The Costs of Reducing Carbon Emissions from Deforestation and Forest Degradation in the Brazilian Amazon: Designing a Politically-Feasible Approach

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1 The Costs of Reducing Carbon Emissions from Deforestation and Forest Degradation in the Brazilian Amazon: Designing a Politically-Feasible Approach Daniel Nepstad & Frank Merry World Bank May 27, 2008

2 Collaborators: Britaldo Soares-Filho (Univ. Federal Minas Gerais) Andrea Cattaneo (WHRC) Paulo Moutinho (Instituto de Pesquisa Ambiental da Amazonia) Steve Schwartzman (Environmental Defense) Tracy Johns (WHRC) Oriana T. Almeida (Universidade Federal do Para, IPAM) Sergio Rivero (UFPa) Maria Bowman (WHRC)

2003 Science; Alencar et al. 2006 Earth Int.

3 Carbon emissions from tropical deforestation 1998: emissions from forest fires in Amazon and Borneo = Pg 1/3 Paige et al Science; Alencar et al Earth Int. Tropics Non-tropics Long term 50% 50% 1990s 100% 0% Houghton et al in Moutinho and Schwartzman, Eds.

Amazon 2030: 55% cleared or degraded; 15-25 B

4 Amazon 2030: 55% cleared or degraded; B tons C emitted Nepstad et al Phil Trans Roy Soc

5 Politically feasible REDD Core assumption #1 Over what time period will payments be made? More than a century! Payments commensurate with reductions In most nations deforestation is <1% per year

6 Core assumption #2 What benefits for indigenous/traditional forest people? Forest people are forest guardians, or potential forest guardians, and deserve compensation

7 Core assumption #3 Compensating private landholders for forest conservation? Yes, even if conservation is a legal requirement. Long-term incentives are necessary to compensate for the opportunity costs of forest conservation.

8 Core assumption #4 Compensating governments to protect their own parks? to implement their own environmental laws? Yes. Laws can be undone. Parks can be undone. Long-term incentives are needed for forest protection.

9 Core assumption #5 Is it possible to avoid the TFAP trap through multiple-stakeholder processes and efficient fund designs? Yes. Without these attributes, REDD will fail.

10 Core assumption #6 There are substantial economic benefits of forest conservation that offset the opportunity costs of forest conservation

11 Core assumption #7 Enormous spatial variation in the suitability of forestlands for conversion to crops and livestock

12 Successful REDD programs will be negotiated How to allocate payments? This will be the focus of negotiations Carbon Market Payment for Reductions %? %? %? Forest Peoples Fund Private Forest Fund Government Fund Reduction of Emissions Demonstrated

13 Two components of our analysis: 1. Illustrative example of actual costs for compensating (a) Public Forest Stewards (Forest People), (b) Private Forest Stewards, and (c ) the Government 2. Opportunity costs of reducing forest clearing, using spatial rent models, as a ceiling

14 Future forest allocation in the Brazilian Amazon (achieved in 10 years): 27% 40% indigenous land, extractive reserve 6% 10% biological reserves, parks 4% 20% national/state production forests 0% 10% legal private forest reserve

15 30 years of REDD: Carbon emission reduction below baseline (6.3 B tons) Carbon emission reduction below projected (~20 B tons) The price of carbon: Full compensation of $41B in opportunity costs=$6.5/ton C Adjusted costs = $1.2/ton C

16 Total forest carbon stock: 48 B tons Total opportunity costs of remaining forests: $257B Cost per ton C: 90% <$5 94% <$10 Is this curve helpful for the policy debate?

17 How much will it cost in practice? Forest People Fund ( Public Forest Stewardship Fund ) Forest family subsidy ($1,200/yr) Forest protection/management ($10/km2)

18 How much will it cost? Private Forest Stewardship Fund 100% compensation of opportunity costs for forests beyond legal requirement 20% compensation for forests required by law

19 How much will it cost? Government Fund Public land protection/management ($20/km2/yr) Protected area creation ($50/km2) Private land licensing/monitoring $10M/yr) Services (heatlh, education, credit) ($700/family/yr)

