in European Union, Indonesia

Why a price on carbon will not stop deforestation

Three straws in the wind: Two pieces of policy news and a new piece of research. Two weeks ago, a leaked document from the EU revealed that the European Commission and some member states hope to include oil palm plantations in the definition of forests.

Yesterday, the Jakarta Post reported that Indonesia’s Forestry Ministry is drafting a decree to reclassify oil palm plantations as “forests”.

Last week, the European Commission’s Science for Environment Policy put out a News Alert with the headline “Pricing carbon insufficient to save tropical forests from deforestation”.

There are two related issues here. The first is the definition of “forest”. Currently, the UN defines a forest as any area larger than 500 square metres with crown cover of 10 per cent and trees capable of growing two metres high. Clearly, this definition fails to address the conversion of native forests to monoculture industrial tree plantations. (Incidentally, the UN has not yet attempted to agree a definition of forest degradation. The latest document from the Ad-hoc Working Group on the Kyoto Protocol, includes two alternative lists of definitions. But the word “degradation” is not included in either list, not even in square brackets.)

The second issue is whether deforestation (including conversion of forests to monocultures) can be prevented by putting a price on carbon. Recent research, published in Environmental Science and Technology found that putting a price on carbon is unlikely to prevent forests being cleared for oil palm plantations. Part of the problem is that a higher carbon price drives up demand for biofuels (as an alternative to expensive fossil fuels). This in turn increases both the price of biofuels and the likelihood that forests are converted to oil palm plantations.

Under the EU’s Renewable Energy Directive, 10 per cent of all road transport fuel will have to be “renewable” by 2020. This directive has helped drive a massive expansion in the area of oil palm plantations for biofuel, which has resulted in the destruction of vast areas of forest (and therefore increased greenhouse gas emissions). Instead of addressing this problem, the EU seems determined to make matters worse. A draft communication (available here – pdf file 98 KB) from the European Commission was recently leaked. It is supposed to provide guidance to EU member states on the use of biofuels, but it includes the following extraordinary statement:

“Continuously forested areas are defined as areas where trees have reached, or can reach, at least heights of five metres, making up a crown cover of more than 30 percent. They would normally include natural forest, forest plantations and other tree plantations such as palm oil. . . . This means, for example, that a change from forest to oil palm plantation would not per se constitute a breach of the criteria.”

Rainforest Rescue and Friends of the Earth Europe are campaigning against this attempt to reclassify oil palm plantations as forests.

Indonesia is the world’s biggest producer of palm oil, with oil palm plantations covering an area of 7 million hectares. Currently these plantations are classified as an agricultural crop. But earlier this week, the head of research and development at the Forestry Ministry, Tachrir Fathoni, explained to the Jakarta Post that Indonesia wants to re-classify this area of monoculture as forest. “It is to anticipate the implementation of the REDD scheme,” he said.

Fathoni argued that Malaysia already includes oil palm plantations in its forest sector. “By doing so,” he said, “Malaysia can reap financial incentives from the UNFCCC [from] carbon trade.” Financial incentives, that is, to clear forests and replace them with oil palm monocultures. Obviously, providing carbon credits for oil palm plantations is not quite what most people have in mind when they think about REDD. Equally obviously, the UN needs to sort out its definition of forests in order to exclude industrial tree plantations.

A common “solution” put forward to prevent the conversion of forests to plantations is to make the forest worth more standing because of the carbon stored in it than the palm oil would be worth from the plantation that replaced the forest.

It sounds simple, but recent research by Martin Persson and Christian Azar at the Chalmers University of Technology in Göteborg, Sweden indicates that a price on carbon may not be enough:

“We estimate that deforesting for palm oil bioenergy production is likely to remain highly profitable, even in the fact of a price on the carbon emissions from forest clearing.” [*]

An important part of their findings is that increasing the price of carbon will not solve the problem. The European Commission’s Science for Environmental Policy summarises their argument as follows:

“Landowners anticipate gains in the future because they expect carbon prices to rise over time. This means that landowners can pay a relatively low price for carbon emissions from deforestation now and profit from a greater willingness to pay for bioenergy in the future as climate policy is strengthened and carbon and energy prices rise. As a consequence, the value of land will also rise. A higher carbon price will not only increase the cost of forest clearing but also the revenues from doing so.”

