financial incentive benchmark for redd+
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FIB for REDD+ Arild Angelsen
School of Economics and Business, Norwegian University of Life Sciences (UMB), Ås , Norway &
Center for International Forestry Research (CIFOR), Bogor, Indonesia arild.angelsen@umb.no
COP 18 Doha 28.11.12
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Reference levels: BAU (technical – measuring ER)
vs. FIB (financial incentive benchmark) (political – assigning ”quotas”)
Time
’Historical baseline’)
Realised path FIB
BAU baseline
Commitment period
REDD credits
Forest carbon stock
Emissions = negative change in forest carbon stock
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Why not to set FIB = BAU baseline
Too costly (expensive)!
Key challenge: create a REDD mechanism that:
– Gives strong incentives for emissions reductions
– Is not too costly (cost efficient)
– Is considered fair
=>Is politically acceptable (effective, costs, fair – 3Es)
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UNFCCC: Historical + National circumstances
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Main considerations for setting FIB
Simplest: FIB=BAU
1. Additionality
2. Participation constraint (“no lose” principle)
3. Effectiveness and efficiency
– Compensating only real costs
4. “Fair sharing” (equality)
– Income (GDP per capita)
5. Uncertainty
– Steps: lower RL if low quality data used
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Marginal costs of REDD
Price of REDD credits
$
BAU
C
B
A
FIB Realised emissions
D
Credits for sale/ comp.
Emissions REDD
1. Additionality
Additionality (weak): Realized emissions < BAU
Additionality (strong): FIB ≤ BAU
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Marginal costs of REDD
Price of REDD credits
$
BAU
C
B
A
FIB Realised emissions
D
Credits for sale/ comp.
Emissions REDD
2. No-lose principle or participation constraint
Transfer: B + C
Costs: A + B
Participation constraint: FIB set such that A ≤ C
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Marginal costs of REDD
Price of REDD credits
$
BAU
C
B
A
FIB Realised emissions
D
Credits for sale/ comp.
Emissions REDD
3. Effectiveness
Maximize effectiveness, given participation
constraint: CB set such that A = C
Compensate only real costs
– Trade-offs!
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Options to max. effectiveness (given REDD fund)
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Option Elaboration Incentives (overall
reductions)
Information require-ments
Risk handling
1.Stricter FIB
Might include a safety margin to account for uncertainty
Good; Correct incentives on the margin (don’t affect overall reductions)
Medium - high Good, countries adjust efforts based on new information, but may also opt out)
2.Lower price
Reduced price per tCO2e to make overall pay lower
Incentives on the margin reduced; less emissions reductions
Low Good
3.Different-iated payment
Example: corridor approach
Good, payment mimics the MC curve
High, must know differentiated costs
Good
4.Sub-FIBs Sub-FIBs for areas or sectors (drivers)
A version of the option above
Good, as above High, detailed information about costs
Good
5.Fixed contract
A deal about fixed reductions and fixed payment (based on estimated costs)
Uncertain; must include conditions target under-/over- achieved
High Poor, REDD countries assume high risk
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4. Fair sharing
1. Differences in capabilities
2. Differences in responsibilities
3. REDD+ transfers for development and adaptation
- Additionality?
Operationalise the benefit and cost sharing principle:
– income per capita
– emissions (current or accumulated)
– individual assessments of capabilities and needs
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5. Uncertainty
Risk at international level between parties:
Risk REDD country: not paid for their effort
– BAU higher, costs higher, policies ineffective
Risk REDD donor: pay is not additional, or high
REDD rent
– BAU lower, costs lower
Several options for dealing with uncertainty
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Option Elaboration Pros Cons Most
applicable
for 1.Ex post
adjustment RL formula agreed a
priori; final FIB set when
e.g. ag prices are known
Predictable; adj.
made as more data
become available
Hard to
establish the
formula
Steps 2 & 3
2.Corridor
approach Gradually increasing
payments within a RL
corridor
Flexible; payments
also mimic marginal
cost curve
Political
acceptability Steps 1–3
3.Conser-
vativeness
factor
FIB multiplied by an
conservativeness factor
(<1), based on data
quality
Lowe risk of over-
payment (hot air);
incentives to get
better data; accepted
by UNFCCC; easy
to implement
Makes
REDD+ less
attractive for
countries with
poor data
Steps 1–3
4. Renego-
tiation Renegotiate RL during
the course of
implementation of a
REDD+ agreement.
Flexible, can
incorporate
unforeseen factors
Political
gaming Steps 1 & 2
5.Insur-
ance Insurance contract-based
approaches in Steps 1 &
2
Well developed
markets for
insurance
Expensive;
complex
contract
Steps 2 & 3
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A proposal for setting FIB for result based payments
1. Historical deforestation (RL I=FIB I)
2. Business as Usual (BAU) deforestation
– Historical deforestation + National circumstances, e.g.
forest cover
– Adjusted BAU (RL II=FIB II)
3. Costs, based on arguments of effectiveness and
efficiency; set such that transfer = costs (FIB III)
4. Fair sharing, rich (> USD1 000/capita) countries pay
some share of costs, poor countries are overcompensated
(FIB IV)
5. Stepwise approach, high uncertainty of underlying data
impose a conservativeness factor (FIB V)
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Historic
al
deforest
ation
Forest cover Costs Fair sharing Uncertainty
Variables
Hist.defo
r rate
(FIB I=
RL I)
Forest
cover
BAU defor
(forest
cover)
(FIB
II=RL II)
Defor
after
REDD+
Emission
reductions
Opp.
costs
per
tCO2
Cost
adjust.
factor
FIB
III
FS
factor
(based
on
GDP)
FIB IV Cons.
factor FIB V
Example I: Poor, low deforestation, forest rich country
Parameter value
(threshold) 50 % 5,0 3,0 1 000
Area (1000 ha) 350 180 000 746 373 373 597 631 504
Relative to forest or land
area 0,19 % 72,00 % 0,41 % 0,21 % 0,21 %
0,33
% 0,15
0,35
% 0,80
0,28
%
Emission MtCO2
(100tC/ha)
128
274
137
137
Value (USD million)
684
411
0,60
500
REDD+ transfers (USD
million)
684
411
-
473
-
241
Example II: Rich, high deforestation, low forest cover country
Parameter value 50 % 5,0 3,0 1 000
Area (1000 ha)
1 000 70 000
846
423
423
677
588
529
Relative to forest or land
area 1,43 % 28,00 % 1,21 % 0,60 % 0,60 %
0,97
% (0,35)
0,84
% 0,90
0,76
%
Emission MtCO2
(100tC/ha)
367
310
155
155
Value (USD million)
776
466
0,60 5 000
REDD+ transfers (USD
million) 776 466 303 195
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Summary
A reasonable proposal
– BAU, costs, capacities, and uncertainty
– Specifications debatable
Lower FIB, but
– More REDD for given international funding (effectiveness)
– “Something one can afford”
Need to deal with uncertainty
– Stepwise approach:
• Incentives for upgrading MRV and RL system
– Corridor approach:
– Reduce uncertainty for both parties
– mimic the MC curve (only compensate real costs)
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Based on ‘Analysing
REDD+’ (chap. 16)
and DECC-report
http://forestsclimatechange.org/
AnalysingREDD+
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