Costing REDD+

The costs of Reducing Emissions from Deforestation and Degradation

Rhett Butler, mongabay.com

REDD+: History & Ambition

Evolution:

RED => REDD+

But goal remains the same:

Curb carbon emissions from deforestation and forest degradation by compensating forest owners

Co-Benefits

REDD+ Isn’t Free

Opportunity costs

Implementation costs

Transaction costs

Other / “hidden” costs

Why the Cost of REDD+ Is Important

Policy makers

- How much would it cost our country to avoid deforestation?

- How would these costs be distributed?

- What are the best opportunities for reducing deforestation?

Landowners/users

- How much should I get paid?

Opportunity Costs

Opportunity costs = benefits forgone

Protecting forests entails a tradeoff

Opportunity cost analysis seeks to quantify what is given up by protecting forests.

Why Opportunity Costs Are Important

• Large component of REDD+ costs

• Insight into drivers

• Identify likely impacts of REDD+ across different groups

• Establish fair compensation

• Determine downstream costs

Calculating Opportunity Costs

Value = net income/ha/yr or NPV of land use activities that would take place were REDD+ not implemented

Factors that influence value:

- soil, topography, climate, water availability

- infrastructure, market access

- zoning, protected areas

Carbon storage of land use activities, relative to intact forest

Opportunity costs are affected by value of land use

Calculating Opportunity Costs

World Bank 2010

Tradeoff Curve

World Bank 2010

Calculating Opportunity Costs

Indonesia: large-scale oil palm (Butler et al. 2009)

NPV (2008) = $9630/ha

Carbon stock relative to primary forest = • (Forest carbon) – (Oil palm carbon)• 225 tC/ha – 35 tC/ha = 190 tC/ha

Opportunity Cost($9630/ha)/(190 tC/ha) = $50.68/tC or $13.82/tCO2e

Abatement Cost Curve

McKinsey Cost Curve

Calculating Opportunity Costs: Scale(Boucher 2008)

1. Global economic

2. Regional empirical

3. Area-based

Cost of reducing deforestation ~50%

$11.66

$5.52

$2.51

Opportunity Cost Models/Tools

National level analysis: use bottom-up approach

• Specific to each country

• Works sub-nationally

Other tools• ORISIS (collaborative effort)

• World Bank’s Estimating the Opportunity Costs of REDD+: A training manual

Where REDD+ Opportunity Costs Fail

Opportunity costs are not enough to forecast the cost of REDD+

Chief criticisms:•Non-market activities

•Favors industrial users => BAU

•Implementation and transaction costs can be substantial

•Does focus on compensating opportunity costs miss cheaper approaches?

Criticism: McKinsey Cost Curve

•Undervalues non-market activities, especially subsistence farming

•Encourages BAU for palm oil, soy, pulp and paper, rubber

Opportunity Costs: Criticism

-REDD+ supports intensification-Intensification often capital intensive

-What about smallholders?

-What about wildlife-friendly farming?

-Will REDD+ subsidize industrial capacity expansion (e.g. Indonesia)

-Moral hazard-Lack of governance scenario

-Subsidies now worth penalties in future

Cattle Ranching in Brazil

•Low intensity cattle ranching has negative NPV

•But most deforested land in Brazilian Amazon becomes pasture

•Opportunity cost modeling may not capture full value; thus compensating for opportunity cost would fail

•Conversion for land speculation, not beef production.

Example opportunity costs

World Bank 2010

Cheaper Options than Compensating OCs?

Good governance-Law enforcement a lot cheaper (e.g. Brazil, Indonesia)

Modifying economic policies-Ending damaging subsidies

-Collecting taxes instead of bribes

Implementation and Transaction Costs

Implementation and transactions cost can be substantial

Implementation costs

Cost of carrying out actions to reduce deforestation and degradation

•Land use planning

•Institution-building

•Forest protection

•Improved forest and agricultural management

•Administration

Implementation costs

Usually assumed to be substantially lower than opportunity costs-Boucher 2008: <$1/tCO2e

- Implementation $0.51 (Nepstad et al 2007) + Transaction $0.38 (Antinori and Sathaye2007) + Administration $0.04 (Greig-Gran 2006)

-Sohngen 2008: $1/tCO2e based on USDA Conservation Reserve Program

But not a safe assumption:- Juma’s implementation + transactions costs = 45%

REDD+ may be more costly than we think

Institutional costs may be quite high

- DNPI Indonesia: $3.29-$6.00/tCO2e for 4 provinces

- Lack of absorptive capacity

- Entrenched interests

- Land tenure mess

- Danger of getting it wrong-Indonesia’s reforestation fund: lost $5.2 billion in 5 years; losses continue today

How does a country stop deforestation?

No successful models for stopping conversion of primary forest despite billions of dollars invested

No silver bullets

1. Protected areas: limited effectiveness

2. Payments for ecosystem services: small impact to date

3. Certification: niche markets, probably not significant

4. Law enforcement: usually punishes small-scale forest resource users

5. Intensification: capital intensive, usually limited benefits for rural poor

What works?

