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Cablegate: Brazil Launches Its Amazon Fund, but Who Will Contribute

VZCZCXRO3040
RR RUEHAST RUEHHM RUEHLN RUEHMA RUEHPB RUEHPOD RUEHTM
DE RUEHBR #1159/01 2461110
ZNR UUUUU ZZH
R 021110Z SEP 08
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 2343
INFO RUEHSO/AMCONSUL SAO PAULO 2654
RUEHRI/AMCONSUL RIO DE JANEIRO 6536
RUEHRG/AMCONSUL RECIFE 8393
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHNY/AMEMBASSY OSLO 0041
RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE

UNCLAS SECTION 01 OF 03 BRASILIA 001159

SENSITIVE

SIPDIS

DEPT FOR OES/PCI - L.SPERLING
DEPT FOR OES/ENCR - S.CASWELL AND C.KARR-COLQUE
DEPT FOR OES/EGC - D.NELSON AND T.TALLEY

E.O. 12958: N/A
TAGS: SENV ENRG KGHG EFIN NO BR
SUBJECT: BRAZIL LAUNCHES ITS AMAZON FUND, BUT WHO WILL CONTRIBUTE
BEYOND NORWAY?

REF: (A) BRASILIA 750, (B) OSLO 472

BRASILIA 00001159 001.2 OF 003


1. (U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED AND NOT FOR
INTERNET DISTRIBUTION.

2. (SBU) SUMMARY. On August 1, President Lula signed Decree 6527
calling on the Brazilian National Development Bank (BNDES) to create
the "Fundo Amazonia" (or Amazon Fund), a new tool to help reduce
Brazil's high rate of deforestation. Environment Minister Carlos
Minc announced that the government had a target of USD 900 million
for the first year, and it seeks to raise as much as USD 21 billion
by the year 2011. Brazilian officials stress in the domestic press
that they will not brook any foreign interference with this fund.
Contributors will receive non-transferable certificates (but not
credits or any rights) indicating the reductions in carbon emissions
resulting from their contributions. Minc claims Norway is ready to
make a major contribution and others (Germany, Sweden, and even the
United States) are thinking about following suit. For its part, the
Norwegian Embassy says that Norway is negotiating conditions for a
series of contributions to the fund of about USD 100 million per
year for five years. END SUMMARY

3. (SBU) On August 1, Brazilian President Luiz Inacio Lula da Silva
issued a decree (No. 6527) creating the "Fundo Amazonia" (or Amazon
Fund). At the press event for the launching, Environment Minister
Carlos Minc announced that Norway is expected to make the first
contribution in September for a total of USD 100 million. Minc
announced that the government has a target of USD 900 million for
the first year. According to Eduardo Bandeira de Mello, the head of
the Environment and Social Responsibilities Department of Brazil's
National Development Bank (BNDES), which will manage the new fund,
it could receive as much as USD 21 billion by 2011.

THE FUND'S GOAL, ACTIVITIES AND GOVERNANCE

4. (SBU) Decree 6527 declares that this new fund has the goal of
"preventing, monitoring and combating deforestation and promoting
the conservation and sustainable use of forests in the Amazon
biome." The fund will support activities in management of forests
and protected areas, environmental monitoring, sustainable economic
development, zoning and regularization of land titles, conservation
and sustainable use of biodiversity, and recovery of degraded forest
areas. With one exception, all activities must conform to the
guidelines set forth in the government's Plan for a Sustainable
Amazon (PAS), which was announced on May 8 (see REFTEL A) and the
government's Plan for Prevention and Control of Deforestation in the
Amazon (PPCDAM). The single exception is that up to 20% of the
resources can be used for the development of deforestation
monitoring systems, including for forests outside the Amazon biome
(such as the Atlantic Forest) and even in other tropical rainforest
countries outside of Brazil.

5. (SBU) Minc told EmbOffs on August 12 that there would not be any
disbursals from the fund if the annual rate of deforestation is
increasing. The decree, however, speaks vaguely of the Environment
Ministry setting annual disbursal levels based on a to-be-developed
methodology taking into account both reductions in carbon emissions
from deforestation and also the amount of carbon reduction per
dollar spent. This new fund incorporates elements of Brazil's
proposal at the Conference of the Parties (COP-12) of the UN
Framework Convention on Climate Change (UNFCCC) in Nairobi in 2006.
That 2006 proposal called for the creation of a voluntary
international fund based on positive incentives for reducing
deforestation rates, but without imposing on Brazil any obligations
to do so and no repercussions for failing to reduce deforestation.

6. (SBU) The Amazon Fund decree sets up a Steering Committee
composed of representatives of the national government, as well as
representatives from (i) those state governments in the Amazon
region that have developed a plan to prevent deforestation, and (ii)
six designated non-governmental organizations (NGOs), including
national associations for industry, farmers, and indigenous groups.
The Steering Committee will meet twice a year and will operate on a
consensus basis, but in all cases is to be guided by the PAS and the
PPCDAM. (NOTE. Reportedly, the fund initially had featured a
significant role for international NGOs, but those provisions were
stripped out when Minc became Environment Minister in May. END
NOTE.)

7. (SBU) BNDES will be the Executive Secretary of the fund. It

BRASILIA 00001159 002.2 OF 003


will be responsible for day-to-day operations and for development
and oversight of projects. The decree allows BNDES to keep 3% of
all money raised to cover operational costs.

