CHALLENGE
Charcoal is one of the main sources of energy used in the production of pig iron for steel in Brazil. The vast majority of the current charcoal production is from unsustainable and often illegal harvest of native forests, leading to severe environmental degradation and deforestation. However, there have been successful business cases of forest plantation for charcoal production in Brazil, including one Clean Development Mechanism (CDM) project financed by the Prototype Carbon Fund in Minas Gerais. Expanding the area of forest plantations for charcoal on idle or degraded pasture land would reduce the pressure on native forests in Brazil.

However, barriers have prevented wide adoption of forest plantations for charcoal. Some of the barriers include:

• lack of credit to finance the initial production costs (first income revenue usually is generated after 7 years of plantation),
• difficult access to credit (forest plantations are often not accepted as collateral for loans),
• higher transaction costs relative to deforestation and coal production (planted forest activity has a cycle of 14-21 years of production, is labor intensive, and results in high costs of land management and environmental licensing),
• inefficient technologies for carbonization process (contributing to the emission of greenhouse gases (GHG), including methane),
• unclear agricultural and environmental regulatory framework to forest production,
• weak institutional arrangements, etc. 

With 62 pig iron mills, the state of Minais Gerais is Brazil's largest producer of steel and iron, responsible for 60% of the national production.  Minas Gerais approved a law which virtually bans the use of charcoal from deforestation by 2018. In order to supply the industry with charcoal from plantations Minais Gerais would need about 1.5 million ha under new plantations.

APPROACH
PROFOR and the BioCarbon Fund co-financed a study designed to identify institutional and financial arrangements required to mainstream forest plantation business models and promote the potential development of CDM projects aimed at reducing GHG emissions in the forestry and iron supply chains in the state of Minas Gerais.

The displacement of non-renewable charcoal by renewable charcoal by 2017 and the use of charcoal to produce up to 46% of the pig iron and steel by 2030, would potentially mitigate 62 Mt of CO2 between 2010 and 2030. This would represent 31% of all emissions reductions expected from the steel industry and contribute to Brazil's overall effort to reduce its GHG emissions by 39% by 2020.

RESULTS
The study's methodology and preliminary results were presented during a workshop "Identifying Financial and Institutional Arrangements for Scaling Up Renewable Charcoal Production" in Belo Horinzonte, Minas Gerais, in December 5, 2011. (A presentation from that workshop is available in Portuguese on this page). At completion, final reports with the technical work, datasets, and related links were shared with key counterparts within the government, private sector, and financial institutions.

The analytical work supported by this project was a key building block in the World Bank’s strategy for supporting Brazil’s move toward a low carbon economy as stated in the Brazil Country Partnership Strategy for 2012-2015, under Objective 4: Improving sustainable natural resource management and climate resilience. ("Helping the Federal government and the private sector to implement Brazil’s National Climate Change Plan, including through developing programs and financial mechanisms to promote sustainable land use, decrease deforestation, and increase energy efficiency and renewable energy.")

The Minas Gerais Development Policy Loan III ( P121590), to which this study contributed, is one of the deliverables of the new country strategy. The State has adopted measures to encourage forest plantation within its territory to supply raw input to industries within its territory.