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LETTER
REDDinthered:palmoilcouldunderminecarbon
paymentschemes
1 2 2
Rhett A. Butler , Lian Pin Koh , & Jaboury Ghazoul
1 Mongabay.com,P.O.Box0291,MenloPark,CA94026,USA
2 ¨ ¨ ¨
Institute of Terrestrial Ecosystems, ETH Zurich, Universitatstrasse 16, Zurich 8092, Switzerland
Keywords Abstract
Biodiesel; biodiversity; biofuels; climate change;
SoutheastAsia. Mechanisms to reduce carbon emissions from deforestation and forest degra-
dation (REDD) have been gaining momentum as a way to combat global
Correspondence warming, fund forest conservation, and deliver economic benefits to rural
Lian Pin Koh, Institute of Terrestrial Ecosystems, populations. However, the economic viability of REDD schemes will depend
¨ ¨ ¨
ETHZurich,Universitatstrasse16,Zurich8092,
Switzerland. Tel: +41 44 632 6836; fax: +41 44 on the profitability of alternative land uses. Oil palm agriculture has become
6321575.E-mail:lian.koh@env.ethz.ch a major driver of tropical deforestation over the last few decades. Here, we
model and compare the profitability of converting forest to oil palm versus
Received:23September2008;accepted17 conserving it for an REDD project. We show that converting a hectare of for-
December2008 est for palm oil production will be more profitable (yielding net present val-
doi: 10.1111/j.1755-263X.2009.00047.x ues of $3,835–$9,630) to land owners than preserving it for carbon credits
($614–$994), which are currently restricted to voluntary carbon markets. Giv-
ing REDDcreditspriceparitywithcarboncreditstradedincompliancemarkets
would boost the profitability of avoided deforestation (up to $6,605). Unless
post-2012 global climate policies legitimize the trading of carbon credits from
avoideddeforestation, REDDwill not be able to compete with oil palm agricul-
ture or other similarly profitable human activities as an economically attractive
land-useoption,inwhichcaseREDDwillnotbeabletofulfillitsprimaryfunc-
tion of avoiding deforestation.
Introduction landrights of forest users (e.g., indigenous communities);
system “leakages” (when conservation measures in one
Tropical deforestation is both a major source of carbon area displace deforestation or forest degradation to an-
dioxide emissions and a leading cause of species extinc- other); and the establishment of appropriate deforesta-
tions (Page et al. 2002; Ramankutty et al. 2007; Sodhi tion baselines (Myers 2007; Miles & Kapos 2008). Owing
et al. 2007). Financial mechanisms to reduce carbon emis- in part to these unresolved issues, REDD is not sanc-
sions from deforestation and forest degradation (REDD) tioned under the clean development mechanism (CDM)
have been proposed to compensate land owners, orga- established by the Kyoto Protocol to the United Na-
nizations, or countries for the value of carbon stored tions Framework Convention on Climate Change (UN-
in forests that would otherwise be released into the at- FCCC) (United Nations Framework Convention on Cli-
mosphere by deforestation (Myers 2007; Nepstad et al. mateChange2001).Assuch,carboncreditsfromavoided
2007; Miles & Kapos 2008; United Nations Framework deforestation projects cannot be purchased by industrial-
Convention on Climate Change 2008). Additionally, car- ized nations for meeting internationally mandated emis-
bon credits generated from this mechanism can be a po- sions targets. Instead, REDD credits can only be traded
tential source of income to drive forest conservation in on voluntary markets (e.g., Chicago Climate Exchange;
developing countries (Laurance 2006; Tollefson 2008). www.chicagoclimatex.com) or paid for using designated
However,REDDfacesseveralpoliticalandtechnicalchal- carbon funds (e.g., Forest Carbon Partnership Facility
lenges, including concerns over national sovereignty and [FCPF] of the World Bank; carbonfinance.org), where
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Conservation Letters 2 (2009) 67–73 Copyright and Photocopying: 2009 Wiley Periodicals, Inc. 67
Palmoilunderminescarbonpaymentschemes R. A. Butler et al.
carbon prices are substantially lower and less responsive where much of future oil palm expansion in Southeast
to price fluctuations in competing commodities than are Asia is expected to occur. We assumed that the conces-
thoseincompliancemarkets.Therefore,theeconomicvi- sion will either be developed by a large plantation com-
ability of REDD schemes andtheiradoptionbythosewho pany or preserved for carbon credits from REDD.
