Opportunity costs and cost per tonne of carbon sequestered of reducing the clearing of primary forest for industrial logging and oil palm production

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1 Opportunity costs and cost per tonne of carbon sequestered of reducing the clearing of primary forest for industrial logging and oil palm production Presentation by Dr Colin Hunt for interdepartmental administrators at the Department of Environment and Conservation of Papua New Guinea, Port Moresby, 5 November 2009

2 Industrial Logging

3 Contribution to GDP GDP current prices GDP, current prices, kina billions Contribution to GDP of log exports, % Log exports as % of GDP

4 Contribution to foreign exchange earnings Kina millions Total exports nominal value Contribution to total exports of log exports, % Log exports as % of total exports 0 0.0

5 Contribution to government receipts Government receipts, kina millions Total government receipts Contribution of log export tax to total govt. receipts, % Log export tax as % of govt receipts

6 Shares of log FOB Logging company Landowner royalty Government Landowner development benefit

7 Regional economic benefits (1) It has been estimated (FAO 2005) that 8,000 landowners at any one time receive monetary benefits through the provision of wage labour to logging companies. Survey data suggested a wage rate of K60 per fortnight (Siuta 1998, cited by Kocher Schmidt et al. 1999:Table 4) and an annual wage benefit of K12.5 million. If employment levels have been maintained and wages have kept pace with inflation then the 2008 wage benefit would have been about K30 million. Assuming a multiplier of 0.7 on local expenditure of K15m suggests a secondary benefit from wages of K10 million.

8 Regional economic benefits (2) In many locations where logging takes place, landowners are in subsistence of semi-subsistence; and major constraints to development are transport difficulties, lack of government support, the absence of physical infrastructure and remoteness. Cash cropping and small-scale industry is precluded. By generating landowner royalties and development levies the industry makes an important potential contribution to regional incomes and assists in the development of regional infrastructure with socio-economic value. But the same development constraints apply to the ability of landowners to invest the proceeds of logging in productive enterprises.

9 Regional economic benefits (3) After local forest resources have been exploited the logging companies move on. Royalty payments to local landowners then cease and local infrastructure left behind invariably deteriorates due to lack of maintenance. Much of the benefit to landowners at local level can therefore be characterised as ephemeral.

10 Volume of log exports m3 millions Projection High 1 Actual to 2008, Medium projection to projection Low 0 Linear (Actual to 2008, Medium projection to 2020)

11 Log export tax, US$ Projection High Actual to 2008, Medium projection to 2020 projection Low

12 Landowner royalty, US$ Projection High Actual to 2008, Medium projection to 2020 Projection Low

13 Landowner development benefit, US$ US$, millions Projection High Actual to 2008, Medium projection to 2020 Projection Low

14 Log export income and cost per tonne Present value of log export income, $US of CO2e, present values Income High Income Medium Income Low Value High 140 Value Medium Value Low Present value per tonne of CO 2 e emitted, $US

15 Oil Palm

16 Contribution to GDP 25.0 GDP current prices 6.0 GDP, kina, billions Contribution to GDP of palm oil exports % Palm oil exports as % of GDP

17 Production, Tonnes of fresh fruit 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Smallholder production Estate production Price of palm oil Palm oil export price kina per tonne

18 Value of exports 1200 Kina millions Cocoa Coffee Tea Copra Copra oil Rubber Palm oil

19 Palm oil exports contribution to GDP 25.0 GDP current prices 6.0 GDP, kina, billions Contribution to GDP of palm oil exports % Palm oil exports as % of GDP

20 Fiscal implications palm oil sector In 2008, New Britain Palm Oil paid K599 million in income tax (New Britain Oil Palm 2008: 33). If this tax level was replicated in other companies, the total company tax receipts from palm oil companies would be in the vicinity of K1 billion. This level of tax would represent 35 percent of all company tax receipts in 2008 and 14 per cent of all government receipts (Bank of Papua New Guinea 2009).

21 Regional economic benefits (1) The large increase in prices in 2007 and 2008 has been reflected in the returns to smallholders. The price paid for fresh fruit to growers in West New Britain in February 2008 was K362 per tonne (Bourke and Harwood 2009: 335). Assuming that this price was paid by all companies suggests a gross income to smallholders of about K500 million. It is estimated that about 166,000 people live in oil palm producing households (Oil Palm Research Association (2007), cited by Bourke and Harwood 2009: 331), suggesting that incomes per person was approximately K3,000 in Oil palm income would be in addition to income received from other smallholder cropping, small business activities and wages.

22 Regional economic benefits (2) The economic benefits of palm oil production in regional areas is enhanced by the employment of workers on the nucleus estates and at processing mills. There is a dearth of data on the wages paid and numbers employed. However, extrapolating from the financial accounts of New Britain Palm Oil (2008: 33), on the basis that this company is responsible for about half PNG s production, suggests that several hundred million kina was spent in Papua New Guinea by palm oil companies as a cash payments to suppliers of product together with wages to employees. The full annual impact of this cash injection into regional economies could amount to well over one billion kina, after taking account of the multiplier effect.

23 Regional economic benefits (3) Infrastruture and social benefit

24 Volume of palm oil exports 1200 Projections High Palm oil exports, tonnes, Actual to 2008, Medium projection to 2020 Projection Low 200 Expon. (Actual to 2008, Medium projection to 2020 )

25 Value of palm oil exports Palm oil exports, $US, millions 900 Projection High Actual to 2008, Medium projection to Projection Low

26 Area under oil palm Hectares Projection High Actual to 2008, Medium projection to 2020 Projection Low

27 Cost per tonne of CO2e P.V. of palm oil/ha = Cost per tonne of CO2e Cum emissions CO 2 e/t/ha