, California            BOB CORKER, Tennessee
BARACK OBAMA, Illinois               LISA MURKOWSKI, Alaska
ROBERT P. CASEY, Jr., Pennsylvania   JIM DeMINT, South Carolina

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page

Barrasso, Hon. John, U.S. Senator from Wyoming, statement........     5
Eizenstat, Ambassador Stuart E., partner, Covington & Burling 
  LLP, Washington, DC............................................     7
    Prepared statement...........................................     9
Forrister, Dirk, managing director, Natsource LLC, Washington, DC    30
    Prepared statement...........................................    33
Gurney, Dr. Kevin, associate director, Purdue Climate Change 
  Research Center (PCCRC), Purdue University, West Lafayette, IN.    22
    Prepared statement...........................................    24
Hayes, David J., former Deputy Secretary, Department of the 
  Interior; senior fellow, World Wildlife Fund, Washington, DC...    13
    Prepared statement...........................................    15
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     3
Menendez, Hon. Robert, U.S. Senator from New Jersey, opening 
  statement......................................................     1
    Article from New York Times ``With Guns and Fines, Brazil 
      Takes On Loggers''--Apr. 19, 2008..........................    53

             Additional Statements Submitted for the Record

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, prepared 
  statement......................................................    54
Hagel, Hon. Chuck, U.S. Senator from Nebraska, prepared statement    55
Schafer, Jacqueline, Assistant Administrator for Economic Growth, 
  Agriculture and Trade, U.S. Agency for International 
  Development, Washington, DC, prepared statement................    56

                                 (iii)

  


             INTERNATIONAL DEFORESTATION AND CLIMATE CHANGE

                              ----------                              


                        TUESDAY, APRIL 22, 2008

        U.S. Senate, Subcommittee on International 
            Development and Foreign Assistance, Economic 
            Affairs, and International Environmental 
            Protection, Committee on Foreign Relations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:01 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Robert 
Menendez, chairman of the subcommittee, presiding.
    Present: Senators Menendez, Kerry, Lugar, and Barrasso.

           OPENING STATEMENT OF HON. ROBERT MENENDEZ,
                  U.S. SENATOR FROM NEW JERSEY

    Senator Menendez. Good morning everyone. This hearing of 
the Subcommittee on International Development and Foreign 
Assistance on the international deforestation and climate 
change hearing is now in order.
    Let me welcome our panelists. We appreciate you being here. 
I will introduce you formally in a moment.
    Let me wish everyone a happy Earth Day. It is an 
appropriate day to be having this hearing.
    I will start off with an opening statement and we will 
recognize other members as they come.
    Let me thank Chairman Biden and Ranking Member Lugar for 
their continued strong leadership on climate change. Recently 
they sent a letter to committee members reaffirming the 
committee's commitment to closely monitor international climate 
change negotiations and ensure that the Senate is intimately 
involved in this process. They also indicated that this 
subcommittee would play a key role in holding hearings and 
building a record so that the Senate is ready to ratify a 
multilateral climate change treaty within the next 2 years.
    There is little doubt that addressing deforestation and 
degradation would be a critical part of any post-Kyoto climate 
change treaty, and I think it is fitting that we are holding 
this hearing on Earth Day. Thirty-eight years ago today, the 
first Earth Day was observed. It has become a day to spark 
awareness and a day to remember the vast gifts this planet has 
given us. This global perspective is essential if we hope to 
solve our planet's climate crisis.
    In negotiating the post-Kyoto treaty, we must all be 
cognizant of the challenges and opportunities different 
countries face in lowering their greenhouse gas emissions. 
There is no doubt that we must all protect U.S. interests, but 
our planet is in peril and we are all going to have to work 
together to fix it.
    But what does working together look like in the context of 
a multilateral climate treaty? In my mind, it means at least 
three essential things.
    First, working together means the United States must be 
respectful of the fact that different countries face different 
circumstances. Therefore, we cannot expect every country to 
commit to the same constraints on carbon that we do.
    Second, we must be prepared to help developing nations 
create the capacity needed to reduce their emissions and grow 
along a greener and cleaner path.
    And third, we must hold every nation, including major 
emitting developing nations, accountable for implementing 
strong policies that will result in emissions reductions.
    Only through such a cooperative framework will we 
successfully negotiate a treaty that achieves the emissions 
reductions we need but is able to be signed and ratified by 
developed and developing countries alike.
    Efforts to slow the rates of deforestation and degradation 
of tropical rainforests could prove to be the critical linchpin 
in this cooperative process.
    As Ambassador Eizenstat will explore in more detail in his 
testimony, avoided-deforestation was not covered by the Kyoto 
treaty. Deforestation was not addressed, in part, because there 
was a real distrust in the capacity of forested nations to 
effectively enforce policies designed to protect tropical 
rainforests. This distrust was not unfounded. In 1990, there 
was an international effort to provide $1.5 billion to help 
Brazil reduce deforestation. Yet, from 1990 to 2004, the rate 
of deforestation doubled.
    Another reason Kyoto did not give credit for avoided-
deforestation was because it was nearly impossible at the time 
to monitor rates of deforestation.
    Fast forward to Bali, Indonesia. Avoided deforestation of 
tropical rainforests has become a major part of the framework 
for a post-Kyoto climate treaty.
    So what has changed?
    One thing that has changed is technology. As Dr. Gurney 
will testify, satellite technology has now advanced to the 
point where rates of deforestation can be measured more 
accurately and more quickly. However, this is an evolving field 
and we need to be careful that our policy mechanisms do not get 
out in front of the technology needed to implement them.
    The world is also more committed to stopping deforestation 
because we have a fuller understanding of just how critical 
rainforests are to regulate the climate. We now understand that 
rainforest destruction accounts for 20 percent of global 
greenhouse gas emissions and that the world's forests contain 
50 percent more carbon than the entire atmosphere.
    Another reason attitudes have changed about including 
avoided-deforestation in a climate treaty is the sense of 
opportunity. Billions of dollars are now flowing to help 
developing nations clean up their energy infrastructures in 
order to reduce greenhouse gas emissions. As Mr. Forrister will 
testify in more detail, developing nations with rainforests are 
now asking why they cannot enjoy the same sort of financial 
support to reduce rates of deforestation.
    Simultaneously, many companies in developed nations are 
looking for ways to lower future compliance costs under a 
carbon-constrained economy. Tropical rainforest protection is 
seen as one of the cheapest ways to reduce greenhouse gas 
emissions. So perhaps market-based mechanisms where companies 
can gain carbon credits for investing in avoided-deforestation 
projects could be part of a solution to our climate crisis.
    That said, there are many obstacles to creating a market-
based forest protection system that will work. On Saturday, the 
New York Times had a piece that described quite well how 
difficult it has been for Brazil to protect large swaths of 
rainforests even when they commit tens of millions of dollars 
and hundreds of officials to the endeavor.
    Mr. Hayes will discuss some of these challenges in his 
testimony, including the challenge of leakage. If we allow 
companies to invest in an avoided-deforestation project in a 
particular region, what prevents loggers from just moving to 
another section of the forest? The answer has to be that 
baselines of deforestation must be made for any country that 
hosts international deforestation projects and that these 
nations and the holders of credits from projects in this nation 
must be held accountable for results. A market in carbon 
credits is only as strong as the market's confidence that the 
credits actually correspond to real carbon reductions.
    Finally, while these rainforests may be located within the 
boundaries of a given country, the consequences of their 
destruction are global.
    I look forward to hearing from the distinguished panel on 
all of these topics, and I hope we can all develop a deeper 
understanding of what must be done to protect the world's 
rainforests and what must be done to protect all of us from the 
destructive consequences of climate change.
    With that, I am pleased to recognize the distinguished 
ranking member of the full committee, Senator Lugar.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    Senator Lugar. Well, thank you very much, Mr. Chairman. I 
thank you for holding this important hearing.
    A year ago today, I was on my farm in Marion County, 
Indiana, for an Earth Day ceremony recognizing the role of 
agriculture and forestry in mitigating the social, economic, 
and political threats posed by climate change. I was joined by 
Richard Sandor, chairman and CEO of the Chicago Climate 
Exchange, and Tom Buis, president of the National Farmers 
Union, to promote how certain no tillage agricultural practices 
and forestry can sequester carbon dioxide and help offset the 
environmental threats from excessive carbon emissions.
    For a number of years now, we have dedicated about a third 
of the 604-acre Lugar farm to growing black walnut and other 
hardwood trees. As these majestic trees grow, they absorb and 
store carbon from the air around Indianapolis. To highlight the 
opportunities of participating in the markets for carbon 
sequestration, the Lugar stock farm has entered into a binding 
contract with the Chicago Climate Exchange to provide offset 
credits to entities that may want to use them to mitigate the 
greenhouse gases they produce. These markets can be an 
important tool in our broader climate change policy. And this 
has given us an opportunity to discuss the subject more broadly 
in Indiana.
    I believe carbon sequestration and many other innovative 
ideas can change the dynamic of the political debate on climate 
change, both in the United States and internationally. The 
debate should be about more than constraints. It should be 
about how we can use economic incentives and opportunities to 
change behavior and to influence the personal and societal 
choices that we make.
    Clearly, there are economic opportunities in clean energy 
sources, solar, wind, and biofuels, and carbon sequestration 
and storage technologies. But improvements in farming and 
forestry practice may be among the lowest hanging fruit in the 
quest to deal with climate change.
    During the global climate change discussions in the late 
1990s in Kyoto, the concept of carbon sinks provided by 
forestry and agriculture was taken off the table. But last year 
during the Bali discussions, the topic of carbon sequestration 
through forestry and agriculture practices was revived. Now, 
this is an important development in my judgment. It should be 
embraced by the United States.
    I mentioned the celebration at my farm last year with the 
Chicago Climate Exchange. More than 20 years ago, we had a 
similar celebration at my farm when Secretary of Agriculture 
John Block announced the Conservation Reserve Program. This 
program has encouraged thousands of American farmers to grow 
trees on marginal lands, especially along watersheds. Many 
American farmers participate in this program, but many more 
should do so because almost every American farm has a back-40 
of unused land. Native trees should be planted on this land, 
and this practice provides income for farmers and climate 
change mitigation for the world.
    I also want to note that 10 years ago, Senator Joe Biden 
and I passed the Tropical Forest Conservation Act. Since then, 
more than 47 million acres of tropical forests around the world 
have been conserved through ``debt for nature swaps'' in 12 
countries. Recently the Foreign Relations Committee passed a 
reauthorization of this bill, which I am hopeful will be 
approved soon by the full Senate. This program has given the 
United States a cost-effective tool with which to promote the 
preservation of tropical forests, but much more needs to be 
done, obviously, on a global scale.
    All these activities could serve as parts of the foundation 
for any cap-and-trade system that arises out of legislation in 
this country or international agreements under the United 
Nations Framework Convention on Climate Change. A critical 
element of any cap-and-trade system is the accountability and 
transparency of the carbon that is being mitigated, 
sequestered, and stored.
    The Chicago Climate Exchange requires me to conduct an 
annual accounting of my trees, and that is not difficult for 
only 200 acres of hardwood trees. But how do we analyze tens of 
thousands of acres of trees in remote areas of the world?
    Now, this is one of the questions at the heart of Project 
Vulcan at Purdue University. I am particularly pleased 
Professor Kevin Gurney, who leads Project Vulcan, is here to 
testify today.
    Last week, I sent a Dear Colleague letter to Senators 
depicting one of a series of maps produced by Purdue, along 
with NASA and the Department of Energy, showing carbon 
emissions in the United States. This type of mapping technology 
will be critical to a vibrant carbon trading market in the 
future and to efforts to quantify the benefits of preserving 
forest lands.
    I welcome all of our distinguished witnesses and look 
forward, along with you, Mr. Chairman, to their testimony.
    Senator Menendez. Thank you, Senator Lugar.
    Senator Barrasso.

   STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM WYOMING

    Senator Barrasso. Thank you very much, Mr. Chairman. Thank 
you for holding this important hearing.
    I welcome this opportunity to address the climate change 
issue in the Foreign Relations Committee. I have been an active 
participant in the Environment and Public Works Committee on 
this very issue.
    I agree with you, Mr. Chairman. Climate change is an 
international issue, and the United States is a major emitter 
of greenhouse gases. Yet, China and India are surpassing our 
country with emissions, and they are the international actors 
that must be at the heart of any agreement to address carbon 
releases.
    We here in the Senate can pass legislation to provide the 
incentives to develop the technology we need to be more carbon-
neutral. I recently introduced a bill, the GEAR Act, and this 
legislation seeks technology to remove the excess greenhouse 
gases already in the atmosphere. It makes sense to me that we 
explore proposals to remove and permanently sequester those 
greenhouse gases from the atmosphere to slow or reverse climate 
change.
    And to me the best way to develop the technology we need to 
achieve this is through a system of financial awards or prizes 
for achieving technological goals established by Congress. 
Technology incentives do work. Many will have a beneficial 
impact on climate change just as they have 500 years ago for us 
finding a solution to the issue of understanding longitude and 
how to sail the seas. Charles Lindbergh was competing for a 
prize at the time that he flew across the Atlantic Ocean. So 
those are the things that I am working on with the GEAR Act.
    I believe Congress must not pass legislation that places 
caps on our emissions while other countries like China and 
India are exempt. We risk passing legislation that is long on 
sacrifice by Americans but short on progress globally.
    So I welcome the opportunity to hear the discussion today 
regarding the role that forests play in cleaning our air. 
Forests are essentially a carbon sink. They make up the largest 
portion of carbon stored in terrestrial land masses. That is 
because trees and plants absorb carbon for growth. Carbon 
dioxide is released into the atmosphere when these trees and 
plants are destroyed by things such as wild fires.
    In my home State of Wyoming and across the West, we have 
long been concerned about the release of carbon into the 
atmosphere from out-of-control blazes. According to one source, 
the annual worldwide burning of forests, including the fires in 
the Western United States, release about 2 billion metric tons 
of carbon dioxide into the atmosphere.
    That is one of the reasons that I and many of my Western 
colleagues have long supported forest health activities such as 
thinning and removal of fuel loads on the forest floor. It is 
my hope that that issue is addressed in the upcoming Lieberman-
Warner climate change debate that we are holding now in the 
Senate.
    Maintaining the planet's existing tropical forests will 
store a vast amount of carbon. Up to 30 percent of the carbon 
dioxide added to our atmosphere over the past 150 years has 
come from deforestation. The vast majority of carbon stores in 
these forests has still not been released. So they must be 
protected. The vast majority of these forests are outside of 
the United States boundaries. So to preserve these areas, we 
will need international cooperation and one such tool has been 
the Tropical Forest Conservation Act that our ranking member, 
Senator Lugar, has mentioned. A reauthorization bill on this 
important program has been introduced and I hope that 
legislation will soon be considered on the Senate floor.
    I look forward to working with the members of this 
committee on this important issue.
    Thank you, Mr. Chairman.
    Senator Menendez. Thank you, Senator Barrasso.
    Before I turn to our panel, let me say that Senator Hagel 
has a statement for the record, and without objection, we will 
include it in its entirety.
    Let me turn to our witnesses. Let me welcome Ambassador 
Stuart Eizenstat who is our first witness this morning. He 
heads the law firm of Covington & Burling's international law 
practice and is formerly the Deputy Secretary of Treasury 
during the Clinton administration in which he led the U.S. 
delegation at the negotiation of the Kyoto Protocol.
    Our second witness is David Hayes, he is the global chair 
of the Environment, Land and Resources Department at Latham and 
Watkins and will be testifying in his role as the senior fellow 
at the World Wildlife Fund. Mr. Hayes has extensive expertise 
on carbon trading, as well as a multitude of forestry and land 
management issues.
    Dr. Kevin Gurney is the associate director of the Purdue 
Climate Change Research Center and has valuable insights on the 
role deforestation plays in climate change, as well as the 
latest technology for monitoring rates of deforestation.
    And Dirk Forrister is the managing director of Natsource 
and has extensive experience with carbon markets. And I am also 
pleased to see that Mr. Forrister has his J.D. from Rutgers Law 
School, one of the premier law schools in the world, a school 
that happens to be in my home State of New Jersey and where I 
got my law degree as well.
    Anyhow, welcome to all of you. In the interest of time, we 
ask that you keep your testimony to about 7 minutes. We will 
include your entire testimony for the record, and with that, 
Ambassador Eizenstat, if you would start.

STATEMENT OF AMBASSADOR STUART E. EIZENSTAT, PARTNER, COVINGTON 
                 & BURLING LLP, WASHINGTON, DC

    Ambassador Eizenstat. On a personal note, first, Mr. 
Chairman, may I say how much it is a pleasure to call you 
Senator, and for the ranking member, I have had the privilege 
of knowing him since he was the mayor of Indianapolis. He has 
had such a distinguished career. It is always a pleasure to be 
before him.
    I am very pleased that you are holding this hearing because 
the Senate Foreign Relations Committee can help bridge the gap 
between domestic U.S. climate legislation and the international 
effort dealing with forests necessary to deal with one of the 
great challenges of our time.
    I have been working with the Environmental Defense Fund, 
the Nature Conservancy, Conservation International, Defenders 
of Wildlife, the Wildlife Conservation Society, and major 
corporations, including Shell, AIG, PG&E, AEP, and Duke Energy, 
to make sure that in any U.S. legislation dealing with climate 
change that domestic and international forest carbon 
initiatives are included.
    Two important observations at the beginning. First, the 
forest sector is critical to dealing with climate change. As 
you have all recognized, it accounts for 20 percent of global 
greenhouse gas emissions. But to put that in context, that 
means it is the second largest source of carbon emissions, 
second only to actual burning of fossil fuels, and it is more 
than the entire global transportation sector combined.
    If one looks at the world's top emitters, such as Indonesia 
and Brazil, they have achieved that rank not because of their 
industrialization, but largely because of the emissions 
associated with deforestation. We cannot solve the climate 
change problem if forests are not included.
    The scientific case is unmistakable. We cannot stabilize 
the atmosphere, anything remotely close to what scientists 
believe is necessary, if we leave 20 percent of global 
emissions out of the effort. But there is also a secondary 
benefit, and that is, by protecting forests, we also conserve 
biodiversity. Tropical forests are home to half of the world's 
terrestrial species and also are important to the livelihood of 
the world's rural poor.
    The political case is equally strong. As I will discuss in 
a moment, one of the ways to break the logjam that Senator 
Barrasso mentioned, for example, with China and India, is to 
incentivize developing countries to break out of the lockstep 
that I confronted in Kyoto that China and India had by giving 
developing countries who have forests an incentive through 
avoided-deforestation credits to protect their forests. That is 
their contribution and can serve as a central model for 
electric power and transportation.
    Bringing climate change policy through deforestation would 
also provide linkages between any ultimate U.S. cap-and-trade 
program that we may have and countries that are already part of 
Kyoto or a post-Kyoto treaty. I believe, unfortunately, that in 
the near term, we are not going to have two-thirds in the 
Senate to pass a treaty, and therefore, we have to find 
linkages between an ultimate U.S. piece of legislation and 
international trading markets. Recognizing credits for reduced 
emissions from deforestation can bridge the divide with our 
international partners.
    The economic case is absolutely compelling because this is 
a low-cost mitigation option. It is a way that regulated 
companies in the United States can cheaply reduce their costs 
of compliance. It is flexible, and by putting it in our cap-
and-trade system and providing international trading in 
forestry credits, it will mean both incentivizing developing 
countries to participate but also lowering the cost of 
compliance.
    Permit me to suggest that there are two ways in which to 
finance efforts to reduce emissions from deforestation. One is 
to create an international fund, a government-to-government 
fund. This would be, in effect, foreign assistance provided by 
a number of countries. The second would be market-based 
mechanisms to channel private sector capital to developing 
countries to protect their forests.
    Now, frankly, I think we need both, but it is sophistry to 
expect that we can get a fund large enough. Sir Nicholas Stern, 
for example, feels we will need up to $10 billion per year to 
provide adequate incentives for developing countries to protect 
their forests. To do that alone by foreign assistance--we need 
to harness the carbon market, which last year was some $60 
billion, to deliver capital on a scale needed to have an impact 
on the problem. And, Senator Lugar, I am on the board of the 
Chicago Climate Exchange, and they much appreciate what you are 
doing. But we need to harness that kind of market.
    Now, what Bali did, Mr. Chairman, as you alluded to, in the 
forest area it is recognized for the first time, which we did 
not fully do at Kyoto, that any climate change regime following 
Kyoto has to include provisions for what they called reduced 
emissions from deforestation and forest degradation, or REDD. 
The Bali Action Plan specifically references incentives to 
reduce emissions from deforestation and forest degradation in 
developing countries. And that is a huge step forward because 
now the international community is clearly recognizing that 
efforts to conserve the world's tropical and subtropical 
forests have to be part of any long-term global effort for 
climate change mitigation.
    This is in no small part due to the remarkable efforts of a 
group of over a dozen developing countries in the Coalition for 
Rainforest Nations. These are countries who are themselves the 
stewards of tropical and subtropical forests where most of the 
emissions of CO2 are coming from in the forest area. They are 
saying their part in dealing with climate change will be to 
take specific measurable commitments to avoid deforestation, if 
they are provided in an international regime with sufficient 
incentives to do so. And hopefully, as we will discuss in the 
question period, with the tremendous pressures on commodity 
prices, the tremendous pressures to cut those forests down and 
grow soybeans and other products, we have got to provide a 
counterweight so that they do not have an incentive to cut the 
forests down and leave it all to agriculture.
    Now, the opportunities for U.S. leadership--and this will 
be my close--to take a lead on deforestation is to do the 
following, and that is, that any cap-and-trade legislation, 
Lieberman-Warner or any variation thereof, should include 
provisions to recognize credits from reduced emissions from 
deforestation in developing countries. Congress can design 
legislation to allow credits for reduced emissions from 
deforestation to be traded in a U.S. cap-and-trade system in a 
manner ensuring environmental integrity three ways, and then I 
will close.
    First, in the current version of Lieberman-Warner, it 
allocates 2.5 percent of total emission allowances to 
international forest carbon activities. That percentage could 
be even increased more.
    Second and even more important, the current Lieberman-
Warner bill allows regulated entities to satisfy 15 percent of 
their compliance obligations with allowances from foreign 
greenhouse gas trading markets. This should be expanded beyond 
15 percent, but even more critical is I urge this committee in 
the strongest terms to include in that provision expressly 
allowing forestry credits to be counted in that 15 percent or 
whatever ultimate percentage is selected.
    And third is to include provisions in a U.S. cap-and-trade 
bill that provide incentives to developing countries to move 
toward what you have suggested, Mr. Chairman, which is a 
national accounting baseline system so we can measure forests, 
and if they do so, they should not be subject to any 
quantitative limitations in their ability to trade credits for 
avoided-deforestation.
    The long and the short of it is this is a win-win situation 
for everybody. It lowers the costs of compliance by regulated 
companies in the United States; it provides incentives for 
developing countries to take actual specific obligations; and 
it will provide a huge boost in dealing with climate change, 
reducing our costs in the United States and incentivizing 
countries abroad to participate.
    Thank you again for the opportunity, and I look forward to 
your questions when the panel has the opportunity to fully give 
their testimony.
    [The prepared statement of Ambassador Eizenstat follows:]

Prepared Statement of Stuart E. Eizenstat, Partner, Covington & Burling 
                          LLP, Washington, DC

    Good morning, Mr. Chairman and members of the subcommittee. Thank 
you very much for holding this hearing and for the opportunity to 
testify on international deforestation and climate policy. This is one 
of the most important aspects of the climate change problem and I 
commend you for your attention to it. The Senate Foreign Relations 
Committee can help create the bridge between domestic U.S. climate 
change legislation and the international effort necessary to deal with 
one of the greatest challenges of the 21st century. During my tenure as 
Under Secretary of State in the Clinton administration, I led the U.S. 
delegation in the negotiation of the Kyoto Protocol. Forests were a 
major source of contention in those negotiations, and although we were 
able to get credits for afforestation and reforestation projects in 
developing countries, emissions from tropical deforestation were 
ultimately excluded from the Kyoto regime. But much has changed since 
Kyoto was negotiated, and the recent meetings in Bali put the 
deforestation issue squarely on the agenda of international climate 
policy--providing a critical boost to efforts to fill the gap left open 
by Kyoto by bringing deforestation into the international climate 
regime. I believe that the U.S. has a significant opportunity to lead 
on this issue--in the international process but also, importantly, in 
the way that we design our domestic cap-and-trade system.
    I currently serve on the advisory board of Sustainable Forestry 
Management and we have been working with the Environmental Defense 
Fund, the Nature Conservancy, Conservation International, Defenders of 
Wildlife, and the Wildlife Conservation Society as well as a number of 
major companies, including Shell, AIG, PG&E, AEP, and Duke Energy, to 
develop a Forest Carbon Dialogue that seeks to include domestic and 
international forest carbon provisions in U.S. climate legislation.

