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+