Paying the real cost of stopping deforestation

Deforestation occurs around the world for a variety of reasons and at an alarming rate – a football field of rainforest is cleared every six seconds. The reasons for deforestation vary widely across different regions and communities. While cattle ranching is a leading cause, other factors like palm oil, logging/timber production, agriculture, commodity extraction and subsistence living from forestry also contribute to deforestation. Halting these activities might seem simple at first sight, but they are often rooted in more deep-seated socio-economic issues such as population growth and economic challenges (new-found oil is hard to resist in any country).

To believe we can stop deforestation arising from these different causes at the current, often too low price we pay for carbon credits today (as low as US$2/tCO2eq) is at best na?ve and at worst tantamount to wilful ignorance.

This raises important questions. Should we require a (detailed) analysis of the true cost of stopping deforestation when we (the investors and buyers) assess the viability of a project? Who should prepare this analysis and is it realistic to require it?? Perhaps most critically, should buyers be willing to pay the higher premium to tackle more complex and expensive causes of deforestation when cheaper credits are available?

?Executive Summary

• ? The major drivers of deforestation are cattle ranching, logging, commodity extraction and agriculture, but subsistence living from forestry use is also an important cause. These drivers vary across different regions.
• Three main types of costs exist in stopping deforestation: Implementation Cost, Transaction Cost and Opportunity Cost. Opportunity Cost represents the potential earnings lost if deforestation activities cease (e.g. stopping oil drilling) and therefore needs to be compensated for (e.g. community benefits).? It often dominates the other costs.
• Different deforestation drivers have varying opportunity costs. Commodity extraction, agriculture and timber logging typically have higher opportunity costs than fire preservation and subsistence living. For example, avoiding oil palm-based deforestation in Indonesia has an average opportunity cost above $30/tCO2eq, far exceeding the current price paid for REDD+ credits at $5-10/tCO2eq – and at times as low as $2/tCO2eq.
• It is tempting to assume that stopping Avoided Planned Deforestation (APD) always costs more than Avoided Unplanned Deforestation (AUDD), because the former involves compensating companies for lost revenue (e.g. buying back land for a palm oil plantation). However, this isn’t always true (e.g. illegal logging (AUDD) can be highly lucrative where laws are not enforced).
• The mitigants for AUDD and PAD are different. In the case of AUDD, it involves providing financial support to local communities to create alternative income streams, such as boosting local farming yields. It is tempting to think of this as simple cause-effect relationship (e.g. create another job), but that is far from the reality in practice. Intergenerational efforts are needed to bring about lasting change. It builds on first providing the most basic needs such as healthcare and schooling, and only then can we hope to generate new revenue streams. This is often an uncomfortable truth for investors and buyers that want to see immediate change.?
• Determining the cost of AUDD requires answering complex questions such as who is impacted by the REDD+ project (the size of the community), how do they benefit, and the necessary measures to implement lasting viable change. This is the essence of a thorough Free, Prior, and Informed Consent (FPIC) process, and highlights the absolute criticality of enabling communities to decide their own development plans and benefits needed (e.g. schools, healthcare, money etc).
• With opportunity costs being very different, we may see a pattern of differentiated prices for REDD+ credits that reflect the driver of deforestation However, we see no such consistent pattern in today’s market.
• One reason buyers don’t consistently pay the price to stop deforestation is that project developers are not required by the verification standards and VVBs to produce detailed analysis of the total cost and the income expected to cover this cost. This arguably should be part of assessing a project’s viability and permanence. Without this information, buyers can’t make an informed decision. They could ask for these kinds of analysis, but my experience is that they don’t. As an aside, rating agencies ideally would like the information but don’t have it and do not strictly require it.?
• We then need to ask if carbon credit methodologies or investors should require project developers to prepare the cost analyses. With so much cost already placed upon REDD+ developers to develop and document projects, I am very hesitant to advocate further requirements. Yet, I believe these analyses are important. I would argue that a rudimentary (“back of an envelope”) calculation can be provided by developers at little cost, but more detailed studies will have to leverage publicly available data on the opportunity cost per location. I have not found these to exist consistently. They should.
• Of course, paying a price higher than the marginal cost to stop deforestation is the correct starting point, but it is equally important to inspect that the money earned is also being used to stop deforestation. A project can be well-funded but if funds are misused (e.g. not paid to the communities asked to change behaviour in AUDD cases) then deforestation will continue.
• High-quality REDD+ projects require adequate funding. If we are not willing to pay the necessary price, we should not be surprised by continued deforestation and negative attention to REDD+. Pay the right price and be part of the solution to stop deforestation.

