PROJECT INFORMATION DOCUMENT FINAL STAGE Report No.: Project Name. Improving Rural Livelihoods through Carbon Sequestration Project Region

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1 PROJECT INFORMATION DOCUMENT FINAL STAGE Report No.: Project Name Improving Rural Livelihoods through Carbon Sequestration Project Region SOUTH ASIA Sector (Agro-) Forestry (100%) Project ID P Borrower(s) N.A. Implementing Agency VEDA Climate Solutions Ltd with J.K. Paper Mills and Vanitha (Women) Empowerment, Development and Advancement (VEDA) Mutually Aided Cooperative Society Ltd. Environment Category B Safeguard Classification S 2 Date PID Prepared May 1 st, 2007 (update) Appraisal Authorization April 4 th, 2007 Estimated Date of Board ERPA s signature May 8 th, 2007 Approval 1. Key development issues and rationale for Bank involvement India revised its National Forest Policy in 1988, giving highest priority to environmental sustainability. In order to reduce pressure on forests, the policy inter-alia proposes that forest-based industry should establish direct relationships with individuals who can supply them the raw materials from non-forest land. Since then, agro-forestry plantations have been gaining popularity, including the establishment of out-growers schemes with forest-based industries, although, due to transaction costs, these opportunities tend to have remained out of reach of small farmers. This project is in line with the Country Strategy for India dated September 15, 2004, and more specifically with measures envisaged in the Partnerships for the Global Environment. It also supports the Millennium Development Goal No 7, Ensuring Environmental Sustainability. The proposed project would not only sequester Green House Gas (GHG) emissions and generate global environmental benefits; it would also improve the revenue-generating capacity of small farmers, thereby contributing to India s poverty alleviation goals as aligned with Millennium Development Goal No 1. Being the first of its kind, the Project is also expected to have significant demonstration effects. In view of this, the World Bank s involvement through the Bio Carbon Fund in supporting this project is considered appropriate. 2. Proposed objective(s) The proposed AR-CDM (An Afforestation Project under Clean Development Mechanism project) will mobilize and encourage resource poor farmers to raise plantations of tree species with high rates of carbon removal in their farmlands. The proposed AR-CDM project activity will also help explore and demonstrate the technical and methodological approaches related to a credible carbon removal process. This will be a pilot initiative that aims at improving rural livelihoods through Carbon Sequestration by adopting environment friendly technologies based on agro-forestry practices. The global environment objective of this project is to sequester greenhouse gases by expanding agroforestry plantations on mostly degraded lands that are owned by small farmers. The AR-CDM project has

2 been developed through a series of consultations with different partners such as farmers, Veda-Max, JK Paper Mills (JK) and the World Bank, where a broad consensus on the following was reached: To remove CO 2 through plantation forestry in degraded areas and to test and pilot how reforestation activities generate high-quality greenhouse gases emission removals that can be measured, monitored and verified. To develop plantation and agro-forestry models for providing multiple benefits to farmers in respect of timber, pulpwood, firewood, minor forest produces, intercropping along with carbon removal. To provide additional income and promote livelihoods of poor farmers through carbon revenues. To reforest degraded lands and increase soil and moisture conservation for reclaiming waste land in the region. To reduce the dependence of the paper industry on natural forests and increase bio-diversity. To build capacity of the various stakeholders to benefit from global mechanisms. The interventions proposed under the project makes the villagers a strategic seller of carbon credits under the Kyoto Protocol and also selling carbon in response to global demand for Certified Emissions Reductions under the Clean Development Mechanism. Host country approval with the endorsement of the Ministry of Environment and Forest, the Designated National Authority in India, was received on November 3, Project description The proposed AR-CDM project will mobilize and encourage poor farmers (especially women and marginal farmers) to raise plantations of tree species with high rates of carbon removal in their farmlands. The project will promote plantations of multi-purpose and multi-type species in 3500 Ha. The project will be implemented in Andhra Pradesh and Orissa, covering six districts (Raigarda, Kalahandi, Koraput, Vijayanagaram, Srikakulam and Visakhapatnam). The project partners will take into consideration criteria such as carbon removal rates, biodiversity enhancement, soil and moisture conservation and the associated minor forest produces. Several options for choice of species with carbon credit potential have been finalized in consultation with the farmers and other sector partners. This includes fast growing and short rotation species, timber species and various options of inter-cropping. The project is envisaged with a mix of species comprising of Eucalyptus, Casuarina, Subabul and a combination of miscellaneous fruit bearing species such as Mango, Jamun, etc. The establishment of plantations on these degraded lands will be based on the technical and practical experience of JK Paper Mills in association with participating marginal and small farmers. While the AR- CDM project is an independent pilot initiative, it can also be considered as an additional component of the ongoing JK Paper Mill supported plantation program. While the two projects (CDM & JK) adopt different approaches and are being implemented on different lands, they still complement each other. The JK being a community-driven project focuses on enhancing pulp wood production through extensive community mobilization process and technological innovation (i.e., development of clonal technologies and local gene pool). Whereas in AR-CDM project, the focus is only on afforestation for which the