LOOK, NO STRINGS

8. (SBU) The key for the Brazilian government is that contributors
will have no say whatsoever in how the funds will be used. Minc
exclaimed, "With the Amazon Fund, the donor countries don't have a
seat" on the Steering Committee. Minister for Strategic Affairs,
Roberto Mangabeira Unger, who oversees the PAS, declared, "The fund
is a vehicle by which foreign governments can help support our
initiatives without exerting any influence over our national
policy." He added, "We are not going to trade sovereignty for
money." President Lula said that the fund was not only good for the
country's image, but would also allow Brazil to walk with its head
held high in international forums.

9. (SBU) So, what do donors get for their contributions? The
decree provides that donors will receive a certificate showing the
reductions in carbon emissions resulting from their contributions.
The Environment Ministry will develop a methodology for calculating
the quantity of carbon emission reductions, which will be verified
by a technical committee. Moreover, BNDES is required to employ an
external auditor, though there is no provision for sharing that
audited report with contributors.

10. (SBU) Under no circumstances, however, will a certificate be
transferable nor will it generate any rights or credits. COMMENT.
This comports with Brazil's long-standing opposition to granting
carbon credits for reduced emissions from deforestation. END
COMMENT. Amb. Everton Vargas of the Ministry of External Relations,
the lead official on Brazil's climate change team, repeatedly has
stressed that Brazil opposes the use of credits in connection with
forests because it does not want to create a means by which
developed countries can use Brazil's forests to avoid having to
reduce their greenhouse gas emissions. Moreover, he underscores
that Brazil will not accept any restrictions that could impede their
development plans for the Amazon and carbon credits for tracts of
forests could be viewed as denying Brazil the right to develop those
lands.

NORWAY LIKELY TO CONTRIBUTE WITH SOME STRINGS

11. (SBU) At a meeting on August 22, the Norwegian Embassy DCM
informed EmbOffs that Norway is negotiating with Brazilian officials
making a series of contributions to the fund over the next five
years (REFTEL B). The amount hasn't been specified; however, he
acknowledged that discussions were revolving about a USD 100 million
contribution in the first year and similar amounts for the next four
years. An announcement is expected during the Norwegian Prime
Minister's visit to Brazil in September. Norway has a critical
requirement: the funds need to be used in a manner that would allow
Norway to qualify the contribution under the OECD Development
Assistance Committee (DAC) rules on assistance. The DCM explained
that the Norwegian government was under domestic pressure to provide
qualified aid equal to at least one percent of Gross Domestic
Product (GDP). He said Norway hadn't met the 1% goal in recent
years and so the government wanted to establish a program for Brazil
and a handful of developing countries with large forests to boost
its qualified aid levels.

12. (SBU) COMMENT. Coincidentally, the Norwegian DCM said the
Prime Minister's top priority for his upcoming visit to Brazil is to
strengthen ties in the area of exploring and developing the newly
discovered off-shore oil and gas reserves. He explained that Norway
had many companies that would be able to supply a significant
quantity of goods and services to Brazil in this area. Further, the
Norwegian government had the technical advisors who could help a
country follow the "Norwegian Model" in developing its oil sector.
While there is no talk of a direct linkage between contributions to
the fund and gaining oil and gas contracts (which would be
inconsistent with ODA rules), the contributions could well have a
positive impact. END COMMENT.

13. (SBU) Minc has urged the USG to contribute to the fund.
Further, he claims to be in discussions with Germany, Switzerland
and some private corporations for contributions. The British DCM
reports that the United Kingdom would like to help Brazil in the
area of reducing deforestation, but this Amazon Fund with "no

BRASILIA 00001159 003.2 OF 003


strings" and "no supervision" is not attractive.

SERIOUS OUTSTANDING TECHNICAL QUESTIONS

14. (SBU) The Amazon Fund still needs to overcome some significant
technical hurdles. BNDES has limited experience with environmental
projects and a small environmental staff. At the same time, it has
a track record of loans to a variety of projects in the Amazon
region that have been drivers of deforestation - like ranching and
slaughterhouse industries. It is unclear how soon BNDES would be
able to receive contributions and then develop worthwhile projects.

15. (SBU) What could be even more challenging for the fund is that
under existing law contributions will be subject to a tax of about
30%. NOTE. Norway has made clear that it will not make any
contribution to the fund unless the tax issue is satisfactorily
resolved. END NOTE. BNDES's lawyers are working to find a way to
avoid taxation of contributions, but to date has not solved this
conundrum. On August 1, the President submitted a Provisional
Measure (No. 438), which if approved by the Congress, would grant a
tax exemption for the Amazon Fund.

COMMENT
-------

16. (SBU) The Brazilian government believes that with the Amazon
Fund it has created a mechanism for the international community to
provide financial support to address the serious ongoing
deforestation problem in Brazil without going through international
financial institutions. It meets the Lula Administration's two
criteria: (1) no outside interference in the government's forest
management policy, and (2) no credits under the UNFCCC or other
market scheme. The question is which country, other than Norway,
will contribute.

16. (SBU) In addition, the fund may be encountering domestic
troubles. What may be a particularly telling warning signal for the
fund is that not one of the governors or environmental secretaries
from the nine states in the Amazon region was present at the August
1 launching of the Amazon Fund. The largest state in the region,
Amazonas, has its own, state-level mechanism to combat deforestation
and does not appear to be supportive of the competing Amazon Fund.
This domestic disarray at a minimum sows confusion among potential
contributors interested in supporting Amazon forest conservation.
END COMMENT.

SOBEL

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