would be investing in such projects are dependent on
boththeeligibility of REDD for the CDM after 2012 when Converting forests for palm oil production
the first commitment period of the Kyoto Protocol will
expire, as well as the profitability of alternative land uses. Under the scenario of forest-to-oil palm conversion, we
Oil palm agriculture (Elaeis guineensis) deserves spe- assumed a constant conversion rate of 1,250 ha per
cial attention because over the past few decades it has year over 8 years. To determine profitability, we col-
become a major driver of deforestation in the tropics lected data on yields for oil palm products—fresh fruit
(Fitzherbert et al. 2008; Koh & Ghazoul 2008; Koh & bunches (FFB), CPO and palm kernel (PK), potential
Wilcove 2008a, b). The global land area under oil palm revenues from these products based on alternative pric-
cultivation has more than tripled since 1961 to over ing scenarios (either constant price or variable price),
13 million ha (Food and Agriculture Organization of as well as plantation setup and annual operations costs
the United Nations 2008). This crop is most extensively (Appendix S1–S4).
planted in Indonesia and Malaysia, which are currently Given the growing number of highly efficient, mod-
the world’s largest producers of palm oil—exporting a ern oil palm companies operating in Indonesia, we as-
combined total of 28.6 million tons of crude palm oil sumed that the average productive lifetime FFB yield of
(CPO)in2007–2008(FoodandAgricultureOrganization our hypothetical Sumatran concession will range from
of the United Nations 2008). In these two countries, more 17 tons/ha (low-yield scenario) to 20.5 tons/ha (high-
than half of oil palm expansion since 1990 has come yield scenario) based, respectively, on Indonesia and
at the expense of forests (Koh & Wilcove 2008a). The Malaysia’s average FFB yields in 2007 (Food and Agricul-
spread of oil palm has been accompanied by a doubling ture Organization of the United Nations 2008). We then
in CPO prices, from $478 per ton in 2006 to $1,196 per applied a standardized yield curve to each yield scenario
ton in the second quarter of 2008 (World Bank 2008a). to calculate year-by-year FFB yields over the concession’s
Because most of the CPO traded internationally is im- productive lifespan (Appendix S3). This yield curve was
portedbyemergingeconomiessuchasChina(6.2million derived from empirical data on FFB yields compiled by
tonsin2007–2008),India(4.9milliontons),andPakistan the Indonesian Oil Palm Research Institute (Appendix
(2.5 million tons)—82.3% of which is used by the S3). Under the low yield scenario, FFB yields were as-
food processing industry (United States Department of sumed to increase from 5.9 tons/ha in the third year of
Agriculture—Foreign Agricultural Service 2008)—palm planting when palm trees reach maturity to 21.9 tons/ha
oil price trends are closely tied to those of other veg- in the ninth year, before decreasing to 12.1 tons/ha in
etable oils, such as soybean (Figure S1). The diversion the twenty-fifth year. Under the high-yield scenario, FFB
of large swaths of agricultural land in the United States yields were assumed to increase from 7.1 tons/ha in the
to produce energy crops (e.g., maize, Zea mays), coupled third year of planting when palm trees reach maturity to
with rising food demand from developing countries (e.g., 26.4 tons/ha in the ninth year, before decreasing to 14.6
China), and rising crude oil prices (leading to higher food tons/hainthetwenty-fifthyear.WeassumedaCPOyield
production, processing, and distribution costs), have syn- of 21%ofFFBproduction(i.e., oil extraction ratio) and a
ergistically contributed to the rise in price of food crops PKyield of 5% of FFB production based on industry data
worldwide, including vegetable oils (World Bank 2008b). (Appendix S4).
As such, the price of palm oil is heavily influenced by CPO prices have been highly volatile since 1990, but
global market trends of both food and energy commodi- have risen sharply since 2006 (World Bank 2008a).
ties (Figure S1). In this article, we investigate whether Our model relies on the most recent commodity price
high palm oil prices could undermine REDD schemes in data (World Bank 2008a) and commodity price fore-
the tropics by comparing the returns of oil palm opera- casts (World Bank 2008b) from the World Bank, which
tions to profit models for early stage REDD projects. projects prices through 2020. Under a high-yield con-
stant price (HYCP) scenario, we assumed CPO prices to
maintain at $749 (the average price from January 2006–
Material and methods November2008)from2009to2039(WorldBank2008a).
