Economic potential of land-use change and forestry for carbon sequestration and poverty reduction

• NSW Department of Primary Industries, Australia
• Forest Research and Development Agency, Indonesia
• World Agroforestry Centre, Indonesia

Concerns over global warming, fuelled by greenhouse gas emissions, have led to the development of schemes to alleviate its impact. One such idea is the use of forests as 'carbon sinks'. This recognises the ability of trees to sequester CO2 through photosynthesis and to store it as biomass, rather than release it into the atmosphere.

Carbon sequestration, as the process is known, can be used to garner payments or credits for stored carbon. These credits can be traded or used as incentive payments in encouraging reforestation projects. Questions relating to the profitability of sequestration and appropriate systems for capturing carbon were addressed in an earlier ACIAR project (ASEM/1999/093). This developed infrastructure, bioeconomic models and skills to evaluate sequestration projects and proved its potential in Indonesia.

New forest growth and slowed deforestation leave Indonesia well placed to capitalise on carbon sequestration. Reforestation is a priority for Indonesia, but has had little impact in the smallholder sector. There is potential to use carbon credits to promote reforestation, a process that would also help in poverty alleviation during growth periods. Barriers to the widespread use of this process exist, most notably transaction costs and a lack of standards. The key is to find ways of reducing transaction costs and overcoming other barriers by developing standard, simplified ways of designing, registering and managing land-use change and forestry (LUCF) projects in exchange for carbon-credit payments. Research is an essential ingredient in achieving this.

The objectives are to:
determine the most appropriate land-use change and forestry systems for capturing carbon-credit payments and assisting in poverty reduction;
estimate the transaction costs of actual projects and identify principles of project design to minimise these costs.

The infrastructure for applying the methodology described here was largely developed in project ASEM/1999/093 with several outputs relevant to this subproject: (i) Several models of farm-forestry (FF) systems; (ii) parameter values for several FF systems; (iii) information on prices, costs and inputs required by several FF systems; (iv) computational tools for economic analysis of carbon-sequestration activities.

Farm-level analysis will begin with data collection activities. It is important to have a wide selection of alternatives and data for different environments, so as to have enough choice to select efficient portfolios of activities within a larger project. A model will be developed to allow selection and ranking of LUCF systems. A list of LUCF systems and their performance in selected sites will be produced and risk analysis undertaken to express results as probability distributions.

Transaction cost data will be identified from existing carbon sequestration projects to develop a dataset with estimates of the costs of project implementation, registration, monitoring and certification. An economic analysis of project-design alternatives will be undertaken, along with a cost-minimisation analysis. This will lead to a set of prescriptions for efficient project design being produced.

The project posed three questions:
How do smallholders compare with other landholders in terms of efficiency in sequestering carbon?
How likely is it that smallholders will want to adopt carbon sequestering activities?
What sorts of policies and projects will make this more likely?

To answer these questions the research team collected data on agroforestry systems that have been adopted by smallholders in three regions of Indonesia. These systems were evaluated in terms of their economic performance, their labour requirements, and their carbon sequestration potential. It was found that some of these systems are competitive with other climate-mitigation measures in terms of abatement costs per tonne of CO2 emissions reduced. The team also obtained evidence on the transaction costs that may be faced by projects involving smallholders by studying several reforestation projects located in Indonesia and Latin America.

Researchers derived a project feasibility frontier (PFF), which shows the minimum project size viable for a given carbon price. They found the PFF to be a useful tool for project evaluation. They also found that project viability is highly sensitive, not only to transaction costs and carbon-sequestration potential but also to the size of participating farms.

Throughout the project the team placed emphasis on producing papers and presenting at conferences to ensure that their findings were disseminated as far as possibleof particular importance in the rapidly evolving climate-change policy environment. Outputs can be placed in the following categories:
An integrated system of parameter values and bioeconomic models to analyse the performance of different agroforestry systems.
Estimates of transaction costs associated with different project designs.
Identification of constraints caused by political and social factors.
Enhanced capacity of government research agencies, both in Indonesia and Australia.
Three software packages were produced:
TreeSmart: A relational database containing 110 Australian species that have agroforestry potential in medium to low rainfall areas (<600mm) and data on tree growth, soil type and climate from various trials.
SCUAF (a model of soil changes under agroforestry)- rewritten to work in conjunction with a spreadsheet, thus making it easier for users to design and manipulate their agroforestry systems. A set of examples, including shifting cultivation, rotations and agroforestry systems, was designed by Prof. Anthony Young, one of the original creators of the model.. The software and examples are available for free download at: http://www.une.edu.au/carbon/scuaf.php.
BRASS (Bioeconomic Rubber Agroforestry Support System). This is one of a new generation of models originally developed by the Bioeconomic Agroforestry Modelling Project at the University of Wales. The software and examples are available for free download at: http://www.une.edu.au/carbon/software.php.

An important outcome of the project is the integration of scientific and economic information and methods. The project has also built up the capacity of Indonesians to be involved in the debate about carbon sequestration. Members of the research team have become members of the CDM Secretariat recently created within the ministry of Forestry, and they have made use of the resources produced by the project. CDM (the Clean Development Mechanism) is an arrangement under the Kyoto Protocol allowing industrialised countries with a greenhouse gas reduction commitment (so-called Annex 1 countries) to invest in emission-reducing projects in developing countries as an alternative to what is generally considered more costly emission reductions in their own countries.

On the Australian side of the project, development of the TreeSmart database has enhanced the capacity of the research team, and its future use by New South Wales DPI has the potential to lead to high adoption rates. TreeSmart is being made available to extension agents, Catchment Management Authorities (CMAs), and other people involved in research and/or management of dryland salinity through tree planting.