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Rain orest Foundation UK Climate and Forests Policy Brie November 2010 01

Box 1: Background to REDD

De orestation and orest degradation are estimatedto contribute between 12% and 18% o greenhousegas (GHG) emissions which cause anthropogenicclimate change. Parties to the UNFCCC agreedin Bali in December 2007 to explore policies and

nancial incentives that would reduce emissionsrom de orestation and orest degradation (REDD).

Around 40 national governments are in the processo creating national REDD strategies, in collaborationwith the World Banks Forest Carbon PartnershipFacility (FCPF) and the UN-REDD programme, amongstothers. Many other sub-national REDD projects are

already operational.

Call a thing immoral or ugly, soul-destroying or a degradation o man [but] as long as you have not shown it to be uneconomic you have not really questioned its right to exist, grow and prosper. E.F. Schumacher 1

Key messages

The carbon mitigation cost-curve, as used byMcKinsey & Company, has become infuential innational and international REDD policy making,but it is misleading or decision-makers.

The approach is methodologically awed as itexcludes transaction and implementation costs,as well as the challenges o governance, andundervalues activities not integrated into ormalmarkets, such as subsistence arming.

The approach is awed as a policy-makingtool as it does not consider alternativepolicy options, and avours policy thatwould allow industrial uses o the orest tocontinue business-as-usual, whilst penalisingsubsistence activities. This is distortingnational REDD plans.

The use o the top-down cost-curve approachhas contributed to exclusive and opaquenational REDD processes. These processes

should be par ticipatory, bottom-up andrespect ul o the rights o local communitiesand indigenous peoples in particular.

1. What is the cost-curve and why isit important?

The carbon mitigation cost-curve is arguably one o the most well-known diagrams in climate changepolicy discussions. It is a visual representationwhich shows the size o opportunities or

reductions in GHG emissions or di erent activitiesin order o cost (see Figure 1). The x-axis shows

the abatement potential (how much CO 2 could beavoided by any one activity) and y-axis shows thecost per tonne o CO 2 equivalent (tCO 2e) reduced.

Although used by several organisations, it is mostassociated with the consulting rm McKinsey &Company (McKinsey). 2

The cost-curve has been used by McKinsey ina number o reports commissioned by nationalgovernments and international institutions on how torespond to climate change, including many relatedto reducing emissions rom de orestation and

orest degradation in developing countries (REDD).McKinsey have produced national reports relatedto REDD or the governments o Brazil, Guyana,Democratic Republic o Congo (DRC), Indonesia andPapua New Guinea, amongst others. The cost-curveprovided cost estimates or the infuential report o the In ormal Working Group on Interim Finance orREDD (IWG-IFR) in 2009. 3

At the international level, the use o the cost-curve has helped to rame the debate over cheap

McREDD: How McKinsey cost-curves

are distorting REDDBy Nathaniel Dyer and Simon Counsell

Briefng


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02 Rain orest Foundation UK Climate and Forests Policy Brie November 2010

Source: McKinsey & Company.(2009.) Pathways to aLow-Carbon Economy: Version 2 o Global Greenhouse Gas Abatement Cost Curve., p. 7.

reductions o emissions that are theoreticallypossible rom the orest sector, and what actionsshould be prioritised. At the national level,McKinseys analysis has been used to in ormnational strategies on how countries will implementREDD. For example, signi cant sections o the 2009McKinsey study or DRC, including 14 strategicoptions or REDD, were integrated with virtuallyno alteration into the countrys REDD ReadinessPreparation Plan (RPP) submitted to, and approvedby, the World Banks Forest Carbon PartnershipFacility (FCPF) in March 2010 which set out theprocess by which DRC will become ready or REDD. 4

This brie ng will rst highlight some o theweaknesses o the cost-curve methodology and thenexamine its use as a policy-making or infuencingtool or REDD be ore drawing some conclusionsand recommendations. We believe that use o the cost-curve could mislead decision-makers asto the choice o the most appropriate strategies

or REDD and their likely costs and bene ts. Itcould result in pressure to reduce de orestationand degradation alling disproportionately on localcommunities and indigenous peoples, endangeringtheir customary land rights and traditional way o li e, while allowing large-scale extractive industriesto continue business as usual or even to bene t

rom REDD without changing destructive practices.According to the general McKinsey cost-curve above,several o the lowest-cost, highest abatementpotential options (those with low, wide columns) arerelated to orestry, including reduced slash and burn

agriculture, degraded land restoration and reducedpastureland conversion.

2. Why the McKinsey cost-curve ismethodologically awed

The cost-curve is methodologically fawed as it doesnot show the real costs o REDD: it substantiallyunderestimates the cost o reducing emissions

rom activities such as subsistence agriculture andit o ten bases calculations o compensation oninfated, unveri able projections.

Missed opportunities to show the real costo REDD

The cost-curve purports to give decision-makers abirds eye view o carbon mitigation measures romthe point o view o cost-e ectiveness, but it ails toinclude large and unavoidable costs into the model.There are at least our types o cost or REDD 5:

Opportunity costs: that is, the projected nancialbene ts that a land owner would orego by not

de oresting or degrading orests. For example, i a land owner can earn $10/ha/year rom natural

orest, and $50/ha/year rom palm oil, theopportunity cost o not converting the land wouldbe $40/ha/year.

Implementation costs: or carrying out theactions and projects to actually reducede orestation or orest degradation, includingadministration costs.

Transaction costs: or identi ying REDDprogrammes, negotiating contracts, and

Figure 1: The global McKinsey cost-curve


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monitoring, reporting and veri ying (MRV)emissions reductions and social andenvironmental bene ts. These are costs that donot directly lead to reductions in emissions.

Institutional costs: support or legislative andinstitutional re orms and capacity-building neededto create an enabling environment or REDD.

