What Does the Resurgence in Carbon Pricing Mean for Tropical Deforestation?

Carbon pricing policies are once again on the upswing, as evidenced by a flurry of news in the past two weeks. Canada’s federal government issued a carbon pricing plan that would see that all states implement either carbon taxes or cap-and-trade programs, starting in 2018. The Paris climate agreement will enter into force this November, with its promise of “internationally transferred mitigation outcomes.” And the International Civil Aviation Organization (ICAO) recently inked an agreement through which airlines will purchase billions of tons of emission reduction credits.

Might one or more of these carbon pricing policies finally address tropical deforestation—the second-largest source of climate emissions? And if so, how many emission reductions could tropical forests provide at what cost? In light of all the recent policy movement, now is a good time to take stock of supply and demand for tropical forest carbon.

A supply curve for tropical forest carbon

Protecting and restoring tropical forests could potentially supply up to 24-30 percent of climate mitigation, but what does the supply curve for this mitigation look like? That is, how many emission reductions could be provided at what cost? Multiple lines of evidence support the conclusion that reducing tropical deforestation is a comparatively cost-effective climate solution:

Government expenditures. The restrictive actions taken by Brazil to impressively cut deforestation cost the national, state, and local governments less than $5 per ton of carbon dioxide. This is from a recent published study in Ecological Economics that divided the $2 billion cost of government program expenditures—roughly one-third of the cost of the Rio Olympics—by a rough-cut estimate of how much carbon was saved.

This implies that a payment of $5 per ton would be sufficient to make it worthwhile for forest country governments to reduce deforestation, at least insofar as other forest country governments could replicate what Brazil achieved. Of course this doesn’t consider opportunity costs of landholders within Brazil who would like to deforest to grow beef or soy, whether legally or illegally, and now aren’t able to do so.

International pay-for-performance agreements. For more than six years, the government of Norway has been paying the governments of Brazil and Guyana $5 for every ton of carbon dioxide they keep out of the atmosphere by protecting their forests. The 11-donor Carbon Fund of the Forest Carbon Partnership Facility may soon pay a similar price for emission reductions in several dozen states within forest countries attempting to subscribe to the program. This level of supply is non-negligible, but it doesn’t come anywhere close to all of the more than 50 countries in the REDD+ readiness pipeline. Furthermore, Indonesia and Norway never set a price for their pay-for-performance agreement, but we’re not seeing evidence of successful forest conservation at $5 per ton. All this implies that an international carbon price of $5 is sufficient to motivate participation by some governments, but not most. A price higher than $5 per ton would be needed to motivate other forest countries to supply.

Forest conservation programs and projects. Within tropical countries, the small number of cost-effectiveness analyses to date suggest that programs or projects to conserve forest can produce relatively large carbon benefits for relatively low costs. A randomized controlled trial (RCT) in Uganda by Seema Jayachandran and her co-authors determined that payments to villagers to delay deforestation kept carbon out of the atmosphere at a cost of around $1 per ton. A study by the World Resources Institute concluded that securing indigenous land tenure in three Latin American countries could avoid emissions for $2-12 per ton, based on analysis of the budgetary cost of land titling programs and generous assumptions about carbon savings. And a dozen or so site-level REDD+ projects are selling forest carbon credits to voluntary offset buyers for $10 per ton, suggesting that their costs are lower than this. 

Partial equilibrium models. For the last decade or so researchers have built marginal abatement cost curves projecting how much forest carbon could be kept out of the atmosphere at what carbon price, using partial equilibrium models based on estimates of opportunity cost. A price of $10 per ton gets anywhere between 0.5-3.5 billion tons of carbon dioxide per year, depending on the model (see chart below). Estimates by McKinsey and Company come in at the most optimistic end, in part because they include reforestation. A model I built with Jens Engelmann produced the most conservative numbers, in part because it accounted for how land users actually responded to changes in agricultural prices. Even at the conservative end, reducing deforestation is four to five times cheaper than a comparable level of emission reductions in the United States or Europe.

