Can tropical forest loss be offset by a forest “credit”? A closer look at an emerging environmental market in Paraguay
by A. Gómez and Ryan Sarsfield
Can a market for environmental service certificates offset impacts on Paraguay's ecosystem, such as forest loss? How can such an environmental market ensure sustainable development?
Paraguay, a small and biodiversity-rich country with no access to the sea but bathed by formidable rivers, decided in 2006 to create a new pathway to promote sustainable development through a market for Environmental Services Certificates (CSA). This initiative allows for the mitigation of environmental impacts for large scale projects, and for rural properties that lack the minimum forest area required by forestry legislation, through the purchase of CSA. In this analysis, we embark on a journey through a road-building project, navigating Paraguay's CSA system, docking at the key ports of this public policy and suggesting new currents that the country can explore to strengthen and expand this valuable initiative. Taking into account the almost 20 years of transformation of the nation’s landcover where more than 4.7 million hectares were lost - greater than the area of Denmark - and which represents 18% of the country's total forest, it is worthwhile to analyze the results of the program and its possible role in the future of the country's environmental policy.
Environmental Services Certificates (CSA) and their role in forest conservation as a potential promoter of sustainable development in Paraguay
When well structured, an environmental market can reorient an economic system to avoid environmental damage, compensate or replace loss, and encourage the responsible use of natural resources. With this premise, the Ministry of Environment and Sustainable Development (MADES) of Paraguay seeks to promote a balance between the economic development of this country and the mitigation of impacts on nature, especially deforestation, caused by the displacement of natural forest due to economic growth, primarily agriculture.
The Environmental Services Certificate (CSA, by its initials in Spanish) is an instrument created in Paraguay to encourage and recognize the conservation and restoration of ecosystems that provide environmental services, such as carbon capture, biodiversity conservation, water resource protection, and scenic beauty. This certificate allows landowners, companies, and communities to receive financial recognition for their efforts to protect or restore the environment. In addition, the CSA is a tradable asset that can be transferred or sold to companies or organizations interested in offsetting their environmental impacts or complying with ecological regulations.
The environmental services market in Paraguay has experienced remarkable growth in recent years, consolidating its role as a key tool for conservation. Currently, approximately 1,027,789 hectares (2.53% of the national territory) have CSA, nearly the size of Jamaica, of which 10% is located on indigenous lands. In the last eight years, 1,254 CSA transactions have been registered, totaling more than USD 25 million, with the majority of them for the purpose of offsetting projects of high environmental impact. The value of CSA varies significantly between ecoregions, ranging from USD 119 to USD 687 per hectare.
The environmental services market in Paraguay, like any other, requires a tradable asset, in this case the Environmental Services Certificate (CSA). It also needs a seller capable of providing the service, and a buyer interested in offsetting its own environmental impact or complying with current regulations. Finally, a regulatory body that guarantees the validity and compliance of the CSA is essential.
There are two main contexts that promote the acquisition of CSA. The first is rural landowners who lack the minimum forest reserve area required by law, and therefore must compensate for this deficit by purchasing CSA. The second situation occurs in “high environmental impact” projects, such as the construction of roads or hydroelectric dams, which also require CSA to mitigate the negative effects of their activities on the environment.
This article will focus on the regulation of CSA for high-impact projects, a timely issue given that the Paraguayan government is in the process of acquiring CSA for an approximate value of 6.5 million USD. This amount represents 26% of the total value of CSA negotiated over the last eight years, which underlines the importance of analyzing this mechanism at a key moment of its implementation - and potential improvement.
To illustrate how the system works in Paraguay, we will use the example of the new Puerto Indio highway project, located in the district of Mbaracayú, department of Alto Paraná. This project is 63 km long and crosses a subtropical forest rich in biodiversity in the Alto Paraná ecoregion (see Map 1). The Ministry of Public Works and Communications (MOPC) will be responsible for the construction of the road, which makes it the buyer who must compensate for the environmental impact caused by the project.
Map 1: Location of the Puerto Indio road, Mbaracayú district, in the Alto Paraná ecoregion
The buyer knows that they will need to acquire CSA, but must first determine the amount. This is where the regulator, the Ministry of Environment and Sustainable Development (MADES), comes into play. MADES requires that for high-impact projects, it is mandatory to acquire CSA for a value equivalent to 1% of the total investment; for the Puerto Indio highway, this would be approximately 400,000 USD.
This raises the first question about the Paraguayan system: what are the fundamental drivers of the value of the environmental impact? Currently, this value is associated with the cost of the project, but how is this logic justified in the face of such different realities as a road that crosses a well-drained pasture versus one that passes through a primary forest rich in biodiversity? A fundamental principle of the valuation of nature and its services is that the price must represent the cost of the nature impacted. However, in this system, the economic investment is evaluated by the opportunity cost, not the value of the damage caused to nature.
