Seeing REDD: Unresolved trade issues at the brink of consensus

In the lead-up to the UNFCCC’s Sixteenth Conference of the Parties (COP16), the UN collaborative initiative on Reducing Emissions from Deforestation and Forest Degradation, or “REDD” programme, has become the focus of increased attention. Still a pilot project, REDD’s basic premise is simple: to have rich countries pay poor countries to preserve or replant their forests. In return, rich countries would get a “carbon credit” to offset other emissions in a wider carbon-trading scheme. As a result, the programme’s designers hope, the programme would be win-win. However, while REDD’s premise is simple, the details of such a programme are complicated and the subject of negotiation and concerns about corruption, monitoring and verification pervade the programme.

Less attention, though, has been given to the potential trade implications of REDD. To make REDD conducive to world trade, policymakers should consider its possible impact on two aspects of world trade: the currencies of recipient countries, and the incentives for logging in non-participating countries. Together, these unintended trade consequences could damage REDD’s credibility on the world stage. Though REDD has made considerable progress in the last few years, especially in comparison to other climate change initiatives, policymakers would be wise not to take its success for granted. Looking to Cancun and beyond, REDD should remain an ongoing subject of analysis and improvement, especially in light of its potential—and unresolved—impacts on trade.

Negotiating background

Though initiatives against deforestation in poor countries have had a long history, proposals to frame them as an emissions-reduction scheme did not arise until 2005 when COP11 took place in Montreal. There, led by Papua New Guinea, the Coalition of Rainforest Nations proposed the basic scheme where rich countries would pay poor countries for maintaining their forests. At first treated with scepticism by rich countries, particularly the United States, momentum behind the programme grew nonetheless and at the Bali COP in 2007 the parties erected it as a major new pillar in efforts at climate change mitigation.

Further, Bali supplemented the basic REDD programme with a call for the development of another programme, REDD+, which aims not only to pay poor countries to maintain their forests, but also to help them conserve, sustainably manage, and enhance their carbon forest stocks. Hence, REDD+ is more about capacity building, while REDD proper is more about payments, though both programmes are closely related. While REDD and REDD+ were expected to be fully developed by the Copenhagen Conference in 2009, the momentum for a wider climate deal collapsed there, and REDD stalled with it. Nevertheless, Articles 6 and 8 of the Copenhagen Accord highlighted the importance of REDD and REDD+, with the latter article comitting countries to pay US$30 billion for the 2010-2012 period.

Despite the overall disappointment at Copenhagen, REDD still stands out as an area of considerable progress. Shortly after consensus was reached on the Bali Action Plan, a bevy of multinational partners arose to fund REDD and REDD+ pilot programmes. The most prominent partners include the UN, with its UN-REDD Programme, and the World Bank, with its Forest Carbon Partnership Facility (FCPF) and Forest Investment Program (FIP).

Currently, the various partners are experimenting with different pay-for-forest schemes among pilot countries, as well as with different techniques in forest surveillance, payment method, fund governance, and more. The problems thus far with REDD have been well documented, including strong concerns over corruption and verification.[1] To facilitate learning to deal with these problems, the negotiating countries launched the REDD+ Partnership in May 2010; its website hosts a database of the various REDD+ projects for review by other partners and the public. Ideally, these countries hope, a few best practices will emerge from all the experimentation to pave the way for implementation of REDD in a larger climate change treaty.

Today, deforestation and forest degradation account for between 15 to 20 percent of worldwide carbon emissions; as such, they are of critical importance to mitigating the impact of climate change. But like all efforts at mitigation, REDD and REDD+ may unexpectedly impact international trade.

Trade impacts

The REDD programme has already been the subject of public criticism over issues such as the potential for corruption, but the potential effects to trade have been significantly overlooked. Two aspects of international trade stand out as susceptible to REDD influence. First, REDD may significantly appreciate the currencies of heavily forested developing countries, making it harder for them to pursue an export-oriented model of development. Second, REDD could relocate deforesting industries to countries where deforestation is not currently a problem – a form of carbon leakage. While neither problem seems severe enough to scrap the overall effort at REDD, each problem should be addressed in a targeted manner to ensure REDD remains credible with developing countries in the long run.

Currency appreciation

All things being equal, REDD has the potential to appreciate a forested country’s currency, and thereby hurt its attempts to promote exports. At its core, the REDD programme dissuades those countries who would deforest or degrade a forest by promising them, instead, a higher payment for keeping their forests robust and standing. In other words, by giving a monetary incentive for healthy forests, REDD raises the opportunity costs of deforesting products. Presumably, an effective REDD programme will raise the opportunity costs high enough that forest maintenance prevails over forest degradation and the products associated with such degradation, such as palm oil.

