REDD+ as performance-based aid

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Professor Arild Angelsen gave this presentation in Bonn, Germany on 5 June 2013 at an event organized by CIFOR titled ‘REDD+ performance and verification: Insights from CIFOR’s Global Comparative Study (GCS) on REDD+’. This was an official side event to the 2013 Bonn Climate Change Conference.

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REDD+ as performance-based aid

  1. 1. REDD+ asperformance-based aidArild AngelsenSchool of Economics and Business,Norwegian University of Life Sciences (UMB), Ås , Norway &Center for International Forestry Research (CIFOR), Bogor, Indonesiaarild.angelsen@umb.noBonn5.6.2013
  2. 2. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.no 2The core idea of REDD+ (multi-level PES)SchoolofEconomicsandBusiness
  3. 3. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noA modified REDD+3Objectives: CO2 Co-benefitsFunding: Rich pay poor Country commitmentPolicies: PES Broad PAMs Forest policiesSchoolofEconomicsandBusinessFunding: Market PublicScale: National Local/projects
  4. 4. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noWhy has REDD+ changed? Learning by trying– PES is difficult– PAM is difficult: impacts?, political economy– Mobilizing funding is difficult– Using money is difficult Failure of Copenhagen– Not new climate deal– Different funding sources: broader objectives with aid Interests and ideologies– Resistance to ‘commodification’, markets and PES– Broadening scope and objectives to accommodatediverse interests4SchoolofEconomicsandBusiness
  5. 5. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noREDD as performance-based aid (PBA)The PES idea survived, but modifiedNow: 2/3 of international funding for REDD+ isfrom aid budgets«Aidification» of REDD+– PBA, conditional aid, result-based aid, …A strong faith in PBA:“But with results-based payments I cannot see any largerisk” (Erik Solheim, ex. Minister of Env. & Dev., Norway)5SchoolofEconomicsandBusiness
  6. 6. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.no... a mixed experienceSurprisingly, the development aid experience notbrought into the REDD+ debate“This is indeed the core of what conditionality issupposedly about – aid buys reform. Unfortunately, itdoes no such thing” (Collier, 1997)“Conditionality is not an effective means of improvingeconomic policies in recipient countries” (Killick, 1997)Differences in compliance, but no difference in aiddisbursement in World Bank projects (Svensson, 2003)Much political support, little evidence (Eldridge andPalmer, 2009)6SchoolofEconomicsandBusiness
  7. 7. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noChallenge 1: Donors willing to spend(and recipients unwilling to reform):The budget pressureStrong pressure to spend– Seen as a measure of success– If not, risk cuts in future budgetsHow to change this?– Focus on results rather than aid volumes– Disbursement delinked from annual budget processes(multi-year funds)– Competition: “aid tournaments”– Third party to handle moneyCreate a positive opp.cost of aid funds:No spending is good (otherwise threat not credible)!7SchoolofEconomicsandBusiness
  8. 8. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.no.. how to change ….Recipient country:Weaken domestic resistance to policy reformsneeded to implement REDD+:– “Ownership” of the policy reforms– REDD+ aid gives financial arguments to proponentsof policy reformsin domesticpolitics– Policy dialogue(or “cheap talk”)8SchoolofEconomicsandBusiness
  9. 9. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noChallenge 2: Performance criteria and measurementLevel Input Activity orprocessOutput Outcome ImpactFocus Quantitiesof variousinputs, invalues ortimeActivitiesundertakento producespecificoutputsImmediate/-technicalresults ofinterventionIntermediateand mid-term effects,i.e.observablebehavioral,institutional& societalchangesBroader andlong termeffects, oftencaptured insectoralstatisticsTerms InputindicatorsProcessindicators &milestonesOutputindicatorsResultsindicators;OutcomeindicatorsImpactindicators;GoalindicatorsREDD+examplesResourcesspent (USD);Technicalassistance(persondays)NationalREDD+ plancompleted;Free PriorInformedConsent(FPIC)consultations conductedPoliciesadapted andenforced;No. ofloggersadaptedreducedimpactloggingReductions indeforestation;Reductions inunsustainable timberharvestCertified/-verifiedchanges inGHGemissions9Source: Wertz-Kanounnikoff andMcNeill (2012)SchoolofEconomicsandBusiness