                  I. DEFORESTATION AND CLIMATE POLICY

    There are two important observations that must be kept in mind as 
we explore options for including deforestation in international and 
domestic climate policy.
    1. The forest sector is a key part of the climate change problem. 
As some of you may know, deforestation--almost all of which occurs in 
the tropics--accounts for about 20 percent of global greenhouse gas 
emissions. That is more than the entire global transportation sector. 
Deforestation is the largest source of emissions in many developing 
countries--accounting for over 90 percent of the emissions from some 
key developing countries. Some of the world's top emitters, such as 
Indonesia and Brazil, have achieved their rank largely because of 
emissions associated with deforestation.
    2. We cannot solve the climate problem if we do not include 
forests. Despite its massive contribution to global climate change, 
deforestation in developing countries is currently excluded from the 
international climate regime by the rules governing the first 
commitment period (2008-2012) under the Kyoto Protocol. This makes no 
sense scientifically, and it makes no sense politically or 
economically.
    The scientific case for including deforestation in the effort to 
address global climate change is very strong, as articulated by the 
recent reports by Sir Nicholas Stern of the U.K. Government and the 
Intergovernmental Panel on Climate Change, among others. We simply 
cannot stabilize the composition of the atmosphere at anything remotely 
close to what scientists consider a prudent level if we leave 20 
percent of global emissions out of the effort. In addition to the 
obvious climate protection benefits that come from reducing emissions 
from deforestation, protection of tropical and subtropical forests also 
generates significant social and environmental cobenefits, including 
the conservation of biodiversity (tropical forests are home to half of 
the world's terrestrial species), the maintenance of critical ecosystem 
services, and the protection of livelihoods for many of the world's 
rural poor.
    The political case is equally strong: Finding a way to bring 
deforestation and forest restoration into the climate regime offers the 
only meaningful path for many developing countries to participate in 
international efforts to deal with climate change, since regrettably 
they are opposed to economywide targets, even growth reduction targets, 
as we learned at Kyoto. And without developing country participation, 
there will not be an effective post-2012 international climate regime. 
Put another way, the forests issue provides a possible way to break the 
logjam plaguing the Kyoto process by creating opportunities for certain 
developing countries to receive tradable credits for reducing their 
emissions from deforestation. This, in turn, could serve as a model for 
similar approaches in other sectors, such as electric power or 
transportation, allowing developing countries to take important steps 
without having to embrace Kyoto-like economywide commitments from the 
start, which is highly unlikely in the short term.
    Bringing deforestation into climate policy also provides a possible 
linkage between a U.S. cap-and-trade program and trading systems in 
nations that are part of the Kyoto and post-Kyoto process. I believe it 
is unlikely in the near term that the U.S. Senate will ratify a climate 
change treaty without specific commitments from China and India, which 
they are unlikely to provide. Recognizing credits for reduced emissions 
from deforestation in evolving compliance regimes can therefore help 
bridge the divide with our international partners.
    And, of course, the economic case for including deforestation in 
the climate regime is compelling given that this is a low-cost 
mitigation option that is available now, as both the Stern Report and 
the IPCC have noted. Accordingly, we should be developing mechanisms to 
take advantage of these reductions as we work toward the fundamental 
transformation of our energy system. From the U.S. domestic 
perspective, recognizing credits for reduced emissions from 
deforestation in our own cap-and-trade system could therefore provide 
significant cost-control benefits and much needed flexibility to 
regulated entities in the U.S., as they move toward adoption of low and 
no carbon technologies. Allowing regulated entities in the U.S. to 
satisfy part of their compliance obligations with international forest 
credits is like allowing them to design their supply chains in a manner 
that takes advantage of cheaper inputs. A key beneficiary is the U.S. 
consumer, who pays lower prices for the goods and services produced by 
these U.S. companies. Forest carbon is a critical part of the effort to 
control compliance costs in a U.S. cap-and-trade system.
    Finally, efforts to bring international deforestation into the 
climate regime also have important synergies with efforts to promote 
and enhance adaptation to climate change in developing countries. Given 
the vital role of forests in providing environmental goods and 
services, recognition of credits for international forest carbon 
activities would generate numerous environmental cobenefits, including 
restoration of degraded lands and watersheds, improved habitat, reduced 
erosion, clean water, and enhanced ecosystem services--all of which 
enhance the adaptive capacity of rural communities. Efforts to protect 
forests and promote sustainable forestry are also critical components 
of an effective strategy to reduce migration and conflict among 
vulnerable rural populations, thereby promoting environmental security. 
By channeling much-needed capital to the rural poor and providing 
incentives for them to sustainably manage their landscape, forest 
carbon credits could reduce pressures that lead to migration and 
conflict. Indeed, forest carbon credits provide one of the only means 
by which many of the rural poor in the developing world can stabilize 
their local forested environments and themselves adapt to climate 
change.
    Simply put, we believe that reduced emissions from deforestation, 
together with efforts to plant new trees and restore forests, must be 
part of the solution to global climate change. It is certainly not the 
solution by itself, but we cannot achieve real climate protection 
without including forests.

II. POLICY OPTIONS AT THE INTERNATIONAL LEVEL FOR FINANCING EFFORTS TO 
                         PREVENT DEFORESTATION

    The current international policy debate has identified two main 
options for financing efforts to reduce emissions from deforestation:
    1. An international fund (or collection of funds) that channels 
money to developing countries in order to finance forest protection 
efforts. This money could come from a variety of sources, including 
Overseas Development Assistance (ODA), carbon taxes, emissions 
allowance auction revenues, or debt-for-nature transactions. The 
important point is that this would depend on public sector, government-
to-government financing.
    2. Market-based mechanisms that channel private sector capital to 
developing countries in order to fund forest protection efforts. The 
basic idea here is that existing and emerging cap-and-trade systems 
could be designed to recognize credits for efforts to reduce emissions 
from deforestation and thereby leverage potentially significant flows 
of private sector capital for efforts to reduce emissions from 
deforestation.
    In evaluating these two options, several key points should be kept 
in mind:
    First, in order to have a meaningful impact on the problem, 
significant and sustainable flows of capital must be mobilized. The 
Stern Review, for example, estimates that it would take between $5 and 
$10 billion per year to significantly reduce deforestation in 
developing countries. It is highly unlikely that ODA or some other type 
of public financing could realistically provide this level of 
investment on a consistent and sustainable basis over time. My view is 
that it cannot. Although multilateral and bilateral funding sources 
have an important role to play in this effort, we must harness the 
carbon market--which doubled in size in 2007 to $60 billion--as a 
vehicle for delivering capital on the scale needed to have an impact on 
the problem. Having a fund is not inconsistent with using market-based 
mechanisms. Both can play a role, but market-based mechanisms are far 
more powerful in leveraging private sector investment.
    Second, regardless of which policy instrument (or combination of 
instruments) is put in place to deal with the problem, careful 
attention must be given to monitoring and quantifying changes in forest 
cover and forest carbon and to the development of appropriate 
accounting frameworks for measuring progress and ensuring environmental 
integrity. Without environmental integrity, the whole effort will 
collapse. In contrast to the situation prevailing a decade ago at 
Kyoto, significant progress has been made, particularly in the 
development of remote sensing capabilities and accounting 
methodologies, and in our ability to quantify changes in land cover and 
forest carbon stocks with confidence.
    Third, deforestation cannot be considered in a vacuum and there is 
no one-size-fits-all recipe for solving the problem. Regardless of how 
the financing for reduced emissions from deforestation is ultimately 
designed, careful attention must be given to the promotion of policies 
and projects that will address the fundamental drivers of 
deforestation--drivers that vary within and among countries. Integrated 
approaches will be necessary to provide meaningful and economically 
rational alternatives to deforestation, which means that we must look 
at afforestation and reforestation projects in addition to and as 
complements of avoided-deforestation efforts.

    III. THE CURRENT STATE OF INTERNATIONAL NEGOTIATIONS TO CREATE 
                  MECHANISMS TO PREVENT DEFORESTATION

    The 13th Conference of the Parties to the United Nations Framework 
Convention on Climate Change, held last December in Bali, Indonesia 
(COP-13), produced three major outcomes:
    First, COP-13 defined a path forward for the negotiation of a 
comprehensive agreement to take effect when the Kyoto Protocol's first 
commitment period ends in 2012. This is the so-called ``Bali Action 
Plan.'' Notably, the United States joined the global consensus to 
launch this negotiation process.
    Second, the developing countries assumed at least some qualified 
responsibility for reducing their own greenhouse gas emissions, within 
the context of their own economic development and with the assistance 
of wealthier countries. This is a significant development. It opens the 
door to an eventual agreement that will in some manner address the 
critical role of China, India, and certain other G-77 countries that 
already are--and will be with further economic growth--major 
contributors to climate change in the decades to come.
    Third, and most significant for our purposes here, was the 
recognition by all countries that whatever climate change regime 
emerges in the next round of negotiations, it should include provisions 
for Reduced Emissions from Deforestation and forest Degradation (known 
as ``REDD''). To that effect, the Bali Action Plan specifically 
references the importance of addressing, in the context of the post-
2012 agreement, ``policy approaches and positive incentives on . . . 
reducing emissions from deforestation and forest degradation in 
developing countries.'' This represents an important step in the 
direction of filling the gap left open by Kyoto and including 
deforestation in international climate policy.
    Concurrently with the Bali Action Plan, COP-13 adopted a decision 
specifically on REDD, focusing on ``approaches to stimulate action.'' 
This additional decision, which I will refer to as the ``REDD 
Decision,'' calls for countries to undertake immediate efforts, 
including demonstration projects and activities, to begin to address 
the drivers of deforestation and to determine the efficacy of various 
different approaches. Those early efforts are meant to be taken into 
consideration--and, presumably, credited in a post-2012 regime--when 
the eventual framework on ``policy approaches and positive incentives'' 
is ultimately agreed.
    Attached to the REDD decision is a set of principles meant to 
provide ``indicative guidance'' with respect to the nature and goal of 
these demonstration activities. Of particular interest is the question 
of precisely how these demonstration activities, if conducted at a 
subnational level, will contribute ultimately to the development of 
``national approaches, reference levels and estimates [of 
deforestation].'' This, like many other methodological issues, will be 
addressed over the course of the next 2 years.
    What is critical here is that the international community, as 
represented by the Parties to the Framework Convention, now clearly 
recognizes that efforts to conserve the world's tropical and 
subtropical forests must be part of any long-term global framework for 
climate change mitigation. This is due in no small part to the 
remarkable efforts of the Coalition for Rainforest Nations and their 
allies in putting this issue on the agenda. It is now clear that the 
developing countries that are the stewards of these tropical and 
subtropical forests are offering to take real and measurable action to 
reduce deforestation, provided that the international regime is 
designed to offer the right incentives for action. It is essential, 
therefore, that we provide these incentives, including in the United 
States in forthcoming climate change legislation.
    With regard to specific policy instruments, the REDD Decision does 
not expressly endorse any particular approach and certain countries 
have thus far insisted that this decision be pushed to future meetings. 
It is also important to recognize that different countries and blocks 
of countries have endorsed different instruments for dealing with REDD. 
In our view, market-based approaches offer the most realistic 
opportunity for generating the scale of capital flows needed to make a 
significant dent in the rate of deforestation--let alone the amounts 
required to actually reverse the overall trends and eventually to halt 
deforestation altogether. And the Bali Action Plan expressly calls for 
considering ``[v]arious approaches, including opportunities for using 
markets, to enhance the cost-effectiveness of, and to promote, 
mitigation actions.'' Many participants in the negotiations have noted 
that the term ``positive incentives'' is generally viewed as 
encompassing market mechanisms. My view is that markets must play a 
fundamental role in developing an effective policy for reducing 
emissions from deforestation.
    For the reasons that I have outlined, the Parties to the Framework 
Convention will almost certainly include efforts to reduce emissions 
from deforestation in the global climate change strategy that emerges 
over the next couple of years. I submit to you that this will be a very 
good thing, for the following reasons:
    First, the enormous environmental significance of preserving the 
world's forests, from the standpoint of the avoided carbon emissions 
and the protection of the Earth's climate system as well as the 
conservation of irreplaceable biological diversity and protection of 
vital ecosystem services;
    Second, the importance of having--for the first time--the active 
participation by developing countries, such as those of the Coalition 
for Rainforest Nations, in the global effort to mitigate climate 
change;
    Third, the importance of an avoided-deforestation regime as a model 
for other developing countries to take targets in other sectors, such 
as electric power or transportation, if they refuse to take Kyoto-like, 
economywide commitments, which many will refuse to do in the near term;
    Fourth, the contribution that this will make to the willingness of 
the United States and other developed countries to take on ambitious 
targets or goals--knowing that all cost-effective alternatives are 
being explored and will eventually be available so long as they have 
environmental integrity; and
    Last, but decidedly not least, the opportunities created by such an 
effort, if properly designed and implemented, for developing countries 
to forge an economic development path that is sustainable and 
consistent with the preservation of these vital natural assets. 
Significant incentives must be put in place to counter the existing 
pressures to cut and burn forests for agricultural expansion and other 
economic development.

                 IV. OPPORTUNITIES FOR U.S. LEADERSHIP

    The U.S. has a real opportunity--in our domestic climate 
legislation--to lead on the deforestation issue by including provisions 
that recognize credits for reduced emissions from deforestation in 
developing countries. Such forest carbon credits would provide much-
needed flexibility and cost reductions for regulated entities under a 
U.S. cap-and-trade system, while incentivizing developing countries to 
take action to reduce emissions from the forest sector.
    And this does not have to wait--indeed it should not wait--until a 
post-2012 agreement is negotiated and in place. My view is that 
Congress can design legislation that allows credits for reduced 
emissions from deforestation and other international forest carbon 
activities to be traded in a U.S. cap-and-trade system in a manner that 
ensures environmental integrity without imposing massive transactions 
costs on the whole effort.
    To that effect, we are encouraged by the provisions in the current 
version of the Lieberman-Warner bill which allocate 2.5 percent of 
total emissions allowances to international forest carbon activities. 
We would like to see that percentage increase. But we also believe that 
the current provision that allows regulated entities to satisfy 15 
percent of their compliance obligations with allowances from foreign 
greenhouse gas emissions trading markets should be expanded and opened 
up to explicitly include credits for international forest carbon 
activities. And we believe that there should be provisions in the bill 
that incentivize developing countries to move toward national 
accounting frameworks for forest carbon, and that credits from 
countries that adopt national accounting frameworks should not be 
subject to quantitative limitation. These provisions would give a huge 
boost to the whole effort to protect and restore tropical forests in 
developing countries and encourage those countries to participate in a 
global climate protection effort. They would also allow regulated 
entities in the U.S. to tap into the cost-control benefits of these 
activities, thereby reducing the overall costs of a cap-and-trade 
program to the U.S. economy.
    We hope, therefore, that the members of this important subcommittee 
will recognize the importance of incorporating reduced emissions from 
deforestation in U.S. cap-and-trade legislation in a manner that 
comports with the ongoing effort to bring deforestation into the 
international climate regime.

    Senator Menendez. Thank you, Ambassador.
    Mr. Hayes.

     STATEMENT OF DAVID J. HAYES, FORMER DEPUTY SECRETARY, 
DEPARTMENT OF THE INTERIOR; SENIOR FELLOW, WORLD WILDLIFE FUND, 
                         WASHINGTON, DC

    Mr. Hayes. Thank you, Mr. Chairman, Mr. Ranking Member, and 
members of the subcommittee, for the opportunity to testify 
this morning on this incredibly important topic, international 
deforestation and climate change, particularly on Earth Day. I 
can think of no better way for all of us collectively to spend 
our time than to deal with this very important issue.
    I am testifying this morning on behalf of the World 
Wildlife Fund where I am a senior fellow. In addition to my 
work at WWF, I have had a longstanding interest in this issue 
dating back to my time as Deputy Secretary of Interior in the 
Clinton administration.
    I would like to say at the outset that WWF which, of 
course, has a broad mandate to protect biodiversity on this 
planet, is very encouraged by the promising first steps that 
the international community is taking with regard to global 
deforestation. The Bali discussions that Ambassador Eizenstat 
just referenced, kick off, I think, a very, very strongly 
promising new chapter here.
    I should mention historically, as discussed in my 
testimony, that WWF was quite skeptical back in Kyoto days, as 
the Ambassador will confirm, about inclusion of forestry as 
part of the Kyoto compact. We think times have changed now that 
the industrial world is focused on reducing industrial 
emissions, and we must also deal with deforestation, which is, 
by all accounts, responsible for at least 20 percent of global 
greenhouse gas emissions.
    We are also encouraged at WWF about the Lieberman-Warner 
bill and the fact that, in addition to a U.S.-based constraint 
on carbon emissions, it includes an international forestry 
title, which recognizes that the United States needs to play a 
leadership role in reducing emissions from deforestation and 
degradation abroad.
    However, unlike conventional sources of greenhouse gas 
emissions, deforestation, and forest degradation present very 
difficult, multifaceted challenges that cannot be easily 
tackled. We think it is important to look at the root causes of 
deforestation and degradation if we are going to really deal 
with this issue comprehensively. It is going to require the 
cooperation of governments who are losing their forestry 
resources. Importantly, it is going to require the cooperation 
of the United States and our trading partners whose practices 
are influencing how forestry resources are being used and the 
participation of indigenous peoples and others who are most 
impacted by land choices made in their homelands.
    As a result, we think that the international discussions 
and U.S. legislation should focus first on promoting economic 
models that will address these root causes of deforestation and 
degradation and which will involve the coordinated effort of 
the international community.
    That is one reason why the discussions made this morning 
about Senator Lugar's work on the Tropical Forest Conservation 
Act are absolutely apropos. We cannot look at establishing a 
credit market for carbon from protected forests without looking 
at other tools that we can bring to the table to help protect 
forests and certainly the Tropical Forest Conservation Act is 
one.
    Another, which this committee also is looking at, is 
amending the Lacey Act to prohibit imports into the United 
States of timber products comprised of illegal timber. Again, 
we cannot look at this issue through blinders and assume that 
creating a credit market that will attempt to protect forests 
will be enough to solve this problem without dealing with the 
realities that were highlighted in the New York Times on 
Saturday about illegal logging in many of these countries.
    In that regard, I should mention that, as you know, the 
World Bank has reported that many tropical forested countries 
are losing billions and billions of dollars from illegal 
logging. These are countries that typically outlaw this logging 
but do not have the institutional capability to deal with it.
    I would like to finally--I believe my time is up--explain 
that we are very encouraged by the notion of using carbon 
markets as a key element here to deal with the deforestation 
efforts, but we need to put a warning sign out there. The 
deforestation issue presents special challenges.
    First, in terms of the local capacity of developing 
countries to measure and monitor and validate the reductions 
that are needed if we are going to use these credits as though 
they were emissions reductions that have compliance impacts in 
a U.S.-based system.
    And second, we have to recognize the fact, in addition to 
this problem of capacity, the special challenges of measurement 
that we are going to hear from Professor Gurney about. This is 
a very difficult area in which to precisely measure emissions 
reductions and the ``leakage'' issue--the problem of 
potentially having deforestation simply moved to another area. 
This is not something we can do on a project-by-project basis.
    Because of these challenges, some skepticism is important, 
but we also think that optimism is essential. We have to solve 
this problem. We can solve this problem. It is going to take a 
concerted effort. The World Wildlife Fund and many others in 
the conservation community look forward to working with this 
committee toward that end.
    Thank you very much.
    [The prepared statement of Mr. Hayes follows:]

  Prepared Statement of David J. Hayes, Senior Fellow, World Wildlife 
                          Fund, Washington, DC

    Thank you Mr. Chairman, Mr. Ranking Member, and members of the 
subcommittee, for the opportunity to testify this morning on the 
important topic of international deforestation and climate change. I am 
testifying today in my capacity as a Senior Fellow at the World 
Wildlife Fund (``WWF''). In addition to my work with WWF, I have had a 
longstanding personal and professional interest in forestry issues, 
having served as Deputy Secretary of the Interior in the Clinton 
administration. Given the importance of this issue to the global 
environment, it is particularly fitting that the subcommittee is 
holding this hearing on Earth Day.

                                SUMMARY

    WWF is encouraged by the promising first steps that the 
international community is taking to address global deforestation and 
degradation as part of the United Nations framework convention on 
climate change, as evidenced in the recent Conference of the Parties in 
Bali, Indonesia, and in discussions leading toward Copenhagen, when a 
new treaty is expected to be completed. WWF also is encouraged that S. 
2191, America's Climate Security Act, introduced by Senators Lieberman 
and Warner, which would establish a U.S.-based program to constrain 
greenhouse gas emissions, also includes an international forestry title 
which recognizes that the U.S. must play an active role in ``reduced 
emissions from deforestation and degradation'' or ``REDD,'' working in 
tandem with affected nations and the entire international community.
    The attention on deforestation is both appropriate and necessary, 
given the fact that the on-going loss of forestry resources accounts 
for approximately 20 percent of all greenhouse gas emissions, 
worldwide. Simply put, we cannot make progress in battling climate 
change unless we reduce the alarming rate of deforestation that is 
occurring on an on-going basis in a number of developing nations.
    Unlike conventional sources of greenhouse emissions, however, 
deforestation and forest degradation present multifaceted challenges 
that are particularly difficult to tackle. Sustainable progress will 
only be made by addressing the complex root causes of deforestation and 
forest degradation. This will require the cooperation of the 
governments who are losing their forestry resources; the cooperation of 
the U.S. and other developed nations whose trade practices are 
influencing how forestry resources are being used (and/or abused); and, 
importantly, the active participation of indigenous people and others 
who are most impacted by land use choices made in their home lands.
    WWF believes that international climate change discussions and U.S. 
legislation should focus, first, on promoting economic models that 
address the root causes of deforestation and degradation and which 
involve the coordinated effort of the international community. Economic 
initiatives that encourage trade in sustainable forestry resources and 
products, and which penalize forest degradation and the loss of 
valuable forest resources, for example, must be actively promoted. The 
development of international carbon markets that will recognize and 
reward the financial value of maintaining tropical forests and reducing 
rates of deforestation also should be the subject of active 
consideration. To lay the groundwork for developing such a market, a 
significant investment must be made in building local capacity to 
measure and monitor the carbon stocks in developing countries' forestry 
resources.
    In this regard, WWF supports the Lieberman-Warner bill's 
establishment of an Emission Allowance Account ``for use in carrying 
out forest carbon activities in countries other than the United 
States.'' Such an allocation would generate funding needed to help 
local citizens and institutions develop and proliferate the 
technologies and methodologies that will reliably measure and track the 
carbon content of forests and forest products, and to undertake the 
training needed to generate and validate the data used for this 
purpose. As discussed further below, these are essential prerequisites 
of any effort to establish a credible and viable carbon market in those 
countries.
    As a corollary, WWF also supports the Lieberman-Warner bill's 
general expression of interest in developing and promoting a carbon 
market that could generate financial support for protecting forests. 
WWF believes that the U.S. should proceed deliberately in this area, 
however, in close cooperation with the international community. A 
carbon market that effectively generates financial incentives to reduce 
tropical deforestation should not be presumed to operate in the same 
way as today's voluntary market for carbon offsets from forests, or the 
Kyoto Protocol's project-based Clean Development Mechanism. A different 
approach will be needed if credit is to be given to avoiding 
deforestation and to the on-going conservation of forestry resources.
    A deliberate approach also is needed due to the significant 
concerns that have been raised about the environmental integrity of 
some offset projects that have been developed under existing 
frameworks. Similar concerns will apply to forest-based credits. 
Indeed, forestry credits are likely to generate special scrutiny, given 
the large number of credits that potentially could be generated from 
avoided-deforestation projects and the special challenges of 
quantifying and verifying emissions reductions from improved forestry 
practices, particularly with regard to ``leakage,'' ``permanence'' and 
``additionality,'' as discussed below. In addition, a carbon market 
that credits forestry-based ``offsets'' must not enable industrialized 
nations to avoid investments in their own emissions reductions.
    Despite these challenges, WWF is optimistic that the U.S., working 
with the international community, can identify and implement a 
comprehensive program that tackles the root causes of deforestation. 
This effort can and must include the development of financial 
mechanisms that will sustainably protect forestry resources and 
complement commitments by developed countries to reduce their 
greenhouse gas emissions.