In our example, the MOPC (buyer) has determined that it must purchase CSA for a value of 400,000 USD, but where, and from whom? In response, the MADES (regulator) informs the buyer that it can purchase CSA from anywhere in Paraguay, from a landowner who has valid certificates in any ecoregion, from the Humid Atlantic Forest in the east to the Dry Chaco on the border with Bolivia. The value of the CSA is calculated per hectare, varying according to the ecoregion (see Map 2). For example, if the MOPC decides to purchase CSA in the Alto Paraná ecoregion, where its project is located, it would have the option to purchase CSA on an area of 840 hectares. In contrast, in the Médanos ecoregion, it could obtain CSA representing 3,361 hectares, while in the Central Coast, the number would be considerably lower, with only 582 hectares.
Map 2: Variation in the cost / hectare of CSA across different ecoregiones of Paraguay.
The value of CSAs varies between 119 USD and 687 USD per hectare, due to the opportunity cost, which estimates the income lost by not using the land for other purposes. To determine the costs, factors such as productivity, potential income, the coefficient of production for irrigation, the uncertainty of the investment and a biogeographic weighting are considered. In this context, the main determinant of the value of a CSA is the estimated economic loss, i.e., what a farmer doesn’t earn by not carrying out their usual activities. Meanwhile, the ecosystem is used as a classification criterion, not as a determinative element. This suggests that the environmental component has a secondary role in the valuation of the CSA.
This approach gives rise to the second question about the system: why prioritize agricultural production instead of valuing the environmental service itself, when the policy is explicitly oriented towards ecological benefit? With this emphasis, the objectives seem more economic than conservation-oriented, which raises concerns about the lack of adequate analysis regarding ecosystems that are high biodiversity, under greater pressure, or scarce. In contrast, in Colombia, four key elements are taken into account to calculate the Compensation Factor: Representativeness, Rarity, Remaining Extent, and Rate of Conversion.
With more clarity on the price and volume of credits needed, the buyer decides to hold a public tender to find the seller or sellers who hold CSA worth USD 400,000. In this case, six sellers were awarded the contract, three of which are located in the Pantanal ecoregion (tropical wetlands more than 650 km from the project), two in the Dry Chaco (forests adapted to arid climates, with twisted and thorny trees, bushes, and salty waterways, more than 750 km from the project) and one in the Central Selva (150 km from the project). In none of the six cases were the CSA acquired in the Alto Paraná ecoregion where the project is being executed, a subtropical forest at high risk from agriculture and with a high level of endemism.
Pantanal Forest, by Bernard Dupont
Forest of the Dry Chaco Ecoregion
This purchase is valid for 5 years, after which the sellers can offer the same service on the same land to another buyer, while the buyer has no further obligation. It is important to highlight the scarcity of CSA supply, since in this case only seven sellers responded to the tender, of which six made a sale.
Following the fundamental principle of equivalency, the question arises: does it make sense for a project to compensate for its environmental impact by acquiring CSA in another ecoregion? In the case of Alto Paraná, one of the most degraded ecoregions in the country, compensation through CSA from the Dry Chaco or the Pantanal does not adequately address the local restoration or conservation that this area requires. The purchase of CSA in distant ecosystems could generate an "environmental fragment" and is not equivalent to the damage in Alto Paraná. In addition, the re-sale of CSA in the same area after 5 years creates a result contrary to the principle of no net loss, making the original impact a net loss for the long term.
Map 3: Distance between the Puerto Indio Road Construction Project and the purchased CSAs.
Finally, this situation raises a fourth question: does this system of 5-year contracts, with the possibility of reselling CSA each cycle, demonstrate additionality and permanence? These ensure that the actions taken ultimately result in gains in nature beyond what would have happened, and that these gains endure for the long term. In this case, apparently not. Certified areas, since they can be constantly resold, will not add new conservation areas, while the impacts of the projects will continue to decrease areas of native ecosystems. This creates an imbalance in which the net environmental impact will increase, but mitigation will not increase proportionally, compromising the effectiveness of the system in the long term.
An alternative could be that instead of acquiring CSA for 5 years on 1,386 hectares, it would be more efficient to invest in the purchase of areas to be held in perpetuity. With current market prices, that same investment would allow for permanently securing more than 26 hectares of well-drained areas or up to 57 hectares in lower areas. This alternative not only guarantees long-term conservation, but would also strengthen protected areas. Another option could be the restoration of forests in degraded areas located on indigenous lands, provided it is agreed upon with the community, generating additional social value.
It is important to note that if the price of CSA does not correspond fully to the real value of restoration or the purchase of conserved lands, it can encourage the purchase of CSA to facilitate changes in land use (i.e. deforestation) as it is low cost, causing the opposite effect to conservation.
