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Well-structured economic incentives could massively reduce deforestation emissions in Indonesia

Indonesia’s tropical forests are the world's third-largest, covering more than half of the country and possessing some of the richest and most unique biodiversity on earth. But Indonesia has lost more than 20% of its forest since 1990.

Indonesia's forests

Indonesia's forests offer a huge opportunity to cut carbon emissions that cause global warming -- and earn significant income for national and state governments. (Photo credit and thanks to CIFOR)

The carbon released through deforestation and related changes in land use has made Indonesia the third-largest national contributor of greenhouse gas emissions (behind China and the U.S.) – and also one of the most promising areas in the world to put into action effective policies to reduce deforestation and combat climate change.

In a study developed in collaboration with Indonesian government and non-governmental partners and published in one of the world’s leading scientific publications, the Proceedings of the National Academy of Sciences, my colleagues and I have found that the ways countries could choose to set up a framework of economic incentives for reducing deforestation really matter.

While most economic analyses of the potential for reducing deforestation emissions have been at a high theoretical level, our study takes the analysis closer to the level of policy implementation.

We found that, with an international carbon price of $10 per ton of carbon dioxide, which is relatively modest compared to existing and projected greenhouse gas compliance markets, and strong and specific economic incentives for local decision-makers, Indonesia could:

  • achieve major reductions in national greenhouse gas emissions from deforestation — up to a 26% reduction in national greenhouse gas emissions
  • earn significant new income for national and regional governments – as much as $1 billion of net national revenue per year over and above payments to local governments

Worldwide, emissions from deforestation contribute about 15% of global greenhouse emissions; the Indonesian government estimates 85% of its country’s emissions come from agriculture, forests and land-use change.

Policies to Reduce Emissions from Deforestation and forest Degradation (REDD+) aim to provide incentives for forest conservation by giving living forests an economic value, and have the potential to cut greenhouse gas emissions substantially right away while protecting ecosystems and generating economic and social benefits for indigenous and local communities.

Important economic analysis of REDD+

Our analysis, “Structuring economic incentives to reduce emissions from deforestation within Indonesia” by Jonah Busch of Conservation International, myself, and others, is an important advance because it:

1) Analyzes specific policy choices for designing a national framework to reward REDD+ activities at the local level

Our results show that Indonesia can maximize its emissions reductions while staying within its budget through a comprehensive national policy framework that both encourages broad participation and includes rewards for reductions measured across larger geographic scales, such as the political units of districts or provinces.   This system would be superior to more traditional approaches based on payments only on a site-by-site basis, which run the risk of overpaying certain sites while providing insufficient incentives to others, and thus have an increased risk of emissions shifting to these locations (“leakage”).

In particular, we found that either of two REDD+ policy scenarios would lead to strong outcomes for both the climate and Indonesia’s economic interest:

Graph showing deforestation in Indonesia from 2000–2005. (a) observed deforestation; (b) modeled expected deforestation without REDD+; (c) expected deforestation with “improved voluntary incentive structure” for REDD+ at a carbon price of $10 per ton.

    1. A cap-and-trade or tax-and-subsidy REDD+ program with international carbon payments at $10/ton showed the highest potential benefits for Indonesia during the 2000-2005 study period. Such a program could: reduce national emissions from deforestation 20-31% over five years; avoid 163-247 million metric tons of carbon dioxide from deforestation emissions every year; and inject into Indonesia’s national REDD+ program a net budget surplus of $1 billion per year.
    2. A well-structured voluntary incentive structure could be a more politically attractive option, compared to a mandatory system. To be effective environmentally but not exceed the program budget, a voluntary REDD+ system must balance robust and widespread local incentives with maintenance of revenue, through policies that, for example, combine shared revenues and responsibilities for the program between national and subnational governments, and that make payments for emissions reductions to districts or provinces rather than individual site. Operating at these larger scales helps target resources and account for possible emission shifts (“leakage”) as well as less predictable emissions at more local levels. Structured this way, Indonesia’s REDD+ program could: reduce national emissions from deforestation 17-26% over five years; avoid 136-207 million metric tons of carbon dioxide from deforestation emissions each year; and, with international carbon payments at $10/ton, yield a net budget surplus of $331 million per year for Indonesia.

Either system would be more than twice as effective at reducing emissions as a “basic voluntary structure," where payments would be made for voluntary reductions in emissions at the level of individual sites on a solely project or landowner basis.

These results show the way REDD+ policies are designed can have important implications for national and local budgets and make a huge difference in achieving large-scale, cost-effective emissions reductions.

2) Relies on actual historical data

This is the first time potential emissions reductions from deforestation in Indonesia have been estimated using actual historical data on how deforestation varies with economic factors. This provides a stronger basis for informing REDD+ policies than prior analyses that rely on various assumptions for how readily deforestation can be reduced.

3) Develops “OSIRIS” model to help inform policy decisions

To conduct our analysis, we used a model called OSIRIS (the Open Source Impacts of REDD+ Incentives Spreadsheet), a set of free, transparent, open-source, spreadsheet-based decision support tools.

The model estimates and maps the climate, forest and revenue benefits of alternative policy decisions for REDD+.  EDF and Conservation International developed a version of OSIRIS for Indonesian policy makers in collaboration with its National Council on Climate Change, and with co-authorship from Padjadjaran University and World Resources Institute. We have versions of the model for other countries and are working to enhance the analysis and extend the model to additional countries.

Analysis timely as Indonesia develops its REDD+ strategy

Our analysis, published in this week's Proceedings of National Science, offers valuable information for Indonesia's REDD+ strategy.

Indonesia’s President Susilo Yudhoyono committed in 2009 to reducing his country’s greenhouse gas emissions by 26-41% below its “business as usual” levels (the amount of emissions Indonesia expects to hit if no efforts are made to curb emissions) by 2020.  These goals could translate to substantial reductions below current levels, based on the best current projections.

In May 2011, Indonesia and Norway signed a $1 billion agreement to cooperate on reducing emissions from deforestation and forest degradation.

Currently the Indonesian government is developing its National REDD+ Strategy, and our analysis offers some valuable information as the country decides how to implement REDD+. We’ve already received positive feedback from our analysis – in fact, the National Council on Climate Change in Indonesia published our findings in a joint policy memo and chapter in a book about REDD+.

We look forward to Indonesia’s policy-makers’ using the best knowledge and technology to structure a REDD+ framework that will provide the economic incentives to achieve the country’s enormous potential to fight climate change and protect biodiversity.

You can read more in our full PNAS article,  “Structuring economic incentives to reduce emissions from deforestation within Indonesia,” our joint press release with Conservation International and at the ORISIS webpage.

Posted in Deforestation, Economics, REDD|: | 1 Response