These will be higher in countries with poor orestgovernance and could include costs related tosocial wel are and biodiversity protection.

As a general rule, cost-curves or REDD onlyinclude opportunity costs. Indonesias greenhouse gas abatement cost curve (2010) published byIndonesias National Climate Change Council (DNPI)and based on McKinsey analysis says: The costo each opportunity also excludes transaction andprogram costs to implement the opportunity on alarge scale... [and] will in most cases be higherthan those shown in the cost curve. Similarly, thecost-curve report McKinsey produced on behal o the DRCs Ministre de lEnvironnement, de laConservation de la Nature et du Tourisme (MECNT)in 2009, says it does not include the collection o transaction costs, communication or in ormationcosts, subsidies or carbon costs, or the consequentimpacts on the economy. 6

The opportunity cost approach, which underpinsthe cost-curve, is based on the theory that i theland owner is compensated or the monetary valuewhich is orgone by not cutting down the orest,they will choose to keep it standing. However, notall REDD activities will be so simple in reality. REDDactivities in particularly large countries especiallythose with weak governance and REDD actionstargeting disparate and marginalised groups willentail very substantial transaction, implementationand institutional costs. It should also be noted thatin order to ensure that the emissions reductions o a REDD project are permanent , implementation and

transaction costs may well have to continue or manyyears a ter the active li e o the project has beencompleted.

To take an example rom Brazil, the Juma Reserve inAmazonas State estimates that payments to amiliesand support or communities (which may already bemore than the basic opportunity cost) will account or

just over 55% o costs. The remaining 45% o costswill be or other activities such as improving orestlaw en orcement and governance, administration,

monitoring carbon and preparatory meetings with

communities (see Figure 2). It is likely that in otherREDD projects, implementation and transactioncosts could be signi cantly higher.

Despite the caveats, o ten in ootnotes, statingthat the cost-curve only shows some o the costso REDD, this has not been built into the cost-curvemodel or the headline numbers. A recent reportby Rights and Resources Initiative and CIRAD(Agricultural Research or Development) concludedthat opportunity cost is just the tip o the icebergwhen it comes to estimating the real compensationthat will have to fow into tropical developingcountries to implement e ective, e cient and airREDD+ programs. 7

When these hidden costs are incorporated into thecost-curve, it would signi cantly change the heightso the various columns. Decision-makers relyingon the cost-curve to give them an accurate basis

or comparison between di erent options shouldthere ore tread very care ully.

PAYMENTS TO FAMILIES/SUPPORT TO COMMUNITIES

PROTECTED AREA MANAGEMENT AND LAW ENFORCEMENT

ADMINISTRATION AND STAFF

CARBON MONITORING

COMMUNITY MEETINGS ETC

Figure 2: Costs o the Juma Reserve inAmazonas State, Brazil

Costs shown are estimated total costs rom 2005 to 2050 calculated at a 5% discount rate.Source: Viana, Virgilio M.; Grieg-Gran, Maryanne; Della Ma, Rosana; Ribenboim, Gabriel. (2009.) The costs o REDD: lessons rom Amazonas, IIED Briefng Paper p. 4.


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Source: Indonesias National Climate Change Council (DNPI). (2010.) Indonesias greenhouse gas abatement cost curve. August 2010, p. 21.

Do the cheapest reductions come rom thepoorest orest users?

The cost-curve as it stands is particularly poorlysuited to showing the real costs o reducingde orestation and degradation caused bysubsistence activities that are not part o the marketeconomy. McKinsey claims that large amounts o emissions 2 gigatonnes (Gt) o CO 2e could bereduced globally rom slash and burn agricultureconversion at a cost o less than 2 per tCO 2e: this,they point out, is very inexpensive in comparison toother mitigation options. 8

Similar claims have been made in national cost-curvereports on REDD. For example:

The McKinsey-inspired Indonesian NationalClimate Change Council report estimatesthat stopping orest conversion to smallholderagriculture is the single largest opportunity atslightly more than 190 MtCO 2e and can be

achieved at US $1 per tCO 2e.9

(see Figure 3).

The McKinsey report or DRC suggests a higher,but still relatively inexpensive, cost o 4.80 to 6.50 per tCO 2e or reducing de orestation romsubsistence agriculture. 10

These emissions reductions have been calledthe low-hanging ruit in the ght against climatechange, 11 but why are they are so cheap? Like mucho McKinseys cost-curve work, the calculations

behind the headline numbers are not given (see Box2). As shown above, the headline cost only takes

into account opportunity cost, or the economicvalue that derives rom de oresting or degrading theland. This is particularly problematic with regard tosmall-scale agriculture, as by de nition much o itis primarily armed or subsistence purposes andis not sold on the market. Subsistence uses do notgenerally yield a quanti able economic value, andare there ore not captured in the cost-curve. Evenwhen small-holder produce is sold at market, the neteconomic value o one hectare o manioc or cassava,

or example, is negligible. This is a clear illustration

o how the cost-curve tends to recommend thataction is taken where the least economic value isdrawn rom the orest, or in other words, in areascontrolled by poorer orest users. This logic couldlead to perpetuating the poverty o the poorest

armers as it does nothing to improve poorpeoples position, merely advocating that one sourceo a poverty-level income is replaced by another.