Under a low-yield variable price (LYVP) scenario, we as-
We based our analysis on a hypothetical 10,000 ha sumed CPO prices to follow World Bank forecasts, de-
concession of old-growth forest in Sumatra, Indonesia, clining from $533 per ton in 2009 to $488 per ton in
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68 Conservation Letters 2 (2009) 67–73 Copyright and Photocopying: 2009 Wiley Periodicals, Inc.
R. A. Butler et al. Palmoilunderminescarbonpaymentschemes
2010, before recovering to $643 in 2015, and decreasing possibility of deforestation or forest degradation in the
to $510 in 2020 (World Bank 2008b), at which we as- subsequent 22 years, for example, by holding some of
sumed it will remain until 2039. PK price was assumed ´
the carbon proceeds in escrow (Ebeling & Yasue 2008).
to be approximately 60% of CPO price based on industry Whileearnings during the period from interest and other
data (Appendix S4). investmentsmayboostthenetpresentvalue(NPV)ofthe
We based the costs of establishing and operating an project, we chose not to speculate on the value of these
oil palm plantation on midpoint values of published esti- returns. Similarly, due to the uncertainties in account-
¨
matesfor tropical forest in Sumatra (Rotheli 2007): setup ing methods for leakage, we chose not to incorporate this
costs of $3,441–$4,190 per ha; annual operations costs in our calculations. However, our models of REDD and
(maintenance, harvest, milling, and transport) of $253– oil palm profitability published in the Supplementary In-
$308 per ton CPO produced. In some oil palm devel- formation do allow the examination of the effects of in-
opments that involve new plantings, the sale of timber corporating return on investments and potential carbon
products from clearing of land may be used to subsidize leakage (Appendix S1 and S2).
plantation development (Casson 1999). In our calcula- We modeled the operating profit under five carbon
tions, we also included an estimated logging income to pricing scenarios using forward prices of carbon deriva-
defray plantation setup costs (Tomich et al. 2002; Grieg- tives traded in either voluntary or compliance markets
Gran 2008). Production, yield, and cost data were then (Capoor & Ambrosi 2008; Appendix S1 and S2). For
used to determine profit. compliance market scenarios, we assumed REDD credits
would track current voluntary market prices until 2012,
Reducing deforestation and forest degradation before diverging thereafter. These carbon-pricing scenar-
ios are described below:
Under the alternative scenario of preserving the conces- Voluntary (constant price)—Based on Volun-
sion for REDD, we assumedthattheentire10,000hafor- tary Carbon Financial Instruments (CFI) from
est area will be left undisturbed and thus be eligible for the Chicago Climate Futures Exchange (CCFE;
carbon credits via the REDD mechanism. In our calcula- www.chicagoclimatex.com). We assumed a carbon
tions, we included no compensation for other ecosystem price of $4.40 per ton CO2e in 2010, and used the
services (e.g., erosion control, watershed protection) or current December 2010 futures contact price of $4.65
economic activities (e.g., sustainable harvesting of forest per ton CO2e as the carbon price from 2011 to 2039.
products) that may continue on the land. Voluntary (annual appreciation)—In this variation of
While estimates for forest carbon stocks are variable the voluntary market scenario, we assumed that prices
(Raflietal. 2007), default values from the United Nation’s in the voluntary market would appreciate by 5%
Intergovernmental Panel on Climate Change have been annually, increasing from $4.40 per ton CO2e in 2010
adopted as the best practices for estimating forest carbon to $18.23 per ton CO2e in 2039.
when information is limited (Rafli et al. 2007). Preserv- Compliance (JI)—Based on Joint implementation,
ing the forest concession will avoid 5.46 million tons of as defined in Article 6 of the Kyoto Protocol, which
carbon dioxide emissions relative to converting it for oil “allows a country with an emission reduction or limi-
palm over the 30-year period, based on the difference tation commitment under the Kyoto Protocol (Annex
in aboveground biomass between lowland tropical rain- BParty) to earn emission reduction units (ERUs) from
forests (225 Mg C per hectare) and oil palm plantations an emission-reduction or emission-removal project in
(76 Mg C per hectare) for tropical insular Asia (Eggleston another Annex B Party, each equivalent to one ton
et al. 2006; Rafli et al. 2007; Gibbs et al. 2008). of carbon dioxide-equivalent emissions (CO2e), which
Weusedtwoapproachestocarboncreditallocation.In can be counted towards meeting its Kyoto target”
the first approach—the equal allocation model (EA)—we (United Nations Framework Convention on Climate
assumed that carbon credits will be allocated and sold on Change 2001). We used the 2007 average price for
an equal annual basis over the 30-year period at an an- JI projects (Hamilton et al. 2007; Capoor & Ambrosi
nualsite-specificdeforestationrateof3.3%.Inthesecond 2008) of $12.17 per ton CO2e for post-2012 profit
approach—thefront-weightedallocationmodel(FWA)— projections.
