Goal: mitigate climate change cost-effectively

1. Effective international policy to reduce emissions from deforestationSuzi Kerr (and Arthur van Benthem)Motu and Stanford, EconomicsEarth System Science 2010

2. Goal: mitigate climate change cost-effectively

3. Goal: mitigate climate change cost-effectively Pricing carbon storage in forests is critical

4. Goal: mitigate climate change cost-effectively Pricing carbon storage in forests is critical Emissions reductions ≠ ‘policy’

5. Goal: mitigate climate change by reducing deforestation Problems with ‘offsets’ Leakage ‘Adverse selection’ Solutions and the tradeoffs involved in them.

6. Focus on ‘getting prices right’ Fund used to pay for temporary reductions relative to baseline at approx global carbon price; or Integration in cap and trade Country level targets and remote monitoring Minimises corruption Minimises leakage and adverse selection Maximise domestic policy flexibility – efficiency and sovereignty Be generous to developing countries through baselines not exemptions International policy ‘proposal’ for deforestation

7. Why are people deforesting? Land at risk 0 ‘Returns’ to clearing

8. Because humans have been clearing land for a long time, the ‘returns’ distribution for land that is still in forest is right censored Most forest is not at threat of deforestation in the short term. The distribution of returns on forested land f(r) Land at risk 0 ‘Returns’ to clearing

9. Protect if r < pc Total cost = carbon stock x carbon price Efficient but extremely expensive. Policy option 1: provide reward for carbon storage on all forested land Land that will not be protected even with carbon price 0 ‘Returns’ to clearing

10. Policy option 1: provide reward for carbon storage on all forested land Land at risk 0 ‘Returns’ to clearing Protect if r < pc Total cost = carbon stock x carbon price Efficient but extremely expensive.

11. Theory: minimises transfers from developed countries – only pay for real reductions Problem: uncertainty in baseline – accurate prediction of return impossible Policy option 2: Offsets - reward relative to a baseline

12. People participate because they can protect forest at low cost Others participate because they will be rewarded for doing nothing Adverse selection: Those who participate will not be those you want to participate

13. Can easily get most wrong Estimated return baseline Land at risk 0 ‘Returns’ to clearing

14. Under offsets: Make a baseline mistake to the right of zero and you get spurious credits Can easily get most wrong Estimated baseline Land at risk 0 ‘Returns’ to clearing

15. Under offsets: Make a baseline mistake to the right of zero and you get spurious credits Make a mistake to the left, lose efficiency but you have no balancing of spurious credits Systematic bias – can pay a lot and achieve almost nothing Can easily get most wrong Land at risk 0 ‘Returns’ to clearing

16. Increase scale of projects – deal with regions and countries not properties. Many properties that would individually have had unfavourable baselines (opted out) will now be included in the programme More efficient Less rewards for doing nothing If baseline is unfavourably biased by mistake, risk that some entire countries could opt out – loss of efficiency Are there intermediate solutions between very high transfers and inefficient offsets?

17. Suppose δis the true marginal environmental benefit from reducing one tonne C. pc is the carbon price offered (i) Raise pc toward δ– stronger international climate agreement (ii) Lower r if possible – technical assistance Both will increase efficiency Both will reduce the share of spurious units 2. Alter carbon price offered

18. Other policy choices involve a trade off between efficiency and transfers to developing countries. Whose welfare are we concerned about? Welfare depends on: efficiency of mitigation amount of transfers to developing countries amount of accidental spurious credits

19. (iii) Reduce pc below δ?Commonly called ‘discounting’. Simple logic – if 10% are spurious, pay 10% less on each. But, paying less changes participation. Efficiency loss – only good projects drop out Greater share of credits spurious Lower transfers to developing countries 2. Alter carbon price offered

20. Suppose δis the true marginal environmental benefit from reducing one tonne C. (iv) Raise pc above δ? Less efficient – some land not deforested that ‘should’ be. Can increase participation and hence efficiency. Larger transfers to developing countries Fewer spurious units 2. Alter carbon price offered

21. Bias in favour of seller – higher baseline deforestation rate. Offset with greater reductions elsewhere Unambiguously increases efficiency Increases transfers to developing countries 3. Bias baselines deliberately

22. (ii) Bias in favour of buyer – lower baseline deforestation rate Require country to take some independent action before they get reward. Can lose a lot of efficiency Can save buyer a lot of money 3. Bias baselines deliberately

23. The level of generosity needed to achieve global efficiency depends on accuracy of baseline – maximise scale Offset generous baselines with tighter targets in Annex I – Annex I could still win. ‘Best’ policy option? Generous baseline f(r) Land at risk at time t 0 ‘Returns’ to clearing

24. Effective policy to avoid deforestation could significantly lower mitigation costs There is a tradeoff between efficiency and minimising transfers to developing countries This tradeoff is minimised if scale is maximised – e.g. Country level Lowering prices or baselines reduces efficiency and shifts mitigation cost to developing countries Most efficient option is to deliberately make baselines more generous. Conclusions

25. Be brave: large scale Be generous: put global efficiency ahead of narrow developed country interests Then science becomes critical factor again Conclusions