The di erence between theoretical opportunity costsand real activity costs is particularly large in relation

to slash-and-burn arming. As an example, i the costo reducing slash-and-burn arming is estimated atUS $1 per tCO 2e (similar to above), this would implythat a typical amily with a holding o one hectareo orest containing around 200 tonnes carbon perhectare could be prevented rom clearing orestthrough compensation o approximately US $720. 12

This gure o US $720 per amily is likely to bea massive underestimation once the costs o mechanisms to support alternative livelihoods,relocation (i this is necessary and consentedto), and replacement o other services previously


Figure 3: REDD cost-curve or Indonesia


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supplied by the orest is included. 13 Any suchscheme would have to deal with the challengeso operating over enormous areas with, globally,hundreds o millions o smallholders. Giving orestdwellers or armers money equivalent to the marketvalues o those outputs wouldnt help themmuch. 14 Signi cant up ront investments would beneeded in readiness actions related to governance

and monitoring systems. There would be signi cantrisks o human rights violations, entrenching poverty,and marginalisation o local communities andindigenous peoples in the absence o this.

Years o development experience shows that theimplementation costs o a REDD programme to airlyand equitably reduce slash-and-burn would be muchhigher than the cost-curve estimates, as would thetransaction costs o setting up a payments scheme,monitoring results, and national systems to ensurecompliance. A air and equitable scheme would needto show rom where orest-dwellers will be able toaccess ood, uel and materials or housing that arecurrently obtained rom the orest, and ensure thatcompensation was at least adequate to purchasereplacements. These alternative materials and

oodstu s, especially i they are imported or grownintensively, would themselves have a substantialcarbon ootprint which is not included in the cost-curve model. More research is needed into themarginal carbon bene t o stopping small-scaleslash-and-burn arming, which could be low or evennegative. It should also be noted that in manyremote areas there are large missing marketsin key districts, which would leave subsistence

armers unable to easily switch to marketedgoods due to lack o access to ood and othervendors. Under these circumstances, cessation o subsistence arming could cause ood price infation,

ood shortages and possibly mass demographicrelocation. There are probably many hundredso millions o people worldwide depending onsubsistence arming in orest areas or their survival.

Furthermore, the cost curves do not distinguishbetween genuinely destructive slash-and-burn

arming (o ten or commercial purposes), andtraditional and broadly sustainable rotational orest

arming, or swidden agriculture which is intimatelylinked to the way o li e o many orest communities.Traditional rotational orest arming as used inmany tropical orest areas involves the subsequentre-growth o orests, and storage o carbon. 15 Thecarbon emissions caused by this arming, over a ull

rotation o 10-20 years, would there ore be muchless than might be indicated rom one snapshotin time.

Box 2: McKinseys Black Box

The term black box describes any process orsystem whose inner workings are unknown, ornot transparent, and there ore does not provide asatis actory explanation o the outputs. Speci cre erences or cost estimates, or calculations toshow how the headline gures were estimated, are

rarely given in McKinseys cost-curves, as is shown byexamples rom Indonesia and DRC below. 37

Logging, natural orest and fres in Indonesia

The McKinsey-inspired Indonesia report claims thatsustainable orest management (SFM) and reducedimpact logging could save 200 MtCO 2e, at a costo slightly more than US $2 per tCO 2e abated. Itgoes on to say that: The alternative [to SFM] stopping logging altogether would have the samee ect on emission reduction, but has a much higheropportunity cost. 38 No re erence or justi cation isgiven to support this claim, and it goes against bothcommon sense how could no logging produce thesame amount o emissions as continuing logging? and scienti c research. 39 Reduced impact logginghas been shown to reduce carbon content o natural

orest by almost 40%, most o which ends up in theatmosphere. 40 In addition, a genuine comparison o policy options would need to consider the longer termimpacts o logging, including the construction o roadsthat increase access to the orest. Studies haveshown that previously logged orests are up to eighttimes more likely to be de orested and converted toagricultural land than undisturbed orests. 41

The Indonesia report also includes prevention o orest re as a separate policy option which could

save 43 MtCO 2e in 2030 at a cost o US $2 pertCO2e. 42 Again no external re erence is given orthese gures. There is also a lack o analysis aboutthe interconnection o di erent policy levers. Naturalrain orests are largely immune rom re, whereaslogged orests are ar more vulnerable. An article inNature showed that during El Nio res in late 1990s,60% o logged orests in Indonesian Borneo burned,compared to just 6% o primary orest. 43

Illegal logging in DRCThe McKinsey report or the DRC states that 5% o the countrys total reductions in GHG emissions couldcome rom reductions in illegal logging, or 22 to 23Mt CCO2e. 44 Again, no re erences or calculations areprovided to support this number. Such a high levelo precision is surprising, given that no-one has aprecise idea o the volume o wood cut illegally in theDRC, let alone the resulting carbon emissions. 45

Unless ull re erences and calculations can beprovided, and light shone into McKinseys black box,these numbers should not be used to in orm nationalREDD programmes.



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In reality, picking o the apparently low-hangingruit may be more risky, di cult and costly than the

simplistic modelling o the cost-curve suggests.

Looking through a crystal ball:in ated baselines

There is not enough space here to deal adequatelywith the technical and ambiguous subject o baselines, or de orestation and degradation

re erence levels; this has been done elsewhereby Dr Alain Karsenty. He has shown that creatingaccurate models to predict uture de orestation isparticularly di cult, as is proving that payments leadto additional reductions. 16

Whilst there are valid arguments about how toensure that global schemes to reduce de orestationare designed to include as many countries aspossible, especially the so-called High Forest Cover,Low De orestation countries, the use o infated

baselines in the McKinsey cost-curves raises aserious moral hazard or tropical countries. Therst McKinsey report or Guyana presented a

de orestation scenario o 4.3% per year whichwould result in near total destruction o Guyanasrain orest in 25 years and is wildly infated romthe actual rate o de orestation, which is estimatedto be between 0.1% and 0.3% per year. 17 TheMcKinsey scenario suggests that Guyana could earnapproximately $580 million per year by cutting its

orest and replacing it with high value agricultureat this infated pace. 18 Although this is implausibledue to poor soil quality, the President o Guyanarepeated this gure in international meetings as

the level o unding Guyana would need to preventde orestation. 19 This, however, is based on anunrealistic, projected baseline and has very littlerelation to how much e ective orest protectionwould cost in Guyana. Furthermore, there is adanger that these high-de orestation scenarios couldbecome sel - ul lling prophecies and encouragetropical governments to pursue destructive practicesin order to increase their expected compensation.