we assumed that the credits will be allocated and sold Compliance (CER)—Based on Certified Emission Re-
only during the period where the forest would otherwise ductions, which are tradable credits issued under
be converted for oil palm (e.g., years 1–8) at an annual the Kyoto Protocol’s Clean Development Mechanism
site-specific deforestation rate of 12.5%. Thereafter funds (CDM). CERs are usually generated by sustainable de-
wouldbeusedatthediscretionofthelandowner,assum- velopment projects in developing countries (Capoor &
ing some provision would be made to insure against the Ambrosi 2008). We used the current market price for
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Conservation Letters 2 (2009) 67–73 Copyright and Photocopying: 2009 Wiley Periodicals, Inc. 69
Palmoilunderminescarbonpaymentschemes R. A. Butler et al.
2012 CER futures contract of $37.57 per ton CO2eas tructure maintenance; information, education, and com-
the basis for the forecasts. munication; monitoring; sustainable livelihoods (when
Compliance (EUA)—Based on European Union Al- applicable); marketing; and finance and administration
lowances, which are credits issued under the Euro- (Eggleston et al. 2006; Thoumi 2009).
pean Union Emission Trading System. We used the
current market price for 2012, 2013, and 2014 CER fu-
tures contracts—$46.89, $50.29, $52.44 per ton CO2e, Results and discussion
respectively—for the basis of our calculations. We used
the 2014 price as the carbon price from 2015 to 2039. Ouranalysis reveals that the development of the conces-
We estimated the development cost of establishing sion for oil palm agriculture will generate an NPV ranging
a REDD project to meet the standards of the World from $3,835 to $9,630 per hectare over a 30-year period
Bank’s Forest Carbon Partnership Facility (FCPF; car- (Figure 1). Under the second scenario of REDD, we deter-
bonfinance.org) at $25 per ha based on the costs of mined that voluntary markets will limit REDD operating
funding the project design document, governance and profit to $614–$994 per hectare in NPV over the 30-year
planning, enforcement and zonation, land tenure and period—substantially less than profits from oil palm con-
acquisition, monitoring and measurement,surveyingand version. However, giving REDD credits price parity with
research, and other costs (Eggleston et al. 2006; Thoumi carbon credits in compliance markets would boost the
2009). Annual maintenance costs are estimated at $10 profitability of avoided deforestation to $1,571–$6,605
per hectare. These include, but are not limited to, gov- per hectare (Figure 1; Appendix S1 and S2), and possi-
ernance and planning; enforcement and zonation; infras- bly as high as $11,784 per hectare if carbon payments are
Figure 1 Comparingtheprofitabilityofpreserving
a10,000haforesttoreduceemissionsfrom
deforestationandforestdegradation(REDD)versus
convertingitforpalmoilproductionovera30-year
period. (A) Accumulatednetoperatingprofitfrom
2009to2039.(B)Netpresentvalues.REDD
profitability is based on carbon prices of voluntary
andcompliancemarkets,includingVoluntary
CarbonFinancialInstruments(CFI)fromthe
ChicagoClimateFuturesExchange,Joint
Implementation(JI)underArticle6oftheKyoto
Protocol, Certified Emission Reductions(CER)under
theKyotoProtocolsCleanDevelopment
Mechanism(CDM),andEuropeanUnionAllowances
(EUA)issuedundertheEuropeanUnionEmission
TradingSystem.Palmoilproductionprofitability
wasmodeledforthescenariosofhigh-yieldand
constantprice(HYCP),andlow-yieldandvariable
price (LYVP). Model details are provided in the
SupplementaryInformation(AppendixS1).
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70 Conservation Letters 2 (2009) 67–73 Copyright and Photocopying: 2009 Wiley Periodicals, Inc.
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