WWF and Forest Conservation
    For more than 45 years, WWF has been protecting the future of 
nature. Today WWF is the largest multinational conservation 
organization in the world. WWF's unique way of working combines global 
reach with a foundation in science, involves action at every level from 
local to global, and ensures the delivery of innovative solutions that 
meet the needs of both people and nature. WWF currently sponsors 
conservation programs in more than 100 countries, thanks to the support 
of 1.2 million members in the United States and more than 5 million 
members worldwide.
    WWF is actively engaged in the protection and sound management of 
forestry resources around the world. By way of example, WWF is involved 
in: (1) The Congo Basin Forest Partnership (CBFN), a Presidential 
Initiative with 34 partners worldwide, which seeks to reform forestry 
practices, promote economic development, and improve governance, by 
supporting a network of national parks, protected areas, and well-
managed forestry concessions; implementing sustainable, community-based 
natural resource management; promoting ecotourism; helping to enforce 
antipoaching and forestry laws; and working with the regional Forestry 
Commission; (2) the Heart of Borneo Initiative, which seeks to protect 
the highland forests on the island of Borneo, shared by Indonesia, 
Malaysia, and Brunei Darussalam, by improving transboundary 
cooperation, expanding the protected area network, emphasizing 
responsible resource use across multiple extractive industries, such as 
pulp and paper and palm oil production, and developing long-term 
sustainable and equitable financing mechanisms; and (3) the Amazon 
Initiative, which includes work through the Amazon Region Protected 
Areas Program (ARPA), and the Amazon Headwaters Program, as well as 
efforts to engage major corporations in Europe and the U.S. to build 
commitments to purchase of sustainably managed wood from this region.
    Transcending our work in specific regions such as the Congo Basin, 
Borneo, or the Amazon, WWF also works directly with global forestry 
markets. WWF is a partner in the Global Forest and Trade Network 
(GFTN), supported by the Sustainable Forest Products Global Alliance 
(Global Alliance)--a U.S. AID--funded public/private partnership that 
catalyzes businesses, public agencies, and nongovernmental 
organizations to promote responsible management of forest resources, 
reduce illegal logging and improve the well-being of local communities. 
The GFTN seeks to provide committed companies with tools and technical 
assistance to achieve responsible forestry through their management and 
purchasing practices. It has established regional Forest Trade Networks 
in key producer and consumer countries and regions covering over 30 
countries, with a total of 361 separate legal entities around the 
world. GFTN Participants and Applicants produce or trade in an 
estimated volume of 222 million cubic meters of round wood equivalent, 
representing 12.3 percent of the global total traded, estimated at 
1.799 billion cubic meters in 2005 by FAO. In terms of value, GFTN 
Participants and Applicants produce or trade in an estimated $49 
billion or approximately 13.6 percent of the global total ($360 billion 
estimated by WRI). In addition, GFTN Participants and Applicants employ 
over 150,000 people, or approximately 1.2 percent of the global total 
based on the FAO estimate (in 2000) of 12.9 million forest workers 
globally.
    Through its work, WWF has come to understand the complex factors 
that play a key role in maintaining healthy forests. WWF works on 
different aspects of forestry management--governance, trade, logging, 
conversion, finance, supply chain, etc.--giving us a unique holistic 
view of how to address forestry management in the context of carbon 
management.

Tropical Deforestation and Its Impact on the Global Carbon Cycle
    Forests play a key role in the global carbon cycle, and they must 
play a central role in efforts to slow and eventually halt human 
contributions to climate change. Forty to sixty percent of the world's 
land-based carbon is stored in forest reservoirs, and these natural 
resources provide a critically important line of defense against carbon 
emissions. Just when we need the world's forests the most--to remove as 
much carbon dioxide from the atmosphere as they possibly can--our 
forests are disappearing. Over the last 8,000 years, the world has lost 
about half of its forest cover: \1\ the current rate of forest 
destruction is estimated to be 32 million acres each year.\2\ In the 
next 24 hours, deforestation at rates of about 100 acres a minute will 
release as much CO2 into the atmosphere as would 8 million people 
flying from London to New York.\3\ In recent years, forestry-sourced 
emissions have accounted for about 20 percent of total global 
emissions.\4\ The Intergovernmental Panel on Climate Change (IPCC) 
estimates that land use change emissions, mostly from tropical 
deforestation, released between 800 million and 2.4 billion metric tons 
of carbon per year during the 1990s, and currently releases an 
estimated 1,700 million tons per year.\5\ In the past, these emissions 
represented anywhere from 10-25 percent of all global human-induced 
emissions.\6\
---------------------------------------------------------------------------
    \1\ Submission by the Governments of Papua New Guinea & Costa Rica, 
``Reducing Emissions From Deforestation in Developing Countries: 
Approaches to Stimulate Action,'' COP 11; available at http://
www.rainforestcoalition.org/documents/COP-11AgendaItem6-
Misc.Doc.FINAL.pdf.
    \2\ Bryan Walsh, ``Getting Credit for Saving Trees,'' Time 
Magazine; available at: http://www.time.com/time/magazine/article/
0,9171,1642887,00.html.
    \3\ Cool Earth Action, http://www.coolearth.org.
    \4\ Blue Climate, ``Expand Kyoto Clean Development Mechanism to 
Include Deforestation?''; available at :http://www.blueclimate.com/
blueclimate/2006/11/expand_kyoto_cl.html.
    \5\ Center for International Forestry Research, ``Reducing 
Emissions from Deforestation''; available at: http://
www.cifor.cgiar.org/carbofor/highlights/reduce-emission.htm.
    \6\ Submission by the Governments of Papua New Guinea and Costa 
Rica, ``Reducing Emissions From Deforestation in Developing Countries: 
Approaches to Stimulate Action,'' COP 11; available at http://
www.rainforestcoalition.org/documents/COP-11AgendaItem6-
Misc.Doc.FINAL.pdf; ``IPCC Special Report on Land Use, Land Use Change 
and Forestry''; available at: http://www.grida.no/climate/ipcc/
land_use/index.htm.
---------------------------------------------------------------------------
    When we lose our forests, the global environment takes a double 
hit. First, the carbon that was being stored in forests is vented to 
the atmosphere, adding to the man-induced increases in carbon emissions 
that are causing climate change. This makes emissions from 
deforestation and other land use changes comparable to global emissions 
from petroleum, coal, or natural gas,\7\ and almost equal to all U.S. 
emissions.\8\ Emissions from deforestation in Brazil and Indonesia 
alone are equal to the entire reduction commitments of the Annex 1 
countries of Kyoto Protocol during the Protocol's first commitment 
period.\9\
---------------------------------------------------------------------------
    \7\ Submission by the Governments of Papua New Guinea and Costa 
Rica, ``Reducing Emissions From Deforestation in Developing Countries: 
Approaches to Stimulate Action,'' COP 11; available at http://
www.rainforestcoalition.org/documents/COP-11AgendaItem6-
Misc.Doc.FINAL.pdf; ``IPCC Special Report on Land Use, Land Use Change 
and Forestry''; available at: http://www.grida.no/climate/ipcc/
land_use/index.htm.
    \8\ Katherine Ellison, ``Shopping for Carbon Credits,'' Salon.com; 
available at: http://www.salon.com/news/feature/2007/07/02/
carbon_credits/index_np.html.
    \9\ Center for International Forestry Research, ``Reducing 
Emissions from Deforestation''; available at: http://
www.cifor.cgiar.org/carbofor/highlights/reduce-emission.htm.
---------------------------------------------------------------------------
    Second, in addition to directly burdening the atmosphere with large 
volumes of new carbon emissions, deforestation impairs or destroys many 
of the goods and services that forests provide to both the environment 
and to people. The Natural Capital Project, a joint project sponsored 
by WWF, the Nature Conservancy and Stanford University's Woods 
Institute for the Environment, has identified and is quantifying many 
of these services, including protection of water supplies, the 
generation of a wide variety of forest-related products, and the 
promotion of recreation and tourism and cultural and aesthetic 
values.\10\
---------------------------------------------------------------------------
    \10\ See, e.g., http://naturalcapitalproject.org/toolbox.html#Life.
---------------------------------------------------------------------------
Reduced Emissions From Deforestation and Degradation Should and Will Be 
        Addressed as Part of the International Framework Convention on 
        Climate Change
    Although forests play a central role in the carbon cycle, forestry 
issues have played a limited role to date under the Kyoto Protocol. 
There are sound, historical reasons why forestry is not a primary focus 
of the existing Protocol. Specifically, in the leadup to the Kyoto 
agreement, a number of countries, including the United States, were 
arguing that the absorptive capacity of their carbon ``sinks'' should 
reduce their obligations to mitigate emissions from other sources. WWF 
objected to countries relying on existing forestry resources as a means 
of avoiding having to reduce emissions from industrial sources, and WWF 
played a significant role in limiting the role of forestry and land use 
in establishing baselines under the Kyoto Protocol and in meeting 
carbon emissions reductions required under the Protocol.
    But the times and circumstances have changed and, WWF strongly 
believes that forestry issues--particularly tropical deforestation and 
degradation--must now be incorporated into the international framework 
on climate change. The debate on forestry has moved from a discussion 
revolving around the tactical use of forests to define emissions 
reductions obligations to a recognition that deforestation is a major 
source of carbon emissions that must be reduced in the first instance. 
The science on this issue also has advanced significantly in the years 
since Kyoto. Remote sensing technology and other scientific tools 
enable us to better understand and calibrate the impact of the 
deforestation and degradation that is occurring around the world. 
Finally, unlike the Kyoto negotiations, developing countries are now 
engaged in this issue and are asking that forestry resources be 
incorporated into the international climate framework. As you know, the 
Coalition for Rainforest Nations and other developing world nations 
have advanced serious proposals which prompted the international 
community, in the recent Bali discussions, to launch a new initiative 
to integrate forestry issues into the international framework 
convention on climate change.

Special Challenges Associated With Effectively Reducing the Rate of 
        Tropical Deforestation and Degradation
    Although a consensus is emerging that tropical deforestation issues 
must be addressed as a part of the international framework convention 
on climate change, there are special challenges in designing an 
initiative that will avoid tropical deforestation and in folding such a 
plan into an international agreement and/or into domestic legislation.
    First, the causes of deforestation and the degradation of forests 
in developing countries are complex, and are not easily addressed 
through financial transfers or short-term conservation efforts. The 
problems of deforestation and forest degradation can only be 
effectively addressed by acknowledging and systematically confronting 
their underlying causes. The economic pressures to clear forests in 
some developing countries are enormous. The short-term gains from 
overharvesting can be irresistible, particularly when the economic 
advantages of conducting sustainable forestry practices and the 
marketing of forestry products may not be appreciated or, in some 
cases, may not be feasible. Indigenous and forest-dependent people have 
an enormous stake in these issues, and strategies to protect forests 
cannot go forward without the full participation of the people who live 
and work in forested areas. Indeed, the only forest protection strategy 
that is likely to have long-term success is a strategy that 
acknowledges the economic drivers at work and which promotes the 
introduction of sustainable forestry practices on a global basis--work 
that WWF has been pioneering for many years.\11\
---------------------------------------------------------------------------
    \11\ See generally, the Center for International Forestry Research 
Web site, http://www.cifor.cgiar.org/Research/ENV/Themes/SUF.
---------------------------------------------------------------------------
    Second, while the science has improved, there remain serious 
technical and methodological issues associated with monitoring and 
measuring emissions from forestry resources. Measuring carbon stocks in 
forestry resources is a complex undertaking. It is not amenable to the 
same type of precision that can be achieved when documenting emissions 
from point sources.\12\ Also, forests raise special challenges 
regarding the ``permanence'' of carbon sequestration, given the dynamic 
nature of forests, including different rates of tree growth and death, 
periodic fires, etc. ``Leakage'' also is a special concern that poses 
perhaps the most significant challenge in the forestry sector. If 
deforestation is avoided in one area due, for example, to a project-
based investment in maintaining a particular forest, there may be a 
risk that deforestation will simply occur in another, unprotected area. 
Finally, the concept of avoided-deforestation--which is based on the 
need to protect existing forestry resources--does not comport with the 
usual test for demonstrating progress in reducing emissions--the 
``additionality'' test which customarily measures ``additional'' 
reductions that would not otherwise have occurred against a preexisting 
baseline.\13\
---------------------------------------------------------------------------
    \12\ See, e.g., Zach Willey and Bill Chameides (ed.), ``Harnessing 
Farms and Forests in the Low-Carbon Economy: How to Create, Measure, 
and Verify Greenhouse Gas Offsets'' (Duke University Press 2007).
    \13\ See generally, Mark Trexler, Derik Broekhoff and Laura 
Kosloff, ``A Statistically-Driven Approach to Offset-Based GHG 
Additionality Determinations: What Can We Learn?'' Sustainable 
Development Law and Policy (Winter 2006).
---------------------------------------------------------------------------
    WWF does not believe that any of these technical and methodological 
issues are insurmountable. National baselines for deforestation rates, 
for example, provide a promising means to address leakage and 
permanence. Nonetheless, all of these issues present difficult 
challenges in the forestry context; they must not be brushed aside. It 
will take a large, well-organized, and concerted effort on these 
technical issues to earn the credibility that must underpin major 
investments in protecting the world's forests.
    Third, as a related point, there is limited institutional capacity 
in many developing countries to apply the type of new technologies and 
methodologies that are needed to track and calibrate progress in 
limiting deforestation and degradation. There is an enormous gap 
between what is theoretically possible and on-the-ground capabilities 
in many of the concerned nations, which are grappling with severe 
economic and social challenges on many fronts.
    The combination of these special challenges means that the 
traditional approach for reducing greenhouse gas emissions is not 
easily and readily applied in the tropical deforestation context. When 
seeking to reduce emissions from other types of sources, financial 
capital is typically invested in specific projects that generate 
measurable and verifiable reductions in greenhouse gas emissions that 
otherwise would not have occurred. These demonstrated reductions are 
then traded on the carbon markets that have emerged under the Kyoto 
scheme, and through the voluntary marketplace.
    As explained above, concerns about measurement error, leakage, 
additionality and permanence on a project-by-project basis can be acute 
in the forestry context. Moreover, the typical notion of rewarding 
efforts to reduce emissions that would otherwise occur does not fit 
with the compelling need to maintain the status quo in terms of 
protecting tropical forests that are threatened by conversion to 
agriculture or other land uses. We must find ways for tropical forested 
countries that have current low rates of deforestation and forests that 
engage in sustainable forest management practices to participate in 
future carbon markets. In addition to these forestry-specific 
challenges, the broader questions about the environmental integrity of 
``offset'' schemes, and their relationship with other emissions 
reductions commitments, must be squarely confronted and addressed.\14\
---------------------------------------------------------------------------
    \14\ See generally, David J. Hayes, ``Getting Credit for Going 
Green: Making Sense of Carbon `Offsets' In a Carbon Constrained 
World,'' Center for American Progress (March 2008). See also WWF 
analysis of the operation of the CDM mechanism, http://
assets.panda.org/downloads/cdm_report_wwf_background_paper.pdf.
---------------------------------------------------------------------------
    For all of these reasons, WWF believes that it is not appropriate 
to simply assume that the model of investing in carbon reduction 
projects, as implemented through the Clean Development Mechanism under 
the Kyoto Protocol and other ``offset'' models, can or should be 
applied in the international forestry context. WWF will be an active 
participant in the international discussions following Bali, in which 
alternative approaches will be discussed for how best to bring 
forestry, and the deforestation and degradation issue in particular, 
into the international climate framework. Concurrently, WWF will be 
developing a portfolio of pilot projects within tropical forested 
countries with current high rates of deforestation that will address 
capacity building and the technical and methodological needs that have 
been discussed in this testimony.

                            RECOMMENDATIONS

Multilateral Negotiations
    Although the discussions on this subject remain in their early 
stages in the international arena, a few observations that may be 
helpful to this committee's consideration of this issue are in order--
particularly with regard to U.S. engagement on the tropical 
deforestation problem.
    First, the United States must be actively involved in post-Bali 
efforts to address the tropical deforestation issue. Good ideas are 
being put on the table. The Tropical Rainforest Coalition, for example, 
has asked for the assistance of developed nations to ``support [forest 
protection efforts] through capacity-building, research and 
development, [and the] transfer of appropriate environmentally sound 
technologies.'' The coalition also has expressed an openness to 
consider a variety of alternative financing mechanisms to address the 
deforestation issue.
    A number of proposals are being floated, including the 
Environmental Defense Fund's notion of ``compensated reduction'' under 
which tropical countries would receive emissions allowances tradable in 
the global carbon market based on a showing of ``real reductions'' that 
have been proven to have taken place. EDF's proposed focus is on ``a 
nation's entire forest system, not just individual projects, thereby 
avoiding problems that have hindered consensus on forest issues.''
    Also, some NGOs have suggested that the U.N. adopt a ``dual markets 
approach'' under which a separate carbon market would be created in 
which developed countries could invest in reducing deforestation in 
developing countries in order to achieve a portion of their national 
Annex I post-2012 carbon reduction targets.
    Creating a dual market would address the concern that avoided-
deforestation credits could be given out too generously and without 
adequate safeguards, thereby potentially disrupting the more carefully 
constrained carbon market.\15\
---------------------------------------------------------------------------
    \15\ See, e.g., Center for Clean Air Policy, ``Reducing Emissions 
from Deforestation and Degradation: The Dual Markets Approach'' (August 
2007), http://www.ccap.org/international/FINAL%20REDD%20report.pdf. See 
also, Greenpeace, ``Tropical Deforestation Emission Reduction 
Mechanism: A Discussion Paper'' (December 2007), http://
www.greenpeace.org.uk/files/pdfs/forests/tderm-funding-mechanism.pdf.
---------------------------------------------------------------------------
    Other proposals focus on the creation of a global avoided-
deforestation fund or funds, financed by governments and/or the private 
market, which would be applied toward avoided-deforestation and 
sustainable forestry initiatives, including capacity building and the 
development of a technical information needed to assess progress.
    The United States should be an active participant in the 
international discussions addressing all of these approaches.

U.S. Legislative Proposals Addressing Forestry and Climate
            Capacity-building; Technical and methodological support
    As noted above, WWF supports the Lieberman-Warner bill's 
establishment of an Emission Allowance Account ``for use in carrying 
out forest carbon activities in countries other than the United 
States.'' This allocation can generate some of the funding that is 
needed to address the technical and methodological gaps, and the 
institutional limitations, discussed above. Such funding should be 
coordinated with the work of other governments and NGOs who are 
actively engaged in addressing these issues.
    In addition to the proposed Lieberman-Warner funding mechanism, WWF 
urges this subcommittee to consider providing foreign assistance 
funding from other programs that are under its jurisdiction (including 
USAID program assistance, for example) to address urgent needs 
presented by global deforestation. Many agencies of the United States 
Government are involved in trade and development issues that directly 
or indirectly affect tropical deforestation. WWF urges the subcommittee 
to request the administration to identify and coordinate these 
activities, so that the U.S. can maximize its efforts to reduce the 
massive greenhouse gas emissions that are being caused by 
deforestation.

            Application of carbon markets and other financial 

                    INCENTIVES TO FORESTRY RESOURCES

    As discussed above, WWF also believes that there is an important 
role for the carbon market to play in addressing this issue. For the 
reasons discussed above, however, it is important not to prejudge the 
nature and scope of that involvement. Neither the U.S. nor any other 
developed nation should presume what type of approach will be 
acceptable and/or desirable from the perspective of the developing 
nations that are facing the on-going challenge of deforestation and 
forest degradation.
    In that regard, the Lieberman-Warner international forestry title's 
indication that EPA should ``recognize credits from forest carbon 
activities,'' while also encouraging EPA ``to identify other 
incentives, including economic and market-based incentives, to 
encourage developing countries with largely intact native forests to 
protect those forests'' leans in an appropriate direction. The 
legislation, however, would benefit from more explicit instructions to 
EPA to develop options for crediting forest protection activities in 
coordination with post-Bali discussions that are occurring on an 
international level. EPA should be directed to work with interested 
parties, including scientists, industry representatives, NGOs, and 
others, to identify and/or develop workable technical and 
methodological approaches for measuring carbon stocks in various types 
of forests, and in defining and accounting for carbon impacts 
associated with engaging in sustainable forestry practices in tropical 
forests. Guidance also should be developed for addressing the 
permanence, leakage additionality issues discussed above.

            Other policy initiatives to address international 

                    DEFORESTATION AND CLIMATE CHANGE

    While much of the discussion on forestry and climate change 
currently taking place among policymakers centers on a post-Kyoto 
multilateral framework and specific U.S. cap-and-trade legislation such 
as S. 2191, it is important to recognize the multitude of other efforts 
taking place to address forestry conservation, and their role in 
addressing climate change.
    Legislatively, for example, Congress can and should reauthorize the 
Tropical Forest Conservation Act, which provides for debt-for-nature 
swaps for certain countries and eligible debt, and which is under the 
jurisdiction of the Foreign Relations Committee. This program can play 
an important role in forest conservation as it relates to climate 
change through the development of a debt-for-carbon program for 
forestry conservation. Congress also is considering amendments to the 
Lacey Act to prohibit imports into the U.S. of timber products 
comprised of illegal timber. Prohibitions like this, which address the 
demand side, provide an implement complement to conservation efforts 
that focus on supply side. Likewise, a number of Free Trade Agreements 
with developing countries rich with tropical forests--including Peru, 
Columbia, and Malaysia--may soon come before the Senate. How forestry 
conservation and technology are handled in those FTAs may have a strong 
bearing on forestry conservation in the context of climate change.
    The U.S. also can take additional steps administratively to promote 
forestry conservation practices. The U.S. recently entered into a 
bilateral agreement with Indonesia on forestry conservation, and is 
currently negotiating a Memorandum of Understanding with China, through 
the Strategic Economic Dialogue, on timber trade. These agreements can 
create important opportunities for collaboration to address 
deforestation and forest degradation. USAID also can and should explore 
its financial assistance framework and funding priorities in the 
context of climate change. Much of its biodiversity work ($195 million 
in FY 2009) focuses on forestry conservation. These activities should 
be evaluated with an eye toward mitigating greenhouse gas emissions, 
and adapting to a changing climate.\16\ In sum, WWF encourages this 
subcommittee to utilize its full jurisdiction in exploring ways to 
address deforestation and climate change.
---------------------------------------------------------------------------
    \16\ In August 2007, USAID published ``Adapting to Climate 
Variability and Change: A Guidance Manual for Development Planning,'' 
which also can be used in considering how best to fund forestry 
conservation projects for climate change.
---------------------------------------------------------------------------
                               CONCLUSION

    WWF thanks the subcommittee for holding a hearing on the critically 
important topic of reducing emissions from deforestation and 
degradation, and for inviting WWF to testify on the subject. WWF looks 
forward to continuing to work with the subcommittee, and with the full 
Committee on Foreign Relations, on this vitally set of important 
issues.

    Senator Menendez. Thank you, Mr. Hayes.
    Dr. Gurney.