Other more subtle infated baselines in the McKinseyapproach also promote perverse outcomes. The DRCreport identi es compensation to logging companiesas a potential way to reduce orest-sector emissions.As Gregersen et al state, the current volume o legal harvest in the DRC is between three to vecubic metres per hectare. The model used in theMcKinsey report assumes that this will increase to15 cubic metres per hectare by 2030: this, however,is extremely unlikely due to the geography and highoperating costs in DRC. It is then proposed, in themodel, to compensate logging companies to reducetheir extraction (against the infated uture baseline)to 10 cubic metres per hectare in reality, this wouldbe an increase o ve cubic metres per hectare romthe true historical baseline (see Figure 4). A paymentwould then be made to the companies in order tomake the new (increased) volumes sustainable orthe company. 20 Government regulation capping thevolume harvested per hectare would be much morecost-e ective. 21

Similarly, the McKinsey report or Guyana discussesrolling back environmental regulations that limit

Figure 4: Proposal or increased logging to be compensated by REDD payments in DRC

Future logging scenario according to McKinsey report for DRC

15

10

5

0

2010 2015 20302020 2025

L o g g

i n g

h a r v e s t p e r

h e c

t a r e - c u b

i c m e

t e r s

Current legal harvest of commercial timber

Projected baseline - from which compensation will be paid

Reduced harvest

Compensation proposed

Actual increase in logging density


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extraction o timber to 20 cubic metres per hectareto allow or a more permissive regulatory regimethat would allow up to 40 cubic metres o timber perhectare to be logged. 22 This would then be used to

orm a new baseline, double what is permitted undercurrent legislation, rom which reductions wouldbe judged. In both o these examples, it would thenbe possible or logging companies to increase theirreal volume o extraction o timber and receive REDDpayments or apparently reducing de orestation and


Box 3: Will REDD be more expensive or lessexpensive than the cost-curve numbers?

This brie ng argues that the cost-curveunderestimates the cost or some policy options,which will make reducing de orestation by thosemeans more expensive than the headline gure. Ithas also argued that large trans ers o unds are not

necessary or other policy options where reductionscould be achieved at a cost less than the headlinegure. This appears to be a contradiction.

The explanation or this is linked to the nature o theopportunity cost approach. Cost-curves mentionedin this brie ng have included cost estimates that areboth too high and too low, depending on the policyoption. This brie ng shows that the real costs o reducing emissions rom small-holder agriculture inIndonesia once more than just opportunity cost istaken into account will be much more expensivethan the gure o US $1 per tCO 2e. It was alsosuggested that the option o paying loggers in theDRC or palm oil producers in Indonesia according toopportunity cost is ine cient and signi cantly moreexpensive than maintaining or en orcing governmentregulations. It argues that the policy mix betweenincentives, imperatives and capacities is needed.

This brie ng is not calling or increased costestimates or REDD, but or a broader and morenuanced approach. To risk stating the obvious,de orestation and degradation are not solely causedby economic drivers, but are infuenced by the political

and social environment. Investments in improvingorest governance and regulation, or recognising

customary land rights, could mitigate de orestationand orest degradation more e ectively and atless cost than paying opportunity costs. Hatcherhas estimated that the cost range o recognizingcommunity tenure rights ($0.05/ha to $9.96/ha) is several times lower than the yearly costsestimates or administering, implementing and

nancing an international REDD scheme ($400/ha/year to $20,000/ha/year). 48 Less money used moreintelligently will result in better outcomes or orestpeople and the climate than more money put to thewrong uses.

degradation. Furthermore, national commentatorshave stated that the higher baseline is unrealisticgiven the operating conditions o the Guyanese

orest sector. 23 (see Box 3 or urther discussion).

3. Why the cost-curve is misleading asa policy-making tool

The problems o using the cost-curve as apolicy-making tool stem rom its methodologicalweaknesses, but it is worth expanding on this givenits important role in national dialogues on REDD inmany rain orest nations.

The opportunity cost approach attracted internationalattention when it was used in the Stern Reviewo 2007. It has been argued that, despite itsmethodological faws, opportunity cost and thecost-curve are use ul tools at a high level to get

decision-makers to consider the advantages o REDD. Supporters o this view generally concedethat the cost-curve should not be used orselecting on-the-ground REDD activities, nor areaso intervention. However, it is now clear that in anumber o countries cost-curves are not only playingan important part in national policy making, but arealso shaping the development o operational REDDprogrammes.

Simple economics is not the only policy tool

in the boxThe opportunity cost approach, and the cost-curve, tend to take a one-size- ts all approachto avoiding de orestation through incentives orpayments to landholders. However, this overlooksthe interaction o di erent policy levers to achievethe goal o reducing de orestation. In order tohave a complementary policy mix, one would needto consider imperatives (laws and regulations)and capacities (the ability to en orce them andprovide good orest governance) in addition tosimple incentives (REDD payments). 24 This wasacknowledged by the IWG-IFR report: in somecountries signi cant results could be achievedthrough improved law en orcement, which could beachieved with relatively low investment, much lowerthan would be needed or REDD+ to compete withillegal activities 25 It has been broadly accepted,through the three-phrased approach or REDD, that atrans er o unds alone will not achieve the intendedaims.

