Emission Reductions Program to Combat Climate Change & Poverty in the Caribbean Coast, the BOSAWAS & the Indio Maiz Reserves

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Country Context: Nicaragua’s economic and poverty outlook has been jeopardized by the political crisis that began in April 2018.Social and political unrest and a protracted political crisis have affected economic activity and eroded confidence. Real GrossDomestic Product (GDP) contracted by -4.0 and -3.9 percent in 2018 and 2019, respectively. According to the latest World Bankforecasts for 2020, economic growth is expected to fall to -5.9 percent, and would recover slowly to 1.1 percent by 2021. TheCOVID-19 (Coronavirus) pandemic plus the violence that has prevailed in the last years, job losses, a fall in consumer and businessconfidence, and a decline in labor intensive sectors have taken a social and economic toll, further halting progress achieved inpoverty reduction since 2005. Nicaragua is one of Latin America’s least developed countries. Poverty (with income below USD 3.2per person per day in 2011 Purchasing Power Parity – increased to 13.1 percent in 2019 (from 9.5 percent in 2017). Currently, thepandemic is expected to adversely affect Nicaragua through declined remittance inflows, reduced trade, paralyzed tourism, andincreased risk premiums, partially offset by lower oil prices. The gender equality index in Nicaragua was is 0.65 in 2019(Classification 55 of 129 countries) reflecting considerable inequalities in health, empowerment, and education. Indigenous andAfro-descendants’ women and youth tend to be disproportionally affected by poverty. Agriculture and livestock have continued togrow despite the political crisis and the COVID19 pandemic. Local demand for agricultural products has remained stable. Ininternational markets, the agri-export sector has fared well. Historically, increases in agricultural and livestock production havenot been accompanied by significant intensification, and yields for Nicaraguan commodities are among the lowest (USD717/hectare)among its regional peers. This extensive production model, in concert with the development of roads and other infrastructure, hascaused serious threats to forest ecosystems. Nicaragua is highly vulnerable to natural disasters and climatic variability,including droughts, hurricanes, floods and landslides (particularly in the coastal zones), in addition to geological events,earthquakes, and volcanic eruptions. Tropical cyclones currently appear on the increase and heavy rainfalls, combined withunsustainable land use management, make communities more vulnerable to landslides. A strong warming trend across the country hasbeen reported, manifesting through diurnal temperature increases (+0.40 degrees C) in deforested areas. Sectoral andInstitutional Context Nicaragua’s diverse forests are essential to sustain the livelihoods of Indigenous peoples andAfrodescendant communities and the economy. Most of the Nicaragua’s forest area (82%) lies in the Caribbean Coast, which contains3.2 million hectares of relatively well-conserved sub-tropical forests. Forest ecosystems are home to approximately 20,000 floraand fauna species. Forests contribute to regulate hydrology and precipitation, conserve water sources, biodiversity, and soilfertility, critical functions to maintaining regional and local agricultural productivity. They are often a primary source ofincome and wealth for forest dwellers (including the extreme poor), who in the Caribbean Coast are approximately 1.1 millionpeople. Forest also sustain the cultures and spiritual values of Indigenous peoples and Afro-descendent communities.However,forests are threatened by deforestation and forest degradation. The forest cover has been reduced by more than half during the last35 years in Nicaragua. The country has experienced forest loss of approximately 147,200 hectares per year since 2005 (2.3% peryear). Over time, the Caribbean area has become the primary source of deforestation (97% of the national deforestation between 2010and 2015), with expansion of extensive livestock and agriculture mirroring forest cover loss – and with a significant sharehappening in the two largest protected areas. The annual reforestation is insufficient (4,000 ha/year) to counterbalance forestloss. Increasing pressure on forests, mainly due to the growing migration to the Caribbean Coast, often leads to land speculation,affecting the IATs. Weak forest sector governance is also a major underlying driver of forest degradation. The Indigenous peoplesand Afrodescendent communities often lack the necessary capital, equipment, technical knowledge, infrastructure and commercialcontacts for sustainable forest management. This lack of opportunity together with the lengthy, time-consuming and costly processesfor obtaining permits incentivizes small-scale but widespread illegal forest extractive activities such as logging, firewoodharvest and charcoal production. Forest fires also have a great incidence.Deforestation and forest degradation are responsiblefor a large share of the country’s Greenhouse Gases (GHG) emissions. Under the business-as-usual scenario used in Nicaragua’sNationally Determined Contribution (NDC) on climate change, the Agriculture, Forestry, and Land Use sector was responsible for67 percent of the country’s total GHG emissions. Projections indicate that the national GHG emissions could grow by 33 to 55percent between 2010 and 2030. In this context, Nicaragua developed an Emission Reductions (ER) Program focused on two largepolitical jurisdictions in the Caribbean Coast, the country’s main agriculture frontier. The ER Program area covers approximately 7million hectares, of which about 45 percent are covered by forests. The ER Program area is culturally diverse and has high povertylevels and incidence of extreme poverty. The ER Program represents the investment phase of the Reduction from Deforestation andforest Degradation (REDD+) financing strategy. The proposed Emission Reductions Payment Agreement (ERPA) forms the actual results-based payment mechanisms for the ERs. The ER Program contributes to national development priorities and operationalizing theNational REDD+ Strategy (known as ENDE-REDD+). It also contributes to the World Bank Group’s corporate goals of ending extremepoverty and boosting shared prosperity sustainably. The ER Program is aligned with Nicaragua’s FY18-22 Country PartnershipFramework. Particularly, the Project will contribute to achieving Objective 6 on improved natural resource management (water,forests, and land) and reduced vulnerability to natural hazards, under the third pillar, “Improving Institutions for Resilience andSustainability.” Operation Description(i) Scope of the instrumentThe proposed operation consists of a transaction through anERPA for the delivery of, and payment for ERs and subsequent distribution of payments according to a Benefit Sharing Plan (BSP).The financing for this operation is provided by the FCPF Carbon Fund and will not cover the investment costs associated to ERProgram implementation. The ERs generated will be measured as tCO2e against a previously determined Forest Reference EmissionsLevel (FREL) through a Monitoring Reporting and Verification (MRV) system and involving independent, third-party verification ofmonitoring reports.(ii) Separate and Complementary Underlying activities that will generate the ERsTo reduce Greenhouse Gases(GHG) emissions, Nicaragua will implement the separate US$115.5 million BioClima Project, financed by the Green Climate Fund (GCF)through the Central American Bank for Economic Integration (CABEI), and the Global Environment Facility (GEF). The BioClima Projectimplements the investment side of the ER Program, focused on financing actions in the BOSAWAS Biosphere Reserve and the Indio MaizBiological Rese rve. The Ministry of the Environment and Natural Resources (MARENA) will be BioClima Project’s Implementing Entity,in close collaboration with the National Forest Institute and the Ministry of Family Economy. In addition to GCF and GEF resources,the BioClima Project financ