REDD: Lecture II global regime

Transcription

1 REDD: Lecture II global regime ECN 372 Arild Angelsen Professor, Dept. of Economics & Resource Management (IØR), Norwegian University of Life Sciences (UMB), Ås, Norway & Senior Associate, Center for International Forestry Research (CIFOR), Bogor, Indonesia

2 Outline 3 REDD lecture: 1. Basics 1. History 2. The core idea, and its modifications 3. Preconditions for creating a REDD-carbon market 4. The political economy 5. How REDD has evolved Economic theory: - What is a needed to create a market? - Political economy analysis 2

3 School of Economics and Business Key elements of a market Buyers Commodity/service (CER) Sellers Institutions (market place, rules, ) 3

4 2. Global regime 1. Phases 2. Funding: 1. REDD costs how much to compensate? 2. Carbon market integration 3. Reference levels 4. Liability common but differentiated responsibilities 5. Other non-climate objectives Economic theory: - What is economic costs? - Allocation of emission rights 4

5 3. National implementation 1. Causes of deforestation 2. Policy measures 3. Institutional framework 4. Norway how to make a contract to achieve REDD+ in Indonesia Economic theory: - Von Thünen model of land use basic economics - Contract theory Literature: 5

6 The ideal REDD scheme International level National level Aid (ODA) REDD Payments National REDD Fund Compliance (offset) markets Other? Global fund Emission reductions National REDD DNA International REDD-PES scheme REDD Payments Emission reductions National REDD-PES scheme Sub-national level Land users Local governments Communities 6

7 Phases Objectives Upfront capacity building 1. Readiness 2. Policies and measures Upfront investments in REDD infrastructure (monitoring systems, forest and carbon density data) National strategies Ongoing emission reductions Adoption of policies that enable and promote REDD investments. 3. Direct payments Direct PES-type payments for reduced emissions, can enable the generation of REDD credits Features Upfront financing Little direct effect on land use emissions Upfront transaction costs Upfront financing Costs/benefits depend on policy Recurrent transaction costs Performance payments Payments need to cover landholder s opportunity and transaction costs 7

8 Challenge 1: Scope of REDD Changes in: Forest area (hectare) Carbon density (carbon per hectare) Reduced negative change Avoided deforestation Avoided degradation Enhanced positive change Aforestation & reforestation (A/R) Forest regeneration & rehabilitation (carbon stock enhancement) Forest carbon (C) = forest area (ha) * carbon density (C/ha) 8

9 Challenge 2: What to credit? Input Policies and measures (PAM) Emissions: Change in stocks Output Stocks (level, or pct. of level) Strong arguments for emission based approach: Incentives should aim at the target Generate tradable REDD credits (tap into compliance market) Problems with stock based approach: Dilute the mechanism, incentives at the margin Low additionality 9

10 Challenge 3: One or two baskets? (Integration with broad post-2012 climate regime) This is more a question of funding and fungibility (REDD used as offsets) Arguments for inside: Tap into compliance market REDD inclusion -> more ambitious global targets Seen as part of AFOLU: More coherent accounting framework Gradual expansion of creditable activities Arguments for outside: Market flooding, REDD+ not being additional Move faster with REDD+, not wait for other areas 10

11 Challenge 4: Finding the right scale? Credit to countries, projects or both? Nested approach: 1. Sequential: first project, then national 2. Simultaneous: both coexist The most flexible: - Harmonization issues - Credit sharing 11

12 Challenge 5: Avoiding leakage (displaced emissions) Monitor: The Voluntary Carbon Standard for land-use projects and the BioCarbon Fund now recommend leakage-belt monitoring, e.g. areas five to seven times the size of project areas greater than 100,000 ha and 20 to 40 times the size of smaller ones (<100,000 ha). Increase Scale: Move from subnational to national levels. For international leakage: get broad participation. Discount: The various UNFCCC-proposed mechanisms, such as banking non-credited conservation reserves, insurances, discounted credits, or leakage-adjusted baselines and targets. Reward better monitoring. Redesign: how large are leakage risks for different on-the-ground REDD actions? Priority to less mobile deforesting agents? Neutralize: Example: neutralizing alternative livelihoods components, cf. ICDP. Leakage a sign of a healthy economy Must accept some leakage 12 Move to national level