Demand for tropical forest carbon

So, that’s supply. What about demand? Who might be willing to pay for reductions in emissions from tropical deforestation? There are a growing number of possibilities.

Regulatory offsets. Ever since the failed Copenhagen climate agreement in 2009, California’s cap-and-trade program has been the best hope for forest carbon offsets to enter a compliance market. With aggressive climate targets recently signed into law, there is once again a path for California to let companies buy tropical forest offsets during the program’s third compliance period from 2018-2020. If this happens, the amount of offsets bought by California companies would be small. But by legitimizing the market California could open the gates to buyers from Quebec, Ontario, or other provinces or states.

Voluntary, industry-wide offsets. The recent ICAO assembly in Montreal resulted in a commitment of “carbon neutral growth” for international flights between more than 60 countries starting in 2021, and between all countries by 2027. The Environmental Defense Fund estimates that meeting this target will require airlines to curtail their planned emission growth by 2.5 billion tons over 15 years. Tropical forests could help them meet this demand—a 10% reduction in tropical deforestation could more than cover the difference.

Paris pathways. The UNFCCC provides several potential pathways for countries to purchase national or state-level reductions in emissions from deforestation and forest degradation (REDD+). The Paris climate agreement enables trading between countries through “Internationally transferred mitigation outcomes” (ITMOs). The Green Climate Fund could pay for performance in reducing emissions, much like the multilateral Carbon Fund, though ideally with fewer aid barnacles than the World Bank. And a “Sustainable development mechanism” could become a successor to the Kyoto Protocol’s Clean Development Mechanism in verifying offset credits.

Domestic carbon price policies. Some large middle-income countries, including Brazil, China, Chile, Korea, Mexico, and South Africa, have either started or are mulling domestic carbon pricing. Forests could be included in these markets, either as offsets or as a regulated sector as they are in New Zealand’s carbon market, e. Even without a carbon market, tropical countries could create a de facto fiscal incentive for forest conservation by basing internal transfers of tax revenue to states on the protection and restoration of forest cover, as India has done.

Overcoming hesitation

Including tropical forests in carbon markets lowers the cost of meeting any given climate target. And because meeting the target is cheaper, the target can be made stronger. But if including tropical forests in carbon markets is so beneficial, why hasn’t it been done yet? There have been a few hesitations.

Monitoring challenges. In the past, monitoring changes in tropical forest cover was expensive and difficult. This meant that emission reductions could realistically only enter through discrete projects in small areas, raising concerns about the effects beyond the project boundaries. “Avoided deforestation” was excluded from the Kyoto Protocol’s Clean Development Mechanism for this reason. But recent breakthroughs in satellite monitoring mean that it’s now possible to consistently track emissions from tropical deforestation over large areas and long time periods, making REDD+ at the national or state level one of the tracks of international climate negotiation that reached consensus most quickly.

Flooding the market. Ironically, tropical forests’ low cost of mitigation was not a selling point for the European Union Emission Trading Scheme (ETS). In 2008, EU regulators prohibited REDD+ credits from entering the ETS before 2020, based on the concern that cheap offset credits from tropical forests could “flood” the European carbon market, driving down the domestic carbon price and reducing incentives to cut carbon in European industries. However, the entry of forest carbon credits into carbon markets need not be all-or-nothing. Regulators could place quotas on their use, as in California, or could apply an offset trade ratio as in 2009-2010 unpassed US federal climate legislation.

A variety of other technical and social issues were systematically worked out through years of international negotiations, policy research, and advocacy, as explained in Frances Seymour’s and my forthcoming book, Why Forests? Why Now? The Science, Economics, and Politics of Tropical Forests and Climate Change.

In short, for tropical forests and carbon markets, supply is plentiful, new sources of demand are arising, and obstacles to market transactions are falling.