20 The Costs of Reducing Deforestation US$ (millions) Year Forest People Private Government

21 Spatially-Explicit Models of Rent for Timber Production, Cattle, and Soy Amazon timber industry and logging model Brazil beef industry and cattle model

The Amazon timber industry Industry dynamics Frontier expansion in 3 periods Log production: ~20 to 24 million m 3 3,000+ mills Poor technology adoption million m 3 logs 100 80 60 40 20 Forest Policy

22 The Amazon timber industry Industry dynamics Frontier expansion in 3 periods Log production: ~20 to 24 million m 3 3,000+ mills Poor technology adoption million m 3 logs Forest Policy Logging concessions Decentralization to State control 3 players in industry Conventional vs reduced impact logging Years Source: IBGE (Merry et al. 2007)

24 A logging rent model Stumpage values = Returns to forest land = Rents = f(sawnwood Sawnwood price j * tax deduction * processing loss - (transportation cost xy + harvest cost j + milling cost j )*interest rate) Milling centers The model produces dynamic rent surfaces based on wood prices, harvest h and milling costs collected for 588 milling centers located throughout ut the Amazon

25 Mill Capacity: 140,000m 3 Profitable cells

26 The boom and bust lifecycle For each time step, a milling center attempts to match its current harvest capacity collecting wood in cells that become profitable. A center s harvest capacity is allowed to increase (up to 20%) or decrease annually according to the profitable wood volume available within its area of influence. As a result, milling centers have a boom and burst lifecycle as they gradually exhaust profitable forests located in accessible regions.

27 When a center approaches its demise (runs out of profitable volume), it gives birth to new centers located in inner Amazon regions, perpetuating the way the logging frontier evolves. 200 km new pole

28 Logging Net P. Value ( ) U$ 550 U$ 0

30 The Cattle Industry in Brazil Brazilian Herd Growth Million Head Year Amazonia Rest of Brazil Brazilian Beef Production Metric Tons (1000 CWE) 12,000 10,000 8,000 6,000 4,000 2, Year Production Exports Domestic Consumption

31 Production of Brazilian Beef: size of herd and annual slaughter 250,000 Head of Cattle in Thousands 200, , ,000 50, Head slaughtered Total cattle herd

32 Cattle rent model format -

33 $R Sample Rent Trajectory (Discounted $R/ha) (Large ranch, Pasture regeneration, High stocking density) Land purchase, forest clearing, pasture formation, and infrastructure investment Debt-free; animal care, electricity Stabilization Pasture and maintenance of reformation herd, continued are (grading, most credit soil significant repayment preparation, costs seeding) to maintain stocking density Repayment on credit for infrastructure, land purchase; Herd evolution Forested Cerrado Deforested

34 Major ranching expenditures as a percent of total annual costs 100% 80% 60% 40% 20% 0% Year Electricity Land Purchase Mineral Salt Animal Health Farm Labor Fence Maintenance

35 Amazônia-minimum investment Amazonia Rondônia Acre Amazonas Roraima Pará Amapá Tocantins Maranhão Mato Grosso

36 Amazônia-with land purchase, itr, forest income, and tractor Amazonia Rondônia Acre Amazonas Roraima Pará Amapá Tocantins Maranhão Mato Grosso

37 Cattle Net P. Value ( ) U$ 1,150 U$ 0

38 Discounted Rents 30 years Per ha Soy bean $0 to > $8,000 Cattle $0 to $1,150 Logging $0 to $550 Smallholders

39 Conclusions: 1. REDD programs are long-term and will be negotiated 2. There are substantial economic benefits associated with REDD that offset opportunity costs 3. The cost of REDD determined by political and economic concerns 4. The cost appears to be highly competitive

REDD REDD THE COSTS AND BENEFITS OF REDUCING CARBON EMISSIONS FROM DEFORESTATION AND FOREST DEGRADATION IN THE BRAZILIAN AMAZON

REDD REDD THE COSTS AND BENEFITS OF REDUCING CARBON EMISSIONS FROM DEFORESTATION AND FOREST DEGRADATION IN THE BRAZILIAN AMAZON Reducing Emissions from Deforestation & Forest Degradation REDD REDD Reducing Emissions from Deforestation and Forest Degradation United Nations Framework Convention on Climate Change (UNFCCC) Conference