3 farmers will receive cash incentive (by being a potential seller of carbon credit) on two types of lands; (i) non-arable agriculture waste land, and ii) degraded common property land. The project plans to strengthen the farmer-industry partnerships with buy-back arrangements to purchase pulp wood and other produce expected under the project (after the stipulated carbon emission period). It will encourage farmers to go for agro-forestry practices such as inter-cropping during the first year of the plantation to meet their subsistence needs. It has also established a long-term credit network with financial institutions to help farmers meet the cost of plantation and maintenance. Planting materials are developed from local gene pool, which are located around the project area, and from clonal material which are developed from mother plants which are mostly native to the area or grow under similar conditions. In case of clonal planting material the candidate plus trees of Eucalyptus and Casuarina will be selected from the states of Orissa and Andhra Pradesh and multiplied in the research facilities of JK Paper Mill after extensive evaluation of their promising traits. The clones which demonstrated high productivity, tolerance to pests and diseases and drought resistance are short listed for multiplication. These are being supplied to growers and have a proven potential of being genetically superior, fast growing and ensuring uniform growth besides being disease and pest resistant. 4. Risks Technical The risks identified pertain mainly to grazing, fires, insects and pests. These will be dealt with in the following manner. Farmers are expected to provide necessary support and protection through adequate fencing in the potentially threatened areas. Pests will be avoided and controlled by implementing pest management strategies which will integrate adequate cultural practices as well as chemical control on a limited scale in line with the provisions of the Environmental Management Framework. For fire protection and prevention, necessary training will be provided to farmers. In order to prevent fires, fire lines will be cut in areas prone to fires and monitoring patrols will be constituted by farmers. The survival and growth of the plantations as well as the knowledge level of the farmers will be the indicators for effectiveness of the steps taken for the identified threats. Financial In order to set-up agro-forestry plantations, small farmers need access to finance that they typically do not have or do so only on a limited scale. In view of this, the establishment of agro-forestry plantations will be financed partly from suppliers credit provided by JKPL (particularly for seedlings) as well as credit provided by the banking sector, mainly for working capital purposes. Based on the buy-back arrangements with JKPL, the company has been able to facilitate access to credit for small farmers who otherwise might have had difficulties in accessing these sources. Implementation In order to be successful, there is a need for effective cooperation between agro-forestry farmers, J.K. Paper Mill and VEDA Climate Solutions Ltd. Since all parties are poised to gain from working together, the absence of a track record in doing so might reflect some implementation risks. These risks are addressed in the following manner. First, J.K. Paper Mills has quite some experience with out-growers schemes, albeit mainly including large farmers and not small farmers as envisaged under the Project. Under these arrangements, JK Paper Mills will provide all the inputs and services to the farmers that it typically provides, as well as gear-up training particularly in those aspects that are considered as specified