   STATEMENT OF DR. KEVIN GURNEY, ASSOCIATE DIRECTOR, PURDUE 
CLIMATE CHANGE RESEARCH CENTER (PCCRC), PURDUE UNIVERSITY, WEST 
                         LAFAYETTE, IN

    Dr. Gurney. I would like to thank Senator Menendez and 
other members of the Senate subcommittee for inviting me here 
today to testify on matters of deforestation and climate change 
within the context of U.S. domestic policy and the 
international policy regime. I particularly thank Senator Lugar 
for his opening statement and including the Vulcan Project in 
his comments. It was an unexpected but pleasant surprise.
    The topic of deforestation within the broader umbrella of 
climate change policy intersects in complex ways with a number 
of scientific disciplines, including climate science, 
biogeochemistry, and ecological sciences. My written submission 
and comments today are an attempt to clarify some of these key 
intersections and, in doing so, assist the policy process as it 
considers deforestation as an element in greenhouse gas 
mitigation strategies.
    Deforestation is one of many carbon fluxes or transfers 
between the earth's surface and the atmosphere. After 
accounting for fossil fuel incident production emissions of CO2 
into the atmosphere and taking into account the now well-
quantified removal of CO2 from atmosphere by the oceans, the 
net exchange with the land-based biosphere remains a poorly 
understood portion of the overall budget. When satellite remote 
sensing is combined with ground-based observations and 
biosphere models, it is estimated that land use change, 
currently dominated by tropical deforestation, emits an amount 
of CO2 equivalent to one-quarter of that emitted by fossil fuel 
sources alone. This estimate, however, is not well quantified. 
It varies by almost 69 percent.
    Furthermore, in order to complete the atmospheric budget, 
the total of which is well constrained by precise atmospheric 
measurements, a large removal process must be at work. This 
removal process, which you can think of as sequestration or 
uptake, is understood to be occurring in the land-based 
biosphere and is removing almost one-third of the combined 
fossil and deforestation emissions. Originally referred to as 
the missing sink, which is a play on the phrase ``the missing 
link,'' this removal is now generally referred to as the 
residual flux.
    The reason I bring up this seemingly arcane piece of 
biogeochemistry is that this uptake is at work in many places, 
even in intact, mature tropical forests, the same forest 
regions that are under threat from deforestation.
    From the atmosphere's point of view, which is the point of 
view central to climate change, the total net flux emerging 
from tropical forests, which is the sum of deforestation and 
atmospheric removals, is what climate science ultimately must 
know. The distinction between these two fluxes is, therefore, 
somewhat misleading in that the estimated magnitude of one--
deforestation, for example--is actually dependent upon the 
estimated magnitude of the other.
    From the ecological perspective, however, the distinction 
between deforestation and residual flux uptake is crucial, as 
deforestation is distinct in its implications for biodiversity, 
regional climate, regional hydrology, and habitat. Tropical 
deforestation has emerged within the climate change policy 
discussions for a number of reinforcing reasons. It is a 
significant component of the overall net land-atmospheric flux 
and it is often the dominant source of greenhouse gas emissions 
for many tropical developing countries. For example, 84 percent 
of Indonesian greenhouse gas emissions in 2000 were due to 
deforestation. For Brazil, this number was 62 percent; for 
Malaysia, 81 percent. In terms of strict mitigation 
considerations, the deforestation flux is the first point of 
consideration for these and many other tropical countries.
    Deforestation has gained added momentum within the 
international negotiations due to the importance this topic 
holds for many other stakeholder communities such as those 
focused on biodiversity, cultural concerns, and socioeconomic 
interests. A number of proposals have been put forth on how to 
structure deforestation emission reduction targets within the 
international regime, and pending domestic legislation reflects 
this structure, for example, Senate bill 2191. Many suggest a 
baseline against which progress can be measured, recognize the 
need to create incentives for deforestation reductions, and 
have varying degrees of financial reward for selling credits 
accrued through deforestation rate reductions.
    The most obvious scientific question that emerges as these 
policy options are considered is the ability to accurately 
measure and monitor deforestation fluxes. Attempts have been 
made to quantify the level of uncertainty associated with 
deforestation carbon emissions. At the regional scale, such as 
for the Brazilian Amazon, these estimates are conservatively 
estimated to be on the order of 50 percent. Attempts to project 
what these uncertainties may be in a few years suggest a 
lowering to 16 percent. However, there are key caveats to these 
values and these caveats could, indeed, increase the present 
and future values of uncertainty in significant ways.
    It is important to note that the satellite measurement 
component of these uncertainties is typically the most 
accurate. Biomass estimation, forest structure, and other 
ground-based elements are the most uncertain and the most 
difficult to improve.
    The measurement difficulty emerges again when considering 
the establishment of baselines to measure deforestation 
progress because historical data is less comprehensive and 
accurate and current measurements establishing historical 
baselines is potentially error-prone. A series of additional 
difficulties emerge such as the considerable variations in 
deforestation fluxes from year to year, some initiated by 
processes beyond human control, the difficulties associated 
with additionality, the continuing concern over leakage, the 
recognition of forest degradation as a significant contributor 
to the total deforestation flux, and the challenges of 
verifying reported fluxes using independent techniques.
    These difficulties should not be construed as either 
insurmountable or a reason to delay consideration of policy 
options for crediting deforestation reductions. It is merely to 
establish what the current capabilities and knowledge are on 
this topic so that prudent policy choices can be made and 
policies structured with designed flexibility to progress as 
scientific knowledge improves.
    Whether or not current scientific knowledge is sufficient 
to support the current policy goals under discussion rests to a 
great degree on the implicit policy priorities. If the net 
radiative forcing of deforestation emission reduction is 
paramount, the current science on the net impact of 
deforestation on the atmosphere may be too limited and too 
uncertain to adequately support the aims of current proposals. 
If primacy is placed on tropical forest preservation, the 
potential cobenefit of lowered greenhouse gas emissions may not 
require a high level of scientific certainty and emphasis 
should be placed on those aspects that assess the phenomenon of 
deforestation with perhaps less emphasis on the net associated 
greenhouse gas emissions.
    Thank you very much, Mr. Chairman. That concludes my verbal 
testimony to this subcommittee.
    [The prepared statement of Dr. Gurney follows:]

  Prepared Statement of Dr. Kevin Robert Gurney, Associate Director, 
Purdue Climate Change Research Center (PCCRC), Purdue University, West 
                             Lafayette, IN

    This statement presents an overview of tropical deforestation 
within global carbon cycle science and how this science intersects with 
current and future policy. It begins by setting the large-scale 
features of carbon exchange followed by a more specific treatment of 
tropical deforestation. This scientific understanding is then placed 
within the context of current international policy discussions on 
deforestation reduction credits and potential U.S. policy with similar 
aims. I will review the relevant scientific knowledge in support of the 
proposed policy goals, highlighting uncertainties and scientific 
challenges.

                              THE CONTEXT

The Global Carbon Cycle
    The current budget of carbon dioxide (CO2) within the Earth's 
atmosphere continues to present challenges to quantification, 
particularly the portion that involves exchange between the terrestrial 
biosphere and the atmosphere. Table 1 presents the Intergovernmental 
Panel on Climate Change's (IPCC) recent review of the global carbon 
budget for the decade of the 1990s.1,2 The most precise 
budget element is the increase in atmospheric carbon. This increase 
amounts to 3.2 billion tonnes of carbon each year or 3.2 ``GtC/y.'' \3\ 
The emission of fossil fuel-derived carbon and that due to cement 
production is also relatively well-known at 6.4 GtC/y. Recent research 
into ocean exchange has improved that portion of the budget (an uptake 
of -2.2 GtC/y), leaving a final term in the budget: The net land-
atmosphere exchange which amounts to global net uptake of -1.0 GtC/y. 
You will note that the confidence regarding the magnitude of these 
large net fluxes around the planet increases, with the last term having 
an uncertainty of over 50 percent (a one sigma uncertainty).

                       TABLE 1.--IPCC REVIEW OF THE GLOBAL CARBON BUDGET IN UNITS OF GtC/YEAR WITH ONE SIGMA UNCERTAINTY ESTIMATES
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                1980s                                 1990s
                                                               ----------------------------------------------------------------------------   2000-2005
                                                                       TAR            TAR revised            TAR                AR4              AR4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Atmospheric increase..........................................  3.3    3.3    3.2    3.2     4.1  0.1
Emissions (fossil+cement).....................................  5.4    5.4    6.4    6.4     7.2  0.3
Net ocean-to-atmosphere flux..................................  -1.9   -1.8   -1.7   -2.2   -2.2  0.5
Net land-to-atmosphere flux...................................  -0.2   -0.3   -1.4   -1.0   -0.9  0.6
Partitioned as follows:
  Land use change flux........................................               1.7                1.4               n.a.                1.6          n.a.
                                                                    (0.6 to 2.5)       (0.4 to 2.3)                          (0.5 to 2.7)
  Residual terrestrial sink...................................              -1.9               -1.7               n.a.               -2.6          n.a.
                                                                  (-3.8 to -0.3)      (-3.4 to 0.2)                        (-4.3 to -0.9)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    It is this last term, the net exchange between the global 
terrestrial biosphere and the atmosphere, that is of particular 
relevance to tropical deforestation, climate change and policies aimed 
at their amelioration.
    The net land-atmosphere exchange is commonly defined as having two 
very important parts:

          (1) The ``land-use change'' flux, and
          (2) The ``residual'' flux.

    The first is an amount of carbon emission that is associated with 
readily observable phenomena at the surface and is nearly synonymous 
(in modern times) with tropical deforestation. This emission has an 
estimated magnitude for the 1990s of 1.6 GtC/y but with a large, 
uncertain range (0.5 to 2.7 GtC/y). This value is at the core of the 
oft-cited comment that tropical deforestation accounts for 
approximately 20 percent of global carbon emissions. However, it is 
worth noting that this is a poorly known quantity and more correctly 
ranges from 6 percent to 32 percent of global emissions.
    The residual flux, as it's name implies, is the uptake necessary to 
balance the well-constrained total budget. It is a phenomenon of 
considerable scientific research and profound importance to climate 
change and climate change policy.\4\ It is a very uncertain flux 
ranging from -4.3 to -0.9 GtC/y and it's magnitude is directly tied to 
the estimated magnitude of tropical deforestation. Were the estimated 
tropical deforestation to increase, the residual uptake would also 
increase (a larger net uptake value) in order to maintain the same 
total global budget.
    A series of hypotheses have been posited to explain this residual 
flux and include a combination of CO2 fertilization, nitrogen 
fertilization, climate variability/change, and human management with 
the mixture differing from place to place. It must be remembered that 
all net terrestrial biosphere fluxes are the balance of very large 
gross fluxes of over 100 GtC/y, due to the seasonal ``give and take'' 
of photosynthesis and respiration. Hence, isolating this residual flux 
is akin to searching for a ``needle in the haystack.''
    The separation of the net land-atmosphere exchange (into parts (1) 
and (2) above) is, in some ways, an intellectual convenience. Many of 
the processes in (2) above are thought to occur simultaneously with 
those in (1). For example, there is research that suggests net carbon 
uptake is occurring in mature, intact tropical forests. The implication 
is that countries with large tropical forests may have both 
deforestation and net uptake (CO2 fertilization, N fertilization, etc.) 
occurring within national boundaries.
    This distinction goes beyond simple academic curiosity. The 
atmosphere ``sees'' the total net flux--this is what drives the 
additional greenhouse gas forcing due to this large component of the 
atmospheric carbon budget. A portion of climate change forcing is due 
to deforestation. However, it appears that there are countervailing 
processes ameliorating the full carbon impact of the deforestation 
emissions.
    In addition to carbon emissions from tropical deforestation and the 
resulting addition to atmospheric CO2, tropical forests have a number 
of key interactions with the climate system that are poorly understood 
but recognized as being important at the large scale. For example, 
tropical forests act as crucial mediators of radiation transfer and 
water exchange between the tropical land regions and the atmosphere. 
Recent research has shown that large-scale deforestation/afforestation 
can have a cooling/warming influence of measurable magnitude relative 
to projected climate change.\5\ Furthermore, the impact of 
afforestation in the tropics is one of cooling while high latitude 
afforestation exacerbates climate warming.
    There is also research that indicates potential feedbacks between 
climate and forest function.\6\ For example, changes in forest cover 
could cause changes in local climate, particularly drying and warming 
resulting in a shift toward savannah or grassland ecosystems. This 
shift would transfer potentially large amounts of carbon to the 
atmosphere and act as a positive feedback between climate change and 
tropical forest integrity.
    It is important to keep in mind that this is a view of tropical 
forests that is necessarily from the climate science perspective. 
Tropical forests have additional importance when viewed from 
ecological, social, and economic perspectives. Policy options may 
include these other perspectives.
Tropical Deforestation
    The current estimates for tropical deforestation at the regional 
scale are arrived at through a variety of techniques such as satellite 
remote sensing, ground surveys, aircraft, flux towers, model estimation 
and inverse approaches. Many of these are used in combination, with 
each having particular strengths and weaknesses. When ordered by their 
carbon emissions magnitude (for the decade of the 1990s), the IPCC 
estimates the large tropical regions as follows:

          Tropical Asia: 0.8 GtC/y (0.4 to 1.1)
          Tropical America: 0.7 GtC/y (0.4 to 0.9)
          Tropical Africa: 0.3 GtC/y (0.2 to 0.4)

    When viewed next to the decade of the 1980s, all regions have 
exhibited increases in total deforestation carbon emission, though 
uncertainty is large. When examined as a year-to-year phenomenon, 
large-scale deforestation emissions exhibit considerable variability. 
For example, the Brazilian space agency has estimated the year-to-year 
variations in deforestation emissions to be as high as 30 percent.\7\
    At the individual country-level, the importance of deforestation as 
a share of total national emissions varies substantially among tropical 
countries. Table 2 lists many of the top greenhouse gas (GHG) emitting 
countries with the land-use, land-use change share quantified 
separately. Tropical countries are shown in italic.

    TABLE 2.--RANKED GHG EMISSIONS FOR THE YEAR 2000 WITH THE LULUCF
                         COMPONENT ISOLATED \8\
------------------------------------------------------------------------
                                      LULUCF       LULUCF      Percent
                                    (MtC eq) a   (MtC eq) b     LULUCF
------------------------------------------------------------------------
USA..............................       1779.7       -110.0            6
China............................         1336        -12.9            1
EU (25)..........................       1280.8         -5.7          0.4
Indonesia........................        834.5        699.5           84
Brazil...........................        604.4        374.5           62
Russia...........................        538.4         14.7            3
India............................        490.5        -11.0          2.2
Japan............................        365.1          1.2          0.3
Malaysia.........................          237        190.8           81
Canada...........................        201.9         17.6            9
Mexico...........................        165.8         26.4           16
South Korea......................        143.7          0.4          0.3
Ukraine x........................          141          0.0          0.0
Myanmar..........................        138.6        116.1           84
Australia........................        135.3          1.2          0.9
Iran.............................          122          2.3          1.9
South Africa.....................        113.1          0.5          0.4
Venezuela........................          104         39.3           38
Turkey...........................        102.8          5.7          5.5
Dem. Rep Congo...................        100.7         86.6           86
Zambia...........................         69.1         64.3           93
------------------------------------------------------------------------
a ``MtC eq''--million metric tons of carbon equivalent.
b Negative numbers indicate net uptake.
x No CH4 or N2O.

    The majority of the tropical countries have deforestation (which is 
nearly identical to LULUCF in these countries) as the dominant source 
of overall greenhouse gas emissions to the atmosphere. These numerical 
facts indicate why tropical deforestation has emerged as a top priority 
within the climate policy regime: Deforestation is large in the 
absolute global sense and it is often the dominant form of greenhouse 
gas emissions for many developing countries.
Current Policy Consideration
    The current emphasis within the international climate change policy 
realm is on constructing a post-2012 commitment structure in which all 
countries, including those in the developing world, would enter into 
some form of emission mitigation agreement. Because of the preceding 
analysis, the renewed interest in incorporating the developing world in 
future agreements, and the many dimensions of tropical forests, 
tropical deforestation has figured prominently in this discussion and 
is now taking a central role in international negotiations. 
Furthermore, because of lengthy discussion of deforestation in the 
negotiations around the first commitment period of the Kyoto Protocol, 
there is broad interest in structuring deforestation mitigation targets 
at the national level as opposed to the project or plot-scale.\9\
    A number of proposals have been put forth on how to structure 
deforestation emission reduction targets. All of these proposals, with 
one exception (to be discussed later), require determining some form of 
baseline for deforestation against which a target can be compared. 
These baselines can be constructed as historical averages or as 
projections into the future along a ``business as usual'' trajectory. 
Therefore, effort at reducing deforestation, below either the 
historical or projected baselines, constitute legitimate reduction 
effort.
    Many of the proposals also recognize the need to create incentives 
for deforestation reductions and have varying degrees of financial 
reward for selling credits when countries exceed certain mitigation 
thresholds. The supply of financing for these reductions are expected 
to come under a trading regime in which countries that face high 
mitigation costs purchase lower cost deforestation credits and thereby 
meet emission reduction goals.
    Similarly, Senate bill 2191 (America's Climate Security Act of 
2007), proposes mechanisms whereby the United States would allow a 
certain percentage of domestic mitigation to be met by ``carrying out 
forest carbon activities in countries other than the United States.''
    Both the international proposals and S. 2191 intersect in critical 
ways with the current scientific knowledge on deforestation and the 
carbon cycle.

                       CRITICAL SCIENTIFIC ISSUES

Measurement Uncertainties
    A recent study attempted a review of deforestation uncertainties 
when combining a cluster of measurement techniques at the national 
level.\10\ The authors conclude that current quantification of 
deforestation credits at scales approaching the national level (the 
estimate was prepared for the Brazilian Amazon), to be almost 50 
percent (2 sigma interval). This uncertainty accounted for current 
satellite capabilities, above-ground biomass, dead biomass, and below-
ground biomass estimation. The authors note that though seemingly 
large, this level of uncertainty is not fundamentally different from 
those recognized for the non-CO2 greenhouse gases, methane, and nitrous 
oxide, within current Annex I accounting.
    It is also important to note that this estimate does not explicitly 
include the difficulties associated with forest degradation and the 
spatial variability of biomass. Forest degradation is the loss of 
biomass and carbon within a forest system while still maintaining a 
sufficient forest canopy such that an area does not fall into a 
deforested category. Degradation is notoriously difficult to measure 
remotely and is estimated to constitute, for example, 2-25 percent of 
deforestation in the Brazilian Amazon. The variability of biomass is 
also a poorly quantified component of tropical forest inventories and 
similarly could increase this uncertainty should variation occur at the 
regional scale.
    The same study attempted to estimate future improvements in this 
uncertainty estimate and came to the conclusion that expected 
improvements in remote sensing and an anticipated halving of 
uncertainty in ground-level survey data would bring this uncertainty 
down to 16 percent. Once again, however, degradation and the spatial 
variability of biomass could potentially increase this uncertainty 
depending upon how much degradation occurs.

Baselines
    Many of the current international proposals under consideration in 
addition to S. 2191, borrow the precedent established in the first 
commitment period of the Kyoto Protocol for industrial emissions: 
Recommending deforestation reductions relative to a historical 
baseline. Some proposals suggest that deforestation mitigation be 
measured against a projected business as usual trajectory. From a 
scientific perspective, the biggest challenge is the establishment of a 
historical level of deforestation emissions given the fact that data 
availability and quality decreases as one moves back through the decade 
of the nineties and the eighties. The uncertainty associated with 
establishing a historical baseline can have implications for the 
functioning of an international trading regime. Should a baseline be 
set at a level mistakenly higher than actual deforestation levels, 
deforestation levels could potentially increase while at the same time 
offering up undeserved credits and leading to a net increase in 
atmospheric CO2. Should a level be set lower than actual deforestation, 
developing countries could find themselves having to purchase credits 
to cover their shortfall.

Isolating Deforestation or Not?
    Many of the techniques used to assess tropical deforestation are 
better suited, or result in less uncertainty, when used to estimate the 
total net flux between regional forest and the atmosphere. Inverse 
techniques, flux towers, and modeling efforts are less robust at 
isolating the deforestation component of the total net land-atmosphere 
exchange. Furthermore, as highlighted in the opening section of this 
paper, assessment of the total net land-atmosphere flux avails of the 
large-scale mass constraint of the global budget.
    Furthermore, the recognition that there is significant net uptake 
occurring in intact mature tropical forests will raise the possibility 
that developing tropical countries may wish to include that uptake in a 
national baseline estimate or target. There is precedent within the 
Kyoto Protocol for such net accounting and there is no reason to 
believe that it will not be an expectation for accounting in the 
tropical forest regions.
    This will raise a series of additional scientific/technical 
questions, however. An attempt to fulfill a ``full carbon accounting'' 
system requires significant institutional and technical capacity in 
addition to placing pressure on fundamental improvements in 
understanding the current residual flux.

Unforeseen Events/Interannual Variability
    Related to the previous issue of whether to isolate deforestation 
reductions as the creditable component or include other forest 
processes, is the issue of what constitutes a direct anthropogenic 
deforestation activity. For example, observational evidence indicates 
that strong El Nino/Southern Oscillation (ENSO) events are associated 
with biospheric carbon loss in many tropical land regions. In the 1997/
1998 ENSO event, much of this carbon loss in Tropical Asia was 
associated with fire. Estimates indicate that roughly 0.8 to 2.6 GtC/
year were emitted during the ENSO period due to fires, initiated by 
human activity, that in normal years would not cause significant carbon 
emissions. In the dry ENSO time period, these normally controllable 
fires grew to significant size, burning through deep peat forest land. 
This event also highlights the fact that both deforestation and the 
total net tropical land-atmosphere flux has significant variability. 
These variations can occur on timescales of a few years and remain a 
topic of considerable scientific research, as alluded to in the 
introductory section of this paper.

Permanence, Additionality, Leakage, Verification
    Both the international and domestic policy discussions raise a 
series of methodological issues that have direct scientific 
implications. All recognize the need for any biospheric crediting 
mechanism to attend to each of these important issues. They were 
discussed at length during the negotiations leading up to the 
finalization of the Marrakech Accords and have continued to be 
important issues as the negotiations consider a post-2012 policy and 
U.S. domestic legislation considers including tropical deforestation 
credits as a component of national greenhouse gas mitigation targets. A 
short definition of each is as follows:
    Permanence: The need to maintain and continuously guarantee the 
integrity of sequestered or set-aside carbon stocks.
    Additionality: The need to ascertain what is considered an activity 
(altered deforestation trajectory, sequestering carbon activity, etc.) 
additional to what would have occurred without climate policy.
    Leakage: The movement of deforestation from an area or country with 
a deforestation mitigation target to an area or country without such a 
limit. National targets are a recognized improvement over project or 
plot-level efforts but may still exhibit leakage should policies not 
apply across the tropical forest countries.
    Verification: Given the current measurement and monitoring 
challenges, what viable verification opportunities are there for 
deforestation?
    Degradation: An important, but difficult to quantify, portion of 
tropical forest demise.

                              CONCLUSIONS

    The quantification of tropical deforestation carbon emissions is 
intricately tied to the global carbon cycle due to the fact that it 
remains closely linked to the overall net land-atmosphere flux. The 
scientific understanding of tropical deforestation carbon emissions 
over scales larger than the plot level continues to evolve. Research 
has shown that in addition to tropical deforestation emissions, 
tropical forest regions are also likely sequestering carbon in intact, 
mature forests. This has significant implications for policy approaches 
that link reduced deforestation to an international carbon market.
    Measurement and monitoring uncertainties remain substantial and 
have been estimated to be almost 50 percent at the scale of the 
Brazilian Amazon. Degradation and the spatial variability of biomass 
content may further increase this estimation uncertainty. Though there 
is an expectation that this uncertainty will fall due to improvements 
in satellite remote sensing capabilities and better ground surveys, 
whether or not these uncertainty reductions are sufficient to support 
policy goals remains difficult to assess.
    A series of additional difficulties persist in the scientific 
discussions on this topic. These include the ability to establish 
unbiased baselines, the difficulties of large interannual variability 
and unforeseen events, biospheric carbon permanence, additionality, 
leakage, verification, and the challenges of including forest 
degradation.
    Whether or not current scientific knowledge is sufficient to 
support the policy goals being discussed for international policy and 
U.S. legislation, rests to a great degree on the implicit policy 
priorities. If the net radiative forcing of emission mitigation, be 
they industrial or biospheric, is paramount, the current science on the 
net impact of deforestation on the atmosphere may be too limited and 
too uncertain to adequately support the aims of current proposals. If 
tropical forest preservation is a priority, the potential cobenefit of 
lowered greenhouse gas emissions may not require a high level of 
scientific certainty and emphasis should be placed on those aspects 
that assess the phenomenon of deforestation with less emphasis on the 
net associated greenhouse has emissions.

----------------
References
    \1\ Denman, K.L. et al., Couplings Between Changes in the ``Climate 
System and Biogeochemistry in Climate Change 2007,'' The Physical 
Science Basis, contribution of Working Group I to the Fourth Assessment 
Report of the IPCC, 2007.
    \2\ ``Carbon'' as opposed to ``carbon dioxide (CO2)'' is the common 
unit used by biogeochemists in tracing the many parts of the earth 
system that influence atmospheric levels of CO2. A unit of carbon is 
equivalent to a unit of CO2 x (12/44).
    \3\ The atmosphere currently holds roughly 760 GtC of which roughly 
200 have been added since the onset of industrialization.
    \4\ The mechanisms responsible for the residual flux and their 
evolution in the future is a first-order uncertainty in climate change 
projections.
    \5\ See recent research by Bala, G. et al., Proceedings of the 
National Academy of Sciences, 104 (16): 655-6555.
    \6\ See Oyama M.D. and C. Nobre (2003), Geophysical Research 
Letters, 30 (23).
    \7\ Instituto Nacional de Pesquisas Espaciais (INPE) (2005) 
Monitoring deforestation in the Amazon from space, available at 
www.obt.inpe.br/prodes/.
    \8\ This data comes from World Resources Institute's Climate 
Analysis Indicators Tool
(http://cait.wri.org. While the absolute magnitudes contain 
uncertainty, the purpose here is to establish relative magnitudes and 
an ordinal relationship.
    \9\ Papua New Guinea and Costa Rica proposed to include addressing 
emissions from deforestation under the Climate Convention using a 
national emissions approach.
    \10\ Persson U. and C. Azar (2007), ``Mitig Adapt Strat Glob 
Change,'' 12:1277-1304.

                                 ______
                                 
           APPENDIX A: THE ``PRESERVATION PATHWAY'' APPROACH

    A recent proposal attempts to avoid some of the aforementioned 
technical difficulties, particularly those associated with estimating 
baselines.\1\ The approach, called ``Preservation Pathway'' combines 
the desire for forest preservation with the need to reduce emissions 
associated with forest loss by focusing on the relative rate of change 
of forest cover as the criteria by which countries gain access to 
trading preserved forest carbon stocks. This approach avoids the 
technically challenging task of quantifying historical or future 
deforestation emission baselines. Rather, it places emphasis on 
improving quantification of contemporary stocks and the relative 
decline in deforestation rates necessary to preserve those stocks. This 
approach places emphasis on the complete emissions trajectory necessary 
to attain an agreed-upon preserved forest and as such, meets both 
forest conservation and climate goals simultaneously.
---------------------------------------------------------------------------
    \1\ Gurney, K.R. and L. Raymond (2008), ``Carbon Balance and 
Management,'' 3(2), doi:10.1186/1750-0680-3-2. A copy is included as an 
attachment.