Persson and Azar are not arguing that tropical deforestation should be kept out of future international climate regimes. “That would only make matters worse,” they write. But their research has major implications for REDD, particular given the direction that REDD is currently heading – trading the carbon stored in forests and hoping that the magic of the markets will keep the profits from carbon trading higher than the profits from palm oil trading.

[*] ^ Martin Persson and Christian Azar (2010) “Preserving the World’s Tropical Forests—A Price on Carbon May Not Do”, Environmental Science and Technology, 2010, 44 (1), pp 210–215, DOI: 10.1021/es902629x.

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  1. Wow… I never thought that Jon Culshaw and the cast and crew of “Dead Ringers” (a parody impressionist programme of the BBC) would be performing their best impression of realism how to use REDD effectively, compassionately and scientifically….wow again…Palm Oil as part of a productive deal….My Goodness me I believe too much Vin Ordinaire has been drunk.

    If this is the best which the EU can produce to really interpret our needs since the Millenium Ecosystem Analysis of 2005. God Help Us….Long live SEEBif and folks at the Save our Borneo campaign who will be pulling the remaining hairs from their heads if they knew of this nonsense. Come on guys lets get dowm to the real business and stop making fun of our forests, biodiversity and human communities…it is all about life…Okay!

    (Dr.) Nigel Miles

    c/o Green Economic Institute,
    University of Oxford


  2. Strange that the EU says “a change from forest to oil palm plantation” – when they themselves classify oil palm plantations as forests. Slip of the tongue? In fact, everyone involved seems ot be at it. Under the UN system, there is virtuually NO DEFORESTATION happening anywhere – so REDD should be pretty cheap. Yes, there is lots of “temporary destocking” of “forests” that sensible minds call “deforestation”, and which REDD was originally suggested to avoid, but governments and intergovernmental organisations say these “destocked” areas are still “forests” – even when no trees exist, the land is burnt to a cinder, and bulldozers are doing their work. Under the CDM, deforestation is classified in relation to compensatable “reforestation”. It says countries cannot be compensated for “reforestation” unless the “forest” was cleared before 1990. In this line of thinking, there has been NO DEFORESTATION SINCE 1990. Presumably this, compbined with Indonesia’s and the EU’s decision to reclassify oil palm as forests means they Indonesia could not be compensated for reducing deforestation – because it does not have any to reduce. Problem solved…

    Or… We need to seriously wake up our leaders.

  3. Extract from the excellent paper “The impacts and opportunities of oil palm in Southeast Asia” Sheil et al 2009

    Venter et al. (2009) estimate that an area of one million hectares in Kalimantan proposed for oil palm development will generate $1 thousand million in profits from the initial timber harvest and a further $1.78 (±SD 0.92)27 thousand million from palm oil profits over the next 30 years (using a discounting rate of 8 per cent).

    For forest conservation to meet these opportunity costs, emission reductions will need to be compensated in the year they are expected to occur at a carbon price of $4.66 (±SD 1.65) per tonne of CO2-e. This carbon price accounts for the estimated costs of administration and forest protection.

    These figures are well within the scope of global carbon markets, which range from about $5.50 per tonne on the Chicago Climate Exchange (a voluntary carbon market) to about $30 on European compliance markets (April 2008 values), and
    should therefore represent an attractive investment by national governments.

    However, unless REDD carbon credits are allowed to be traded on compliance markets (currently they are restricted to voluntary markets) the conversion of land to oil palm plantations will be more profitable than REDD (Butler et al 2009, Venter et al 2009) except perhaps in the case of carbon-rich peat forests (Venter et al. 2009).

  4. It is worth to note that in the UE definition of forest: “Continuously forested areas are defined as areas where trees have reached, or can reach, at least heights of five metres, making up a crown cover of more than 30 percent. They would normally include natural forest, forest plantations and other tree plantations such as palm oil. . . ” there is the word TREES cited twice. Palms are not trees, no matter their height or crown coverage, they are HERBS, so palms plantation simply cannot be included as forests, because forests are mainly made of TREES. Very simple but fundamental and essential. Should we recall this to the UE leaders ???
    Tropical Forests has been converted at alarming rates and still must fight against land conversion for agriculture and pasture productions, industrial tree plantation (eucalyptus and acacia) and now Oil palm…REDD was supposed to give more value to forest lands to mitigate CO2 emission, now it seems that REDD will have the opposite effect and that deforestation in the tropics will never be stopped.

