Arild Angelsen, Professor of Economics at the Norwegian University of Life Sciences (UMB) and a senior associate at CIFOR, gave this presentation on 28 November 2012 at a joint CIFOR and GOFC-GOLD (Global Observation of Forest Cover and Land Dynamics) UNFCCC COP18 side-event in Doha, Qatar. The presentation discusses relevant considerations for how to set the financial incentive benchmark (or crediting) baseline for REDD+, i.e. the benchmark for rewarding a project or country for reduced emissions. While this is ultimately a political question to be handled through negotiations, these can be done in a more systematic way, as shown in this presentation.

1. 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

2. School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
Reference levels:
BAU (technical – measuring ER)
vs. FIB (financial incentive benchmark)
(political – assigning ”quotas”)
Forest
carbon
stock ’Historical baseline’)
REDD credits
Realised path
FIB
BAU baseline
Time
Commitment period
Emissions = negative change in forest carbon stock
www.umb.no

3. School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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)
www.umb.no 3

4. 4
UNFCCC: Historical + National circumstances
www.umb.no
School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES

5. School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
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
www.umb.no 5

6. School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
1. Additionality
 Additionality (weak): Realized emissions < BAU
 Additionality (strong): FIB ≤ BAU
$
Marginal
costs of
REDD
Price of
REDD
C
D credits
B
A
Emissions BAU FIB Realised REDD
Credits for
emissions
www.umb.nosale/ comp. 6

7. School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
2. No-lose principle or participation constraint
 Transfer: B + C
 Costs: A + B
 Participation constraint: FIB set such that A ≤ C
$
Marginal
costs of
REDD
Price of
REDD credits
C
D
B
A
Emissions BAU FIB Realised REDD
Credits for
emissions
www.umb.nosale/ comp. 7

8. School of Economics and Business
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
3. Effectiveness
 Maximize effectiveness, given participation
constraint: CB set such that A = C
 Compensate only real costs
– Trade-offs! $
Marginal
costs of
REDD
Price of
REDD credits
C
D
B
A
Emissions BAU FIB Realised REDD
Credits for
emissions
www.umb.nosale/ comp. 8

9. NORWEGIAN UNIVERSITY OF LIFE SCIENCES
School of Economics and Business
Options to max. effectiveness (given REDD fund)
Option Elaboration Incentives Information Risk
(overall require- handling
reductions) ments
1.Stricter Might include a Good; Correct Medium - high Good, countries
FIB safety margin to incentives on the adjust efforts
account for margin (don’t based on new
uncertainty affect overall information, but
reductions) may also opt
out)
2.Lower Reduced price per Incentives on the Low Good
price tCO2e to make margin reduced;
overall pay lower less emissions
reductions
3.Different Example: corridor Good, payment High, must Good
-iated approach mimics the MC know
payment curve differentiated
costs
4.Sub-FIBs Sub-FIBs for areas Good, as above High, detailed Good
or sectors (drivers) information
A version of the about costs
option above
5.Fixed A deal about fixed Uncertain; must High Poor, REDD
contract reductions and include countries
fixed payment conditions target assume high risk
(based on under-/over-
estimated costs) achieved
www.umb.no 9

10. NORWEGIAN UNIVERSITY OF LIFE SCIENCES
School of Economics and Business
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
www.umb.no 10

11. NORWEGIAN UNIVERSITY OF LIFE SCIENCES
School of Economics and Business
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
www.umb.no 11

12. Option Elaboration Pros Cons Most
applicable
for
1.Ex post RL formula agreed a Predictable; adj. Hard to Steps 2 & 3
adjustment priori; final FIB set when made as more data establish the
e.g. ag prices are known become available formula
2.Corridor Gradually increasing Flexible; payments Political Steps 1–3
approach payments within a RL also mimic marginal acceptability
corridor cost curve
3.Conser- FIB multiplied by an Lowe risk of over- Makes Steps 1–3
vativeness conservativeness factor payment (hot air); REDD+ less
factor (<1), based on data incentives to get attractive for
quality better data; accepted countries with
by UNFCCC; easy poor data
to implement
4. Renego- Renegotiate RL during Flexible, can Political Steps 1 & 2
tiation the course of incorporate gaming
implementation of a unforeseen factors
REDD+ agreement.
5.Insur- Insurance contract-based Well developed Expensive; Steps 2 & 3
ance approaches in Steps 1 & markets for complex
2 insurance contract 12

13. A proposal for setting FIB for result based
NORWEGIAN UNIVERSITY OF LIFE SCIENCES
School of Economics and Business
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)
www.umb.no 13

14. Historic
al
Forest cover Costs Fair sharing Uncertainty
deforest
ation
BAU defor FS
Hist.defo Opp.
(forest Defor Cost factor
r rate Forest Emission costs FIB Cons.
Variables cover) after adjust. (based FIB IV FIB V
(FIB I= cover reductions per III factor
(FIB REDD+ factor on
RL I) tCO2
II=RL II) GDP)
Example I: Poor, low deforestation, forest rich country
Parameter value
50 % 5,0 3,0 1 000
(threshold)
Area (1000 ha) 350 180 000 746 373 373 597 631 504
Relative to forest or land 0,33 0,35 0,28
0,19 % 72,00 % 0,41 % 0,21 % 0,21 % 0,15 0,80
area % % %
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) 70 000
1 000 846 423 423 677 588 529
Relative to forest or land 0,97 0,84 0,76
1,43 % 28,00 % 1,21 % 0,60 % 0,60 % (0,35) 0,90
area % % %
Emission MtCO2
(100tC/ha) 367 310 155 155
Value (USD million) 5 000
776 466 0,60
REDD+ transfers (USD
776 466 303 195
million)

15. NORWEGIAN UNIVERSITY OF LIFE SCIENCES
School of Economics and Business
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)
www.umb.no 15

16. Based on ‘Analysing
REDD+’ (chap. 16)
and DECC-report
http://forestsclimatechange.org/
AnalysingREDD+
16