    [Editor's note.--The publication mentioned above could not be 
reproduced in this printed hearing. It will be retained in the 
permanent record of the committee. It can also be obtained at http://
---------------------------------------------------------------------------
www.cbmjournal.com/content/3/1/2.]

    Senator Menendez. Well, thank you, Dr. Gurney.
    Mr. Forrister.

STATEMENT OF DIRK FORRISTER, MANAGING DIRECTOR, NATSOURCE LLC, 
                         WASHINGTON, DC

    Mr. Forrister. Mr. Chairman and distinguished members of 
the subcommittee, it is a pleasure to join you today to discuss 
the potential for the emerging greenhouse gas markets to play a 
role in addressing the problem of deforestation.
    I am speaking to you today from a long history of 
involvement in the climate change policy debate. Earlier in my 
career, I served as counsel over on the House side to 
Congressman Jim Cooper of Tennessee who became interested in 
carbon trading policies in the late 1980s. He believed that a 
market-based approach to climate mitigation could attract 
bipartisan support in favor of legislation. Unfortunately, it 
has taken a little longer than we envisioned at that time.
    Back in the early 1990s, the primary examples of carbon 
offset activity were forest offset projects in the 
international arena that were sponsored by companies like AES, 
New England Electric, and the Los Angeles Department of Water 
and Power. It is interesting to me that these pioneering 
efforts have since been overtaken by a much larger global 
industry that has focused much more on other forms of carbon 
abatement than forestry. I recently returned to the United 
States after spending 5 years in my company's London office 
where I watched firsthand, as the global carbon market took 
off, and participated in the development of that market.
    So today I am appearing before you as a businessman on 
behalf of 179 members of the International Emissions Trading 
Association. These companies are all active in the 
international carbon market. The association includes industry 
and industrial giants like AEP, Duke, PG&E, AES, Shell, 
Chevron, DuPont, and Dow. It also includes many of the world's 
leading financial institutions like Merrill Lynch, Citibank, 
Goldman Sachs, J.P. Morgan, and Morgan Stanley. There are also 
a few of the smaller firms like the Chicago Climate Exchange 
and Natsource--my company--who participate as a part of this 
membership. And I do think the IETA membership is the backbone 
of today's carbon market.
    My company, Natsource, is active in this market as a fund 
manager. We are relatively small. We manage approximately $1.2 
billion in assets. These assets are entrusted to us on behalf 
of companies that are seeking compliance with laws for whom we 
build portfolios of credits from the clean development 
mechanism and the joint implementation mechanism of the Kyoto 
Protocol, and we also work on behalf of investors who seek 
financial returns from these markets.
    My company has invested in both U.S. and international 
forestry projects, but these investments are quite small. They 
represent less than 1 percent of the purchases we have made. I 
describe these projects in my written testimony. One of them is 
an afforestation project in Chile, and the other is an avoided-
deforestation project in California that we are investing in, 
believing that it may comply with the California emissions 
trading law.
    So what I am here to discuss today is how we could tilt our 
investment so that we could potentially invest even more in 
carbon sequestration. We and other members of IETA believe that 
the market should be able to invest in a much larger degree in 
this sector, but the reasons we do not are quite sensible. It 
is because the policy environment is not favorable enough to 
encourage us to go into forestry investments.
    And I will describe precisely why that is. Maybe I will 
start with the grounding of the type of policy that IETA 
supports in the emissions trading arena.
    First of all, the membership is united in our belief that 
markets are the most efficient way to address climate change 
and that free markets will ensure that scarce resources are 
deployed in a way that achieves the maximum amount of emission 
reductions at the lowest possible cost. We support policies 
that use allowance trading for covered sources but also allow 
the import of project-based offsets from facilities outside the 
capped entities. And we believe that the use of these offsets 
should be free and unlimited and that this could deliver 
significant cost savings to the U.S. economy in particular.
    We are already watching as in the international arena it is 
reducing compliance costs. The most recent numbers I could get 
my hands on were from 2006. We should have full 2007 data soon. 
But in 2006, European allowance prices averaged right around 
$22 a ton, and during that same period you could buy 
international offsets for less than $11 a ton. So it does 
demonstrate a pretty dramatic cost savings that is evident from 
use of offsets.
    I think EPA's recent analysis of the Lieberman-Warner 
legislation also bears this out. They have estimated that 
unlimited use of international and domestic offsets could 
reduce allowance prices by over 70 percent below the prices in 
the current bill. Our industry thinks those kind of savings are 
worth fighting for.
    We also believe that given the magnitude of the challenge 
posed by climate change, that a full range of policy tools 
should be used and that greenhouse gas markets are just one 
tool among many that could be valuable in this fight. That 
said, it is the most successful tool used on the globe to date 
for mobilizing capital into climate protection.
    We do believe that environmental integrity matters on 
offset projects but that there are rules that can be utilized 
to ensure environmental integrity and offsets, particularly in 
the area of sequestration.
    The way this market has developed, I think you all know 
that it has been largely driven by the Kyoto Protocol and the 
European emissions trading system. That scheme allows limited 
use of offsets, but it has a restriction on the use of 
forestry-related offsets. Avoided deforestation, as Ambassador 
Eizenstat noted, is not a project category allowed under the 
Kyoto Protocol at all, but there are two small slivers of 
forest protection that are allowed. One is afforestation, and 
the other is reforestation.
    Unfortunately, those types of projects are not allowed in 
the European emissions trading system. The national governments 
from Europe can purchase those types of reductions, but they 
have not done so in a very large way. So as a result, if you 
look at the databases of available credit supplies from various 
types of abatement strategies, forestry-related projects 
represent less than 1 percent of the total credits transacted. 
This sector could do a whole lot more if the credits were 
permitted to be used more fungibly with other types of 
commodities in the global carbon market.
    Just to give you a sense of the size, Natsource's advisory 
research unit took a look at it, and in looking at the 
literature available on this, it looks like somewhere between 
15 and 75 gigatons of additional supply could be brought to the 
market from avoided-deforestation, if those units were allowed 
to be fungible in the international market. Those could reduce 
the overall compliance costs by 40 percent.
    Just to give you some flavor of the international carbon 
market, it has been growing rapidly in the last few years. In 
my written testimony, you will find three charts that sort of 
sum it up. Last year that market globally was worth just under 
$60 billion. I think our estimate is $59 billion in total. 
United States companies, I should say, are active in this 
market, as a number of United States companies have assets in 
Europe where they are forced to comply with the European law. 
There are also numerous U.S. financial, legal, and service 
firms active in this market.
    It trades mostly in European allowances, the primary 
instrument traded, and of the $59 billion that I mentioned, 
roughly $41 billion of that represented EU allowance trades. 
The balance of the investment mobilized by that market was in 
clean development mechanism projects worth over $17 billion 
last year. There was a little bit of investment also in a type 
of credit that can be created in the countries of the former 
Soviet Union, but they were less than $1 billion in investment 
last year. I expect that segment will grow.
    In terms of policy recommendations going forward, I have 
already described the limitations on use of forestry-related 
offsets in Europe has really caused a chilling effect on this 
particular market segment, and the shortcomings of the Kyoto 
Protocol, an area of avoided-deforestation, has also chilled 
investment in those types of assets.
    So looking at that policy framework, we would have three 
recommendations for your consideration in the policy arena.
    First of all, a major goal of the design of the post-2012 
project-based mechanisms internationally should be to 
significantly increase investment in forestry-related 
activities and avoided-deforestation in particular. In addition 
to its environmental importance, forest sequestration could be 
a particularly important category for countries and regions of 
the world that are currently not attracting very much 
investment from the CDM, such as sub-Saharan Africa. Designing 
the mechanisms to increase the level of forest sequestration 
projects is one way to improve the global and regional 
distribution of investment.
    Second, U.S. Federal policy should authorize the use of 
international carbon offsets and forestry-related offsets in 
particular as a key tool to control costs of complying with 
emissions targets here. Proposals that include quantitative 
limits or restrictions on the use of forestry-related credits 
for compliance would only increase the costs of the program and 
create market distortions.
    Third, U.S. policy should also support reforms in the 
project-based mechanisms so that they work better. It is not 
easy to get projects approved through the clean development 
mechanism. It is quite a rigorous regime. It is a confusing 
regime, and it could be improved so that it works swiftly and 
efficiently and reliably in producing these assets.
    In the future, we hope that these markets continue to grow, 
and we in the international emissions trading community stand 
ready to assist you as you consider policy alternatives 
involving our sector and the global fight against deforestation 
and climate change.
    Thank you very much.
    [The prepared statement of Mr. Forrister follows:]

Prepared Statement of Dirk Forrister, Managing Director, Natsource LLC, 
                             Washington, DC

    Good morning, Mr. Chairman and members of the committee. Thank you 
for inviting me to testify on this important subject. My name is Dirk 
Forrister, and I am managing director of Natsource LLC, an 
environmental asset management company headquartered in New York City 
with offices in Washington, DC, South America, Europe, Japan, and 
Canada. My testimony will address the potential for greenhouse gas 
emissions trading markets to help combat the problem of deforestation.

    In my remarks today, I will discuss Natsource's experience with:
   Forestry-related carbon offsets;
   The context of today's international carbon markets;
   The minor role that forestry projects currently play in that 
        market;
   The barriers that limit the role of forestry in the effort 
        to address climate change; and
   The potential for improving policy in the future 
        international policy regime to enhance forest protection.

                               NATSOURCE

    Natsource is deeply involved in the international carbon markets on 
behalf of our clients. We are a leading environmental asset management 
firm and currently have approximately $1.2 billion in assets under 
management. This capital is used to purchase greenhouse gas (GHG) 
compliance instruments on behalf of industrial emitters that are 
required to reduce their GHG emissions, and GHG reductions and other 
environmental commodities on behalf of return investors. Natsource 
Asset Management LLC is a registered investment advisor with the 
Securities and Exchange Commission. Our staff is comprised of experts 
that have helped to develop the policies that created emissions markets 
and others that have participated in some of the first and largest 
transactions in the GHG market. New Energy Finance, a leading 
independent analytical service recently ranked Natsource as the largest 
purchaser of carbon credits (on a risk adjusted basis) in the world. We 
attach a press release that communicates this award for the record. We 
have entered into contracts of over $1 billion for these assets.

              INTERNATIONAL EMISSIONS TRADING ASSOCIATION

    I am also testifying today as a representative of the International 
Emissions Trading Association (IETA), a trade association representing 
179 industrial, financial, and service companies who are active in 
emissions markets and greenhouse gas emissions trading policy 
development around the world. IETA is the leading international 
organization that has participated in the development of GHG markets. 
Natsource is a longstanding member of IETA, and I currently serve as 
the chairman of IETA's Clean Development Mechanism (CDM) Working Group 
as well as its Market Oversight Committee. Jack Cogen, Natsource CEO 
currently serves as IETA's chairman.

 MARKETS ARE THE MOST EFFICIENT POLICY TOOL TO ACHIEVE CLIMATE POLICY 
                               OBJECTIVES

    Natsource and IETA support the use of emissions trading to address 
the problem of climate change. We are united in our belief that markets 
are the most efficient way to address climate change. Free markets will 
ensure that scarce resources are deployed to achieve the maximum amount 
of emission reductions at the lowest possible cost. We support policies 
that authorize allowance trading for covered sources, the creation of 
project-based reductions (sometimes called ``offsets'') from uncapped 
facilities, and the use of offsets by regulated firms to comply with 
emissions targets. Natsource and IETA members believe that these 
policies will reduce the cost of climate protection. There should be no 
quantitative or qualitative limits imposed on the use of these markets 
for compliance. Such arbitrary limits only increase costs, diverting 
resources from investment necessary to achieve other societal 
objectives. Given the magnitude of the challenge posed by climate 
change, we believe that all policy tools should be used. Ultimately, a 
portfolio of actions is required to achieve long-term climate 
protection. We do not believe that greenhouse gas emissions markets are 
an end unto themselves, but are a key tool to mobilize capital required 
to assist and facilitate a cost-effective transformation to a lower 
carbon emitting economy.
    We believe that policies can be developed that ensure the 
environmental integrity of carbon offset projects. Specifically, 
offsets created by forestry are a key asset in the effort to mitigate 
climate change. As you know, stabilizing concentrations of GHGs in the 
atmosphere at levels under discussion will cost trillions of dollars 
through the 21st century and ultimately requires the transformation of 
the energy system. Sequestration of carbon dioxide from the atmosphere 
in the near term is essential while society is attempting to create the 
advanced energy technologies which are not yet economically competitive 
but which are essential to achieving the steeper reductions later in 
the century to achieve long-term climate policy objectives. We also 
believe that policies can be designed to guard against potential events 
which would reverse the benefits of forestry offsets. These are events 
such as fires or floods.
    Finally--and of particular importance to today's discussion--as 
governments find ways to strengthen and improve the international 
policy regime to address climate change, IETA's members strongly 
support broadening the carbon offset market to include new asset 
classes, such as those that would award credits for avoided-
deforestation.

                             DEFORESTATION

    Deforestation in developing countries is currently the second 
largest source of human greenhouse gases, representing about 20-25 
percent of global GHG emissions.\1\ According to the Food and 
Agriculture Organization, global deforestation was estimated to be 7.3 
million hectares per year in the period 2000-2005.\2\ However, because 
of concerns about additionality, permanence, and leakage, avoided-
deforestation was excluded from the CDM.
---------------------------------------------------------------------------
    \1\ Skutsch et. al, ``Clearing the Way for Reducing Emissions From 
Tropical Deforestation,'' Environmental Science & Policy, 10 2007, p.1.
    \2\ http://www.fao.org/forestry/foris/data/fra2005/kf/common/
GlobalForestA4-ENsmall.pdf.
---------------------------------------------------------------------------
    We are following with interest proposals that would authorize the 
creation of offsets from avoided-deforestation, such as Reduced 
Emissions from Deforestation and Degradation (REDD) championed by Papua 
New Guinea. We believe that credible, verifiable, and environmentally 
effective rules can be established to govern the creation of emissions 
offsets from avoided-deforestation projects. These projects would 
provide major benefits to host countries and investors in addition to 
benefiting the climate system.

Natsource's Experience With International Forestry Offsets
    Natsource believes that offsets created by forestry are a key 
policy tool in the portfolio of actions to address climate change. 
Natsource Asset Management LLC (NAM) has invested in both domestic U.S. 
forestry offsets and international offset projects on behalf of its 
investors as part of its portfolio of GHG assets. NAM is making these 
investments because we believe that they are good investments but also 
to provide policymakers with the confidence that such projects will 
provide permanent and enduring benefits. Ultimately, investment is 
required to build such confidence. However, forestry-related reductions 
comprise less than 1 percent of NAM's portfolio, due to policy 
restrictions on their use. We have not invested in avoided-
deforestation projects because they are not currently usable for 
compliance in any governmentally sanctioned emissions trading system.
    In Chile, NAM invested in the Nerquihue afforestation project, 
where open land will be converted into a forest by planting trees to 
sequester carbon. The project is comprised of 12 small-scale 
afforestation projects. The project developer has partnered with the 
individual landowners at the project sites and will act as the project 
entity.
    This project includes the use of advanced forestry technology. 
Until the 1990s, the project site land was used for intense agriculture 
and pasture. It is relatively remote and hilly, which hinders the use 
of mechanized land tending and planting. In addition, the project area 
for the plantings is extremely dry and lacks natural seed sources. 
Forest establishment using traditional planting techniques has a high 
chance of failure due to these dry conditions, and is expensive due to 
typical mechanized planting techniques. As a result, the project 
developer will use advanced North American tree inoculation technology 
that will improve the likelihood that the seedlings will prosper. It is 
expected to generate around 470,000 Temporary CERs (tCERs) from 
inception until 2012. This type of unit can be produced under the Kyoto 
Protocol through reforestation or afforestation projects, but is of 
less compliance value because the credits must be replaced in the 
following compliance period.
    In February 2008, Natsource purchased 60,000 tons of carbon 
emissions reductions on behalf of its clients from a private forest 
owner represented by the Pacific Forest Trust. The emissions reductions 
were created through sustainable forestry on a permanently conserved 
property in California. This project illustrates the significant role 
that management of existing forests in the United States can play in 
addressing climate change. The transaction is the first commercial 
delivery of certified emissions reductions under the Forest Protocols 
adopted last fall by the California Air Resources Board (CARB). The 
Protocols are the first rigorous governmental accounting standards in 
the U.S. for climate projects embracing forest management and avoided-
deforestation, while ensuring emissions reductions are real, permanent, 
additional and verifiable. We have attached the press release 
announcing this transaction for the record.
    We view these domestic and international transactions as small 
initial steps in what we hope to be more vibrant involvement in 
forestry-related offset projects in the future. For that to occur, a 
more favorable market and regulatory climate is urgently needed.

International Market Context
    Greenhouse gas markets or the ``carbon market'' as it is known to 
some are evolving and will continue to mature over the next several 
years. We believe that capital is available to finance activities that 
reduce deforestation if clear rules are put in place that govern the 
creation and use of offsets from such activities.
    Driven by companies seeking to comply with greenhouse gas emissions 
targets in Europe and Japan, the international carbon market grew to 
$59 billion in size last year. (The graphic below illustrates market 
growth since 2005 and provides data sources.) This market includes 
trading in several types of compliance instruments, which can be 
categorized generally as either allowances or project-based reductions. 
The latter category includes Certified Emission Reductions (CERs) 
created by the Kyoto Protocol's Clean Development Mechanism (CDM) 
projects as well as Emissions Reduction Units (ERUs) created by its 
Joint Implementation (JI) provisions. Within the CDM, two other types 
of offset can be created for afforestation and reforestation projects 
(sometimes referenced as ``Land Use and Land Use Change and 
Forestry''--or LULUCF). However, these mechanisms do not award CERs for 
avoided-deforestation. Allowance transactions comprised $41 billion of 
this traded value and offsets accounted for the remaining $18 billion.


    Although the CDM has been criticized by some from the environmental 
and investor community, it has stimulated billions of dollars in 
investments that reduce GHG emissions in developing countries and 
reduced regulated firms' costs to comply with emissions targets. CERs 
and ERUs are generally available at much lower prices than EU 
allowances, given the lower cost abatement opportunities in developing 
countries and economies in transition. In 2006, the average price of an 
EU allowance was approximately $22.10 per tonne, while the average 
price of a CER was $10.90 per tonne. Given this price differential, 
many European companies have used CERs and ERUs as important components 
of their strategy to comply with emissions targets. In addition, Japan 
has been a large buyer of these assets given that they are cheaper than 
the cost of reductions that can be achieved in Japan. Many of the U.S. 
members of IETA with installations regulated in Europe have purchased 
these assets in recognition of the important role that offsets play in 
controlling the costs to comply with emissions targets in Europe's 
trading system. IETA supports the inclusion of provisions in U.S. 
climate legislation that would authorize the use of international 
offsets to comply with emissions targets. Compliance costs will be far 
higher without the use of such assets.
    Recent analysis by EPA of the Lieberman-Warner legislative proposal 
concludes that ``the use or limitation of offsets and international 
credits has a larger impact on allowance prices than the modeled 
availability or constraint of key technologies.'' \3\ The analysis 
assumes that international offsets (rather than international 
allowances) will be allowed up to a 15-percent cap. It finds that 
eliminating the use of international credits, while still allowing 
domestic offsets up to the 15-percent cap, would increase allowance 
prices increase by 34 percent. If domestic offsets and international 
credits are not allowed, then allowance prices would increase by 93 
percent. This translates into additional costs to GDP of $314 billion 
in 2020. Analysis by New Carbon Finance--which assumes that the bill 
will only allow use of international allowances, and not international 
credits--obtained similar results. It estimates that if the Lieberman 
Warner legislation was modified to allow international offsets up to 15 
percent of the allocated amounts, prices would decrease by 60 percent 
in the period up to 2015 and by 44 percent by 2020.\4\
---------------------------------------------------------------------------
    \3\ U.S. Environmental Protection Agency, ``EPA Analysis of the 
Lieberman-Warner Climate Security Act, S. 2191 in 110th Congress,'' 
March 14, 2008, http://www.epa.gov/climatechange/downloads/
s2191_EPA_Analysis.pdf.
    \4\ New Carbon Finance, ``North America White Paper--February 
2008.''
---------------------------------------------------------------------------
    As mentioned previously, the global carbon market includes trade in 
both allowances and project-based offsets. In 2007, the $17.1 billion 
in traded offset value consisted of CERs, created by CDM projects. (It 
does not include additional, but much smaller, trade in ERUs created 
from JI projects in countries with economies in transition--Russia, 
Ukraine, and countries in Eastern and Central Europe.) Given policy 
restrictions on the use of forestry-related offsets, the World Bank 
identified that only 1 percent of the traded volumes of offsets in 2006 
occurred in agriculture and forestry projects.\5\ As of March 5, 2008, 
there were 3,082 projects in the CDM pipeline, with a headline volume 
of over 2.5 billion tonnes through 2012.\6\ In the Afforestation and 
Reforestation catagories, there are 17 projects identified, which in 
turn are expected to produce under 7 million tonnes through 2012.\7\
---------------------------------------------------------------------------
    \5\ World Bank, ``State and Trends of the Carbon Market 2007,'' May 
2007.
    \6\ UNEP RISO Center, http://www.uneprisoe.org.
    \7\ Ibid.
---------------------------------------------------------------------------
    The reason for the lower degree of market interest in forestry-
related offset projects is the restrictive policy environment that 
exists for such projects.
Policy Drivers for International Carbon Markets
    The international carbon market was created by a set of policies 
that formed the essential elements of supply and demand, which are 
discussed below. The market demand is driven primarily by compliance 
requirements of the group of developed countries that ratified the 
Kyoto Protocol and the programs they put in place to implement 
compliance with their obligations. The supply of and demand for 
forestry-related credits is driven by rules as to whether they can be 
used for compliance and others governing their creation.
    The Kyoto Protocol authorized the creation of two main types of 
project-based offsets, CERs and ERUs. It incorporated these mechanisms 
to enhance sustainable development, to transfer technology, capital and 
services from developed to developing countries and transition 
economies, and to reduce compliance costs for developed country 
governments and private firms required to meet GHG emission reduction 
targets. Under the CDM, developed countries and firms invest in 
project-based activities in developing countries and use the carbon 
offsets created by these investments to comply with their GHG emissions 
targets. With limited exceptions, CERs of 2000-2012 vintage can be used 
for compliance with emissions targets in countries that are parties to 
the Kyoto Protocol. This gave companies the ability to generate and 
transact early reductions in advance of the Kyoto Compliance period and 
provided an incentive for developing countries to participate in the 
global effort to address climate change. Natsource Advisory and 
Research estimates that there are 2.9 billion tonnes of demand from 
Japan, the European Union and New Zealand.
    The European Union adopted the Emissions Trading Scheme (EU ETS) in 
2004 as a key element of its strategy to comply with its Kyoto 
obligations. It requires emissions cuts from over 10,000 large emitting 
installations across Europe--including heat and power plants, steel 
mills, oil refineries, chemical plants, paper mills and other heavy 
industries. Reductions are required in two phases and cover 
approximately 45 percent of the continent's CO2 emissions. Regulated 
installations can meet their targets by tendering allowances or 
project-based offsets with limited exceptions to Member States. 
Companies in the ETS face stiff penalties if they fail to comply. In 
order to provide a disincentive for noncompliance, installations will 
be fined EUR 100 per tonne for emissions in excess of their targets, in 
addition to having to pay back each tonne of overage.
    The European Union adopted the ``Linking Directive'' in 2005. It 
allows installations in the ETS to use CERs and ERUs for compliance up 
to quantitative limits set by Member States (so called 
``Supplementarity Limits''). It prohibits use of forestry-related 
offsets and restricts use of credits from large hydropower projects.
    Despite the restrictions on use of forestry-related credits in the 
ETS, there is some market potential for these instruments in Europe 
from national purchasing programs. In order to meet the Kyoto targets, 
a number of EU Member State governments have adopted purchasing 
programs for CERs and ERUs that may include forestry-related 
instruments. To give a sense of the potential scale of purchasing by 
these sovereigns, Natsource Advisory and Research estimates that EU 
Member State governments will need to reduce emissions by about 0.55-
0.95 billion tonnes over the Kyoto period based on current emissions 
trends and measures that are already in place. These reductions must be 
achieved through national purchases or other policies and measures for 
noncovered sectors (transportation, commercial and residential 
emissions).
    The other primary source of demand for CERs and ERUs is Japan. 
Natsource Advisory and Research estimates that Japan is approximately 
740 million tonnes short of its Kyoto targets over the 5-year Kyoto 
period based on current emissions trends and measures in place. At 
present, 40 key emitting economic sectors in Japan have entered into a 
set of voluntary agreements with the Government to cut emissions, and 
they are allowed to use CERs and ERUs to meet those commitments. 
Japanese industry is allowed to import forestry-related CERs, which has 
stimulated some Japanese private sector interest in this asset class.
    In addition to these demand considerations, the Kyoto Protocol and 
the CDM Executive Board have influenced the development of supply of 
forestry-related carbon offsets. The parties to the Kyoto Protocol 
struggled for several years to develop guidelines for LULUCF projects 
under the CDM, ultimately reaching agreement in Milan at the 9th 
Conference of the Parties to the U.N. Framework Convention on Climate 
Change in 2003. The COP 9 Decision created two types of temporary 
credits that address concerns about impermanence of the reductions. 
However, the rules governing the creation and use of these offsets are 
difficult to understand, and they create units that must be replaced in 
the next compliance regime. The complexity of these systems and the 
limited compliance value of the offsets have created limited market 
interest in them.
    Even apart from its treatment of forestry-related projects, the CDM 
can be characterized as a complex system. IETA is developing a proposal 
for improving the overall regulatory approach to the CDM for the post-
2012 period. We believe that the CDM's current approach to ensuring 
environmental integrity imposes significant costs and uncertainty on 
investors, which in turn has adversely limited the mechanism's 
potential to mobilize the volumes of capital that will be ultimately 
required to address climate change. IETA members recognize that the CDM 
has made a significant contribution to learning and has created major 
benefits. However, we do believe the mechanism can be reformed to 
influence an even greater level of investment in the future. We believe 
that improvements are needed to influence trillions of dollars of 
large-scale investments in the future that are needed to meet global 
energy demand, and that will determine in large part whether long-term 
atmospheric GHG concentration targets can be achieved. We are also 
interested in providing our views on how the U.S. can learn from CDM in 
the development of domestic legislation.