  5. @Plinio Sist – thanks. To be honest, I don’t know whether palms are trees or herbs. But I suspect that if we went down that line of debate with the EU, the UN or the Indonesian government we’d be lost in a bureaucratic swamp for longer than we care to think about. What is obvious is that whatever species is planted, whether it’s eucalyptus, acacia, oil palm, sugar, soy, bananas or whatever, a plantation is not a forest.

  6. @Stephen Dickey – Thanks for this. I’ve put the links to the papers you refer to at the end of this comment.

    If you read the paper by Persson and Azar (available here), you’ll notice that they refer to Venter et al.’s 2009 paper (reference 17):

    “While two recent papers (16, 17) have analyzed the effectiveness of REDD payments in preventing deforestation for palm oil plantations—with mixed results—neither accounts for the fact that carbon pricing will likely lead to enhanced palm oil prices. Hence, both studies likely underestimate future revenues from forest clearing.”

    In the Discussion section of their paper, Persson and Azar write that

    “our analysis points to an important mechanism that these studies miss. As climate policy is progressively strengthened, and carbon and energy prices rise, so does the value of land. This implies that increasing the carbon price, so as to penalize deforestation even more, will not suffice to change the profitability of deforestation and bioenergy cultivation, since a higher carbon price will not only increase the cost of forest clearing but also the revenues from doing so (up to the point when carbon prices make back-stop technologies like solar hydrogen become competitive, limiting the willingness to pay for biofuels). Reduced deforestation through the price on CO2 emissions therefore becomes an evasive goal.”

    So, to paraphrase: The problem is that a higher carbon price drives up demand for biofuels (as an alternative to expensive fossil fuels). This in turn increases both the price of biofuels and the likelihood that forests are converted to oil palm plantations.

    Douglas Sheil, Anne Casson, Eirk Meijaard, Meine van Noordwjik, Joanne Gaskell, Jacqui Sunderland-Groves, Karah Wertz, Markku Kanninen, (2009) “The impacts and opportunities of oil palm in Southeast Asia: What do we know and what do we need to know?”, Center for International Forestry Research (CIFOR), Bogor, Indonesia.

    Oscar Venter, Erik Meijaard, Hugh Possingham, Rona Dennis, Douglas Sheil, Serge Wich, Lex Hovani, Kerrie Wilson (2009) “Carbon payments as a safeguard for threatened tropical mammals”, Conservation Letters, Volume 2, Issue 3, 2009. Pages: 123–129.

  7. I should have seen this a long way off, stupid of me. But I haven’t been concentrating on the carbon sink/rain forest end of the AGW/carbon market scam.

    Thanks for the elucidation.

  8. These findings have major implications for economics. Mainstream economists are so hypnotized by the free market ideology and dependent on abstract models with no connection to reality that they fail to see important inter-connections between variables.
    What these findings mean is that economic studies which estimate gains from trading REDD carbon credits overestimate these gains.
    Thanks for the referece, I’ll try to get a copy to read.

  9. Part of the issue is that the definition of forest by UNFCCC/CDM — and, as noted above, by the EU — omits the definition of “tree”.

    Botanically, palms are not trees (dicots), but are basically grasses (monocots). The UN FAO specifically excludes oil palm plantations from the definition of “forest” through a purposeful addendum to the FAO forest definition. FAO defines forests by tree cover, area, minimum height and minimum diameter, AND, by addendum to the definition, specifically excludes oil palm plantations.

    If CDM and EU were to follow the FAO definition then the claim could not be made that forests and palm oil plantations are equivalent — which we we all know they are not — along any dimension envisioned by REDD: net carbon storage, biodiversity, ecosystem functioning, indigenous use, sustainability etc.

    Like other examples of biomass for fuel, oil palm may be better accounted through agriculture and energy sectors, rather than conflating with the forest sector.

  10. The most recent “Tropical Timber Market Report” from the ITTO (Volume 15 Number 4, 16-28 February 2010) includes this information:

    Oil palm in forest concessions

    The Indonesian Ministry of Forestry reportedly suggested that a new regulation may be in the pipeline to allow commercial forestry companies to plant crops such as oil palm in new concession areas.

    The purpose of the new mixed forestry concept is to enable forestry companies to survive the low timber prices in the current market as well as to grow biofuel crops to mitigate the country’s current petroleum energy shortage.

    Commercial forestry companies hold concessions on some 37 million ha. of commercial forests in Indonesia, while the government holds another 45 million ha.

    The new regulation (if approved) would permit the allocation of a portion of a forest concessions to be planted with commercial tree crops.