REDD: to transact or not to transact?

I’ve had various conversations with friends and colleagues over the last few days on the subject of REDD. Most commentators seem to agree that REDD is one of  the few things countries did seem able to agree on at Copenhagen, and that some kind of international agreement on it does seem likely to happen. This is all to the good, our concern has instead been the architecture at the sub-national level. This will be driven to some extent by the framework set out at international level (and I won’t pretend to be up to date on all the latest discussions) but individual countries will also have a certain amount of freedom to choose their own solution.

Essentially there are two different kinds of architecture which can be adopted:

1. Transaction based. In this model individual land owners / forest managers make  some changes to reduce deforestation and/or its cousin forest degradation. These changes and the amount of carbon saved are verified, and then the land owner sells these credits (known as Certified Emissions Reductions, or CERs) to the government in their country, who then sell it on to the international market.
2. Fund based. In this model the government undertakes a variety of actions to reduce deforestation and forest degradation. These lead to an overall carbon saving at the national level, at which point it is verified. The government can then sell these as CERs on the international market, the proceeds of which they use to recover the costs of the original activities, but that the implementers of these activities will be paid according to the cost of the activity, not according to the value of the carbon savings achieved as a result.

The astute amongst you will already have noted that both of these architectures rely on the government as the key intermediary between domestic and international markets, and may reasonably question whether many governments, especially but not necessarily only those in the developing world, are well equipped to play such a role. However, since these agreements are being negotiated by national governments we seem somewhat stuck with this situation. The alternative is the voluntary carbon markets on which valuations tend to be an order of magnitude lower. (Nonetheless I know many protagonists who prefer the predictability of these over the uncertainty of the international regulatory market and the intermediation of their government.)

Clearly the transaction-based model is the more economically pure, and should lead to the most cost-efficient outcomes. However, it is also rather more complex to administer since each individual carbon saving must be independently checked and accounted for, no mean task for governments not great at record keeping, and which may impose significant transaction costs. Furthermore, a key issue for REDD is leakage (will conserving one patch of forest simply lead to another patch being felled more quickly?) which is easier addressed at the national level than at the project level, e.g. through a national energy policy to reduce charcoal usage. Finally, efficient markets rely on reasonably well informed participants, something which is likely to be far from the case when those participants are the rural communities who are the de-facto guardians of their local forests. (Trying to explain carbon dioxide, the greenhouse effect, climate change, carbon markets and REDD to people who have barely completed primary school is a serious challenge!) This calls to mind a time when I was sat in a meeting when someone from FAO was presented their proposed project for using Payment for Watershed Services (PWS) as a means to achieve forest conservation in critical catchment forests; his preferred tool was fungible water rights which might be an economist’s nirvana but struck me as being a development worker’s worst nightmare.

So a fund-based model does appear more attractive. Communities can simply be paid for not cutting down trees (this one is relatively easy to explain), the government can tackle leakage issues through broad national policies and implementation programmes, and the total transaction cost should be significantly lower. Not surprisingly many governments like this option (e.g. Brazil’s Amazon fund) because it gives them much more control and freedom of action, and maybe even the possibility to make a nice profit which can boost their tax revenue. Plus for many of the politicians and senior officials responsible for these negotiations it will not have escaped their notice that a fund-based system would bequeath to them vast empires with large budgets, and plenty of opportunity for patronage. A realisation that leads us to the big BUT in all of this. That is donors have been pumping millions of dollars into forest conservation for quite some time now, with mixed results at best. Why, just because now this money is labelled as REDD, should we expect better results?

There are two counter-arguments to this. Firstly the sums of money that will  be available under REDD are several orders of magnitude higher than institutional funding to date. However, though many times financial resources have acted as a significant constraint to forest conservation in developing countries, plenty of very well funded programmes have struggled to make a significant difference, which would seem to invalidate that argument. Secondly, and more cogently, if significant forest conservation gains are not made then the recipient government will soon stop receiving the money. This is a real paradigm shift that holds out the possibility of solving the sustainability problem. Since REDD is paying for results rather for process (as most aid projects have done in the past), governments will have a real incentive to get things right for once, assuming they can actually out-muscle their timber barons, and deliver a sensible, working energy policy.

The question then comes how do governments go about delivering the carbon savings in the face of the last mile problem? Politicians here frequently bemoan and berate civil servants for their laziness and inefficiency (not necessarily unreasonably, though whether the kettle is blacker than the pot is a moot point). Faced with such inflexible and unreactive bureaucracies developing country politicians are apt to reach for panic button which leads to sweeping and rash policy decisions made in a hurry and with little consultation, such as banning agricultural exports in the face of food shortages (rather than keeping markets open to encourage farmers to produce more). This is what has got many campaigners worried; will governments reverse the hard-won gains of the last twenty years in a flash and renationalise forests, disenfranchising local people en masse of their forest rights? For heavily forested developing countries will REDD be any more of a benefit to their citizens than oil has been for ordinary Nigerians? Hence the focus of  many campaigners on “REDD+” or “REDD++” where the pluses stand for social protection and equity, and  biodiversity conservation.

For these reasons, whilst the optimist in me wishes the fund-based model could work, the pragmatist in me says a strong transaction-based architecture is almost certainly going to be required in most cases, and the pessimist in me thinks that we’ll probably end up with mostly fund-based approaches any way. One colleague of mine said he had heard talk of a hybrid approach, but didn’t really understand how it would work. If anyone does I would love to hear about it; please post details in the comments below. Meanwhile I will focus on my next beer transaction.

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