Policy Improvements to Tap Carbon Markets to Avoid Deforestation
    Forest sequestration--particularly avoided-deforestation--is 
potentially an important contributor to GHG reductions and to 
controlling costs of achieving atmospheric concentration targets. 
Carbon markets could assist in achieving forest-related reductions, if 
policies in the U.S., Europe, Japan, Canada, and others were crafted to 
permit use of this asset class in compliance with emissions limits.
    Avoided deforestation projects could provide a substantial share of 
supply for the international market, if policies were more favorable. 
Of the two models cited in the IPCC report that consider forest sinks 
as a category, one model (IMAGE) estimates that they will make the 
second-largest contribution to cumulative emission reductions in the 
short-term, from 2000-2030, with approximately 15 GtCO2e. Another study 
focusing on forest sequestration concludes that forest sequestration 
can account for an even larger share of global abatement--one that is 
in proportion to tropical deforestation's large (25%) share of global 
anthropogenic GHG emissions. The study estimates that forests can 
sequester as much as 75 GtC (i.e., 275 GtCO2e) cumulative to 2050, or 
approximately one-third of total abatement.\8\ This would result in an 
estimated reduction in the price of carbon of 40 percent by 2050.\9\
---------------------------------------------------------------------------
    \8\ ``Forestry and the Carbon Market Response to Stabilize 
Climate,'' M. Tavoni, et al., Fondazione Eni Enrico Mattei, Working 
Paper 2007.15, 2007, http://ideas.repec.org/p/fem/femwpa/2007.15.html. 
As a source for the 25-percent figure, the report cites Houghton, R.A., 
2005. ``Tropical Deforestation as a Source of Greenhouse Gas 
Emissions,'' in: Mountinho, P., Schwartzman, S. (Eds.), ``Tropical 
Deforestation and Climate Change.'' IPAM: Belem, Brazil and 
Environmental Defense: Washington, DC, pp. 13-21.
    \9\ Ibid.
---------------------------------------------------------------------------
    In light of the importance of forest sequestration for achieving 
environmental and economic objectives, we would make the following 
recommendations for your consideration:
    1. In the international arena, a major goal of the design of the 
post-2012 project-based mechanisms should be to significantly increase 
investment in forestry-related activities and avoided-deforestation in 
particular. In addition to its environmental importance, forest 
sequestration could be a particularly important category for countries 
and regions that currently are attracting less CDM investment, such as 
sub-Saharan Africa. Designing the mechanisms to increase the level of 
forest sequestration projects is one way to improve the regional 
distribution of investment.
    2. U.S. federal policy should authorize the use of international 
carbon markets, and forestry-related offsets in particular, as a key 
tool to control costs of complying with emissions targets. Proposals 
that impose quantitative and qualitative limits on the use of markets 
for compliance will increase costs and create market distortions.
    3. U.S. policy should support reforms to the project-based 
mechanisms in the international negotiations to develop a successor 
agreement to the Kyoto Protocol designed to ensure environmental 
integrity while attempting to mobilize larger volumes of capital. This 
system should provide a more reliable, predictable approach to asset 
creation that will help stimulate greater amounts of investment in 
emissions mitigation projects around the world.
    In the future, we expect that international carbon markets will 
continue to grow as the international community negotiates a successor 
agreement to Kyoto and as nations implement policies to achieve their 
climate goals. IETA members believe that international emissions 
markets must play a key role to assist governments in meeting their 
emissions targets in a cost-effective manner. In order for the market 
to truly realize this ambition, it is important to include the widest 
range of emission reduction and sequestration strategies in the set of 
eligible activities for offset creation.
    In conclusion, Mr. Chairman, we appreciate the opportunity to 
testify about the potential for emissions markets to be tapped for 
protecting the world's forests. As you consider policy alternatives for 
advancing this objective, we stand ready to assist you.
                                 ______
                                 

   Press Release of The Pacific Forest Trust and Natsource Announce 
  Landmark Transaction of First Forest-Based CO2 Emission Reductions 
          Certified Under California Rules--February 11, 2008

    New York, NY, and San Francisco, CA.--The Pacific Forest Trust 
(PFT) and Natsource Asset Management LLC (Natsource) announced today 
the completion of a landmark transaction of certified forest 
carbondioxide (CO2) emissions reductions. Natsource, a leading 
emissions and renewable energy asset manager, bought 60,000 tons of 
carbon emissions reductions on behalf of its clients from a private 
forest owner represented by PFT. The emissions reductions were created 
through sustainable forestry on a permanently conserved property in 
California. This deal illustrates the significant role that management 
of existing forests can play in addressing climate change. The 
transaction is the first commercial delivery of certified emissions 
reductions under the Forest Protocols adopted last fall by the 
California Air Resources Board (CARB). The Protocols are the first 
rigorous governmental accounting standards in the U.S. for climate 
projects embracing forest management and avoided-deforestation, while 
ensuring emissions reductions are real, permanent, additional and 
verifiable.
    ``Today marks a significant milestone for the recognition of the 
real benefits of conserving and managing U.S. forests to enhance their 
climate contributions,'' announced PFT president Laurie Wayburn. 
``Investing in the power of forests to protect our climate is a 
practical action that can and should be taken now to reduce CO2 in our 
atmosphere. We are hoping that deals like this will provide 
policymakers around the world with the confidence they need to ensure 
that forestry becomes part of the solution to address climate change.''
    CARB's leadership in adopting the Forest Protocols is helping to 
stimulate a new asset class in global GHG emissions markets, validating 
forests as a cost-effective means to achieve real GHG reductions. The 
Forest Protocols, which are administered by the nonprofit California 
Climate Action Registry (CCAR), can be used as a model to ensure that 
forests be used to achieve enduring benefits and become a solution in 
the fight against climate change.
    ``Until now, forest sequestration has been an untapped asset in the 
effort to address climate change,'' said Jack Cogen, Chief Executive 
Officer of Natsource. ``Forestry can and should be an important part of 
the portfolio of climate change solutions moving forward. This deal 
illustrates that when rigorous, clear rules are adopted, these 
investments can reduce costs for our compliance customers and provide 
what we believe are attractive investment opportunities. Natsource 
participated in this transaction because it complied with California's 
rigorous standards, and we believe that this will ensure that the 
sequestration will provide enduring environmental and economic 
benefits.''
    The CO2 emissions reductions purchased by Natsource clients were 
created by PFT's Van Eck Forest Project, in Humboldt County, CA, that 
uses the CO2 storage capabilities of a working redwood forest. Owned by 
the Fred M. Van Eck Forest Foundation, the 2,200-acre forest is 
permanently protected by a conservation easement. It is managed by the 
Pacific Forest Trust to increase carbon stores, restore biodiversity 
and produce sustainable timber supplies.
    The revenue from the purchase of some of the emissions reductions 
already generated by this project will help finance the ongoing forest 
stewardship activities that will enable the forest to remove an 
estimated 500,000 more tons of CO2 from the atmosphere than would 
otherwise occur over the next 100 years--all while still supplying 
substantially the same volume of wood products from the property that 
would have been harvested under conventional management. Carbon 
sequestration is enhanced on the Van Eck Forest by preventing business-
as-usual logging of all the substantial volume of standing timber on 
the property and by ensuring that selective harvest practices remove 
less timber volume than is grown, allowing carbon stores to permanently 
increase.
    The project's emissions reductions are calculated using the 
scientific accounting standards of the Forest Protocols, based on a 
detailed inventory of the forest and the effects of management 
parameters secured by the permanent conservation easement. These 
calculations have been registered with CCAR after independent third 
party certification by SGS, the world's leading inspection, 
verification, testing and certification company, working with 
Scientific Certification Systems, the leading U.S. forestry 
certification company. Project data is available to the public from 
CCAR.
    ``Dangerous levels of CO2 in our atmosphere are the result of 
fossil fuel combustion and forest loss,''continued Wayburn. ``To 
successfully stabilize our climate, we must address both sources. 
Preventing forest loss and increasing net sequestration through 
projects that meet rigorous standards, such as those in California, can 
secure lasting emissions reductions.''
    As the first asset manager to purchase Van Eck Forest emissions 
reductions, Natsource joins an impressive group of climate leaders that 
have invested in the power of working forests through the Van Eck 
Forest Project, including U.S. House Speaker Nancy Pelosi, California 
Governor Arnold Schwarzenegger, California Assembly Speaker Fabian 
Nunez (D) and California Environmental Protection Agency Secretary 
Linda Adams.
    ``I applaud Natsource for investing in the long-term climate 
benefits of California's forests. Natsource's leadership shows that 
global capital will flow to projects that meet rigorous international 
standards reducing emissions of CO2,'' commented Mary Nichols, Chairman 
of the California Air Resources Board, the lead agency for implementing 
the state's Global Warming Solutions Act.
                                 ______
                                 

Natsource Recognized as World's Largest Purchaser of Carbon Credits by 
                     Leading Investor Research Firm

 ANNUAL MARKET SURVEY BY NEW ENERGY FINANCE CITES NATSOURCE COMMITMENT 
                         IN LARGE TRANSACTIONS

    New York, NY, March 6, 2008.--Natsource, a leading environmental 
asset manager, today announced it was named the largest buyer of 
contracted carbon credits by New Energy Finance in its annual survey of 
activity in the renewable energy and low-carbon sectors. Natsource 
acted as a principal on behalf of its clients. The report noted that 
Natsource has contracted for over 100 million credits from Clean 
Development Mechanism (CDM) and Joint Implementation (JI) projects. 
These credits were contracted for in Emission Reduction Purchase 
Agreements in excess of $1 billion.
    ``We are pleased to be recognized for the work we have done in the 
growing carbon market on behalf our compliance customers and return 
investors,'' said Richard Rosenzweig, Chief Operating Officer of 
Natsource. ``Natsource will continue to be a leader in the EU and Kyoto 
markets and we look forward to bringing our expertise to the evolving 
U.S. market.''
    New Energy Finance, based in London, is a leading independent 
provider of research to investors in renewable energy, biofuels, low-
carbon technologies and the carbon markets. Its annual survey on 
activity in the carbon markets has been published since 2005. The 
ranking methodology used by New Energy Finance includes only those 
projects for which credits have been contractually committed for 
purchase by the principal.
    Natsource's Asset Management Unit is a leading environmental asset 
manager, with a principal emphasis on greenhouse gas markets. It is 
comprised of the Greenhouse Gas Credit Aggregation Pool (GG-CAP), 
private investment vehicles and a series of managed accounts. GG-CAP, 
whose participants include some of the largest power, energy and 
manufacturing firms, uses its participants' capital to purchase and 
manage delivery of a large pool of Certified Emissions Reductions 
(CERs) created by CDM projects and Emission Reduction Units (ERUs) 
created by JI projects that participants can use to comply with GHG 
emissions targets from 2005-2012.
    Natsource Asset Management LLC manages private investment vehicles 
and a series of managed accounts. These investment oriented vehicles 
pursue a strategy designed to take advantage of significant 
opportunities that exist in global emission and renewable energy 
markets.