13 Challenge 6: Ensuring permanence and assigning liability Is permanence a particular REDD problem? Difficult to control the carbon storage (e.g. fire) Continues monitoring and incentives But: Given the finiteness of fossil fuels, it is likely that they will anyway end up in the atmosphere over the long run. Even in case terrestrial carbon sequestration was in fact temporary, it will still have a positive climate effect. A wooden bridge to a clean energy future. The real problem: Lack of national caps & targets (and liability for those) 13

14 Challenge 7: MRV 14

15 MRV The technologies are (almost) there But they come at a cost, sometimes a very high cost The more disaggregated data, the more expensive MRV not an hindrance for moving ahead, but impose limitations for what we can do IPCC guidelines fairly good for deforestation, less developed for degradation Conservativeness principle Reward better MRV (e.g. the level of discounting/gearing) 15

16 Challenge 8: Generating REDD co-benefits Why Should REDD be Pro-poor? Moral arguments: Legitimate rights Practical considerations: forest managers are often poor, and need incentives (pay) Risk reduction: risk of local rejection, even social conflict, if not attended to Attractiveness of REDD investments greater, e.g. CSR Political considerations: REDD funds from international donors and development agencies Procedural matters: The UNFCCC recognises the importance of social issues, including poverty, as global priorities (Decision 2/CP.13). 16

17 Co-benefits (poverty, rights, biodiversity) Opportunities of poor country participation: Nested approach, soft entry Readiness, ODA funding National circumstances a dangerous argument Recognize other international conventions (CBD, Aarhus) Some tradeoffs carbon effectiveness and equity Mainly determined by national REDD strategies 17

18 Challenge 9: what are legitimate costs? A. Cost to landowners (opportunity costs) What is the forsaken opportunities? Agricultural profit (rent) + timber rent NPV (what would it cost to buy the land?) Agric. rent $/tc REDD rent Carbon price REDD costs BAU deforestation Ref. level Actual deforestation 0 Change in tc (forest cover)

19 Some costs estimates 19

20 B. Government costs: What will it cost the national government to produce REDD? 1. Opportunity costs: Should everyone be compensated? Illegal uses? New regulations: compensate all losers? Compensating what? Emission reductions = actual emissions BAU. Setting the hypothetical BAU Forest conservation: stock based payments Not just compensating the bad guys A practical and cheaper approach Opp. costs 20

21 Govt. costs (cont.) 2. REDD rent Paying the triangle vs. the rectangle? Typically increase costs 3x Who owns the REDD rent? What should be the distribution of costs for slowing global warming? Practical ways of organizing a system of differentiated pay Brazil example (Boerner and Wunder, 2008) Differentiate between 3 categories of land users can save some 50 %. REDD rent Opp. costs 21

22 Govt. costs (cont.) 3. Targeting of PES payments How to identify those that plan to deforest next year, and target them and only them Non-targeting may increase payment 2-100x (McKinsey, 2008) Not economic costs, just transfers 4. Administrative and transaction costs Adm costs Nontarget transfers Start-up costs Running costs: Typical estimate USD1 per tco2e REDD rent Might be underestimated Opp. costs 22

23 Govt. costs: Non-PES policies 5. Costs of policies Typical policies: Land reforms Community forest management Agricultural intensification Energy efficiency and fuel substitution Infrastructure Full compensation? Some REDD policies have negative costs Not building a road Removing agric subsidies????????????? Wide range of estimates; largely unknown 23

24 C. International payment for REDD Which costs to use as basis: Only economic costs (opportunity costs + admin & transaction costs)? May achieve much less in the short run What share of costs to be born by REDD countries? What does the principle of common but differentiated responsibilities (CBDR) imply? Setting reference levels RL = BAU + CBDR Costs of generous RLs 24

25 Challenge 10: Finding the money (e.g. USD 15 billion annually for 50 % cut) 1. Development aid or public funds 2. Voluntary markets 3. Compliance markets a. Selling REDD credits (fungibility) b. Auctioning of Emission Allowances c. Tax on carbon trade 25