A more rigorous and sophisticated model needs tobe developed which builds those overlooked costs


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IMPERATIVES INCENTIVES

CAPACITIES


into the bottom line o REDD activities. The cost-curve takes a narrow economic approach, and henceoverlooks the possible reduction o emissions that

could be achieved o ten at a low cost throughgovernance and regulatory re orms such as thelegal de nition o indigenous territories, sound

orest governance, and internal regulation o oresttaxes and changes to subsidies. As noted above, intheir reports or DRC and Guyana, McKinsey havesuggested payments or theoretical reductions o logging intensity measured against an arti ciallyhigh, and o ten implausible, scenario. In both cases,it would be more practical and probably cheaperi the governments passed or en orced legislation

against higher levels o timber extraction, but this isnot considered by McKinsey.

Other examples o regulations, or imperatives touse the language o the complementary policy mix,which would likely be more practical and cheaperthan payments according to opportunity cost are:

In Indonesian law it is illegal to convert peatswamps more than three metres deep toother land uses 26 , the practice is believed tobe widespread and contributes to Indonesiascarbon emissions.

In the DRC, there has been a long butinconclusive legal review o all 156 o thecountrys logging titles which, i properlycompleted, could see illegal logging operationscovering an area o around 10 million hectaresclosed down.

In Guyana, many aspects o the orestry lawcould help to signi cantly reduce orest damageand carbon emissions, but have never beenproperly implemented.

In all three countries, increases in the area-based and other orest sector taxes could helpboth to reduce waste in the sector and also bringin income to the treasury.

Strengthening compliance with this existing lawwould involve governance costs, but is likely to besubstantially cheaper than paying or the opportunitycosts. Such alternative approaches could helpdeal with underlying sectoral problems, insteado pursuing an opportunity cost compensationapproach, which would not only ail to deal with theunderlying problems but could easily exacerbatethem.

Does the cost-curve allocate responsibility andunding or reducing emissions airly?

It has already been argued that the cost-curve doesnot give decision-makers access to all the necessaryin ormation to make in ormed policy choices, and

ails to provide a complete picture o comparativecost-bene t estimates. REDD policy infuenced bythe cost-curve could lead to a alse set o policypriorities and inequitable outcomes or poorer orestusers.

Taking the gures given in the Indonesian cost-curvereport in Figure 3, it is estimated that emissions

could be reduced rom small-holder agriculture atUS $1 per tCO 2e, whereas emissions rom intensiveplantation palm oil could be reduced at US$29per tCO 2e. As has been argued, the di erencein these gures is due to much o the output o small-holder agriculture being used or subsistencepurposes which do not register an economic yield.I compensation was paid strictly according tothese opportunity costs or avoiding de orestation,the outcome would be highly inequitable. Take aREDD project in which subsistence agriculturalists

and palm oil plantation owners are each givencompensation or not de oresting an area o 50

Source: The Transition to a Low Carbon Economy,(2010). Pro essor Andy Gouldson, Director, Centre or Climate Change Economics and Policy, School o Earthand Environment, University o Leeds.

Figure 5: The Complementary Policy Mix


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hectares. I we assume 200 tonnes o carbon perhectare (equivalent to 720 tCO 2), the subsistenceagriculturalists would be paid $36,000, whereasthe palm oil plantation owners would be paid morethan $1 million or nearly thirty times as much to protect an area o the same size. 27 This de escommon sense and would turn an establishedprinciple o environmental law on its head: the

polluter pays principle would become the pollutergets paid principle. This would be a highly perverseoutcome in countries marked by extreme poverty. 28 Although McKinsey have said trans ers to orestpeople or the landless poor might need to exceedopportunity costs substantially, they do not buildthis into their model so that decision-makers cancompare the true costs and bene ts o di erentoptions. 29

In addition, the logic o the cost-curve is that lessexpensive options be taken up be ore others andthat some options are too expensive to undertake atall. This could have the result o allowing extractive-industries to continue business-as-usual, whilstincreasing the responsibility o tackling climatechange on the rural poor, who have contributed theleast to the problem. The McKinsey report or DRCexplicitly states that the de orestation rom someindustrial uses o the orest such as mining andoil exploitation should not be tackled as a prioritydue to the high opportunity cost o these activities. 30 Repeatedly, the reports defect responsibility orreducing de orestation rom orest industries andtowards orest communities. As has been said, theremay be other policy tools, such as regulation, thatcould reduce de orestation rom these activities at a

raction o the opportunity cost.

O course, i projects designed to support ruralpopulations in reducing their dependence on the

orest and gaining alternative livelihoods wereimplemented in the right way, they could bringbene ts. However, i decision-makers see these

actions as an inexpensive and easier option,it is likely that they will be implemented in aninappropriate and inequitable way. There are ur therbarriers or local communities and indigenouspeoples to bene ting rom REDD compensationschemes, such as the near universal lack o clearland title in all the main tropical orest regions, whichis particularly marked in A rica, and a requent lacko existing nancial or banking in rastructure thatlocal communities could use to access payments.

There is a real danger that REDD activities inspiredby the cost-curve would result in regressive

outcomes that penalise poor communities more thanwealthy orest users ( or example, industrial orestry,palm oil and mining industries). Also, this may leadto greater responsibility or reducing emissionsshi ting to poorer countries, and to poorer sectionso their societies, where the apparent lowest costmitigation options lie.

Rain orests are more than carbon

The narrow ocus o the cost-curve on carbon alsoposes problems or its use as a policy-making tool.The model equates one tonne o carbon stored in atree plantation with one tonne o carbon stored in anatural orest, or indeed the carbon emitted rom a

actory. Whilst this is true in the narrowest chemicalsense, it does not bring into the equation thequalitative di erences between a plantation and anatural orest. A natural orest provides biodiversity,livelihood and ecosystem bene ts and servicesthat a plantation cannot. Carbon storage is onlyone service that orests provide, and their ull value

is many times greater.31

The issue o permanence cannot be ignored, as orest carbon would need tobe guaranteed to stay in organic matter or at least ahundred years to o set ossil carbon released as aby-product o industrial processes.

