The financial costs of Reducing Emissions from Deforestation and forest Degradation (REDD)

This study reviews the financial costs of abating greenhouse gas emissions through reducing emissions from deforestation and forest degradation (REDD). It is written from the perspective of an institutional investor seeking cost-effective climate mitigation options.

A review of empirical data from Brazil and Indonesia suggests that REDD may, in many areas, provide a cost-effective climate mitigation option, with estimated costs lying in a range of US$ 2-10 per ton of CO2

Biodiversity could benefit from funding being directed towards efforts to reduce deforestation under the climate change agenda.

With deforestation representing one of the largest sources of global greenhouse gas (GHG) emissions, opportunities to reduce climate change by Reducing Emissions from Deforestation and forest Degradation (REDD), especially in developing countries, have risen to the top of the international climate policy agenda.

To maximize its effectiveness, REDD needs to be broadened to include the restoration of degraded forests, enhancement of carbon stocks and sustainable management of forests, alongside conservation. This is known as ‘REDD-plus’ and offers multiple environmental and social benefits including biodiversity conservation and ecosystem restoration.

A study published by IUCN, The Cost of REDD: Evidence from Brazil and Indonesia, confirms that forest communities, the environment and businesses can all benefit from REDD-plus. The study looks closely at the financial profitability of activities that cause deforestation, such as beef and soybean production in the Amazon, and compares these costs to those of other climate mitigation options, such as energy efficiency or carbon capture and storage. Available data suggests that the costs of REDD lie within a range of US$ 2–10 per ton CO2e (CO2 equivalent), depending on the profitability of crop production on forest land, which includes opportunity, implementation and transaction costs.

“Compared to the cost of cutting industrial GHG emissions, which can exceed US$ 50 per ton CO2e in many countries, REDD provides opportunities to reduce emissions at much lower cost,” explains Nathalie Olsen, of IUCN’s Economics and Environment Programme and co-author of the study. “But a lack of information at the local level is proving a stumbling block to attracting greater financial and political commitment.”

Compensating governments and landowners for the ‘opportunity costs’ of safeguarding forests is likely to be the largest single cost component of any REDD scheme. The opportunity cost of forest conservation refers to the income that is sacrificed as a result of not logging (or logging more sustainably) or not converting land to agriculture. For REDD to be equitable as well as efficient, the rights of local and indigenous people must be properly addressed including through a clear definition of property rights and transparent benefit-sharing arrangements. While this may increase transaction costs, it is essential in order for REDD to be effective.

The IUCN study focused on Brazil and Indonesia as two of the largest GHG emitters. Brazil is responsible for around half of annual global deforestation, most of it taking place in the Amazon. Indonesia is the third largest emitter of GHGs with most of its emissions due to deforestation, forest degradation and forest fires. The study found that in both countries, the financial returns on agriculture and livestock production on recently deforested land are often so low that REDD payments would be attractive to many landholders. In Brazil, at current carbon prices, carbon sequestration can compete with ranching, the most prevalent land use in the Amazon. As roughly 80% of recently deforested land is used for ranching, the scope for achieving cost-effective reductions in CO2 emissions through avoided deforestation seems promising.

“REDD-plus offers a cost-effective way to help meet greenhouse gas emissions reduction targets whilst making a signifi cant contribution to biodiversity conservation,” says Nathalie Olsen. “When forests are conserved for carbon storage, benefits can flow to ecosystem service provision, biodiversity and opportunities for local communities. However, what we need for REDD-plus implementation is a legal and institutional framework to be put in place, and for that we need concerted action at the international level.”