26 International carbon markets 26

27 Impacts of REDD credits in carbon market Glob al cap Supply with REDD Supply with REDD Alt. 1: No change in cap: 100% crowding out (black) Alt. 2: No change in price: higher cap, 100% additional (red) Alt. 3: No change in costs: intermediate: lower price, higher cap (green) Emissons reductions Key: finding the balance between demand and supply: - Avoid flooding, get additional GHG benefits 27

28 Options for a balanced introduction Options Details Comments 1.Simultaneous political decisions 2.Flexible caps 3.Discounting of REDD credits 4.Restriction on demand or supply of REDD credits Decisions on REDD inclusion is accompanied with tighter global emission cap. Overall cap depends on carbon price and REDD inclusion More than one REDD credit used for offsetting is equivalent to one non-redd credit used for offsetting. A cap on how much REDD that can be used as offsets (demand restriction), or how much a REDD country can supply Assumes close simultaneity in the decisions. Caps and rules for REDD supply could also be updated regularly to ensure a balance Rules are established that makes the overall cap and country commitments a function of carbon price, REDD credits available, and possibly other factors. Ensures that each REDD credit purchased results in higher overall emissions reductions, as credits not equivalent in the market. Avoids too low carbon prices and crowding out, but no automatic mechanism to ensure additionality. 5.Banking of credits 6.Tighter reference levels Surplus carbon credits in current period can be used for compliance in later periods RL set below BAU for REDD, i.e. some reduction done by country before REDD credits can be supplied in the market Ensures a more stable carbon price path, and avoids the risk of initial high crowing out effects. Effectiveness hinges on the long term credibility and predictability of the climate regime, including carbon market. Ensures some initial and additional forestry reductions, and therefore that total reduction higher than the offset. 28

29 Some simulation scenarios Commitment Level None Low pledge No REDD/Low pledge (1) High pledge No REDD/High pledge (2- DEFAULT) REDD integration Partial Discounting Discounted REDD/High pledge (3a) Price REDD/High pledge (3b) Two Degree Target No REDD/2 degree (5) Discounted REDD/2 degree (6) Full Full REDD/High pledge (4) Full REDD/2 degrees (7) Constant Carbon Price Full REDD at equalprice/2 degrees (8) Equal Costs Full REDD at equal costs/2 degrees (9) 29

30 Results # Scenario name 1 2 3a No REDD inclusion/low pledge No REDD inclusion/high pledge Discounting REDD/High pledge Carbon Price in 2020 (USD/ tco 2 eq) Global greenhouse gas emissions in 2020 (GtCO 2 eq) Reduction of CO 2 deforestation emission in % below business-as-usual levels in 2020 (% below 2005 levels) World Brazil Indonesia 8 (32) 20 (32) (33) 25 (37) (50) 50 (58) 3b Price REDD/High pledge (42) 52 (59) Full REDD inclusion/high pledge (46) 42 (51) No REDD inclusion/ degrees (33) (37) Discounting REDD/2 degrees (71) 82 (85) Full REDD inclusion/2 degrees (71) 82 (85) Full REDD inclusion at equal price/2 degrees (39) 79 (67) 20 (50) 25 (54) 8 (43) 95 (97) 4 (41) 25 Global Abatement Costs in 2020 (USD billion and % of GDP) 53 (0.07) 71 (0.10) 73 (0.10) 83 (0.11) 74 (0.10) (54) 247 (0.34) 95 (97) 163 (0.23) 95 (97) 157 (0.22) 72 (44) 91 (0.13) 9 Full REDD inclusion at equal costs/2 degrees (0.10) 30

31 Key conclusions Full inclusion of REDD credits under current High Pledges is likely to suppress carbon prices to levels that may be politically unacceptable and not in line with policies aimed at providing strong incentives for moving towards a low-carbon economy. If REDD credits are to be fully included in the markets, the ambition must move towards the two degrees target. Getting global emissions on the track towards a two degrees target will be much more expensive without REDD (about 57 % higher compared to full inclusion), and the target seems politically challenging without a realistic plan on how to finance and harness the lion s share of the REDD potential. 31

32 Challange 11: How to set the reference levels? Reference level two meanings: 1. Business as Usual (BAU) baseline a technical prediction of what would happen without REDD benchmark to measure the impact of REDD policies 2. Crediting baseline (= reference level) benchmark for rewarding the country (or project) if emissions are below that level (or penalize if above, depending on liability) like an emission quota in a CAT system (but asymmetric as limited/no liability if emissions above) Should we (e.g. Norway) pay for 100% of the emissions reduction, or a smaller percentage of them?

