Carbon Market, Biofuels and Tropical Deforestation

By Geoff Michael

Massive carbon emissions and loss of biodiversity from tropical deforestation is continuing at a formidable rate. However, these activities are excluded from the Clean Development Mechanism in the first commitment period. Proposed changes would allow Certified Emissions Credits for avoided deforestation. A sufficient carbon market and changes in the CDM could finance tropical AD projects by providing an incentive to retain forest instead of conversion to pasture. Farmers in the U.S. have an incentive to switch to bio-fuels as the carbon market price rises. If this switch reduces food production the increased market prices may drive increased tropical deforestation.

Massive carbon emissions and loss of biodiversity from tropical deforestation is continuing at a formidable rate. However, these activities are excluded from the Clean Development Mechanism (CDM) in the first commitment period. Proposed changes would allow Certified Emissions Credits (CERs) for avoided deforestation (AD). A sufficient carbon market and changes in the CDM could finance tropical AD projects by providing an incentive to retain forest instead of conversion to pasture. Farmers in the U.S. also have an incentive to switch to bio-fuels as the carbon market price rises. If this switch reduces commodities food or lumber production the increased market prices have the potential to drive increased tropical deforestation. At current commodities prices, a range of c prices $10 to $38 per t c may be sufficient for a 50% reduction in deforestation while prices of $30 to $60 are thresholds for switching some US crop production from food crops to bio-fuels. In this paper I compare estimated savings in c emissions from biofuel production to avoided deforestation at several carbon market prices. I find that above a carbon market of $38 the benefits of additional emissions abatement from US biofuel production is out weighed by the additional incentives to deforest due to higher crop prices.

In both CO2 emissions and biodiversity loss, deforestation of tropical forests is currently the most significant land use change on the planet. Tropical deforestation is the leading source of CO2 from land use change over the last 20 years (IPCC, 2007). Tropical rainforests are estimated to contain 80% of terrestrial species; Richard Leakey estimates a loss of 137 plant, animal and insect species every day due to rainforest deforestation (Leakey,1996). And of course, the bottom line: “A substantial body of evidence suggests that action to prevent further deforestation would be relatively cheap compared with other types of mitigation … [and] has the co-benefit of protecting a significant proportion of the world’s biodiversity that they contain.” (Stern Review, 2006)

The Kyoto protocol requires annex countries to reduce GHG emissions primarily from national measures but flexible mechanisms are also provided. One of these additional mechanisms, the Clean Development Mechanism (CDM) allows annex B countries to implement receive Certified Emission Credits (CER) for implementing projects in developing countries. The CDM has created a carbon market for CERs, over 1000 projects have been registered with an expected reduction of 2.7 bil tons of CO2e. Example projects include Japanese implementation of a N2O emissions reduction at a Uzbekistan factory, or a wind farm in china (UNFCCC Projects,2009). The idea of the CER is that if a emissions-reduction project can reduce CO2 emissions more cheaply in a developing country than an annex B country, and it can be shown that the additional CO2 reduction wouldn’t happen without the project, then the annex B country should be able to pay for the project and receive the CER for the reduction.

For a number of reasons, Emissions-projects for avoiding deforestation (AD) were not permitted in the first commitment period (Laurance,2007):

  • Leakage, that reducing deforestation on one patch of land would just move loggers to a new unprotected area.
  • The feeling that developed countries should reduce their own emissions, not use undeveloped nations to store emissions.
  • Political issues within developing countries; Brazil was particularly concerned that CDM mechanisms might limit their development.

Recently a number of groups have coalesced under the title “Reducing emissions from the tropical deforestation and forest degradation” (REDD), and are rallying support for inclusion of REDD into CDM’s into the next commitment period.

There are several proposals for funding AD. Laurance describes a system of payments to the country, referenced to a baseline rate of deforestation. E.g., Indonesia could receive payments for AD emissions reductions against a past deforestation rate. Issues of permanence and monitoring of the AD, are being debated. Solutions to these issues may include payments as “rent” where the annual payment is only a portion of the full sequestration value. (Laurance, 2007).

If AD is included as a CDM, what is a sufficient carbon price to prevent deforestation? The studies included here are based on a comparison of annual profits from ranching, crops or rents in the tropics. They examine the market choice of ranch or forest, without the complications of land tenure issues, illegal logging, indigenous rights, and cultural institution of claiming land, monitoring etc. (Walker, 2000). In practice, implementing payments may be much more expensive, both politically and financially.

Olschewskia estimates that protecting secondary growth forests in Ecuador becomes attractive over $4.50 per t CO2 and forest plantations viable at $7 per t CO2.( Olschewskia, 2005). Profitability of the grazing land was calculated from current local prices for meat. Significantly, a sensitivity analysis reveled a 94% increase in minimum CER prices from a 30% increase in meat prices.

Kindermann models Gt CO2 per yr reductions globally, finding a $2–8 carbon price would produce a 10% reduction in emissions and $10-38 carbon price for a 50% reduction at current commodities prices (Kindermann et al, 2008). He finds a total abatement of 0.3–0.6 Gt from a 10% reduction; a 50% reduction in deforestation could reduce emissions by 1.5–2.7 Gt yr-1.

When would carbon market prices provide an incentive for US farmers to switch to biofuels? For the purpose of this paper, I’m focusing on switching crops, not cropland pulled from the Conservation Reserve Program or reclaimed abandoned farmland. According to (McCarl & Schneider, 2001), no significant changes will happen to US crop production until the price nears $50 per ton carbon. Below that point emissions reductions are cost effective from reduced soil tillage, with a 1% price increase at a $10 carbon price. At $50 per ton carbon, farmers would switch 3% to biofuels, with a 8% affect on prices an export tonnage. As carbon prices approach $100 farmers may switch 20% to biofuel production, raising food crop prices 30% and reducing exports 40%. This study was done with 2001 fuel prices, and so underestimates the current switch to biofuel production from higher oil prices. They estimate total emissions abatement in the US of 51.8, 146 and 238 M t yr-1 at 10$, $50, and $100 respectively. McCarl points out “U.S. exports diminish and international production increases. Although not accounted for here, this would likely increase emissions in other countries, creating leakage.”

