A Panama hat trick? Higher carbon stock, stakeholder income and forest cover

Results from Panama show that increases in carbon stocks, stakeholder incomes and forest cover can be achieved simultaneously through a landscape approach to REDD+ combining avoided deforestation/degradation, the promotion of silvopastoral and agroforestry systems, and tree plantations. In the presence of an appropriate monitoring system, a landscape approach can also create buffer reserves of carbon to manage risks associated with non-compliance of net emission reduction agreements. This article summarily presents some policies to achieve forest conservation and restoration.

Avoid the transformation of primary forests into secondary forests. The economic benefits of this transition are low and therefore have low opportunity costs (between 0.10 and 0.57 USD/TnCO2e). Once there is a transformation to secondary forest, the opportunity cost of preventing a transition to agriculture or cattle ranching increases significantly. Secondary forests are often in unstable equilibria and generally represent a first step in a transition to other, non-forested land uses.

Figure 1. Cost abatement curve for forest conservation and restoration in Panama

A landscape approach that combines conservation and agricultural policies can result in negative opportunity costs (i.e., overall positive economic benefits). The abatement curve in figure 1 shows that even in the absence of carbon payments, a combined implementation of forest conservation, restoration and increased carbon content in productive systems have substantial positive economic benefits (the area with negative opportunity cost is greater than the area with positive ones). Provided that implementation and transaction costs are maintained at reasonable levels, the result is positive economic benefits overall.

Speculation on land tenure calls for a mix of enforcement and incentives policies. The decision to convert forest may not only be influenced by the profitability of other economic activities but also by expectations of achieving land tenure security. In several regions, land-use transitions do not seem to be economically attractive but this situation changes significantly when the value of land is added to the analysis. As such, it will be important for REDD+ to combine incentives for conservation with actions that support enforcement of laws, particularly those that prohibit forest conversion without legal permit.

Figure 2. Opportunity costs with and without residual land values.

At current prices, carbon payments are not sufficient per-se but are not negligible either. It is not unusual for policy makers to inquire about the estimated volume of carbon payments that could accrue from REDD+, and Panama is no exception. While it is not possible to provide policy makers with an exact figure, it is nevertheless feasible to estimate a range based on the annual deforestation figure of 13,500 ha/y reported by FAO, estimates of land area converted from primary to secondary forest (3,500 ha/y), and land use change projections.

Under these assumptions, a REDD+ programme that reduces deforestation by 50% would bring gross income to Panama in the order of approximately US$ 11 million annually. If complemented with activities that increase carbon stocks in forest and agricultural lands, then gross income could, all or other things being equal or held constant, reach about US$ 22 million annually. When the carbon price is set at US$ 8 per ton of CO2 equivalent, income increases in a range between US$ 17 million to US$ 34 million annually.

Success on increasing carbon stocks in forest and agricultural lands will depend on policies that diminish the perceived risk of these activities and the influence of high discount rates. Increasing carbon stocks in degraded and agricultural lands is dependent on the participation of the private sector and the economic benefit of these activities is highly sensitive to perceptions of risks as well as temporal preferences. The net present value (NPV) of a sustainably managed forest or a silvopastoril system can increase by a factor of 2 when the discount rate is 4% instead of 12%. This result pales in comparison with that of a forest plantation where the NPV can increase by a factor of 10.

The definition of monitoring and governance structures should undergo a rigorous cost-benefit analysis. Net income from REDD+ is dependent on implementation and transaction costs. The estimation of these costs is difficult at the moment because the definition of REDD+ policies and actions in Panama is still at an early stage. However, the available literature shows that these cost, if unattended, can be significant and in some contexts can easily surpass opportunity costs. Ignoring these costs can wipe out net national benefits and derail the whole programme.

In summary, there is potential in Panama to simultaneously achieve the joint goals of higher carbon stock, stakeholder income and forest cover in rural landscapes. An appropriate combination of law enforcement efforts, economic incentives, technical support and attention to costs can achieve a “Panama hat trick”.

More information on REDD+ in Panama available here.

Originally published at the UN-REDD Programme Blog.