33 Forest carbon stock Past emissions (historical baseline) REDD credits Realized path Crediting baseline BAU baseline Commitment period Time 33

34 How to set reference levels Main principle: BAU + common but differentiated responsibilities Crediting baseline < BAU: A balance between: The risk of tropical hot air and higher effectiveness REDD participation and political acceptability Positive incentives (UNFCCC) No-lose systems No liability REDD: move from IPES to CAT Who owns the REDD rent? 34

35 No-lose and reference levels Carbon price determines reductions RL determines overall pay & participation Marginal costs of AD $/tc No-lose: Can move RL to the right until A=C (no REDD rent) D C Carbon price A B BAU deforestation Ref. level Realized reduced deforestation 0 Change in forest cover

36 But RL implications also depends on REDD system D 2 (fund) D 3 (carbon market) D 1 (fixed demand) Supply (after cut in RLs) Supply Quantity of REDD credits D1: RL cut by 10% => 10 % cut in emissions D3: No change in emissions General: higher reductions, depending on supply elasticity 36

37 How to predict (BAU) deforestation? National historical deforestation National circumstances: Forest cover, reflecting stage in forest transition GDP/capita Other factors War, disasters,. Population Commodity prices Ex post adjustment: Brazil being rewarded due to the economic crisis 37

38 Options Assessment Report (Meridian Institute, Norwegian UNFCCC submission) Reference levels based on: Historical natioanal deforestation National forest cover GDP/capita (or LDC) Global additionality (scaling) factor (global RL < global BAU) OSIRIS scenarios: Scenario National historical deforestation Forest cover GDP per capita/ LDC quota Global additionality scaling factor Funding (USD billions/year) Meridian 1 (M-1) M M M M-1 w/ scaling , 10, 20 M-1 w/ scaling , 10, 20 M-1 w/ scaling , 10, 20 M-1 w/ scaling , 10, 20 M-1 w/ scaling , 10, 20

39 USD millions per year Implications of different options REDD transfers to groups of countries with different RL options 0 HFLD HFHD LFLD LFHD Lowest income Low income Medium-high income Nat.def. Nat.def. + for.cov. Nat.def.+GDP/cap Nat.def.+for.cov.+GDP/cap USD 5 billions in a fund based approach Large distributional impacts, e.g. 0.4 to 1.7 b for LDC in option 3 Deviations from BAU reduce effectiveness (reduce participation)

40 . Global additionality factor Overall emission reductions (pct.) with different scaling 80 % 73 % 74 % 76 % 76 % 71 % 72 % 70 % 60 % 57 % 57 % 58 % 59 % 59 % 60 % 50 % 42 % 41 % 40 % 35 % 32 % 32 % 33 % 30 % 20 % 10 % 5 billions 10 billions 20 billions 0 % 100 % 90 % 80 % 70 % 60 % 50 % Global additionality factor Global additionality scaling might increase effectiveness, particularly at high funding levels Generous reference levels have a costs (e.g. 100 to 130 % scaling (option 4), with USD 5bn reduce global emission reductions from 42 to 29%)

41 Different levels of funding & differentiated payment Emission reductions from deforestation (Gt CO2e/yr) REDD funding (USD billions) Uniform pay, high leakage Uniform pay, med.leakage Uniform pay, low leakage Diff. pay, high leakage Diff. pay, med. leakage Diff. pay, low leakage USD 5 b/year: 29-47% reductions Increasing costs: 0->5 b: 42 % (mid); 15->20 b: 6% Sensitive to leakage (and don t know how large) About 2/3 is REDD rent Differentiated pay (only real costs): USD 5 b: 42->65% 41

42 Some conclusions on RL Clear tradeoff: effectiveness participation & REDD rent Large distributional impacts Political pressure for generous ref.levels Some more conclusions: Not one single global architecture/mechanism Different funders, national circumstances, interests A game on definitions of REDD+, depending on national interests 42