This approach also poses a risk that the carbonstocked in new tree plantation schemes would beo set, as it were, against the destruction o natural

orest by extractive industries such as logging ormining. This is, in e ect, suggested in the McKinsey

report or the DRC, with the proposed creation o a

Box 4: Criticism o cost-curve in energy andbuilding sectors

Charles River Associates International, a consultingrm, analysed McKinseys reports on carbon in the

energy sector in Australia and concluded that thecost-curve ramework ignored important costs andrisks, is over-simpli ed, ocused on theoretical savings

not practical realities and could guide decision-makers in the wrong direction. 46 Similar criticismwas levelled at McKinseys work on the buildingsector by the Director o the World Business Council

or Sustainable Developments Energy E ciencyin Buildings project. He wrote that the analysis isoverly optimistic about the low-cost carbon mitigationoptions available, due to not taking into account theinteractions between di erent policy options, nor thecomplex nature o the sector. 47


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carbon sink o 145 MtCO 2e through re orestationand a orestation. 32 This has the added bonus o being urther to the le t o the cost-curve, and henceapparently a less expensive mitigation option. Thelarge volume o carbon that would be sequesteredin these schemes is the justi cation by which theproposal to grant 10 million hectares o new loggingconcession permits in DRC, at the end o the currentnational moratorium on new logging concessions,and 1.6 million hectares o palm oil concessions, isincluded in the proposed national REDD strategy. 33 Similarly, the Indonesian report counts a 280MtCO2e carbon abatement through the increasedcarbon absorption o re orested areas, including ast-wood and palm oil plantations. This would indirectlyo set emissions rom the 11 to 15 million hectareso currently orested land that the government isplanning to convert to meet growing international

Box 5: McKinseys alse good news?

The message included in McKinseys cost-curves isan optimistic one. It says, in general, that througheconomic and technological xes, and without majorbehavioural changes, we can achieve the emissionsreductions necessary to mitigate climate change in acost-e ective way. However, this brie ng has shown

that this optimism might be misplaced, as costs orsome o the policy options are vastly underestimated,while other policy options that do not t in the modelare not taken into account.

In the bigger picture, misplacing optimism in cheapxes or climate change could be very dangerous.

To underestimate the costs o emissions reductionsmeans that they are less likely to be achieved withthe means provided. This would lead to a slowerdecarbonisation in energy systems and more risk o locking-in higher levels o warming. I the cheap andeasy emissions reductions included in McKinseyscost-curves are illusionary, this could have the e ecto holding back more undamental societal changesnecessary to live within our ecological limits.

This also has implications or the wider climatechange debate, in terms o setting out the relativemerits o orest-related emissions reductions optionsin comparison to non- orest options. When the ullcosts o apparently cheap orest options are takeninto account, they would be represented in the cost-curve with higher columns, urther to the right. Thismay mean that orest-related options may not be as

cost-e ective as other non- orest carbon options, suchas investing in solar or wind power, which could leadto misguided national carbon reductions programmes.

demand or pulp and palm oil. 34 Thus, although thetwo ends o the argument are never ully joined upin the reports, as a result o increasing plantations,de orestation o natural orest is allowed to continue.It should be noted that this use o plantations isvery di erent rom using tree plantations as analternative source o uel-wood to natural orest,which may have positive bene ts.

Reducing participation

Another impact o the cost-curve reports relates toprocess. As they have been produced by externalconsultants, working to tight timelines, this has notallowed a ull consultation with relevant stakeholdersand rights-holders. The McKinsey report or DRC,

or example, was written in a period o ve weeks byconsultants, in parallel to civil society engagementin the national REDD process. 35 The reports haveat times also not represented orest sector re ormsthat may have been on-going or many years. Whereconsultations have occurred, ew NGOs have beeninvolved, and almost no local organisations, let alone

orest community representatives themselves. Thisis perhaps to be expected rom this style o top-down economic analysis, but it does pose a problemwhen these reports infuence, or are copy-pastedinto, national RPPs, which are supposed to be ownedby all stakeholders in the country. The secrecy o many McKinsey reports has made participation andtransparency more di cult.

4. Conclusions

Reducing the rate o de orestation and orestdegradation should be done in an equitable and airmanner that respects the rights o local communitiesand indigenous peoples. The key message o thisbrie ng is not that reducing de orestation is toodi cult, but that we cannot get to the desiredoutcome with overly simplistic analysis or policy thatis not based on good evidence.

REDD was proposed as a mechanism to correct thecurrent market ailure to internalise costs, such asthe degradation o ecosystems and their services,that are currently not included in the bottom line.It was based on the argument that we need a neweconomic model to account or these externalitiesand to put our economies on a sustainable path.It is, there ore, ironic that the McKinsey cost-curve,with its hidden costs and partial analysis, hasbecome so prominent in national and international

REDD processes, as it is similar to the narroweconomic approach that contributed to the problem


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that we are now attempting to solve.This brie ng has highlighted methodological andpractical problems with the use o the McKinseycost-curve in REDD. It has shown that the approachis overly simplistic, does not include many o thereal costs o potential REDD activities (particularlysubsistence agriculture), and may misrepresent thevalue o policy options and there ore promote an

un air and unjust distribution o responsibilities andunding or reducing de orestation. These cost-curvesare distorting policy on reducing de orestation anddegradation by ocusing narrowly on carbon storagerather than other services provided by orests, andby proposing narrow economic solutions to inherentlypolitical and multi-dimensional problems. It has beenshown that cost-curve reports have o ten includedhighly infated baselines and have reduced theparticipation o a wide range o stakeholders andrights-holders in national REDD debates.