    Senator Menendez. Thank you all for your testimony. There 
are a lot of insights, also it sounds like some challenges 
along the way.
    So let us start with 7-minute rounds, and we will recognize 
myself.
    Let me ask you all: Does it make sense to allow companies 
to earn emission credits for funding subnational avoided-
deforestation projects before we require those host countries 
to be accountable for national benchmarks on lowering 
deforestation rates? I heard some of the challenges associated 
with that.
    But it seems to me that we have to start off knowing where 
the commencement is in order to understand where we are going. 
And the flip side of that is given the scope of the problem, 
would waiting cause too much in terms of delay?
    And finally, on the other hand, are we pouring money into a 
problem when we might not have the adequate benchmarks to 
figure out whether or not the funding is achieving the 
purported goal?
    I am very interested in this and believe in it, but I also 
see the challenges here. I invite the panel's responses to 
those questions, anyone who wishes to.
    Mr. Hayes.
    Mr. Hayes. Thank you, Mr. Chairman.
    I think you have hit a very key question, Mr. Chairman, 
because the challenges that Mr. Forrister just talked about in 
terms of the clean development mechanism and how it is 
operating under the Kyoto system are squared or cubed when it 
comes to forestry conservation. Under the CDM, there are 
understandings about ``additionality''--about showing that a 
project would not have occurred anyway--which is a prerequisite 
for it. There is an established understanding of how to measure 
the reductions for specific projects in specific sectors. There 
is an understanding of how to deal with permanence, et cetera. 
And it is done on a project-by-project basis. The projects have 
four corners to them and they can be tested and evaluated.
    When you move into the tropical forestry context, you lose 
a lot of those moorings in terms of, for example, whether you 
can proceed on a project basis, which is the first part of your 
question, because of the leakage concerns and the concern that 
we would protect this forest here, but the folks who would 
otherwise have deforested that will simply move over there. I 
think there is a strong view that we need national baselines, 
and that we cannot test for progress on a project-by-project 
basis. That is an important concept that is in the Lieberman-
Warner bill; we should only be working with countries that are 
willing to put those national baselines into effect. And I 
think that makes perfect sense because the problem of leakage 
is so critical.
    The other issues and challenges that I mentioned, including 
the permanence concept and the additionality concept also must 
be dealt with differently because we are talking about, almost 
by definition, protecting forests as opposed to afforestation, 
planting forests. So we are going to have to have a new 
concept.
    I think my bottom line, Mr. Chairman, is that we should be 
focusing lots of attention and finances on pilot projects in 
tropical countries. We certainly should not wait until all of 
the infrastructure is in place, but we should simultaneously 
work on putting that infrastructure in place, as we do pilot 
projects to help get at some of the issues of capacity-
building, of measurement technology, of verification 
approaches, et cetera.
    Senator Menendez. Ambassador Eizenstat.
    Ambassador Eizenstat. I would like to take a slightly 
different view if I may, and that is the question of where 
relative risks are. There is no question, as we have all 
indicated, that establishing a national baseline for countries 
is absolutely critical. That will do a great deal to avoid the 
problem of leakage and to give us a better monitoring device. 
There are mechanisms. The World Bank has a fund to do this. 
Norway is providing assistance to do it. We could do the same.
    But--and here is where I perhaps differ in terms of 
emphasis from David--I think that the risks of cutting forests 
and the pressures are so great with particularly rising 
commodity prices that if we do not take the leap early, while 
we are building that capacity, while we are seeking to have a 
more perfect system, we are going to make the perfect the enemy 
of the good, really.
    That is to say, it is going to take time for Congress to 
pass legislation. It is going to take time for that to be 
implemented. If we do not include in that legislation now, 
provisions to allow this kind of international trading in 
forestry credits while we are building the capacity and we say, 
well, let us wait 4 or 5 years to see if it goes, we will have 
deforested whole areas of the Amazon, Indonesia, and other 
tropical and subtropical forests, which we will never get back. 
So there are risks to doing this without having a perfect 
national baseline system.
    But we have, which we did not have at the time of Kyoto--
and one of the reasons I was not able to get that in is we did 
not have the kind of telemetry by satellites that we have now. 
Brazil has a very good system. They are willing to put the data 
on the Internet free of charge. There are ways to measure this 
so that by the time we get the legislation passed and 
implemented in the United States and we develop this 
international credit system, hopefully the baseline that we all 
hope will be there.
    But again, I do not want to make the perfect the enemy of 
the good and feel that we have to wait until we have everything 
done before we deal with this area, or we are going to have 
whole areas deforested which we will never get back.
    Senator Menendez. But countries like Indonesia and Brazil, 
are they willing to go with a market-based approach alone, or 
are they looking for international----
    Ambassador Eizenstat. Well, that is a very good question. 
Brazil, until recently, has been looking at having an 
international fund of ODA assistance. But again, as we have all 
suggested, you cannot get enough money together on a consistent 
basis to provide the kind of incentives you need to avoid the 
deforestation with the tremendous pressures of rising commodity 
prices to cut and then to plant. You simply cannot do it. You 
have to have a combination.
    I was on a panel recently with the Governor of Amazonia, 
and he is saying--and now his national government is beginning 
to come along--that you cannot do it through a national fund 
alone. You have to have carbon credits, harness this $60 
billion market and combine those.
    Second, the rainforest nations, which have taken the lead, 
are themselves indicating that they will try to establish, with 
the help of developed countries, this national baseline system 
we all want. So they want to have a system that has integrity. 
They realize, over the long term, if they do not, that the 
system will not work. So we are pushing against a more open 
door than we might think because the countries that are pushing 
hardest for this in the rainforest coalition want to have the 
kind of national baseline system that we are talking about.
    Senator Menendez. I have some other questions, but I will 
wait for the next round. With that, I recognize Senator Lugar.
    Senator Lugar. Thank you very much, Mr. Chairman.
    In your testimony collectively, you have illustrated that 
most of the carbon released in the atmosphere from countries 
like Indonesia and Brazil--and these are very large countries 
with growing industrial power--still comes from the cutting of 
trees. Apparently there is recognition in both of those 
countries that this is so, and you have implied, without making 
it explicit, that they must surely appreciate that given the 
current discussions we are having, those trees have value to 
the international community in terms of international 
negotiations, an extraordinary amount of value.
    You have illustrated examples in which baselines are 
discussed on a national basis. Just out of curiosity, with 
Brazil is there an estimate by the Brazilian Government of how 
much carbon are in all the trees of Brazil, or can any of you 
quantify a little bit more precisely what is meant by these 
national baselines?
    Dr. Gurney.
    Dr. Gurney. Sure. Yes, I mean, there are certainly 
estimates. I could not tell you off the top of my head what the 
estimate is for Brazil, but certainly it has been done both by 
national entities within Brazil and, of course, by members of 
the scientific community outside of Brazil.
    The topic of baselines--and sort of maybe somewhat segueing 
with the answers to the last question, since they are revolving 
around a similar topic, the idea of baselines and monitoring 
and measurement. I just want to touch on one thing about 
satellite remote sensing since it is going to come up and it is 
going to come up repeatedly. Satellites are very good at 
looking down at the surface and ascertaining what the canopy 
cover is and have gotten much better at elucidating places 
where deforestation has occurred.
    The big problem--the difficulty is actually figuring out 
how much carbon that represents and, when a canopy changes, how 
much carbon goes from the land surface into the atmosphere. 
That is actually in many ways becoming the hardest part of the 
problem because it is something that is much more difficult to 
do from space, although there are actually techniques emerging 
to actually partly do that estimation from space. Satellites 
cannot see below the canopy, so if forest degradation occurs, 
whereby vegetation is manipulated below the canopy, it is very 
difficult to see from space. Soil carbon, dead biomatter, all 
those components of forests are difficult to see from space.
    And that is why, in many ways, establishing baselines, 
though it can be done--the forest cover can be established and 
forest cover change can be established. The amount of carbon 
forests hold and the amount of emissions associated with the 
changing forests is really the difficult part of the problem.
    And that is why, in many ways, baselines have become tough, 
particularly at the national scale. On an individual plot 
level, you can send a lot of human beings into a plot, spend an 
awful lot of effort, and get good estimates of how much carbon 
is resident in a system and how much carbon is coming out of 
the system when things change. But to do an extrapolation 
across a nation like something the size of Brazil brings up a 
variety of other difficulties. The landscape is heterogeneous. 
It changes from one place to the next. Some areas like the 
Brazilian Amazon are little studied and large and variable.
    So baselines, particularly when you go back in time, become 
even harder, obviously, because going back to the 1980s, for 
example, satellite remote sensing was not as sophisticated as 
it is now. Survey work was much more limited than it is now. 
And hence, trying to determine baselines or trying to create 
baselines that are historical in nature is much more difficult.
    Senator Lugar. But given all those qualifications, though, 
I think Mr. Eizenstat was pointing out that still some interim 
tries may be necessary if we are to make some progress. I think 
we all would recognize with common sense how difficult this is.
    But let me just take a micro example. I have touched upon 
our farm in Indiana. Other farmers in Indiana have come to me--
and this is why Chicago Climate Exchange was hopeful I might be 
a member, and I said, how do I get into this business? Well, 
not easy. The initial idea has to be these are new increments 
of trees. No measurements right now, as I understand it, of 
trees that are already on the farms.
    When we are talking about the specifics of commodity 
changes in a State like Indiana, this is a crucial question. 
People are prepared to get out of the Conservation Reserve 
Program. Those who never got into it are certainly not going to 
sign up. This is going to be a big issue for Brazil, but it is 
a big issue in the United States. Unless there is at least some 
way to jump-start of how you evaluate the trees that we have 
and keep them alive, some problems are going to occur.
    Now, this is a jump over those who are ready to recognize 
treaties to begin with, but I just want to extrapolate out of 
the foreign experience that which is domestic. And that will be 
true, as we know of other countries in the world. The world 
food crisis will not go away. This is not simply a first-year 
process. We now have people that are eating better, thank 
goodness, all over the world, and we have demands for greater 
food, and inequality of the ability of people to get to it.
    So this is a crucial question that, just getting back to 
your discussion, requires a lot faster timeline. It may be 
these are rough and ready calculations, and international 
negotiations among Brazil, Indonesia, the Europeans, and the 
United States to roughly estimate what have you got, and how 
much is it worth to the world, in order to be able to sequester 
this carbon and keep it in the trees.
    Any of you think of how you get into this kind of massive 
international negotiation?
    Mr. Hayes. Senator, if I could. I agree with you that we 
need, to some extent, jump off the cliff and do a lot of 
experimenting, et cetera. Part of the contextual challenge is 
that the assumption that a lot of folks have is that we are 
talking about a system like the clean development mechanism 
under the Kyoto Protocol that will generate pound-for-pound 
reductions that U.S. companies, for example, industrial 
companies, can credit against their account and use in the same 
way that they would use a reduction in their own emissions, by 
investing and reducing their own emissions. That puts an 
enormous amount of pressure on the credibility that we put to 
that offset, if you will. And at this point, I do not think the 
forestry sector can take that pressure because of these issues.
    Now, there are a lot of creative ideas out there about 
potentially having a dual market approach where, instead of 
directly putting pound for pound those carbon reductions from 
forestry offsets into the account of a U.S. regulated company, 
perhaps there is an overall pool of expected reductions that we 
are going to get out of the forestry sector, maybe with some 
discounting mechanisms, some other creative efforts to get the 
program underway, but to assure folks that there will not be a 
flood of these credits coming onto the market, that U.S. 
companies will not be able to use these kinds of credits too 
cheaply to avoid choices that need to be made if we are going 
to really reduce reductions. I think there is a lot of room 
there. But I think, Senator, that assuming we are in this box 
that an offset credit from Brazil gets credited pound for pound 
in the United States like any other United-States-based 
reduction is the source of a lot of the difficulty.
    Senator Lugar. Thank you very much.
    Mr. Forrister. From a market standpoint, I would just add 
that in the clean development mechanism, there are many project 
types that have measurement challenges. That does not mean we 
do not do them. It means that the CDM executive board has set 
strict rules for conservative application of measurement and 
verification techniques so that they do not print too much 
money, if you will. So it has been pretty conservative in the 
application. And I think those same types of systems can work 
in the avoided-deforestation universe.
    I personally totally agree with Ambassador Eizenstat that 
you do not want to let the perfect be the enemy of the good, 
and to us in the market, the holy grail is always a national 
baseline. That is where we would like things to move because it 
is very simple to measure against.
    But realistically speaking, there are a lot of smaller 
countries involved in the Kyoto process that have not been 
participants in the market yet. Probably the only type of 
projects they have that might make sense would be forestry-
related projects, and if you burden them with a national 
baseline right away, it would be very difficult for them to 
participate.
    So I think this is an area where maybe one size does not 
fit all. Larger, wealthier countries could be positioned to 
work toward national baselines more quickly than smaller, 
poorer countries, so perhaps we should create a graduated 
approach. Countries taking national baselines could get in 
early, as an incentive for them to get involved.
    Senator Lugar. Thank you.
    Ambassador Eizenstat. I also think that this notion of 
flooding the market with forest credits is not a valid concern. 
If compensation for reduced deforestation is phased to 
correspond with actual annual emissions reduced--that is, it 
would be no higher than the annual deforestation baseline--then 
the amount of credits available in any given year would be 
limited.
    In addition, the cost of assuring credits meet quality 
standards, companies' concerns with country risk and 
constraints on the ability of forest protection efforts to 
mitigate climate change beyond a certain point--for example, if 
all deforestation could be halted, it would only account for 20 
percent of current emissions--place inherent limits on the 
ability of credits to flood the market.
    So again, I think it is very important not to throw out--it 
is fine to be cautious. We want to do the right thing. We want 
to have national baselines, but I think if we raise these kinds 
of red flags, it can scare us away from doing what is 
absolutely essential to reduce costs at home and incentivize 
countries abroad not to cut down their forests.
    Again, I just come back again and again to the notion. We 
are running out of time on this. The pressures to cut these 
forests are immense. It is almost an exact parallel. The 
higher, for example, soybean prices are, the more forests get 
cut down in Amazonia. And with commodity prices soaring for the 
medium term and perhaps long term, if we do not have a 
counterweight to offer these countries, then by the time we 
come around to the perfect solution, there will not be anything 
to save.
    Senator Menendez. I appreciate the discussion because I 
also think valuation does not have to be static. We can have a 
more conservative estimate at the beginning and as science 
continues to move in the direction of greater exactitude, we 
can raise the valuations along the way.
    Senator Kerry has done a lot work in this field.
    Senator Kerry. Mr. Chairman, thank you very much. Thank you 
for having this hearing.
    I welcome all of you here. I particularly want to welcome 
Ambassador Eizenstat who I had the pleasure of being with in 
Kyoto and watched him pull together what had really been an 
inadequate preparatory runup to the meeting and, frankly, 
salvage what he could in what I thought was a superb job of 
negotiating. And I really applaud you for what you achieved 
there, which was very, very difficult.
    Listening to this, I think a lot of interesting and 
appropriate questions have been asked. But we can measure 
forest carbon, and we can price it. I mean, all of those things 
are achievable. What I am not sure we can do--and I would like 
you all to comment on it a little bit--is find the political 
willpower and define the economic reality of how we are going 
to make this transition.
    I have had the pleasure, through my service on this 
committee, of flying over or spending time on the ground in 
these forests in the Philippines, in Laos, Cambodia, Burma, 
Indonesia, the Amazon, and it is shocking. Five and ten years 
ago, the amount of illegal clear-cutting that I saw, flying 
over that Laotian triple canopy, was astounding. The 
enforcement piece of this has not been talked about--and that 
is perhaps one of the most significant pieces of this.
    I was just recently in Indonesia. When I was in Bali, I met 
with the Indonesian Environment Minister and his staff to 
discuss this. And they sort of look at you with a wink and a 
nod and a smile. But the fact is everybody knows what is 
happening under the table and around the corner. The pressures 
economically to continue to illegally harvest timber are just 
going to be gigantic.
    Time magazine a couple weeks ago had a superb photograph 
that showed the Amazonian deforestation--you just see miles 
upon miles of lush green soybean growing and this one little 
patch left of triple canopy. It makes you cry when you look at 
what is happening. The latest satellite shots portray the level 
of deforestation. The percentage is just enormous and growing. 
Ambassador Eizenstat is absolutely correct about the time 
imperative here.
    And the economic pressures just grow. Take Brazil as an 
example. Cattle ranching and soybean production is causing most 
of the deforestation there. You have to provide an alternative 
source of income for people. I mean, the economic realities in 
most of these countries is that if these folks do not have an 
alternative job and place to earn a living, this is all pie-in-
the-sky talk.
    None of those issues are being adequately addressed even as 
we talk about putting the credits in place, because underneath 
the market structure is this illicit trade that is going to 
take place because the economics push it so imperatively.
    So we have to get an enforcement mechanism in place that 
goes along with the measuring and the transparency. And these 
countries are going to have to sign up and be part of this 
because we cannot go in there and enforce for them, obviously. 
So there is a huge task to accomplish.
    Eighty-five percent of Indonesia's greenhouse gases come 
from deforestation now, and they are in the top 20 of the 
world's countries contributing as a result of deforestation.
    Ambassador Eizenstat. The top five.
    Senator Kerry. The top five. And particularly in the last 
year or two, it has been massive. I mean, as you fly over these 
tropical forests, you see these massive burns taking place, all 
of which contributes to climate change.
    So I would like you to address that. I know we can measure 
deforestation. I know we can establish a price for carbon. I 
know we can put in place a trading mechanism. The question is, 
Can we get these countries to sign on and what will be the 
economic reality of the transformation of their economies so 
they do not have a revolution, so they do not lose their 
governing capacity? I would like you to address that.
    Ambassador.
    Ambassador Eizenstat. I could just start. First of all, the 
fact that we had a treaty was significantly due to the fact 
that Senator Kerry was there. He was a virtual part of our 
negotiating team, and without his day-and-night support and 
lobbying of the EU, we would never have gotten a treaty.
    I think that the political will is there, and I cite two 
examples. One, which I mentioned in my testimony, is there are 
some 15 to 17 countries in the rainforest coalition of nations 
who are saying to the world and said at Bali, provide us 
incentives, and our contribution will be to take specific 
commitments not to cut our forests down. Now, is that perfect? 
Of course, it is not, but neither are any other----
    Senator Kerry. We have to go beyond the fund and the 
credits.
    Ambassador Eizenstat. Absolutely. What they are saying is 
give us incentives and this is our contribution.
    Now, we have been looking. I mean, you know at Kyoto--and 
Mr. Chairman, the terrible problem we had--we had two major 
problems. One was dealing with the EU, which wanted to exact as 
much pain and suffering on their companies as they could 
without offsets, sinks, and so forth. I mean, I was Ambassador 
to the EU and that is another story.
    But the second problem was China and India had a choke hold 
on countries like Argentina and others who wanted to take 
commitments. They would not allow it. It was written into 
Kyoto.
    Now we have got a group of countries who are saying, look, 
we are not going to take economywide emission. It does not make 
sense for Papua-New Guinea and countries like that to do it. 
But our contribution--just exactly what you said in your really 
brilliant opening statement about the fact that every country 
has an obligation but some have different obligations depending 
on their level of--they are saying, our obligation, our 
commitment, our participation will be not to cut our forests 
down if you provide those incentives. And they have the 
political will. They formed a coalition, and they are lobbying 
for this.
    In addition, Brazil is in fact beginning to change its 
policy. People mentioned the New York Times story on Sunday. 
The flip side of that, the positive side, is, for goodness 
sakes, they are now committing resources to stop the logging, 
to stop the cutting. I mean, yes, there is leakage and there 
are problems, but the fact is they are now taking steps 
themselves to make sure that those soybeans that you saw do not 
grow. And if we do not provide them incentives to do that, then 
we are going to find that the pressures from farmers and others 
will be overwhelming.
    Senator Kerry. Well, I think that is well said. One hopes 
it will happen.
    Do you see a sufficient level of global leadership within 
the developed countries to try to put those incentives on the 
table?
    Ambassador Eizenstat. I think that is why it has to start 
with our legislation. In June this is going to be debated, and 
the best way, Senator Kerry, for us to show we are serious on 
the forest issue is for someone, either the chairman's mark 
with Lieberman-Warner or one of you on this committee, to 
introduce--in the 15-percent allowance that the bill permits 
for international trading, to specifically say that forestry 
credits are permitted as part of that 15 percent. That will 
send a signal to these developing countries. It is the single 
most important thing that could be done when this comes up for 
debate.
    Senator Kerry. I agree completely. Senator Menendez and I 
will try to get it in the mark.
    Did you want to comment, Mr. Forrister.
    Mr. Forrister. Just to say that--I guess in a way stating 
the obvious that you are right that the Europeans have, up 
until this point, not had a great appetite for forestry-related 
carbon products coming into their market. But I do think, as 
they look toward the increased level of stringency going out 
into the future and the potential demand from the United States 
and Japan and other countries, as they ratchet down further on 
their commitments, additional tools are going to be needed to 
supply the growing market. I do think there is value in 
providing the incentive from the financial side, so that there 
is a pull on these types of forestry credits. This would mean 
that there is value in keeping your forests standing, which 
would tend to create an alliance with the landowner to try to 
protect that forest and keep it standing because, otherwise, 
they do not get the reward of the money for the forestry 
offset. So I do think that this fundamental design element is 
what is core to the policy.
    There does need to be enforcement locally. That is a very 
important component of making the policy work. But at the same 
time, the financial value reinforces it: They just do not get 
their money unless the forest continues to produce the carbon 
benefit.
    Senator Kerry. Absolutely. I could not agree more.
    Mr. Hayes.
    Mr. Hayes. I just want to make one related point, Senator. 
Your point is very well taken in terms of the local politics 
needing to work for these countries.
    And I think it is important to put sustainable forestry 
into this mix here. I do not think we can have a situation 
where you simply have large cash payments going to countries 
that are avoiding deforestation and think that that is going to 
change the economic drivers here. There are tremendous advances 
that are being made in terms of sustainable forestry, of 
keeping forests that are producing forest products that are 
sequestering carbon in those products, that are protecting 
canopies with those products, and that is another place where 
the United States can lead through amending the Lacey Act, for 
example, and requiring that there not be products coming into 
the United States that are illegal, and more importantly 
probably, putting a forward push on demand by asking for 
certification that products are coming from forests that meet 
sustainable standards. I think these practical, on-the-ground 
things are extremely important.
    Senator Kerry. My time is up. But to accomplish all of 
these things, I think you will agree you really have to have a 
robust international transparent and accountable enforcement 
mechanism. And those countries are going to have to sign up to 
that line. We have not yet achieved this, but I think we are 
moving in the right direction. You give it enough economic 
value without creating allowances that are just giveaways for 
bad practices or that encourage leakage, et cetera. You have 
got to have a comprehensive piece here. If we do that--and I 
think it is doable--then, hopefully, we can encourage a 
sufficiently robust effort on the enforcement piece.
    I was chairman of the Fisheries Subcommittee on Commerce 
for years, and we have been struggling with too much money 
chasing too few fish. And we do not have enough monitors. We do 
not have people out there who are enforcing across the board. 
And I think the same thing will be true in this sector as the 
demand grows for those hardwoods, for the mahogany and the 
teak--you are going to have tough enforcement.
    Senator Menendez. Dr. Gurney, I saw you----
    Dr. Gurney. No. Just a very quick comment just to emphasize 
that there is, obviously, a linkage between the financial 
incentive and the mechanisms those take and the magnitudes and 
this monitoring measurement question.
    Just to go back to the previous comment, again, some of the 
largest sources of uncertainty are, in fact, the in-country 
capacity, technical capacity, human capacity, infrastructure. 
That is actually where probably the biggest difficulty is faced 
from the scientific point of view.
    So certainly, again, there is a linkage between--with a 
sufficient price signal, there is a coevolution between the 
ability to improve measuring and monitoring and the power and 
strength of that price signal. So it is important to recognize 
the two will most likely coevolve since the weakest part is, in 
fact, probably the in-country technical capacity component.
    Senator Menendez. So clearly there would be an incentive 
for the greater the ability for the evaluation to take place, 
the greater the value that may rise in terms of the credit.
    Ambassador Eizenstat. And I think what I would say to 
supplement the professor, which is certainly true about the 
capacity, you have to have both satellite capacity above and 
you have the in-country capacity on the ground. The in-country 
capacity in countries like Brazil is improving. It is not where 
it needs to be.
    But my point is twofold. No. 1, while we are building that 
capacity, let us put the legislation in effect. And No. 2, 
there are mechanisms. The World Bank Forest Carbon Partnership 
facility is trying to provide assistance for just that purpose. 
The Norwegians just announced an aid package for forests. We 
could do the same. So we need to build that capacity on the 
ground. There are mechanisms to already do that, and by the 
time the legislation passes the Senate and gets implemented, we 
will be much further along not with just the satellite 
telemetry but with on-the-ground capacity-building in the 
countries themselves.
    Senator Menendez. Let me follow up. I thank Senator Kerry 
for his intervention. Let me follow up with two last questions, 
and then we will let you go.
    One is along the lines of something I thought Senator Kerry 
was mentioning, and I wanted to pursue it in my second round 
which is the whole sustainable development aspect of this. Just 
like when we were dealing with Plan Colombia in a different 
context, one thing was to do the enforcement, but if you do not 
give a poor coca farmer an alternative to sustain his family, 
he is going to continue to grow coca and that is not in our 
interest. Similarly, here there are obviously consequences as 
well. Logging is not necessarily the only action that is being 
taken here.
    And the question is, Should part of the inducement be how 
we create sustainable development alternatives, be to create 
incentives toward sustainable development in these countries 
that have the rainforests?
    Ambassador Eizenstat. Absolutely. I, 100 percent, agree 
with what David said. I think we should strengthen the 
Conservation Act, the Leahy amendment, exactly as David said. 
We ought to make it increasingly difficult to import logs from 
countries that do not have sustainable development programs, 
and the kind of certification program I think which David 
mentioned makes all sorts of sense.
    So this has to be attacked from a variety of ways. We need 
ODA for funds. We need a carbon market to include forestry 
credits. We need sustainable development programs. All of these 
together have to be considered as part of a whole.
    Senator Menendez. This subcommittee, which also holds 
jurisdiction over all of our foreign assistance--it seems to me 
that one of the marriages we want to be looking at here, 
particularly as it relates to these countries, is what are we 
doing in these countries in terms of USAID and other related 
development assistance projects to marry some of that together. 
Would that be something that is desirable?
    Mr. Hayes. Absolutely, Mr. Chairman. I mention that in my 
written testimony as well.
    And to make a related point, there can be unintended 
consequences here if we do not design the program correctly. 
For example, the problem of palm oil plantations in Southeast 
Asia has been well documented. We want to make sure that not 
only do we have sound economic architecture here for such a 
program, but that it be environmentally sound, that it preserve 
biodiversity principles, et cetera. We are encountering some of 
those same issues here at home, and we need to just be aware 
that they should be part of our design for any international 
program.
    Senator Menendez. Mr. Forrister.
    Mr. Forrister. I think there are ways that aid programs 
could be tremendously beneficial in helping with local 
capacity-building and helping to train the scientists and the 
local verifiers, et cetera about how to operate these types of 
projects. As I think about it, in the business that I have been 
in over the last several years, a lot of us in the carbon 
business have benefited by work that USAID was doing in the 
late 1990s helping through training exercises on how carbon 
markets would work.
    I have personally gone on missions to places, faraway 
places, like Colombia and Ecuador, where I sat down with a 
group of people that have a spark of interest in this market, 
largely because of those programs that were in place back in 
the 1990s. I particularly remember going into those two 
countries--this is 2 or 3 years ago--and probably two out of 
three of the project proposals that local companies brought 
forward were forestry projects, which we could not buy because 
we could not resell them in the European carbon market.
    It is a great thing to create that capacity, but it really 
only works, as again Ambassador Eizenstat has set forth, if 
there is a clear policy signal that these credits are going to 
be good for compliance in a carbon market somewhere. Therefore, 
go forth and multiply. And I really do hope that the U.S. 
Federal legislation has an openness to forest protection 
projects, because I think it can stimulate a huge amount of 
activity globally.
    Senator Menendez. Last two questions. Dr. Gurney, if I gave 
you a magic wand and you could move the science forward, what 
would it take? Give me some sense of magnitude of what it would 
take for a greater ability to be able to quantify the values 
here. I know that is very unscientific, but I wanted to draw 
you out of the box for a moment and see if I----
    Dr. Gurney. The thing that is probably the most effective 
place to expand resources at this point is, again, probably in-
country capacity. By that, I mean country exchanges of 
scientific knowledge. The tropical forested countries are in 
some ways relatively unknown in terms of biomass content, 
spatial variability. There has been work in the last few years 
that more and more is going into tropical forest countries from 
the industrial scientific community, but we need partners in-
country. That has probably been one of the biggest barriers to 
doing effective work there.
    Consistency. Of course, a lot of this goes back to things 
like governance, which I am not an expert at, but I can 
certainly, as an observer from the outside, recognize that that 
is often a difficulty. I will give you a quick anecdote. One of 
the problems we have had in doing work in some tropical 
countries is just simply getting instruments in-country. 
Bringing them across the border effectively becomes an enormous 
barrier sometimes and a big slowdown.
    So probably the first thing I would do is probably build up 
in-country capacity, scientific exchange, development of 
infrastructure within countries like Brazil, Indonesia, 
Malaysia, places where tropical deforestation is moving forward 
at a rapid pace, install more monitoring and measurement 
equipment, the ability to fly aircraft over countries. As I 
said, satellite remote sensing technology is moving forward 
because it is mainly pushed by the industrial world, although 
we need in-country capacity to be able to use and analyze that 
satellite information.
    Senator Menendez. That is very helpful.
    I have a vote going on and we have to get to the floor.
    You have all referred to commodity prices. Certainly there 
has been in recent months reports of soaring food prices 
worldwide, and many place the blame on biofuel mandates and 
some have said that biofuel demand has been blamed for 
increased rates of deforestation in Indonesia and Brazil. And 
some studies have concluded that even incredibly efficient 
biofuel such as ethanol from sugar cane could actually be worse 
for global warming because of the emissions growth associated 
with deforestation.
    Is this a cause for concern; something to look at? Is it a 
time for a pause, or do we just let this ride?
    Ambassador Eizenstat. It is an excellent question. First of 
all, on the magic wand, my magic wand would be to get 60 votes 
for Lieberman-Warner with forestry credits.
    Ag conversion is one of the key drivers of deforestation, 
and as I have mentioned, with rising commodity prices, there is 
increasing pressure to convert land. On the biofuels mandate 
that is in both the U.S. and EU legislation, it does put 
additional pressure on prices. It is estimated that about 15 to 
20 percent of rising food prices come from this and therefore 
increased pressure for conversion or tropical forests for ag 
production.
    This is, again, another reason, however, to place the value 
on the carbon stored in tropical forests so there is a 
counterweight against the economic forces of rising ag 
commodity prices.
    On biofuels policy, it should include full carbon 
accounting, taking account of the carbon emissions associated 
with land conversion. The renewable fuels standard, which is 
part of the 2007 Energy Independence and Security Act, does 
require the administrator to take into account carbon emissions 
associated with land use in the production of biofuels to 
determine whether specific biofuels meet the mission reduction 
thresholds. I think this is important so that we have a real 
picture of what actually is being produced in terms of emission 
reductions or, indeed, increases by biofuels mandates. So I 
think Congress has taken that step and we need to get those 
results as quickly as possible.
    Senator Menendez. Thank you all for your testimony today. I 
think it is a great opening to what will be a series of 
hearings that the committee and the subcommittee will be 
holding on a post-2012 climate change treaty and the things 
that we need to consider, particularly in this case, tropical 
forests.
    The record will remain open for 2 days so that committee 
members may submit additional questions to the witnesses. 
Certainly if you receive those, we would ask you to respond 
expeditiously to them. We thank you again for your insights.
    Much reference has been made to the New York Times article. 
I ask unanimous consent that it be included in the record. 
Without objection, so ordered.
    [The Times article referred to follows:]

                [From the New York Times, Apr. 19, 2008]

              With Guns and Fines, Brazil Takes On Loggers

                        (By Alexei Barrionuevo)

    Alta Floresta, Brazil.--A convoy of six black sport utility 
vehicles pulled into a lumberyard unannounced here one recent morning. 
Out popped about two dozen members of Brazil's security and police 
forces, packing sidearms and rifles. But the weapon the foreman feared 
most was carried by a separate group of agents of Brazil's national 
environmental agency: Bright yellow tape measures.
    ``Thirty-eight! Seventy!'' the agents shouted from the logs 
clustered in the thick mud as they quickly went to work. One agent, 
Mario Rubbo, jotted down the volume of each log for comparison with 
what the lumberyard had declared to state authorities. Discrepancies 
could mean fines or criminal charges.
    This is Operation Arc of Fire, the Brazilian government's tough 
campaign to deter illegal destruction of the Amazon forest. It is 
intended to send a message that the government is serious about 
protecting the world's largest remaining rain forest, but so far it has 
stirred controversy for its militaristic approach to saving trees, and 
the initial results have been less than promising.
    The operation began in February after new satellite data showed 
that deforestation had spiked in the second half of 2007 after three 
consecutive years of declines. The new data rattled the government of 
President Luiz Inacio Lula da Silva, which has been trying to play a 
bigger role in discussions about global climate change amid mounting 
scientific evidence that some 20 percent of annual global greenhouse 
emissions come from the clearing of tropical forests, including the 
burning, decay and decomposition of the land.
    The government says it will now spend $118 million over at least 
the next year to crack down on illegal loggers. It has mobilized some 
600 officials in three states--Mato Grosso, Para and Rondonia--as well 
as 175 cars and trucks and four airplanes. In the operation's first few 
days, the police discovered hidden troves of wood, sometimes 
underground and invisible from the air.
    Already, the authorities have issued $25.9 million in fines, made 
19 arrests and seized more than 51,140 cubic yards of wood, which has 
been transferred to local governments, said Kezia Macedo, an analyst 
with the federal environmental agency, known as Ibama, in Brasilia.
    But the challenges are daunting. The Amazon is vast, with some 1.3 
million square miles still forested. The 48 police officers and two 
dozen environmental agents involved in Arc of Fire here seem minuscule 
for the territory in northern Mato Grosso.
    That is one reason the agents are mostly concentrating on 
bottlenecks where the wood must be transported, catching loggers coming 
in and out of Alta Floresta, a city of about 50,000 people in northern 
Mato Grosso.
    The federal government has tried such police operations before, 
notably in early 2005. But those efforts were only sporadic. This time 
government officials say they plan to establish permanent operations in 
the region to control the exit of wood from the forest, and keep 
pressure on the loggers.
    Tensions were high in the first few days of the program in 
Tailandia, a city in Para State, where loggers joined local officials 
to protest and harass agents involved in the operations.
    Here in Mato Grosso, Brazil's giant agricultural state where the 
most deforestation has occurred, Ibama agents are confronting a 
powerful governor, Blairo Maggi, the world's largest soybean producer, 
known in Brazil simply as the ``King of Soy.'' While Governor Maggi has 
softened his public stance the past few years on deforestation, he 
remains a forceful advocate for agricultural expansion.
    He has reportedly sought meetings with Mr. da Silva in recent days 
to discuss Arc of Fire. Ibama agents privately suggest that Governor 
Maggi exerts a strong influence over Mato Grosso's state environmental 
agency. The state officials have successfully challenged Ibama's method 
of measuring wood volumes and criticized the deforestation-detection 
system of Brazil's National Institute for Space Research.
    Both the federal and state environmental agencies have struggled 
with accusations of corruption. In 2005, Governor Maggi fired his 
environmental secretary after he was charged with bribery, though the 
charges were never proved. In Alta Floresta, the Ibama agents are led 
by Rodrigo Almeida, a former travel agent who has been with Ibama for 
14 years. They try to maintain a low profile and declined to have their 
faces photographed for fear of being singled out for intimidation. 
``For sure, there are a lot of interests involved in these 
operations,'' said Glauco Saraiva, the Federal Police chief who is in 
charge of Arc of Fire here.
    After averaging 7,700 square miles a year in the 1990s, 
deforestation in Brazil had slowed to 4,200 square miles a year in 
2006, before increasing again last year. From August to February an 
average of 270 square miles was deforested a month, according to the 
National Institute for Space Research.
    It is tough to say if the agents are managing yet to turn back the 
trend. In the operation's first month, February, deforestation in 
Brazil rose another 13 percent over January, some 88 percent of it in 
Mato Grosso, the space research institute reported.
    Mr. Almeida, 35, said the alarming increase underscored the need 
for the government's campaign. In Alta Floresta, Lindomar Della 
Justina, the president of the local logging syndicate, said Ibama 
agents were waging a losing battle. ``If you paralyze activity here, 
will that stop the deforestation?'' he asked. ``It won't stop it.''
    Mr. Rubbo, the Ibama agent, essentially agreed. ``I am playing a 
game we are fated to lose,'' he said one afternoon. ``The game is 12 to 
1 against us and there are two minutes to turn it around. But I just 
try to do my part here.''
    Local industry officials like Mr. Justina are not happy. They say 
Arc of Fire is stifling commerce in an industrious town that answered 
the call of the military government in the 1970s for Brazilians to 
colonize the Amazon before foreigners did. ``This strategy to put 
handcuffs on us is killing our morale,'' said Vicente da Riva, the 
president of Alta Floresta's rural association.
    At the Ibama headquarters here, agents study satellite data from 
the space institute and Google Earth on computers. A large green parrot 
occasionally squawks from the roof next to the dining table where 
agents are briefed on their missions.
    A call came one morning at 9. A truck suspected of carrying illegal 
wood was caught on the road into town. Three Ibama agents were 
dispatched to the Federal Police headquarters where the truck had been 
impounded.
    Once there, one agent, Otaciano Matos, pulled a tape measure from 
his burgundy briefcase. He quickly declared it an open-and-shut matter: 
The truck had no license plate and the driver had no documentation 
proving the wood's origin or destination. ``Illegal wood,'' he said 
simply.
    Later that night a group of five Ibama agents drove eight miles out 
of town on a midnight ``blitz.'' Mr. Almeida, the Ibama leader, wearing 
a knit ski cap to guard against mosquitoes, explained that agents had 
caught several trucks at this spot where two dirt roads merge into the 
main highway into town.
    Illegal loggers prefer to travel deep in the night, he said. With 
moonlight forcing its way through the clouds, the agents gathered in a 
circle and smoked cigarettes and traded stories about their hometowns.
    ``Rodrigo, are we are doing the right thing?'' asked Paulo 
Iribarrem, a burly 17-year Ibama veteran, breaking a momentary silence.
    ``Don't worry, pal, this is just the first stage of the 
operation,'' Mr. Almeida replied. ``There is more to come.''
    The agents stopped one passenger car, and a motorcycle or two 
passed by. But after nearly two hours, with no trucks hauling wood, 
they called it quits and headed home.