• We’re not really sure

• In places where deforestation has slowed it has usually been the result of economic factors

• National governments show little success; but markets and local initiatives may be the key• Community forestry

• Ending perverse subsidies

Transaction costs

Cost incurred in making an economic exchange.

Transaction costs do not reduce deforestation but are necessary for a successful REDD+ program.

Each REDD project incurs transaction costs.• Remote ones have higher transactions costs

• No economies of scale

Transaction Costs: Examples

•Site search and selection

•Agreement negotiation

•MRV

•Enforcement

Transaction Costs: Agreement negotiation

Agreement negotiation

- Establishing land ownership is a complex process in many countries

- Multiple owners and users who claim property rights

- State ownership (75%), but local use. Who gets paid?

- All claimants need to be part of the process

- Brazil’s Terra Legal Program (2009)- grant formal legal title to squatters on state

land in the Amazon

Transaction Costs: MRV

- Technology improving, but may require more than just a technical solution

- Additionality remains a problem. How can it be shown that reductions wouldn’t have happened without REDD- e.g. Asia Pulp & Paper project in Kampar

project, Guyana.

- Stabilization in HFLD countries- $1.8B/yr for 11 most important HFLD

countries (Da Fonseca 2007)

CAO/Asner Lab

Transaction Costs: Benefits distribution

- Large number of stakeholders potentially makes benefit distribution is a challenge

- Central government bodies in some countries do not have a good track record (e.g. Indonesia)

- Lessons from Bolsa Floresta?

Transaction costs

Difficult to forecast: $0.38 (Antinori and Sathaye 2007), Juma ~10%; but may be substantially higher in some cases

Alston and Andersson (2010) propose 2 approaches to reduce

1. Sort out property rights• NBER authors suggest field-based forest inventories could include

delineation of property rights as part of the process

• E.g. Rapid Land Tenure Assessment (World Agroforestry Centre)

2. Multi-level governance efforts• Monitoring by local association of forest users and independent research

institutes rather than central govt

“Hidden” costs: economic

- Downstream industries and services- Processing, manufacturing, transport, retail

- Local and regional investment- Public and private sector; infrastructure

- Job creation- Sustainable livelihoods?

- Tax revenue- How much tax revenue does forest carbon

generate? Do smallholder farmers pay taxes?

- Food, fuel, fiber prices- How are they affected by REDD+?

“Hidden” costs: economic

- Policymakers are increasingly aware of these costs

- Examples:- Coalition for Rainforest Nations: $ outside

forest sector- Guyana: $ for infrastructure, roads, health,

entrepreneurship- Indonesia: $ for industrial development;

healthcare model (?)

- Danger: overloading the REDD+ Donkey (Nepstad 2010)

- Focus on transition to LCD has expanded scope considerably

- REDD+ becomes everything to everyone and disappoints

Other costs: social/political/culturalREDD+ reduces these relative to strict AD/RED model

Social disruption• Subsistence farmers abandoning traditional practices; loss of knowledge?• More urban migration? Livelihood shifts?• Conservation refugees?

Ecosystem disservices• Human-wildlife conflict (e.g. elephants, tigers)

Option value• Rising food prices, REDD limits land use options for 30 years

Market risk• Fate of species to be linked with carbon price swings?• Magic bullet (CCS, CO2 ejection system)

Politics• International relations: Trade relationships (e.g. Japan and Philippines)• Local politics (Indonesia)

Cost distribution

• Also important to consider how costs are distributed

• Different groups will be affected in different ways

• Budgetary (implementation and transaction) costs to government; but smaller opportunity costs (tax revenue, government run enterprises)

• Individual actors: mostly opportunity costs. Need to think about compensation

Take home points

•REDD+ may be more expensive than we think, but that doesn’t mean it can’t work

•For REDD+ to be effective, must be realistic and account for all costs

•Decision-makers should have these costs in mind

•Comprehensive tradeoff analysis incorporating an assessment of the less tangible costs and benefits

mongabay.com

Rhett A Butlerrhett@mongabay.com

Global economic models

Top-down approach based on dynamic economic models using aggregate variables (e.g. interest rates, population growth, consumption of energy or timber)

Examples: Ohio State (US), Lawrence Berkeley Lab (US), IIASA (Austria)

Good: incorporates global supply and demand trends

Bad: imprecise, simplistic, not useful for national projections

Global estimate: $1.70-38.00 for 50% reduction between 2005-2030, depending on assumptions and region

Regional empirical models

Bottom-up approach using specific carbon density and per area opportunity cost based on actual NPV of land use

Examples: Alternatives to Slash-and-Burn Program

Good: Precise

Bad: Misses global feedback (supply and demand trends)

Global estimate: $2.51 mean (Boucher 2008, n=29)

Opportunity Costs: Area-based

Per area approach using synthesis of sub-national and global analysis to generate global estimates

Example: Greig-Gran 2006/2008: 8 major countries

Good: Can be applied where forest carbon data is lacking

Bad: Lower resolution than empirical, but based on sub-national opportunity costs; carbon data more generalized over forest areas

Estimate: $2.76-8.58, $5.52 midpoint