Drivers of Deforestation

?The major drivers of deforestation are cattle ranching, logging, commodity extraction and agriculture but subsistence living from forestry use also is important cause (link ).? These drivers vary across regions with cattle ranching dominating in Brazil and agriculture in Asia.

Deforestation drivers are traditionally (e.g. by Verra methodologies) categorised as Avoided Unplanned Deforestation (AUDD) projects and Avoided Planned Deforestation (APD) projects.?

AUDD projects aim to protect forests from highly localised agents of deforestation, such as local communities using slash-and-burn techniques for crop cultivation, charcoal production, illegal cattle ranching, or illegal logging. Deforestation often results from socioeconomic pressures that encourage alternative uses of forested land and the inability of institutions to control these activities (link ).

APD projects aim to prevent deforestation on forest lands that are legally authorised and documented for conversion to non-forest uses. These primarily seek to protect forests from large-scale commercial agents. This includes legally permitted activities such as establishing crop plantations, cattle ranching, timber harvesting, re-routing road projects, building hydroelectric projects, or extracting commodities like oil, gold and nickel.

Mitigants of Deforestation

The mitigation strategies for AUDD and APD are different.

In the case of AUDD, mitigants include providing financial support to local communities so they have the means to pursue alternative livelihoods and create new income streams, such as boosting yields for local farming. It is tempting to think of this as simple cause-effect relationship (pay communities to stop or give them a job) but that is far from the reality in practice.? Intergenerational efforts are needed to bring about lasting change. ?See further below.? This is often an uncomfortable truth for investors and buyers that want to see immediate change. Creating new sustainable livelihoods must be combined with more immediate preservation measures such forest fire prevention measures and increased patrols to monitor and prevent illegal deforestation.?

Case – Kasigau Corridor (VCS)

?The project developer (Wildlife Works Carbon (link ) outlines the deforestation drivers as: “At the start of the project, unplanned slash-and-burn expansion for subsistence farming, charcoal production and cattle ranching were the main drivers of large-scale deforestation in the area.”

The mitigants and the success of the mitigants are then explained as:

“While these threats are still very present in the region, the project activities have been successful at stopping deforestation by providing economic alternatives to the communities. […] deforestation has nearly stopped because the community has agreed to stop extractive forms of livelihoods, now that they have economic benefits from the project in return for protecting the forest. Our conservation strategy is founded on holistically partnering with the local communities who choose to protect their surrounding forest by using carbon revenues to fund their self-determined social and economic development plans. Illegal charcoal burning and commercial poaching have always been and remain a consistent threat, but with the communities support these activities have been dramatically reduced by foot and air patrols conducted by Wildlife Works community rangers.

Additional proof that the project has been successful in protecting the forest and wildlife is the return of elephants to the area soon after the project started. Currently there are over 11,000 elephants in the Tsavo ecosystem with about 2,000 of them using the Kasigau Corridor as their permanent home.”

In the case of APD, the mitigants include, for example, preventing the entire project area from being cleared over 5-10 years by a global corporation that has well-documented plans to convert the forested area to a commercial palm oil plantation. It can also include re-routing a road project to minimise forest land destruction, relocating a hydroelectric production project away from a natural forest, or delineating and/or titling land to traditional and indigenous communities to give them an incentive to keep protecting the forest from conversion. The cost will at times include purchase of title to land.

Cost of Stopping Deforestation ??????????????????????????? ??????????????????????????????????????????????????????????????????????????? ??????????????????????????????????????????????????????

Three types of cost exist in principle:

1.?????? Implementation Costs involved in implementing a REDD programme. Examples include the cost of guarding a forest to prevent illegal logging, relocating timber harvesting activities away from natural forests to degraded land scheduled for reforestation, and paying rangers etc. This also includes a reasonable return on investment for the project developer.

2.?????? Transaction Costs such as the cost of registration, cost to sell the credits, and payment to regulators and government etc.

3.?????? Opportunity Costs are the cost of foregone benefits, such as those from the highest and best use of the land being deforested (e.g., net profit from cattle ranching or oil exploration). This includes the community benefits paid. Theoretically these opportunity costs should be considered at the country level, and not just by directly impacted parties. For a deeper discussion see here (link ).

