Why the Cost of REDD+ Is ImportantPolicy 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 CostsOpportunity costs are affected by value of land useValue = net income/ha/yr or NPV of land useactivities that would take place were REDD+not implemented Factors that influence value: - soil, topography, climate, water availability - infrastructure, market access - zoning, protected areasCarbon storage of land use activities,relative to intact forest
Opportunity Cost Models/ToolsNational level analysis: use bottom-upapproach • Specific to each country • Works sub-nationallyOther tools • ORISIS (collaborative effort) • World Bank’s Estimating the Opportunity Costs of REDD+: A training manual
Where REDD+ Opportunity Costs FailOpportunity costs are not enough toforecast 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 Example opportunity costs•Low intensity cattle ranching hasnegative NPV•But most deforested land inBrazilian Amazon becomes pasture•Opportunity cost modeling may notcapture full value; thus World Bank 2010compensating for opportunity costwould fail•Conversion for land speculation, notbeef production.
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 costsCost of carrying out actions to reducedeforestation and degradation •Land use planning •Institution-building •Forest protection •Improved forest and agricultural management •Administration
Implementation costsUsually assumed to be substantially lower than opportunity costs -Boucher 2008: <$1/tCO2e - Implementation $0.51 (Nepstad et al 2007) + Transaction $0.38 (Antinori and Sathaye 2007) + Administration $0.04 (Greig-Gran 2006) -Sohngen 2008: $1/tCO2e based on USDA Conservation Reserve ProgramBut not a safe assumption: - Juma’s implementation + transactions costs = 45%
REDD+ may be more costly than we thinkInstitutional 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 ofprimary forest despite billions of dollars investedNo 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 costsCost incurred in making an economicexchange.Transaction costs do not reducedeforestation but are necessary for asuccessful REDD+ program.Each REDD project incurs transaction costs. • Remote ones have higher transactions costs • No economies of scale
Transaction Costs: Agreement negotiationAgreement 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 costsDifficult to forecast: $0.38 (Antinori and Sathaye 2007), Juma ~10%;but may be substantially higher in some casesAlston and Andersson (2010) propose 2 approaches to reduce1. 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 modelSocial 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 yearsMarket 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 wethink, but that doesn’t mean it can’t work•For REDD+ to be effective, must be realisticand account for all costs•Decision-makers should have these costs inmind•Comprehensive tradeoff analysisincorporating an assessment of the lesstangible costs and benefits
Global economic modelsTop-down approach based on dynamic economic models usingaggregate 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 trendsBad: imprecise, simplistic, not useful for national projectionsGlobal estimate: $1.70-38.00 for 50% reduction between 2005-2030,depending on assumptions and region
Regional empirical modelsBottom-up approach using specific carbon density and per areaopportunity cost based on actual NPV of land useExamples: Alternatives to Slash-and-Burn ProgramGood: PreciseBad: Misses global feedback (supply and demand trends)Global estimate: $2.51 mean (Boucher 2008, n=29)
Opportunity Costs: Area-basedPer area approach using synthesis of sub-national and globalanalysis to generate global estimatesExample: Greig-Gran 2006/2008: 8 major countriesGood: Can be applied where forest carbon data is lackingBad: Lower resolution than empirical, but based on sub-nationalopportunity costs; carbon data more generalized over forest areasEstimate: $2.76-8.58, $5.52 midpoint