However, since REDD is internationally financed, a successful country programme will not only limit the amount of deforestation, it will also increase the inflows of capital from abroad, putting appreciative pressure on the country’s currency. To illustrate this, consider the differing sources of income between a deforesting industry and a REDD programme. At some level, a deforesting industry sells its product both to a domestic market and a market abroad for export. However, if REDD succeeds at converting forests to protected lands, foreign income will replace the income that had been gained by selling the deforesting product domestically. To make the REDD payment useful, the recipient country has to exchange the foreign payment for its own currency, and so there will be pressure for the domestic currency to appreciate.  Indeed, even for countries that primarily export their deforesting products, REDD payments would presumably have to exceed the income generated by such exports to make the forest protection worthwhile; hence, even exporting countries could face currency appreciation.

The biggest fear arising from such currency appreciation is that it could hurt the export competitiveness of the forested country’s other products. Currency issues – particularly between the US and China – have come to a head in 2010 and those countries with export-led growth models may worry in time that so-called “Dutch disease” may take hold as REDD payments stunt their economic development.[2] In essence, if REDD programmes displace the production of products linked to deforestation, it may not only be foreigners that “pay” to keep the forests maintained – it may be other exporters from the country, too.

However, there is an alternative. Where REDD programmes seem likely to cause currency appreciation, forested countries may be better off turning to REDD+ programmes for sustainable management instead. Where REDD-plus funds train sustainable forestry techniques, rather than transfer cash directly, they will probably be less likely to cause currency appreciation. Though forest management training is admittedly an indirect form of combating deforestation, if it were coupled in exchange for verifiable reductions in deforestation, it could still be effective—and less costly to the country’s exporters. Ultimately, more experimentation needs to be done by the REDD programme partners to determine whether REDD-induced currency appreciation and Dutch disease should be a serious concern.

Deforestation relocation

The second impact REDD and REDD+ could have on international trade is related to the degree to which it changes the source countries of deforestation. Put simply, a successful REDD programme in one country could incentivise other countries to pick up the deforestation instead, where it did not exist previously; as a result, the relocation of the deforesting industry could both leak carbon and change the composition of trade among developing countries.

Similar to the currency problem outlined above, REDD programmes may raise the opportunity costs to producing forest-degrading products, and so discourage their production. Thus, if REDD programmes covered a sufficient percentage of forest sources, the programmes would also raise the product’s prices. In other words, with supplies from developing countries restricted because of REDD, but demand remaining unchanged, prices for products such as palm oil would presumably rise. Yet, higher prices also make the product more attractive to others contemplating joining the market. As a consequence, third countries outside of REDD—which never had a deforestation problem before—may take up the deforesting industries, and so replace the former deforesters. As a result of this unintended carbon leakage, the REDD payments would do little for climate mitigation, still be costly to those who pay them and benefit those who receive them, while incidentally encouraging third-party countries to deforest.

Indeed, REDD could significantly change the composition of South-South trade between REDD payment receivers and third-party countries. On the demand side, REDD recipients, now producing less of a deforesting product, may feel tempted to use their REDD payments to re-import the products that moved to new, non-REDD countries. As a consequence, the real benefit of the REDD payment would not be captured by the world, with reduced carbon emissions, but by the newly deforesting countries, who respond to higher world prices and new demand from former exporters. Policymakers should be careful that their scheme does not merely encourage others to fill the deforestation gap left by the REDD recipients.

To ensure such a deforestation gap does not occur, it is crucial that REDD programme designers focus on engaging as many forested countries as possible. With each additional country that participates in REDD, there are fewer incentives for carbon leakage, and fewer incentives for distortion in South-South trade. Given that deforestation rates vary drastically by country—the rate is 0.17 percent in DR Congo, for example, compared to almost 2 percent in Indonesia[3]— the potential for carbon leakage, without expansive REDD coverage, is huge. REDD should not merely reduce deforestation in Indonesia to replace it with increased deforestation in the Congo.

So, for REDD to be truly successful, it must not only preserve the forests in the countries it targets, but also preserve them around the world without stunting development.

At COP 16, REDD may turn out to be a victim of its own success. Already, the Chair of the Ad Hoc Working Group on Long-term Cooperative Action (AWG-LCA) has designated REDD+ as “almost completed”, and able to deliver “concrete results…without having to devote much time to [it] in Cancun.”  Since most of its work is already done, it is probably safe to say that REDD+ is poised to make progress at the talks, even if we do not know how comprehensive the final product will be.  The AWG-LCA is scheduled to meet on 29 November from 3pm to 6pm – though the group says it will meet for “as long as necessary.” Here, it will make the final preparations for its “outcome” before it is presented to the full COP.

Gregory Hudson is a master’s student at the Graduate Institute for International and Development Studies in Geneva. He also works with ICTSD’s Global Platform on Climate Change, Trade and Sustainable Energy.

1 See, for example, the recent 14th International Corruption Conference in Bangkok on November 13th, where REDD was given high priority as an area of corruption.

2 Macintosh, Andrew. (2010) “Can Money Grow on Trees?” Australian Council for International Development Research Paper. Page 6.

3 Filou, Emille. (2010) “Saving Trees in the Congo Basin: is REDD a Solution or a Quagmire”. Ecosystem Marketplace