Determining the cost of deforestation for AUDD requires answering complex questions such as who is impacted by the REDD+ project (the size of the community), how they benefit, what it would take to stop the deforestation initiative, and what type of community benefits are required to implement a lasting viable change.?

One challenging issue is determining who benefits from deforestation in an AUDD project and hence who should, and realistically must, be enjoying benefits to stop the deforestation. Clearly, the local community the directly lives in or around the forest and uses its resources must be considered.? However, there may be a larger community further away from the project area that would opportunistically use forest resources. On one hand, they should be compensated. However, this risks creating a perverse incentive where people may move to the community knowing that they could take advantage of the community benefits offered. In practice, what I have seen is that the local tribes will set the boundaries of who should enjoy the benefits, and whilst this process is not without challenges, these communities arguably have best knowledge of the beneficiaries of the forest.

A second issue is how to invest in community self-determined development (e.g., how much incentive to provide and which ones). A desktop exercise may suggest a theoretical amount but in practice the amount may be different. A related problem is a free-rider problem, where individuals may look to enjoy the benefits but continue to log illegally. Whilst the entire community may be willing to collectively stop deforestation for a certain amount and type of benefits, individuals may not. We have seen cases where timber companies pay local individuals to secretly “slash and burn” to clear the forest. The timber company then has an easier time lobbying government for a timber concession because the forest is already cleared. The documentary Guardians of the Amazon (link ) provides a vivid example of this. The community here must act as guardians against such practices. Incentives may also be legitimately needed for the government especially where a Corresponding Adjustment (e.g., Article 6 of the Paris Agreement) is requested by the project developer. This topic is outside the scope of this article.

Finally, what type of incentives are needed to stop the deforestation?? It is tempting to think of this as simple cause-effect relationship, where the job to be done is to create alternative jobs to sustain the livelihoods of those benefiting from deforestation. In principle that is true. A project should ideally not rely on carbon credits as the source of income in perpetuity. David Antonelli (link ) has argued that carbon credits should be thought of as a mechanism to bring about viable solutions in their own right (without relying on carbon credits). In the case of REDD+ projects though, the process is a very long and often intergenerational effort. This is because without having in the place the basic infrastructure such as healthcare and education, it is rarely feasible to create long-lasting job alternatives. This is often an uncomfortable truth for investors and buyers that want to see immediate change. Choosing the right benefits is the essence of a thorough Free and Prior Consent (FPIC) exercise and highlights the criticality of enabling communities' self-determined development plans (e.g. letting communities decide what benefits they need, such as schools, healthcare, money etc.). However, the project developer must also have a say in this process, not least to ensure realism in how much can be paid but also to bring in experience from what has worked in other projects in the past.? Local communities may not have this insight.

Price Differentiation amongst Projects

As outlined above, the opportunity cost of stopping deforestation will depend on the nature of the driver and the location. It is generally more expensive to stop oil exploration than subsistence agriculture.

There are few up to date studies that comprehensively show the opportunity cost across drivers and regions, but some studies exist. One study (link ) shows that the average opportunity cost from avoiding oil palm-based deforestation is $24/tCO2eq in Indonesia, with additionally $5,500–11,000/ha provided to landowners for the deforestation avoidance caused by oil palm expansion. This likely brings the total cost above $30/tCO2eq.

Kindermann and others (2008) (link ) estimate that halving emissions from deforestation between 2005 and 2030 would require a payment of $10-21/tCO2. A 10% reduction over the same period would cost $2-5/tCO2 which is roughly the price today. Given that the study is 16 years old, these costs likely would have increased as the cheapest projects have been delivered.

Similarly, the World Economic Forum (WEF) and McKinsey showed in a study (link ) that although the current low prices may be enough to incentivise some projects where land and opportunity costs are very low, in order for REDD+ to deliver its full potential, significantly higher prices will be needed. It shows that even though the majority of Natural Climate Solutions can be unlocked for below $20/tonne, prices around $40 will be needed in the key areas of Brazil and Indonesia, where opportunity costs are high (from valuable export commodities such as soy or palm).??

With opportunity costs being very different, we should expect to see a clear pattern of prices to be paid for REDD+ credits depending on the driver of deforestation. We see no such consistent pattern.?? This is evident when looking at prices for selected REDD+ (AUDD and PAD) over 2022-2023.