  10. 10. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noMove to the right in the table(outcomes and impacts = results)But several problems with moving to the right: Time lag between the (costs of) actions and the payments Measurement is more challenging:1. Area2. Emission factors Benchmarks more difficult to define (next)– The noise increase as move to the right (lower signal/noiseratio) Allocation and sharing of risk (next)10SchoolofEconomicsandBusiness
  11. 11. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noChallenge 3: Benchmarks (reference levels)Benchmarks, i.e. the counterfactual in impactassessment, is genuinely difficult!Even more difficult in REDD+:– How to predict deforestation(and degradation)(BAU baseline)– Who is to pay(crediting baseline)?Huge implications:----------11SchoolofEconomicsandBusiness
  12. 12. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noExample: how choice of RL matters!1. Norway – Brazil agreement– baseline: deforestationlast 10 years– updated every 5 years– 100 C/ha, USD5/CO22. Alternative:- last 5 years, updated every yearAnnual payment (USD million):12SchoolofEconomicsandBusinessYear 1. Actual RL 2. RL=last 5 years2009 2,213 1,7072010 2,298 1,0602011 1,814 7332012 2,137 774Total 8,462 4,2740.0005.00010.00015.00020.00025.00030.00035.000199019921994199619982000200220042006200820102012Deforestation (km2) , Brazil
  13. 13. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noChallenge 4: Uncertainty and risk sharingSeveral sources of uncertainty:1. The BAU baseline; impact of external factors2. The costs of avoided deforestation and degradation3. The effectiveness of the REDD+ policies implementedSimple result-based contracts put most risk on theservice provider (recipient country)13SchoolofEconomicsandBusiness
  14. 14. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noDealing with uncertaintyOption Elaboration Pros Cons1. Ex-postadjustmentof RLRL formula agreed,final RL set whenparameters (e.g. agric.prices) are knownPredictable, andpolitically robustHard toestablish theformula2.CorridorapproachGradually increasingcompensation withina RL corridor.Flexible,compensation alsomimics MC curvePoliticalacceptance3.TieredapproachEstimated RLmultiplied by anuncertainty factor(<1), based onassessment of dataqualityReduced risk ofovercompensationand hot air,incentives toproduce betterdataMake REDD+less attractivefor countrieswith poor data4.RenegotiationsRenegotiate RL basedan initial agreementFlexible, canincorporateunforeseen factorsPolitical gaming5.Insurance Could designinsurance contractbased approaches in 1and 2Well developedmarkets forinsuranceProbablyexpensive,complex formula14SchoolofEconomicsandBusiness
  15. 15. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noChallenge 5: Putting money behind thepromiseA result based system must have «credibility»:– A realistic expectation that money will be paid for resultsachievedA “puzzle”:– A result-based system (e.g. USD 5/tCO2) requires bigmoney (tens of billions dollars per year)– But cannot just throw big money into a very imperfectsystem with high uncertainty about resultsIn the Brazil (and eventually Indonesia?) case:– Is the contract really result-based, given that there is noway Norway (or others) can pay for results?15SchoolofEconomicsandBusiness
  16. 16. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noNorwegian contractsPhase I: Phase II: Phase III:Log-frameelementInputsActivitiesOutputsOutcomesImpactsPay forwhat?Build capacity,prepare REDD+actionPolicy reforms Emission reductionsNorwegianagreementsTanzaniaIndonesia (PI)GuyanaIndonesia (P-II)GuyanaIndonesia (P-III)Brazil16SchoolofEconomicsandBusiness
  17. 17. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noLessons to be learned1. REDD+ is not unique– we can learn from other forms of PBA2. PBA is hard:– don’t be naïve; it’s no panacea3. Don’t promise more than you can keep– be credible about payments4. Mechanisms to increase opportunity cost of funds– multi-year funds, competition (“aid tournaments”),disbursements handled by third parties5. Don’t make all (REDD+) aid performance-based– recipient predictability, maintain policy dialogue, credibility ofthe performance-based elements17SchoolofEconomicsandBusiness
  18. 18. NORWEGIANUNIVERSITYOFLIFESCIENCESwww.umb.noPerformance-basedpayments is a key andattractive featureofREDD+ that weshould pursue,but that does notmean it’s easy18SchoolofEconomicsandBusiness

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