The McKinsey reports are not without merit and,despite the problems highlighted here, do includesome use ul suggestions or reducing de orestationand degradation. They particularly appeal to busydecision-makers who value the visual punch o theirgraphs and sense o certainty implied by their hardnumbers. However, as has been shown, the accuracyo these numbers is shaky, and supporting evidenceis not given to allow ully-in ormed decision-making.

It is clear that reducing de orestation anddegradation is more di cult than many peoplethought a ew years ago. To use a metaphor,the recipe or success requires many di erentingredients, which must be added at the right timeand in the right quantities; some are essential

rom the beginning and others can be added atthe end. Timing is important and great care mustbe taken to create the nished product. Comparedto this description o the ideal recipe or reducingde orestation, the one proposed by McKinsey is the

ast- ood alternative; it could be called McREDD.McREDD looks great and promises many things, butit is produced quickly, rom ready-made ingredients,

and could seriously damage health. In the end, junkeconomics could be more damaging to the worldsrain orests than junk ood.

Recommendations

The McKinsey cost-curve in its current ormshould not be used to in orm national orinternational REDD strategies or programmes, asit is both methodologically fawed and does notgive an accurate representation o the real costsand opportunities o di erent options.

The ull cost including transaction andimplementation costs, and costs o necessarylegislative and institutional re orm andconsultation should be included into REDDprogramme design. 36

National plans or reducing de orestationshould be created in a collaborative, bottom-upapproach, which recognises the rights o localcommunities and indigenous peoples.

More research is needed on the real costso reducing de orestation rom subsistenceagriculture, rotational arming and other policyoptions.

Acronyms

DRC Democratic Republic o Congo

FCPF Forest Carbon Partnership Facility,World Bank

GHG Greenhouse gases

ha hectares

Gt gigatonne, equal to one billion(1,000,000,000) metric tonnes

IWG-IFR In ormal Working Group on InterimFinance or REDD

Mt megatonne, equal to one million(1,000,000) metric tonnes

REDD Reducing emissions rom de orestation andorest degradation

RPP REDD Readiness Preparation Plan

SFM Sustainable orest management

tCO 2 e metric tonne o carbon dioxide equivalent(including all 6 GHG emissions)

UNFCCC United Nations Framework Conventionon Climate Change


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THE RAINFOREST FOUNDATION UKIMPERIAL WORKS 2ND FLOORPERREN STREET LONDON NW5 3EDUNITED KINGDOM

T +44 (0)20 7485 0193F +44 (0)20 7485 0315www.rain orest oundationuk.orgin o@rain orestuk.com

Registered Charity 801436Printed on 100% recycled paperMany thanks to Nils Hermann Ranum, Brd Lahn, Alain Karsenty, Tim Laing, Jutta Kill andDavid Ritter or comments, any aults or omissions remain the responsibility o the authors.

Rain orest Foundation UK Climate and Forests Policy Brie November 2010

Footnotes:

1 Schumacher, EF. (1973.) Small is Beauti ul: A study o economics as i peoplemattered, p. 34.

2 McKinsey & Company. (2009.) Pathways to a Low-Carbon Economy: Version 2o Global Greenhouse Gas Abatement Cost Curve. Available at: http://www.mckinsey.com/clientservice/ccsi/pathways_low_carbon_economy.asp

3 All these reports are based on the cost-curve set out in McKinsey & Company.(2009.)

4 MECNT (Ministre de lEnvironnement, de la Conservation de la Nature et duTourisme). (2009.) Potentiel REDD+ de la RDC. Kinshasa, DRC: December2009 & MECNT (2010.) Readiness Plan or REDD R-PP Final Version (v.3.1),Democratic Republic o Congo, July 15th, 2010. Available at: http://www. orestcarbonpartnership.org/ cp/node/65

5 For more o a discussion o costs see: Pagiola, Ste ano and Bosquet, Benot.(2009.) Estimating the Costs o REDD at the Country Level.Forest Carbon Partnership Facility, Version 2.2, 22 September. Available at:http://www. orestcarbonpartnership.org/ cp/sites/ orestcarbonpartnership.org/ les/Documents/PDF/REDD-Costs-22. pd ; and Boucher, Doug. (2008.)Estimating the Cost and Potential o Reducing Emissions rom De orestation(Brie ng No. 1). Union o Concerned Scientists (UCS).

6 MECNT (2009.), p. 52.7 Gregersen, Hans; El Lakany, Hosny; Karsenty, Alain; White, Andy.

Does the Opportunity Cost Approach Indicate the Real Cost o REDD+?(2010.) Washington, DC: Rights and Resources Initiative.

8 McKinsey & Company. (2009.), p. 120.9 Indonesias National Climate Change Council (DNPI). (2010.) Indonesias green

house gas abatement cost curve. August 2010, pp. 20-21. Available at: http://www.dnpi.go.id/report/DNPI-Media-Kit/reports/indonesia-ghg_abatement_cost_curve/Indonesia_ghg_cost_curve_english.pd

10MECNT (2009.), pp. 3-4.11 See or example: REDD-Monitor. (2010.) We must take advantage o low-hanging ruit solutions such as orest conservation:Interview with Je Horowitz, Chris Lang, 19th February 2010

12 200t carbon is equal to approximately 720t CO 2 . There ore, the opportunitycost abating 200t o carbon at US $1/ tCO 2e is approximately US$ 720. whichmeans that 200t C in an hectare o orest would convert to $1 x 200t x 3.6 =$720 /ha.

