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Should We Include Avoidance of
Deforestation in the International Response to Climate Change?

Bernhard Schlamadinger, Lorenzo Ciccarese, Michael Dutschke, Philip M. Fearnside, Sandra Brown, Daniel Murdiyarso.

Possible refinements
The proposal as currently drafted assumes sale of credits after the emission reduction has been achieved. While this leads to maximum “environmental integrity” because only emission reductions that have already been verified are sold, it might bring about problems in practice. National programs to address deforestation might provequite costly, and up-front fi nancing might be essential. Therefore, it is proposed that the host government could sell options to the carbon credits at a fixed price, with revenues being used for program implementation.
Provided the program is successful, investorcountry governments or companies could then elect to buy the actual credits at a guaranteed strike price. In order to reduce the risk of promising emission reductions that may then not materialize, the host country could limit the sale of options to a certain fraction of the emission savings that the program is expected to achieve. Revenues from the actual sale of credits could then be dedicated to further emission reduction.
A “revolving fund” would thereby be established and would help to solve the “chicken and egg” problem.

Deforestation in the International Response to Climate Change

The guaranteed price of exercising the option would also pose a “price cap” for the investor government for credits to be acquired under the KP. A price cap, in the context of deforestation avoidance, has also been proposed by Schlamadinger et al. (2001). The option price could be seen as an “insurance premium” for governments and companies against possible non-compliance. Another alternative to ex-post crediting after the end of the commitment period would be to allow the host country to sell credits immediately after the monitoring of deforestation has been completed for the fi rst year of a commitment period. It would be up to the host country to determine whether the reduced deforestation is the outcome of successful implementation of policies and measures, or is an outlier due to inter-annual variability in the deforestation rate. In any event, overselling would have to be minimized, perhaps through a mechanism similar to the one already established under the KP for Annex-I countries (UNFCCC 2002a). Particular attention will have to be paid to the setting of the level against which future emissions are assessed. If targets are too weak, e.g. by grandfathering high emissions levels from the past, then lots of credits could be generated without necessarily having reduced deforestation against a business-as-usual case. If, on the other hand, targets are very ambitious, then it might happen that they cannot be reached by the country, which leads to the next question: should non-achievement of targets lead to penalties? This could deter many countries from participating in the system. Without penalties, there is still the risk that a country might move so far above the target that it may become unrealistic to still reach the target (“run-away non compliance”) so that there is no incentive to even start reducing emissions. As a solution to these issues, it is proposed here to defi ne a band within which a country’s emissions are most likely to be in the target period. The lower bound would be the threshold below which the country could claim a full credit for each incremental ton reduced. The upper bound would be set so high that the possibility of emissions exceeding that amount is minimal. In order to minimize the problem of scale and “anyway tons”, credits for emissions below the upper bound would be heavily discounted, with the discount rate decreasing as emissions levels are closer to the lower bound. Another issue requiring further analysis concerns the necessary incentives to landowners within the host country. Santilli et al. (2003a) provide an estimate of the income that a country could accrue for each hectare of forest saved from deforestation, and compare this with the opportunity cost of using the land for agricultural purposes. However, such a comparison is rather theoretical as it 1) assumes that the landowner and not only the government will benefi t from carbon-related funds; and 2) calculates the benefi ts for each hectare of forest actually saved from deforestation, and not all forests that are candidates for being deforested (which would be more appropriate as explained in item b) below).
A vast literature exists on drivers of deforestation (e.g., Barbier and Burgess 2001; Geist and Lambin 2001; Tomich et al. 2001; Brown et al. 2005). These drivers act differently in different countries and regions. To a certain degree, deforestation risks can be predicted. The deforestation pressure is determined by the balance of opportunity costs and benefi ts from protection, carbon payments being only one of the possible elements of the latter. In a national program such as the one proposed by Santilli et al., this balance will strongly depend on the incentives that are provided at the national level to reduce deforestation. There are several options for doing this:
a) A “carbon tax” on deforestation that landowners will have to pay for conversion of forests to other lands. However, in areas where deforestation is already illegal but occurs anyway this is unlikely to be successful. Enforcement is a critical issue.
b) Payments (annual or one-off ) for “avoidance of deforestation”. This would address the problems under option a), but could lead to signifi cant free-riding. Essentially it would become a project-based mechanism on the domestic level. For example, assume 10,000 ha of forest in a region are to be protected, but only 100 ha would actually be subject to deforestation. Assuming perfect foresight, and if the owners of these 100 ha were rewarded, then the outcome could be that 100 ha would be lost elsewhere within this area. Therefore, even a national incentives program could produce signifi cant leakage, which would, however, be detected via nationwide monitoring.

Deforestation in the International Response to Climate Change

If, on the other hand, the owners of all 10,000 ha of land were to receive an incentive not to deforest, the incentive per hectare of land would be much smaller, possibly too small to make any difference. Therefore, the marginal incentive per hectare of land may not be as high as suggested in the Santilli et al. paper (US$500). In order to avoid free-riding, special target areas could be defi ned, where deforestation is felt to be imminent. The use of spatial modeling applied to past patterns of deforestation and a variety of other relevant data bases can result in probablity scores on the likelihood of imminent deforestation (Brown et al. 2005). Taking as an example the Brazilian case, deforestation expectation is highest alongside the roads that are currently being paved. Highway concessions could therefore include an area along both sides of these roads and be awarded an annual fee for forest protection. In this way,

subsidies would be concentrated where they are most needed, and the concession owners would have the incentive to fi nd the most effi cient way of keeping deforestation under control. Similar payments could secure the boundaries of national parks.
c) Other land-use policies. Santilli et al. (2003) mention “programs designed to enforce environmental legislation, support for economic alternatives to extensive forest clearing (including carbon crediting), and building institutional capacity in remote forest regions”. Again, the estimated US$500 per ha would then not be an incentive to the landowner, but only to the government to fund such programs. Therefore, more research should go into designing incentives and policies that would directly infl uence landowner decisions. Funds and programs may also have to be directed towards the improvement of agricultural and other land uses, so that not only is deforestation repressed, but its underlying causes such as demand for cropland and grazing lands or other land-use types are also addressed.

Deforestation in the International Response to Climate Change Deforestation in the International Response to Climate Change

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Source: Proceedings of Workshop on Carbon Sequestration and Sustainable Livelihoods
Editors :
Daniel Murdiyarso
Hety Herawati


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