Strengths of the CSA Market
One virtue of the CSA market is the inclusion of indigenous peoples. With the support of MADES, the National Institute of Indigenous Peoples (INDI) and various civil society organizations, work is being done to strengthen certification in indigenous territories. To date, 17 indigenous communities have already certified areas with CSA.
Another major positive point is the inclusion of high-impact projects within the system. This facilitates the sale of large volumes of CSA between the public and private sectors, as well as with indigenous communities. In addition, it encourages transactions between different State agencies, such as the Ministry of Public Works, which has a significantly larger budget and focuses on development, with MADES, with more limited resources but with the fundamental mission of environmental protection.
Opportunities to improve the system
The Environmental Services Certificate (CSA) system in Paraguay has proven to be a valuable tool for conservation, but still has significant areas for improvement that can strengthen its effectiveness and fairness. Below are some key opportunities:
Mitigation Hierarchy: Environmental markets are not just a compensation mechanism for unavoidable impacts; they should be structured to avoid impacts in the first place. Regulations should require that projects seeking environmental approval must effectively demonstrate that: 1) they avoid the impact as much as possible; 2) they minimize the impact as much as possible; 3) and only then use the CSA mechanism to compensate. This sequence is called the mitigation hierarchy. In addition, the ultimate cost of compensation should reinforce this practice, such that the cost incentivizes projects to reduce their total impact, not the opposite effect.
Real Cost and the 1% Investment Calculation - Appropriate Pricing for Reasonable Incentives and Disincentives: Proper valuation of Environmental Services Certificates (CSAs) should reflect not only the opportunity cost from a production perspective, but also the intrinsic value of environmental services, such as biodiversity and the protection of endangered species. Establishing a pricing system that functions as a reasonable incentive for conservation and a disincentive for degradation could result in a positive change in land use decisions. Landowners could recognize the value of (selling) CSAs not only as additional income, but as an essential component of a sustainable future, balancing economic profitability with the preservation of vital ecosystems.
What’s more, the offset approach based on the arbitrary calculation of 1% of a project’s total investment may not adequately reflect the real environmental impact created. Before considering offsetting, it’s essential to prioritize strategies to avoid and reduce impact. Clear frameworks could be established that incentivize developers to implement environmental damage avoidance and reduction measures in the early stages of their projects. In the end, the goal of putting a price on environmental impact is not simply to raise funds, but is a key tool to avoid impact in the first place.
Equivalency - CSA in the Same Ecoregion: The effectiveness of environmental offsetting would be strengthened if the purchase of CSAs within the same ecoregion as where the project is developed were prioritized. This would ensure that mitigation efforts are directly aligned with local environmental needs, promoting more effective and contextualized conservation. Encouraging the purchase of CSA in the affected ecoregion can contribute to the restoration of critical ecosystems and the preservation of biodiversity. The fact that the price of local CSA can be high is not an unintended consequence, but a good effect of a well-designed framework, and something that creates the right incentives in environmental management decisions.
Permanence - Securing Long-Term Commitment: Addressing the permanence of Environmental Services Certificates (CSAs) through the implementation of perpetual contracts that ensure a long-term commitment to conservation is critical, as environmental damage is largely permanent. Five-year contracts can foster a false sense of compliance and encourage irresponsible environmental practices.
Additionality - Ensuring Incremental Conservation: It is essential that conservation actions funded by CSAs represent a real and additional environmental benefit. CSAs should not be limited to protecting existing areas, especially those already covered by other policies or mechanisms. Instead, they should encourage new initiatives that expand protected or restored areas. An offset program that incentivizes preservation or protection projects tends to result in a net loss, compared to a program that promotes offsetting through restoration. This approach strengthens overall environmental sustainability, promoting a tangible positive impact, and the effective protection of biodiversity in Paraguay.
Transparency - Strengthening the Process: Transparency in the administration and marketing of Environmental Services Certificates (CSAs) is crucial to building trust among the different actors involved, whether sellers, buyers, or other groups. This article was made possible thanks to the information available on the website of the Ministry of Environment and Sustainable Development (MADES) and on the Public Procurement portal. However, it would be beneficial to improve these tools to facilitate access to data, which would allow for statistics and analyses that support and strengthen the CSA system, promoting informed and equitable participation of all stakeholders, including indigenous peoples and local communities.
A compensation system of this type is relatively uncommon among the nearly 200 countries in the world. However, when it is well designed and has the capacity to evolve with experience, it can become a strategic pillar for the country's environmental management, promoting sustainable development. With few modifications, the Paraguay CSA market could be on par with similar programs in Colombia, the US, or other countries. The Paraguayan forest, as an integral part of the nation's natural heritage and home to emblematic species such as the jaguar, has an incalculable cultural and economic value and should not be undervalued, bought, or sold cheaply.