The graph below shows a price series of the eight projects that are part of the Climate Impact X (CIX) nature-based standardised contract basket CIX Nature X (CNX). For ENVA (APD), MNDB (APD) and KTGN (APD), the main driver is logging. For TMBP (AUD), CONC (AUD) and MATA (AUD), it is extraction and mining (illegal); and for KEAS (AUD), CORD (AUD), RIOA (AUD), KAS2 (AUD) and RAYA (APD), the main driver is agriculture / cattle ranching. What can be seen is that the prices across these different drivers are generally closely aligned over time and that some of the higher priced credits do not necessarily have the most costly deforestation drivers.

Preparing the Analysis

?What would an analysis of the cost stop deforestation versus income from carbon credits look like?? A stylized example is presented in a useful paper by the World Bank (2009) (link ):

Stylized Case – World Bank (2009)

In this example, avoiding the loss of 1 hectare of forest prevents 250tC from being emitted, but the alternative land use has a stock of 20tC, so the net emissions avoided are 230 tC.12.? Maintaining forest foregoes $30/year in income from pasture. Given the $10/year that forests provide, the opportunity cost is $20/year. Because this land must be maintained under forest for a long time, this annual opportunity cost must be converted to present value terms. Using a 30-year time horizon and a 10% discount rate, this gives a cost of $209/ha.

This is the value of the income foregone by maintaining forest on this land for this time period. To convert this opportunity cost in per hectare terms to one per ton of carbon terms, we divide by the net emissions reduction, in this case 230tC, and obtain $0.91/tC or, equivalently, $0.25/tCO2e. This is the opportunity cost of REDD in this example.

To arrive at the full costs of REDD from the country’s perspective, implementation and transaction costs must be added. If the implementation costs came to $0.10/tCO2e and the transaction costs to $0.05/tCO2e, then the country would be better off if it were paid any amount over $0.40/tCO2e to avoid deforestation. Individual land users would need to receive a compensation of at least $20/yr to voluntarily forgo deforestation.

A real life example of a project description that provides an analysis comes from the ABC Norte REDD Project VCS 2558 ?in Brazil. As part of its additionality assessment the project outlines an Investment Analysis that considers the costs and potential revenues associated with three scenarios. It uses the analysis to highlight that option 2, which is the project activity, is the least economically attractive, thus justifying its claim to additionality but also viability. Further sensitivity analysis is provided in the project documents, varying various costs and revenues associated with cattle ranching and timber by ±10%.

Real Life Case – ABC Norte REDD Project

Scenarios:

1) Implementation of sustainable forest management plan (SFMP) in the PA; 2) Implementation of SFMP with additional forest conservation and socio-economic (REDD+) activities; 3) Maximised timber extraction followed by cattle ranching.

The project provides an estimate of costs and revenues under assumed production volumes that are either legally stipulated or extrapolated from various literature sources, some of which are cited in the body of the text. The results are:?

These are then converted to NPV over the project lifetime:?

Requiring an Analysis of Cost Drivers and Income

One reason that buyers don’t consistently pay the price to stop deforestation is that project developers are not required by the verification standards and VVBs to produce detailed analysis of the total cost and show that the income expected to cover this cost. VM007, VM 009 and VM 0048 as far as I can tell do not have this explicit requirement, even if this arguably should be part of the assessment of the project’s Viability and proof of Additionality and Permanence (or the opposite). Without the information, buyers can’t make an informed decision.

Rating agencies, acting on behalf of buyers and investors may also require this information.? In speaking to two of them, it seems that ideally they would like the information but in the current market will have to rely on public information and whatever information the project developers will provide. This is a question of market dynamics (who holds the power) and goes beyond the scope of this article.?? BeZero (link ) has outlined how they consider the analysis this article argues for where data allows it.

So, should investors and buyers require project developers to provide the analysis? With so much cost for analysis of REDD+ developers, I am very hesitant to advocate further requirements. Yet I believe they are important. I would argue that a rudimentary (“back of an envelope”) calculation can be provided by developers at little cost but that more detailed studies would have to leverage publicly available data on the opportunity cost per location. As can be seen from the previous section, I have not found these to exist consistently. They should exist. However, if buyers were willing to pay a premium for projects that tackle more complex and expensive deforestation drivers, it would be much more likely that developers would invest the resources into developing them. Buyers arguably should be willing to pay this premium if they have a genuine interest in keeping the projects viable beyond the point of purchase and retirement.

Final thoughts

So how do we get to a situation where the right price is paid? It must start with a willingness to pay for a better product. If buyers consistently showed a willingness to pay a high differentiated price for projects with complex and expensive deforestation drivers, they can reasonably ask for thorough analysis and project developers will have an incentive to provide them.