Evidence of revealed preferences for particular types of projects can be found within formal CDM markets as well, even though all types of tradable Kyoto offset units are notionally equivalent for the purpose of meeting treaty obligations. For example, State and Trends of the Carbon Market (World Bank, 2010a) reports that owners of the most desirable renewable energy projects often by pass exchange platforms where no distinction made among CERs by origin in order to retain premiums of roughly 5 Euros per CER. A similar price differentiation occurs via the private branding of CDM projects, as land-use projects are frequently ineligible for some well-known third-party certification programs, including Gold Standard certification (Gold Standard Foundation, 2010).

Taken together, the restrictions land-use projects face during the CDM cycle, the formal restrictions placed on their use by governments, their disfavor among buyers, and higher transaction costs all work against the economic viability of land-use projects.

**VI. The links between ancillary benefits and sustainable rural development**

For many, the limited scope for agricultural land-use projects under the CDM represents a missed opportunity to finance sustainable development. This argument rests on two foundations. The first is the already discussed normative view that has to do with the sector composition of current investment flows. The notion here is that while the benefits of slowing climate change are especially important to the rural poor, the current composition of projects favor the energy sectors and manufacturing and consequently have little impact on this generation of the rural poor.<sup>46</sup> The second set of arguments, explored in the next section, has to do with the fundamental role played by soil carbon for agriculture, adaptation and soil fertility management.

# <u>Soil carbon sequestration and productivity</u>

Numeric studies suggest that the ancillary productivity benefits of adopting carbon sequestering farming practices that come via higher yields are the dominant source of welfare gains for farmers working degraded soils. This ordering of benefits results from a confluence of factors, primarily assumptions about the price of agricultural outputs and inputs, the sequestration capacity of the soils, the price of carbon credits, and the costs of monitoring sequestered carbon. Using indicative numbers, Graff-Zivin and Lipper (2008) estimated that carbon-market related returns associated with switching from traditional to carbon-sequestering conservation methods ranged from US$0.90 to $15 per hectare, amounts that are unlikely to motivate changes in farming practices. To emphasize their point, the authors reference a study set in Senegal (FAO, 2004) that estimated the returns from marketable soil carbon credits amounted to less than four percent of household income. In contrast, productivity benefits are often large. This is illustrated in table14. The table is constructed from a study by Tennigkeit et al. (2009) that looks at a stylized carbon sequestration problem for African maize on degraded soils under four farming practices. In all cases, the returns from improved yields exceed the gains from carbon credit sales.

Another way to measure the ancillary benefits of land restoration is to examine the rate of return on land restoration projects that do not include carbon financing. Sutton et al. (2008) give s two examples from the region: the Anatolia watershed rehabilitation project in Turkey, and a project in Uzbekistan to reduce soil salinity. The project in Turkey combines a World Bank loan and a GEF grant to promote new farming and forestry production practices, to raise land productivity, and to reduce nutrient discharge from agricultural sources into the Black Sea and to strengthen related institutions for planning and resource management, especially community-based groups. The land management activities are likely to generate mitigation gains, but these benefits are not included when the project returns are calculated. Nonetheless, the economic return

> 46 See, for example, Sirohi (2007) who looks at the composition of CDM investments in India.

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