13 For a uller treatment see Gregersen et al (2010.), p. 12.14 Gregersen et al (2010.), p. 12.15 For example: Tschakert, Petra; Coomes, Oliver T.; Potvin, Catherine (2007),

Indigenous livelihoods, slash-and-burn agriculture, and carbon stocks inEastern Panama, Ecological Economics, 60. Available at: http://biology.mcgill.ca/ aculty/potvin/articles/Tschakert_etal_07.pd

16 Karsenty, Alain. (2009.) What the (carbon) market cannot do., CIRAD,Perspective No. 1, November 2009.

17 O ce o the President, Republic o Guyana. (2008.) Creating Incentives toAvoid De orestation. December 2008, p. 11.

18 O ce o the President, Republic o Guyana. (2008.), p. 1619 For example: Jagdeo, Bharrat. (2009.) Synopsis o the address made by

President o Guyana at the opening ceremony o the 3rd Regional Meetingo the ACP-EU Joint Parliamentary Assembly, 25th February, Guyana. Availableat: www.europarl.europa.eu/intcoop/acp/03_regional/pd /jagdeo_en.pd

20 MECNT (2009.), p. 28.21 Gregersen et al (2010.), p. 10.22 O ce o the President, Republic o Guyana. (2008.), p. 11.23 Singh, Thomas. (2009.) Comment on the McKinsey Report: Creating Incentives

to Avoid De orestation, p. 6. 24 Gouldson, Andy. (2010.) The Transition to a Low Carbon Economy, Centre or

Climate Change Economics and Policy, School o Earth and Environment,University o Leeds

25 Report o the In ormal Working Group On Interim Finance For REDD+ (IWG-IFR).(Discussion Document.) (27 October 2009.) IWG-IFR. Available at: http://www.unredd.net/index.php?option=com_docman&task=doc_details&Itemid=&gid=1096, p. 23.

26 Presidential Decree No. 32/1990 states that peatlands deeper than 3 metersare protected or their water storage unctions.

27 Each ha o orest is assumed to contain 200 t carbon or approximately 720 t CO2 . At acost o $1 per t CO2e, the opportunity cost o protecting 50 ha would be $36,000 (720x 50 x 1); at $29 per t CO2e the opportunity cost o 50 hectares would be $1,044,000(720 x 50 x 29).

28 It should be noted that the DRC RPP has reduction o poverty as a joint goal withreducing emissions.

29 McKinsey & Company. (2009.), p.22.30 Although the report does suggest improving some practices. MECNT (2009.), p. 43.31 See TEEB (2010) The Economics o Ecosystems and Biodiversity: Mainstreaming

the Economics o Nature: A synthesis o the approach, conclusions andrecommendations o TEEB. Available at: http://www.teebweb.org/LinkClick.aspx? leticket=bYhDohL_TuM%3d&tabid=1278&mid=2357

32 MECNT (2009.), p. 28.33 Both options are still included in the DRCs RPP the palm oil will be on ormer

Belgian palm oil plantations. MECNT (2009.), pp. 40 and 45.34 DNPI. (2010.), p. 19-2035 FERN, Global Witness, Greenpeace, Rain orest Foundation Norway and

Rain orest Foundation UK (2010.) A joint statement on the ReadinessPreparation Proposal or the Democratic Republic o Congo, 15th March2010. Available at: http://www.rain orest oundationuk.org/ les/DRC%20RPP%20Joint%20statement%20RFN%20RFUK%20GP%20FERN%20GW_15March2010.

36 We note that the Technical Advisory Panel Review or the DRC RPP says:The transaction and implementation costs o a REDD+ program should beincluded in the cost curve be ore making extensive use o the curve (as is donein the latter sections o this R-PP) in preparing the REDD Strategy. rom FERN,Global Witness, Greenpeace, Rain orest Foundation Norway and Rain orest

Foundation UK (2010.)pd 37 Anderson, Dave. (2009.) McKinsey & Company carbon abatement cost curves:orm over substance? Richland, WA, USA: Paci c Northwest National

Laboratory. Available at: https://blog.pnl.gov/StructuredThinking/index.php/2009/07/mckinsey-substance/

38 DNPI. (2010.), p. 2239 See or example: Brown et al. (2005). Impact o selective logging on the carbon

stocks o tropical orests: Republic o Congo as a case study. Available at:http://zunia.org/uploads/media/knowledge/Deliverable6CarbonCongoFieldReport32905.pd

40 Global Witness. (2009.) Vested Interests: Industrial logging and carbon intropical orests. Available at: http://www.globalwitness.org/media_library_get.php/1067/1288349797/vested_interests.pd , p. 6.

41 Global Witness. (2009.), p. 17.42 DNPI. (2010.), p. 22.43 Quoted in Global Witness. (2009.), p. 6.44 MECNT (2009.), p. 29.45 Karsenty, Alain. (2009.) Commentaires sur le rapport Potentiel REDD + de la

RDC prpar par le cabinet McKinsey pour le gouvernement de la RDC, CIRAD,22 December 2009, p. 4.

46 Thomas, Mike and James, Stuart. (2008.) Need a Strategy (or Policy) toRespond to the Risk o Climate Change? Dont Rely on a Simple Supply CurveApproach. Charles River Associates (CRA) International.

47 Kornevall, Christian. (2009.) The McKinsey Curve False Good News? WorldBusiness Council or Sustainable Developments (WBCSD) Energy E ciencyin Buildings (EEB) project. February 2009. Available at: http://www.eeb-blog.org/2009/02/the-mc-kinsey-curve- alse-good-news-.html. Republic o Congo asa case study. Available at: http://zunia.org/uploads/media/knowledge/Deliverable6CarbonCongoFieldReport32905.pd

48 Hatcher, Je rey. (2009.) Securing Tenure Rights and Reducing Emissions romDe orestation and Degradation (REDD): Costs and Lessons Learned(Paper No. 120). Washington, DC: The World Bank, Social DevelopmentPapers, p. 11.

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