But how much leakage will occur? Lower US timber harvest from changes in logging practices has been displaced to developing country logging. (Niesten et al, 2002). Higher soybean prices increased the rate of Brazilian deforestation (Searchinger, 2008). I use the increase in crop prices from switching US food crops to biofuels to estimate the effective change in carbon market price for tropical AD projects. I then calculate the lowered emissions abatements at those rates. The total emissions reduction from biofuels plus AD (at lowered rates) is compared to AD projects without US biofuels. To estimate total changes in emissions reductions, I make a number of simplifications about the relationships between carbon market prices and crop and MMTC prices and the I assume changes in crop prices have the same effect as meat prices on deforestation.

For example, at a c market price of $40 we expect aproximatly 9% increase in market price from reduction of US crops. Using Olschewskia’s sensitivity analysis showing a 30% increase in crop prices raises the required emissions price by 94%, I estimate the effective carbon market price is 28% lower, or $28.80 for tropical AD projects. At $40 tropical AD projects could sequester 436 MMTC per yr, at $28.80 about 314 MMTC per year, a loss of about 122 MMTC per year from additional deforestation. Biofuels production is estimated to offset 109 MMTC per year in the U.S.. Total emissions reduction with US biofuels and lowered tropical AD is 425 MMTC. So the net result is an increase in emissions of 13 MMTC per year from additional US biofuel production driven by the carbon market price (Figure 1).

figure11

Figure 1. Source: Geoff Michael. Leakage from US biofuel crops reduces overall C emissions abatement. Above a carbon market price of $38, emissions abatement from biofuels plus tropical AD projects is less than from tropical AD projects without US biofuel crops replacing food crops.

Total emissions abatement increases with the increasing c market up to around $38 when US biofuel production significantly increases crop prices, lowering the effectiveness of the carbon market to deter deforestation.

figure2b1

Figure 2. source: Kindermann et al, 2008. CO2 abatement (converted to C) of MMTCE tropics = 10.9 * C market price. From McCarl data a simple regression gives US sequestration per carbon price MMTCE U.S.= 2.3 * C market price +17. If we also a force a linear realtionship between additional biofuels production and corn market price, also from McCarl, we get price % increase = 0.29 * C market price – 2.13.

References:
“The Physical Science Basis, Chapter 7 Couplings Between Changes in the Climate System and Biogeochemistry.” IPCC Fourth Assessment Report. IPCC. , 2007. Accessed 20 Apr. 2009 <http://www.ipcc.ch/ipccreports/ar4-wg1.htm>.

“Project Activities.” CDM: Project Activities. UNFCCC. <http://cdm.unfccc.int/Projects/registered.html>. Accessed 20 Apr. 2009

Leakey, Richard and Roger Lewin, 1996, The Sixth Extinction: Patterns of Life and the Future of Humankind, Anchor

Stern, Nicholas H. The Economics of Climate Change: The Stern Review. Cambridge: Cambridge UP, 2007.

Laurance, William F. “A New Initiative to Use Carbon Trading for Tropical Forest Conservation.” BIOTROPICA 39(1): 20–24 (2007): 20-24.

Olschewskia, Roland, and Pablo C. Benitez. “Secondary forests as temporary carbon sinks? The economic impact of accounting methods on reforestation projects in the tropics.” Ecological Economics 55 (2005): 380-94.

Robert Walker, Emilio Moran, Luc Anselin, Deforestation and Cattle Ranching in the Brazilian Amazon: External Capital and Household Processes, World Development, Volume 28, Issue 4, April 2000, Pages 683-699, ISSN 0305-750X, DOI: 10.1016/S0305-750X(99)00149-7.
(http://www.sciencedirect.com/science/article/B6VC6-3YRVR07-5/2/a555f65e75121a1d32b82121142ad324)

Kindermann, Georg, et al. “Global cost estimates of reducing carbon emissions through avoided deforestation.” Proceedings of The National Academy of Sciences of the USA 105 (2008): 10302-0307.

Bruce A. McCarl and Uwe A. Schneider. Greenhouse Gas Mitigation in U.S. Agriculture and Forestry
Science 294 (5551), 2481. (21 December 2001) [DOI: 10.1126/science

Niesten, Eduard, Peter C. Frumhoff, Michelle Manion, and Jared J. Hardner. “Designing a carbon market that protects forests in developing countries.” Philosophical Transactions of the Roay Society of London A 2002 360, 1875-1888.

Timothy Searchinger, Ralph Heimlich, R. A. Houghton, Fengxia Dong, Amani Elobeid, Jacinto Fabiosa, Simla Tokgoz, Dermot Hayes, and Tun-Hsiang Yu. “Use of U.S. Croplands for Biofuels Increases Greenhouse Gases Through Emissions from Land-Use Change” Science 319 (5867), 1238. (29 February 2008) [DOI: 10.1126/science.1151861]

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1 Response so far »

  1. 1

    Laura Palombi said,

    Finding the magic price point for carbon is a complicated matter. I think your analysis shows how intervention by governments to provide incentives for biofuel production while protecting food crop resources and forested land creates a cascade of consequences. Of course, the price of carbon needs to be strong in order to build confidence in the market. but, if it is too high, the incentive to produce a biofuel crop rather than a food crop will change markets all over the world. Finding a way to value and monitor avoided deforestation seems to be necessary.


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