The Economics of REDD+ and the Importance of Opportunity Costs Analysis

Transcription

1 The Economics of and the Importance of Opportunity Costs Analysis Pablo Benitez, Ph.D. World Bank Institute Bangkok, April 25, 2011

2 Contents Economic Analysis: What For? Benefits and Costs of Opportunity Costs Proposed Approach Advantages and Limitations

3 Economic Analysis, What For? To support planning and decision-making with regard to policies, programs and projects. Economic analysis is often used to: Identify whether the benefits outweigh the costs Identify least-cost opportunities, or low hanging fruit, for achieving a certain goal Identify how sectors in a society are affected by a government intervention Contribute to a better design and implementation of government strategies

4 Timing for Economic Analysis In which of the 3 phases of REDD it fits? Phase 1: development of national strategies or action plans, policies and measures, and capacity-building Is REDD economic analysis mandatory? No, but is in countries interest to do it Important for RPP formulations

5 The Economics of As in many programs and projects, leads: - Monetary Benefits - Co-Benefits - Costs - Indirect Costs

6 Monetary Benefit Depends on the future framework for a Performance Based REDD Scheme (Phase 3) Not clear yet, what it would be: Compliance Market?

7 Co-Benefits of Helps addressing other global problems such as loss of biodiversity Contributes to preservation of watersheds, soils and recreational areas To be Discussed on Friday

8 The Costs of Implementation Costs Forest Protection Improved Forest Management Administration Transaction Costs Emission Reduction Certification and MRV Opportunity Costs Forgone Benefits of Alternative Land Use

9 Opportunity Costs Forgone net benefits from changing land uses, such as potentially more lucrative agricultural crops Difference in earnings from conserving or enhancing the forests, versus converting them to other, typically more valuable, land uses

10 Opportunity Costs: Example Difference in Profits: $400/ha -$50/ha = $350/ha Difference in Carbon: 250 tc/ha - 5 tc/ha = $245 tc/ha Per carbon basis: = $350/$245 = $1.43/tC= 0.39/tCO2e

11 Why Opportunity Cost Estimates are Important? They are relevant In many experiences, most important component of costs Provide insights into deforestation drivers Program Impact Helps to Identify Fair Compensation Schemes High opportunity costs may be linked with high deforestation pressures. Helps to understand impacts of If implementing agency intends to use PES, it helps to design such scheme

12 Opportunity Cost Curve 3 Logged forest to crops in Region B Logged forest to crops in Region A Logged forest to agroforestry in Region A 2 Cost ($/tco 2 e) Logged forest to agroforestry in Region B Reduction Potential (t CO 2 e)

13 Example: a practical application Source: Indonesia National Council on Climate Change and McKinsey & Co., 2009

14 Example: The gains of Cost Curve (Op + T&I) $/tco2 Carbon Price Rent REDD Costs Reduction Potential (tco2)

15 Methods to Estimate Opportunity Cost Curves Econometric General Equilibrium Engineering, Bottom-Up

16 Proposed Approach Engineering Bottom-Up; Integrating Land Use, Carbon and Profitability Analysis (to be discussed in next session) For the vertical axis: Ch4 Classify Ch5 land uses Carbon Forest stocks.. (tc/ha). Ag Ch6 Profits ($/ha) OppCost matrix ($/tco 2 e) Ch7 Opportunity Costs $/tc0 2 e tc0 2 e For the horizontal axis: Ch4 Estimate land use change (matrix of histories or trajectories) Emission matrix (tco 2 e)

17 Advantages of the Proposed Approach Successfully applied in developing country contexts Transparent: all steps of data and assumptions Bottom-up, using farm-level data Uses a free-open access, analysis tool Integrates other aspects, outside of the economics expertise: Land Use Modeling and Analysis Carbon Measurement Co-Benefits

18 Challenges and Limitations Analysis as good as the data is Inter-sector linkages/feedbacks excluded Only covers opportunity costs (implementation, transaction excluded) Social considerations not accounted (wealth distribution / employment/food availability) Focuses just on carbon: what about the other ecosystem services?

19 And, Remember, opp. costs is only one aspect that contributes to decision making Many other issues need to be considered: Social Considerations Land Tenure Environmental Considerations Other Costs: Implementation / Transaction

20 Thank You!