Bad News for Climate Change

They're sitting down in Bali to try to save the world. And while I'm completely on board with more drastic emissions cuts, the inclusion of the U.S. and developing countries, and transfers to poor farmers and low-lying countries to help offset the ill effects anthropogenic climate change has already produced, in the priorities the EU is bringing to the table I also see the expansion of folly.

Still, in addition to helping poor countries deal with climate change, the UNFCCC also wants to help them take their share of the burden. While industry in most developing countries still doesn't emit much carbon dioxide relative to the world's biggest polluters, deforestation has developed into a major problem. Not only do healthy forests serve as "carbon sinks," absorbing carbon dioxide and releasing oxygen in its place, but deforestation in tropical countries now accounts for 20 percent of the carbon released into earth's atmosphere each year. A study released in August concluded that current programs to cut emissions, including the Kyoto Protocol, provide little incentive for leaders of tropical nations to keep their forests intact.

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One such incentive would be to funnel funding to nations with tropical forests through an international carbon trading market. In such a system, richer, higher-polluting nations would be able to fund the preservation of carbon-rich forests to offset their greenhouse gas emissions. The European Union is piloting a similar emissions trading scheme, and according to UNFCCC, trading on that market was worth $30 billion in 2006.

We've already seen perverse effects of the carbon trading regime, most notably perhaps in the short-run, often chaotic, and under-regulated mechanism of planting trees as carbon offsets.* Now to add the preservation of existing forests to this scheme strikes me as a little disastrous; that is, it is a measure that will be taken to give the short-term appearance of "doing something" that is actually a suboptimal long-term solution.

If this brief blurb accurately describes what policymakers might have in mind, what I see is some sort of institutionalized "save a tree" scheme in which emitters will be able to purchase parts of, say, the Amazon rainforest to save it from destruction. Now, I have nothing against such a "save a tree" scheme and think it an unadulterated good that individuals and companies should spend money on such activities. Should such activities be allowed as carbon "offsets" though? I think it is prima facie an idiotic idea that we should equate preventing the destruction of an existing tree with reducing emissions - this is, after all, what the carbon offset scheme is supposed to be doing.

Sure, deforestation contributes to global carbon emissions and preventing it would then lower emissions, just as planting new forests is supposed to increase the sequestration of atmospheric carbon (moving us in the opposite direction). But to institutionalize paying states or owners of forests to protect forests as an "offset" makes the assumption that the forests would otherwise completely disappear. This is not a terrible assumption, given the alarming rate of deforestation.

However, it allows a rich state (say, Canada) to "offset" its emissions by X over the period of the agreement (say, between 2012 and 2020). Canada buys from Brazil enough trees cover X emissions. But over that 8 year period the requisite number of trees have a probability P < 1 of being cut down (P being the "natural" rate of deforestation in Brazil compounded over the 8 years). Do you see what I'm getting at? Brazil's emissions from deforestation, without the credit scheme, would have been PX < X.

Obviously this is so perverse that it can't be what policymakers have in mind. But then what do they have in mind? The obvious solution would be to discount the value of the offset so that Canada can only offset its emissions by PX, now where X represents emissions from cutting down all the trees Canada would buy. But then we have to decide on a baseline rate of Brazilian deforestation (P). Would we hold Brazil's rate of deforestation to an average over a prior period, and then allow countries to pay Brazil to deforest itself at a lower rate? Would they allow countries to pay Brazil not to cut down trees that they "otherwise would"? I just can't think of a satisfactory way to do this without creating perverse incentives and effects. I'm sure the technocrats who have developed carbon offset schemes have a very acceptable answer in mind. Still, I'd be pleased to hear somebody explain how this might work (admitting that my rudimentary reasoning above might be completely off base).

Besides, whatever the effects of such a scheme, it would not itself create new incentives "for leaders of tropical nations to keep their forests intact." It only creates incentives for rich countries to preserve tropical forests; it assumes that the leaders of "tropical" countries are indifferent between taking the cash and cutting down the trees. The only way to create incentives for anybody to quit deforestation is to bind them to an emissions-reduction scheme (or a more targeted anti-deforestation scheme).

*One of the PhD candidates in my department makes this argument as part of a larger project.