4 in the Environmental Management Framework. It will intensify its efforts to arrange for access to credit, while expanding its facilities for suppliers credit. JKPL will also keep record of data and information required to quantify the ERs, as per the agreed monitoring plan, and report through VEDACSL periodically. A formal MoU stipulating the role of JKPL in the Project has been signed between VEDA and JKPL. VEDA Climate Solutions Ltd. will play the role of a bundling entity (on behalf of the individual agro-forestry farmers), acquire the rights to the emission reductions through tri-partite agreements signed between agro-forestry farmers, JKPL and VEDACSL, undertake activities relating to carbon transaction aspects of the Project, and pass on the emission reduction benefits to participating agro-forestry farmers by selling the emission reductions to the Bio-Carbon Fund of the Bank. Agroforestry farmers wishing to put up agro-forestry plantation and claim the carbon credits will sign a tripartite subproject agreement with VEDA Climate Solutions Ltd. and JK Paper Mills Limited, authorizing both parties to carry out all activities relating to the carbon transaction. As part of the agreement, the agro-forestry farmers, with assistance from JKPL, are required to implement mitigation measures in accordance with the EMP in order to be eligible to claim the benefits against emission reductions. Besides the support provided by JKPL, they are responsible for raising their own finances for setting up of agro-forestry plantations. 5. Safeguard policies that apply Social issues were discussed at all stages of project preparation with all stakeholders and also during disclosure workshop. The project involves mutual agreements between willing farmers and the private entrepreneur. This in substance means the project reflects the choice and voice of the farmers. It does not involve community and common land, thus ruling out potential adverse impacts on vulnerable groups who may be dependent on these common properties. The project is spread over six districts with a target area of 3500 Ha, which will have insignificant impact in terms of the inclusion issues. However, some of the beneficiaries could be tribal families (not all). Therefore, the Indigenous People (IP) Policy is not triggered here. However, the principles stated in IP policy would be applied in spirit. The project proponents have agreed to adopt informed consent approach and use culturally appropriate communication strategy. The project has already developed local cultural tribal friendly IEC campaign that are used by JK Paper mill (one of the partners) as part of their corporate social responsibility. However, the following environmental safeguards policies have been triggered following the environment assessment (EA) that has been carried out. Environmental assessment OP/BP 4.01 Pest Management OP 4.09 An environmental assessment (EA) has been undertaken. This included an analysis of sector specific environmental issues, policy and institutional bottlenecks and lessons learned from past and ongoing projects. Incorporating the key environmental challenges identified under the EA, an Environmental Management Framework (EMF) was prepared. Keeping the potential risks in mind, the EMF has developed various environmental management strategies to be used during the implementation of the project. The impact of the proposed project on the environment and plantation associated risks are expected to be negligible. Since there is a possibility of short-term adverse environment impact associated with some of the project interventions, the EMF outlines specific mitigation measures for the same. The EMF outlines several environmental issues and has developed specifications required to mitigate/manage those risks such as water resources, pesticide, soil nutrition depletion and change in land use and industry raw material dependency on agriculture land. Water management and pesticide management are two specific issues prioritized as key environmental challenges that need more attention and the EMF has included a detailed environmental analysis with mitigation measures for both:

5 Surface water conservation and groundwater recharge mechanism: Most of the degraded lands likely to be brought under the project have access to irrigation facilities. The EMF clearly indicates that the status of groundwater in project areas of AP and Orissa is showing a surplus scenario except in certain pockets in AP over-exploitation of ground water is reported to be critical. There is a possibility that majority of the marginal farmers (in project area) are likely to opt for eucalyptus plantation because of the sheer economic benefits. Many reports claims that the past experience of eucalyptus plantation in other states have shown decline in groundwater table. While the impact of eucalyptus on groundwater is debatable, it is best for the Project to restrict its activities to areas designated as safe and not take up plantation activities in areas that are classified as semi-critical, critical and over-exploited with respected to groundwater resources. It is also recommended that the groundwater resources are assessed periodically and the EMF is updated to respond to any changes in the groundwater resource of the project area. Use of pesticides: The project areas in AP and Orissa seem to have clear distinctions in terms of land use. The three districts in AP are predominantly under agriculture while the three districts in Orissa are under both agriculture and forest. However, there is one cross-cutting problem in both states and that is of pest attack of white-ant/termite in most of the tree crops. The major use of pesticide in project activity seems to be aimed at controlling termite attacks on eucalyptus saplings and trees. Treatment against termites is a pre-requisite in raising any plantation particularly, softwood plantation, which could be a preferred species in the project area because of its economic potential. Termites attack the root zone and the saplings are susceptible to such attack during the initial six months. Besides, the bigger trees are also attacked during anytime of its rotation period. The project will be using clonal seedling developed in the green house chamber of JK paper mill. Therefore, termite treatment in project areas is essential to maintaining a high survival rate of the seedlings. 6. Tentative financing Source: ($m.) Private Equity Contribution: 610,928 Commercial Financing 2,517,869 Total capital cost 3,128,798 BioCF Funding 1,117,800 (upon delivery of verified emission reductions to BioCF), with an option for an additional 1,499,310 Contact: Martien van Nieuwkoop Lead Rural Development Specialist World Bank 70 Lodi Estate New Delhi, Tel: India (011) mvannieuwkoop@worldbank.org