    [Mery Galanternick contributed reporting from Rio de Janeiro.]

    Senator Menendez. And with that, the hearing is adjourned.
    [Whereupon, at 12:07 p.m., the hearing was adjourned.]
                              ----------                              


             Additional Statements Submitted for the Record


  Prepared Statement of Hon. Joseph R. Biden, Jr., U.S. Senator From 
                                Delaware

    I thank Senator Menendez for convening this important hearing on 
deforestation issues. It is through forests that our planet breathes. 
Over their life cycles, trees absorb carbon dioxide; when they die, 
they release it. Preserving and adding to our forest cover can 
compensate for our industrial carbon dioxide emissions. Cutting forests 
removes that protection and adds to the global buildup of greenhouse 
gases that are the driving force of climate change.
    That is why forests are now a key feature of international climate 
change negotiations. Nations with significant forest cover have an 
asset that helps the whole planet in the long-term fight against global 
warming. But those same forest assets are worth money today. For many 
of those nations, with tens of millions of people to feed, the 
economics are compelling--cutting and selling those trees for short 
term economic gain beats preserving them for long-term global benefits.
    We must change that equation. We must make preserving and restoring 
forests profitable--not just for the rest of the world, but for those 
countries, too. The basics of the tradeoff are clear. In the simplest 
case, protecting forests can offset emissions from industrial 
activities. If we make it costly for industries to emit carbon dioxide, 
we can make it profitable for them to pay for the protection of forests 
that help to compensate for those emissions.
    But we have a long way to go before that simple transaction can 
become part of the global effort to slow, stop, and reverse the 
increase in the concentration of greenhouse gases that threaten our 
climate. We will need a domestic cap-and-trade system that is part of a 
wider global carbon trading system. We will need an international 
system of measurement and verification for that trading system to work. 
We will need to build the technical capacity in developing countries, 
and the financial markets in developed countries, to bring buyers and 
sellers together.
    If we succeed, there will be many additional benefits. Tropical 
rainforests--our richest carbon sinks--are also our richest harbors of 
biodiversity. They are the sources of life-saving drugs, they protect 
against floods and the erosion of agricultural lands, and they are 
crucial to both fresh and saltwater fishing. I'm proud to have 
authored, with Senator Lugar, debt-for-nature swaps through the 
Tropical Forest Conservation Act. We have written a reauthorization of 
that successful program again this year, and I hope we can finally get 
it passed and signed into law. In the past 10 years, this legislation 
has protected 47 million acres of vital tropical habitat.
    This hearing is exactly what I hoped to see when Senator Lugar and 
I encouraged committee members to focus their energies and attention on 
climate change. The United States continues to participate in 
international negotiations on a post-2012 climate agreement. As those 
discussions go forward, this committee must keep pace with those 
discussions. We must make sure that the Senate itself will be prepared 
to give informed consideration to any international agreement that may 
be reached. The United States, the largest historical source of the 
greenhouse gases now in the atmosphere, is essential to that process. 
We, as a nation, must be prepared to lead in the search for a global 
response.
    Today's witnesses bring broad expertise. Ambassador Eizenstat has a 
distinguished career in public service, and today in private practice 
continues to contribute to important international debates, from 
climate change to Holocaust reparations. He was the lead U.S. 
negotiator in Kyoto and thus knows the process and the policy 
intimately. He is joined today by former Deputy Secretary Hayes who 
spent his time at the Department of Interior working on many closely 
related issues. Dr. Kevin Gurney from Purdue University is a leader on 
the measurement and verification that will prove essential to make any 
deforestation deal work. Dirk Forrister represents the carbon traders 
who deal with carbon on trading markets day in and day out and has also 
been part of our country's official climate change negotiating team.
    I hope that this hearing will bring some much needed focus to 
questions of deforestation. As much as one-fifth of human carbon 
emissions are from deforestation and land use changes--more than the 
entire global transportation sector. That means every car, bus, train, 
airplane in the world. We can't solve this problem without taking into 
account the role of forests.
    Again, I thank Senator Menendez for convening this hearing and for 
his intention to hold a series of hearings exploring the challenges and 
opportunities of a post-2012 climate framework. The science is clear 
that climate change must be addressed, and that it must be addressed 
now, and I hope these hearings and other committee efforts will advance 
our understanding of the role that the United States can and will play 
in the coming years.
                                 ______
                                 

   Prepared Statement of Hon. Chuck Hagel, U.S. Senator From Nebraska

    Chairman Menendez, thank you for holding this hearing on the 
important issue of preventing deforestation as part of an international 
climate change agreement. Thank you also to our witnesses: My friend, 
former Ambassador Stuart E. Eizenstat, on behalf of Sustainable 
Forestry Management; Professor Kevin Gurney, Associate Director of the 
Purdue Climate Change Research Center; David Hayes, former Deputy 
Secretary of Interior in the Clinton administration; and Dirk 
Forrister, Managing Director of Natsource LLC.
    This year, both Congress and the International Community are 
working to craft a realistic approach to mitigating climate change that 
is truly global in nature. A workable international treaty for dealing 
with climate change must be a diplomatic priority.
    The ``Bali Roadmap'' on climate change negotiations has provided 
the outline for negotiations on a successor treaty to the flawed Kyoto 
Protocol. I am encouraged that the roadmap calls for a truly global 
treaty that will ask for commitments from all nations, which is 
consistent with the Byrd-Hagel Senate resolution that passed by a vote 
of 95-0 in 1997.
    Global climate change concerns us all. It does not recognize 
national boundaries. It does not discriminate between rich and poor 
people or industrialized and developing nations. Dealing with it is a 
shared responsibility for all people and all nations. Today's hearing 
focuses on an often overlooked source of greenhouse gas emissions: The 
carbon released by the clearing and burning of tropical forests.
    Today, tropical forest is vanishing at a rate of 5 percent a 
decade, wrecking habitats, harming biodiversity, and releasing 
approximately 3 billion tons of carbon dioxide a year. The destruction 
of tropical forests has been estimated to cause 20 percent of the 
yearly global release of greenhouse emissions. We cannot simply ignore 
these emissions and pretend that all greenhouse gas emissions come from 
power plants--a global treaty must comprehensively deal with all 
sources of emissions.
    If international greenhouse gas emissions statistics included 
emissions from deforestation, Indonesia and Brazil would become the 
world's third- and fourth-largest emitters (behind the United States 
and China), respectively. Together, Brazil and Indonesia contain almost 
35 percent of the world's tropical forests. Since 1990, these nations 
have lost 11 percent of their forest cover.
    Protecting tropical forests is an issue that affects the 
environmental and economic health of nations around the world, not only 
those in the tropics. We must responsibly address climate change with a 
comprehensive international strategy that incorporates economic, 
environmental, and energy priorities. Efforts to protect the world's 
forests are an important part of the Bali Roadmap, and a global 
agreement should recognize the environmental and economic benefit these 
forests hold, when they remain intact.
    The Kyoto Protocol created perverse incentives regarding the 
protection of forests that a new treaty will have to correct. For 
example, under Kyoto, there are financial rewards for capturing and 
storing carbon in forests--but only if nations plant new forests, or 
regrow old forests that have been clear-cut. There is no mechanism to 
protect old-growth forests--which science has shown sequester the 
greatest amounts of carbon.
    Global climate policy will require a level of diplomatic intensity 
and coordination worthy of the magnitude of the challenge. America has 
an opportunity and a responsibility for global climate policy 
leadership. But it is a responsibility to be shared by all nations. If 
we address forestry protection in a rational, manageable, and 
verifiable way, this will help bring a comprehensive U.N. sponsored 
international deal closer to reality.
    Thank you again, and I look forward to the testimony of our 
witnesses.
                                 ______
                                 

 Prepared Statement of Jacqueline Schafer, Assistant Administrator for 
 Economic Growth, Agriculture and Trade, U.S. Agency for International 
                      Development, Washington, DC

    Mr. Chairman, I appreciate the opportunity to submit a statement 
for the record on this important topic. We are eager to highlight how 
our Government and our team at the U.S. Agency for International 
Development (USAID) work to address international deforestation and 
climate change. This cross-cutting issue brings together collaboration 
of many offices in the Bureau for Economic Growth, Agriculture and 
Trade, which I head as Assistant Administrator. I am proud of the work 
of the United States on this issue and honored that the many people 
around the world working for USAID contribute to addressing 
international deforestation and climate change.
    Tropical forests are critical to the survival and well-being of 
people around the world. For example, many people depend on forests for 
food, shelter, income, medicine, and clean water. In addition, tropical 
forests harbor some of the world's unique and critically endangered 
biodiversity, for example at least 120 important drugs currently in use 
were originally derived from naturally occurring plant species. Forests 
help mitigate climate change by storing carbon in vegetation and soils. 
Forests also provide other services, such as regulating water quality 
and quantity by slowing the runoff of rainwater, improving infiltration 
of water into soils, and filtering water as it flows to streams and 
aquifers. This helps provide safe and reliable water sources to 
surrounding communities. Healthy forests enable surrounding communities 
to be resilient to economic and environmental shocks such as drought. 
Forests and biodiversity are also important to many people for their 
spiritual and aesthetic values.
    Unfortunately, tropical forests face a number of threats, including 
conversion to agriculture, illegal logging, unsustainable extraction of 
timber and other forest resources, climate change, pollution, and 
policies that subsidize forest conversion to other uses. Deforestation 
is a significant contributor to climate change: Scientific studies have 
estimated that 20 percent of global greenhouse gas emissions are 
attributable to deforestation. Each year, approximately 10.4 million 
hectares of forest are lost. To put this into perspective, that is 
equivalent to losing an area roughly the size of Virginia each year. 
The World Bank estimates that illegal logging represents a loss of $10-
$15 billion per year to developing countries. Illegal logging also 
fuels corruption and in some countries finances conflict. Loss of 
forest cover, riparian buffers and mangroves also represent a 
significant increase in regional and local vulnerability to climate 
variability and climate change.
    To address these concerns and to ensure that forests and 
biodiversity continue to play an important role in sustainable 
development, USAID supports programs around the globe that aim to 
improve the conservation and sustainable management of forests and 
biodiversity.
    In order to address the societal context in which deforestation 
occurs, it is important to have an integrated response that includes 
promoting sustainable economic development, alleviating poverty, 
strengthening forest governance, and conserving biodiversity. USAID 
works in partnership with recipient countries, NGOs, and other partners 
on many fronts. The goal is to first empower local communities. Local 
populations are the most immediate custodians in the management of 
tropical forests, and USAID recognizes that engaging these users is 
critical to sustainably managing and protecting those forests. Second, 
we aim to improve forest policy. We work with host country governments 
to establish favorable forest management laws and policies, ensure 
transparency and stakeholder participation, and build capacity to 
implement those policies. Third we promote sustainable practices. We 
help establish sustainable forest management practices in forest 
enterprises. Fourth, we coordinate efforts across borders. Important 
tropical forests often cross political boundaries; we support programs 
that work across borders to promote effective large-scale forest 
conservation. And finally, we make it a priority to involve the private 
sector. Through public private partnerships, USAID successfully 
leverages private sector financing and commitments to facilitate legal 
and transparent trade of forest products derived from legitimate 
operators and well managed forests. By forging partnerships that 
function at local, national, and international levels, the U.S. 
Government is implementing a wide range of effective initiatives and 
programs that reduce deforestation and associated greenhouse gas 
emissions while also supporting sustainable development goals.
    I would like to highlight for the committee some of the key U.S. 
efforts in this area. As reported in our most recent performance 
report, USAID supports sustainable forest management and conservation 
around the globe, investing approximately $85 million in tropical 
forest activities from all funding accounts in FY 2006.\1\ These 
investments led to significant accomplishments in Africa, Asia, the 
Near East, Latin America, and the Caribbean. In addition, the Tropical 
Forest Conservation Act program receives an annual budget of $20 
million per year allocated to the Debt Restructuring Account (DR) in 
Treasury in which USAID plays a key management role. In 2006, $27 
million from this account leveraged $42.7 million for forest 
conservation through local NGOs and community groups.
---------------------------------------------------------------------------
    \1\ This testimony contains performance results from the report: 
``Foreign Assistance Act Section 118: Tropical Forests, FY 2006.'' 
Results from FY 2007 are currently being collected and will be 
presented in the FY 2007 Section 118 report.
---------------------------------------------------------------------------
    Activities I would like to highlight include:
    The President's Initiative Against Illegal Logging (PIAIL) assists 
developing countries in their efforts to combat illegal logging in the 
key tropical forest regions of the Congo Basin, the Amazon Basin and 
Central America, and South and Southeast Asia. In Africa, PIAIL works 
through the Congo Basin Forest Partnership (CBFP) and USAID's Central 
African Regional Program for the Environment (CARPE) to reduce the rate 
of forest degradation and biodiversity loss in Cameroon, Central 
African Republic, the Democratic Republic of the Congo, Equatorial 
Guinea, Gabon, the Republic of Congo, Burundi, Rwanda, and Sao Tome. 
CARPE supports a network of national parks and protected areas, 
improves management of forestry concessions, and assists forest 
communities. Residents of the Lac Tele Community Reserve in the 
Republic of Congo created natural resource management committees who 
mapped development, buffer, and protected areas, and mounted community 
patrols in protected areas. By allowing local communities to make their 
own resource use decisions, the communities were able to return to the 
customs of their ancestors, regulate use by nonlocals, and resolve 
conflicts between both families and villages. In February 2005, Central 
African heads of state signed a treaty to coordinate protection and 
management of the regional tropical forest resources. The treaty was 
followed by a Presidential decree to regulate logging concessions in 
the DRC and an agreement between Cameroon, Gabon, and the Republic of 
Congo to implement landscape and wildlife management plans for the Dja-
Minkebe-Odzala Tri-National Landscape. The CARPE program will improve 
the management of over 200 million hectares of forest.
    Tropical Forest Conservation Act (TFCA) agreements are offered to 
eligible developing countries to relieve certain forms of official debt 
owed to the United States Government while simultaneously generating 
funds for forest conservation activities. The TFCA is an interagency 
program led and jointly managed by State, USAID, and Treasury. As of 
December 2007, approximately $95 million in congressionally 
appropriated funds have been used to conclude TFCA agreements with 
Bangladesh, Belize, Botswana, Colombia, Costa Rica, El Salvador, 
Guatemala, Jamaica, Panama (two agreements), Paraguay, Peru, and the 
Philippines. The local funds created under these programs will together 
generate more than $163 million for grants and projects over time to 
help protect and sustainably manage tropical forests in beneficiary 
countries.
    The Liberia Forest Initiative (LFI) was created in early 2004 to 
support the rehabilitation and reform of the Liberian forestry sector 
and to ensure forest resources are used for the benefit of the Liberian 
people. Programs under LFI are jointly implemented by the U.S. State 
Department, U.S. Forest Service, USAID and the U.S. Treasury Department 
together with nongovernmental organizations such as Conservation 
International and the Environmental Law Institute. The initial 2 years 
of LFI focused on helping Liberia reform the process of allocating and 
managing forest concessions so that the U.N. would remove timber 
sanctions. Sanctions were lifted in early 2006 after the new 
democratically elected government developed and initiated a transparent 
concession process. The Liberian Parliament has passed a new forestry 
law supporting a policy of increased transparency in forest management, 
greater community involvement, more equitable access to forest 
resources, and improved forest conservation. Successful implementation 
of these policies promises to reduce illegal and unsustainable logging 
and improve management of Liberia's approximately 4 million hectares of 
forests.
    For the past 15 years, USAID has worked closely with Madagascar to 
protect its exceptional biodiversity and forest ecosystems while 
addressing its significant poverty though our Madagascar Environment 
and Rural Development program. In 2005, the President of Madagascar 
announced his goal of tripling the size of the country's protected area 
network. Working with the Government of Madagascar, USAID helped to 
achieve this goal by assisting in the development of a framework and a 
participatory process that guided the creation of 13 new protected 
areas. The U.S. Government also helped to ensure the long-term 
viability of the protected areas by establishing the Protected Areas 
and Biodiversity Trust Fund with an initial capital investment of $4 
million from three founding donors--the Government of Madagascar, WWF, 
and Conservation International. To reduce slash-and-burn agriculture 
and to address rural poverty, USAID continues its work to introduce 
improved agricultural techniques, to encourage the transfer of natural 
resources management to local communities and to link producers to 
markets. In addition, USAID and the U.S. Forest Service have helped the 
Malagasy Forest Service develop a far-reaching strategy for 
institutional reforms, a competitive forest permit bidding system, and 
a forest zoning process that balances conservation and production 
needs. U.S. Government investments benefit over 13 million hectares of 
forest in Madagascar.
    In Indonesia USAID works through The Nature Conservancy (TNC)--
World Wildlife Fund (WWF) Alliance to Promote Forest Certification and 
Control Illegal Logging. This Alliance has created a comprehensive 
legality standard and timber-tracking system for wood products, 
allowing purchasers to differentiate legal and illegal timber. In 
addition, the Alliance has helped directly improve forest management. 
For example, WWF helped two new companies carry out baseline 
assessments and devise an action plan to achieve forest certification. 
As a result, over 200,000 hectares of forest will be under improved 
management. Through this Alliance, USAID has helped improve the 
management of nearly 1.2 million hectares of forest in Indonesia. USAID 
also protects endangered orangutans and their habitat through community 
and local government participation. Grants have been given to the 
Orangutan Foundation International, The Nature Conservancy, World 
Education and Conservation International to work on the islands of 
Borneo and Sumatra. A major focus includes conducting forest patrols, 
training park officials, and using Geographic Information Systems (GIS) 
to help monitor and manage Tanjung Puting National Park. Additionally a 
38,000 hectare former logging concession has been handed over to and 
managed by indigenous Dayak communities for forest and orangutan 
conservation.
    Leveraging expertise and funding from private sector partners like 
Johnson & Johnson, TetraPak, Home Depot, Gibson Guitars, and Ikea, the 
Sustainable Forest Products Global Alliance (SFPGA) between USAID, 
Metafore, WWF and the worldwide membership of the Global Forest Trade 
Network is working as a public-private partnership to increase the 
demand for products made from sustainably managed forests. This is 
improving the economic viability of sustainable forestry. In Africa, 
SFPGA works in a number of countries to foster sustainable forest 
management. In Cameroon, WWF's Central Africa Forest & Trade Network 
obtained commitments from logging companies to help develop sustainable 
forestry systems by assisting the formation of village forest 
committees to provide input into local forest concession management. In 
Ghana, the Forest and Trade Network has achieved similar participation 
from the forest industry, leading to a recent conference that developed 
management prescriptions for High Conservation Value Forests, a key 
step in obtaining forest certification.
    The long-term goal of USAID's forestry program in Brazil is to 
significantly increase the area of the Brazilian Amazon under 
sustainable forest management, reconciling the desire for economic 
growth with the need for healthy, working forests. USAID's partners 
provide training in forest auditing procedures and forest management 
techniques and a major opportunity exists to support the newly 
established Brazilian Forest Service by expanding on the longstanding 
relationship between USAID, the Brazilian Ministry of Environment, and 
the USDA Forest Service. USAID has helped place an additional 1.4 
million hectares of natural forest under sustainable management in the 
Brazilian Amazon. With technical assistance from USAID partners, 
Conservation International and Instituto Raoni, Brazil also achieved 
the largest area of certified tropical forest in the world: An area of 
1.5 million hectares of Amazonian forest has been certified for 
sustainable extraction of Brazil nuts by Kayapo indigenous communities 
in southern Para State. To date, nearly 3 million hectares of forest 
are under management plans or are certified for sustainable extraction. 
Nearly 3,900 people were trained in sound forest management techniques 
in FY 2006 and nearly 10,000 more were taught best practices, including 
fire management and land use planning.
    Mr. Chairman, USAID is dedicated to applying our experience in the 
design of programs going forward. The long-term success of USAID's 
development programs will depend upon how climate change is considered 
in planning and implementation. We will work with nations to adapt to 
the impacts of climate change, strengthen resilience, disseminate tools 
and methodologies to improve vulnerability and adaptation assessments, 
and integrate adaptation into development. By incorporating--
mainstreaming--climate change into existing priority programs, 
development success becomes more robust when viewed in the long term.
    In response to the May 31, 2007, speech by President Bush on 
climate change, USAID requested an increase in climate change specific 
funding in the President's FY09 budget. The bulk of these efforts will 
add to the extensive forest conservation and biodiversity programs at 
the Agency, and will create new efforts to support adaptation efforts 
in development assistance. The activities will contribute to an 
improved global environment through climate change mitigation and 
adaptation while at the same time contributing to poverty alleviation 
and economic growth in countries USAID serves.
    Activities in the forest sector address forests and climate change 
strategically. Our programs work to reduce CO2 emissions from 
deforestation, promoting sustainable forest management and forest 
conservation, and increase CO2 sequestration through reforestation. 
Activities seek the significant cobenefits of economic development and 
improved livelihoods that come from local economies that are 
diversified through productive integration of trees in agricultural 
lands, and sustainable use of existing forests. Reforestation is a way 
to accomplish economic development, increase food security, meet energy 
needs, provide environmental services like improved water supply, and 
reduce sources of conflict.
    Healthy forests also help buffer against future climate changes and 
increased weather variability. Sustainable forest management can help 
communities' resilience to changing temperature regimes, precipitation 
patterns and runoff. Sustainable forests help maintain water table 
levels, continue local precipitation patterns, provide buffers for 
flooding, and absorb heavy rains. There are a number of key elements to 
USAID's proposed FY09 program. USAID will manage four regional forest 
conservation/sustainable forest management programs (CBFP, ICAA, Asia, 
West Africa) covering heavily forested areas of the tropics and 
subtropics in the developing world. We will continue country-based 
biodiversity programs addressing the identified biodiversity hotspots, 
their relationship as habitat for endangered species, and alternative 
livelihoods and economic growth for the local people. USAID will create 
targeted reforestation programs to increase forest cover in areas 
concerned with degraded lands, impacts from extreme weather events, 
desertification, water harvesting, and drought resilience. And finally 
USAID will invest in sustainable efforts that help developing countries 
meet their own energy demands domestically while providing for food 
security and improved livelihoods of people.
    In closing, Mr. Chairman, forests were once seen simply as an 
important economic asset: A source of timber and game, or land for 
conversion to agriculture. Now we know the importance of forests and 
biodiversity in other roles. They regulate water supplies; they provide 
nontimber assets including tourism, biodiversity, and culture; and they 
influence the global climate and carbon cycles.
    Deforestation is understood to be a threat to biodiversity and also 
to watersheds, livelihoods, and indigenous people--illegal logging 
represents a significant lost asset to the country. We now know that 
deforestation is a significant contributor to global GHG emissions, 
thus reducing deforestation is essential for reducing or offsetting 
emissions. Deforestation also increases vulnerability to climate 
change, at the site and downstream--changing precipitation patterns, 
water retention, water quality, increasing run off especially in 
extreme events--but also results in a lost economic backstop, the 
``supermarket of last resort.''
    As such, USAID will continue to address forests and biodiversity 
management as part of an integrated response to address the drivers of 
deforestation. This response includes promoting sustainable economic 
development, alleviating poverty, strengthening forest governance, and 
conserving biodiversity, while incorporating climate change mitigation 
and adaptation approaches to apply science to reach sustainable and 
enduring development outcomes.

                                  
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