In conjunction with its partners, the Institute for Advanced Development Studies (INESAD) has designed statistical tools, using extensive real life data, to simulate what kinds of policies are likely to make a measurable impact on reducing deforestation while maximizing human wellbeing in Bolivia. As the “How to Live Well in Bolivia” infographic released by INESAD earlier this month illustrates, two policies working in tandem are predicted to have the best results. An internal US$450 tax on every hectare of cleared forest, structured in a way as to mainly affect large-scale commercial agriculture, could raise one billion dollars every four years and kick start deforestation reduction efforts. While laudable on its own, the policy would not be enough. A matching system of payments from rich countries to Bolivia for reducing deforestation that would raise an additional one billion dollars every two years is predicted to act as a catalyst. If the money is then spent on paying people to conserve their forests, on creating green jobs (such as within the eco-tourism sector), and financing anti-poverty initiatives, every year, together, the dual policy effort is forecast to engage 72 percent of the rural population, increase the income of the poor who participate by 29 percent, and achieve a 29 percent reduction in deforestation. (Play the SimPachamama simulation game to see if you can keep forests standing while making the community happy and wealthy).
This, of course, sounds fantastic. But it is worth bearing in mind that, like any simulation or prediction, the model that these results are based on is inevitably stylized. That is to say that it is simpler than the real world. One key issue that this scenario does not take into account is how much of the half billion dollars predicted to be raised every year by the tax and international transfer policies would be spent on actually administering conservation and poverty reduction strategies. Before money can be given by the government to its people, systems and processes—like identifying who deforests how much land and what they therefore need to pay—have to be put in place to collect and distribute taxes and all the people involved need to be paid. These and other similar expenditures are called transaction costs.
The United Nations System for Reducing Emissions from Deforestation and Forest Degradation (UN-REDD) is one proposed international mechanism by which rich countries could compensate farmers in poorer countries for keeping their forests standing. These forests store carbon and help fight climate change by reducing global greenhouse gas (GHG) emissions, which is a top international priority. Although UN-REDD has faced opposition from the Government of Bolivia—not least because of its link to international carbon markets—a number of countries have started to prepare for it. UN-REDD+ goes a step further by incorporating positive forest conservation activities into the framework. However, implementing such a program also comes with transaction costs.
In addition, the money that the farmers would have gained from logging and selling the wood, as well as either growing crops themselves or renting land out for others to farm, is essentially lost. This opportunity cost is important when making financial calculations of whether certain policies would work from the stand point of attracting the participation of and benefiting the people they target. According to research conducted by RTI International1, this opportunity cost is very high for large-scale commercial production of such crops as soy. On the other hand, the International Institute for Environment and Development (IIED) has shown that, the opportunity cost for small-scale subsistence farmers is comparatively not very large at all2. This means that, with a little bit of a financial incentive, ordinary rural farmers are much more likely to agree to stop clearing their forests than corporate agriculturalists for whom only a very large payment is likely to help. And this is exactly the difference that the policies proposed by INESAD aim to address: a moderate tax will not affect the profit margins of large farms too much, while conservation payments and other measures arising from it and the international matching mechanism are likely to convince small farmers to stop clearing forest and focus on managing it better.
While the tools developed by INESAD and their collaborators take opportunity costs into account, they do not count the transaction costs that could be involved, partly because they are hard to predict without real life data. However, recent research in the Amazon has calculated the transaction costs of implementing actual UN-REDD+ programs, data that can now be used to speculate how much of the project budget could be taken up by administrative and other transaction costs. The research is summarized in a 2013 paper entitled “Reducing Emissions from Deforestation and Forest Degradation (REDD+): Transaction Costs of Six Peruvian Projects”, published in the Ecology and Society journal.
The research team, led by Olivia Thompson3 of the Sustainability Research Institute at the University of Leeds, assessed the “set-up, implementation, and monitoring costs, i.e., collectively the transaction costs, of six of the first seven REDD+ project designs from the Peruvian Amazon and compare[d] them with established projects in Brazil and Bolivia.” The major finding is that the yearly cost of implementing UN-REDD+ projects has varied from US$ 0.16 to $1.16 per hectare, and the costs are unpredictable. They vary tremendously depending on how the projects are designed and implemented.
According to INESAD’s projection, around 87,000 hectares of forest that would have been cut down would be saved in the first year if the tax and international payment policies were put in place (or $5.75 per hectare of forest left standing). If the transaction cost estimates of the above research are correct, then this could cost the Bolivian government anywhere between an additional $13,920 to $100,920 just to implement the international payments mechanism (or 2.8 to 20.2 percent of the predicted total annual budget). This does not even consider the transaction costs that would be involved in setting up mechanisms to collect the deforestation tax to begin with.
Let’s take the upper range of the REDD+ transactions and speculate that collecting the deforestation taxes would be equally expensive and cost an additional $1.12 per hectare. In this worst case scenario, the money needed to save a hectare of forest would rise from $5.75 to $8.07 and transaction costs would be make up 40.4 percent of the total annual budget. Then, all other things being equal, only around 62,000 hectares of forest would be protected (29 percent less than the original projection). This means that less people would benefit from the schemes than planned and deforestation reduction would be slower than imagined.
These are important considerations. To make deforestation and wellbeing policies as efficient and effective as possible—by benefiting the maximum number of people at the lowest cost, while preventing as much forest from being cut down as possible—then Bolivian policy makers will need to be smart in how they design, put in place, and run the needed systems. They would do well to pay attention to studies like the one by Thompson and her colleagues and take extra steps to learn from the failures and successes of others. After all, the research does show that some REDD+ projects have managed to keep their transaction costs very low (16c per hectare) and these are the models to emulate.[contact-form to=’firstname.lastname@example.org’ subject=’Sim – Transaction costs’][contact-field label=’Like this article? Enter your email for weekly updates from INESAD’ type=’email’ required=’1’/][/contact-form]
For your reference:
1. Kindermann, G., Obersteiner, M., Sohngen, B., Sathaye, J., Andrasko, K., Rametsteiner, E., … Beach, R. (2008). Global cost estimates of reducing carbon emissions through avoided deforestation. Proceedings of the National Academy of Sciences, 105(30), 10302–10307.
2. Grieg-Gran, M. (2006). The cost of avoiding deforestation. report prepared for Stern Review, International Institute for Environment and Development. Retrieved from http://ibcperu.org/doc/isis/11338.pdf
3. Rendón Thompson, O. R., Paavola, J., Healey, J. R., Jones, J. P. G., Baker, T. R., & Torres, J. (2013). Reducing Emissions from Deforestation and Forest Degradation (REDD+): Transaction Costs of Six Peruvian Projects. Ecology and Society, 18(1). doi:10.5751/ES-05239-180117