Towards a green economy

Forests4 Modelling green investment in forestsIn this section we examine the impacts at a globallevel of increasing investment in two of the optionsdiscussed in the previous section: private investmentin reforestation and public investment in payments toavoid deforestation. This is because both are highly likelyto play a role in climate-change mitigation and will formpart of a post-2012 international climate agreement.4.1 The green investment scenarioUnder the global model developed for the GreenEconomy Report by the Millennium Institute, the greeninvestment scenario (G2) allocates 0.034 per cent ofglobal GDP to reforestation and incentives for avoidingdeforestation/forest protection between 2011 and2050. 6 This equates to US$ 40 billion (in constant 2010US dollar prices) per year on average, with 54 per cent orUS$ 22 billion directed to reforestation and 46 per centor US$ 18 billion per year to avoided deforestation.This is similar in order of magnitude to estimates madein the 1990s of the amount of investment neededfor sustainable forest management in productionforests of US$ 33 billion per year (Tomaselli 2006) andestimates made in recent years for the cost of avoidingdeforestation, which range from US$ 5 billion to US$ 15billion per year (Stern 2007; Grieg-Gran 2006) to US$ 17-28 billion (Kindermann et al. 2008). The amount indicatedfor avoiding deforestation also compares well with theestimate of US$ 12-17 billion per year made in Section3.2 of the investment needed for effective managementof protected forests (based on Balmford et al. 2002).4.2 The baseline scenario:business-as-usualIn the model, the baseline scenario or business-as-usual(BAU) for the forest sector replicates the historical trendfrom 1970 and assumes no fundamental changes inpolicy or external conditions going forward to 2050.6. The 0.034 per cent of GDP for forest-related investments is part of anintegrated green investment scenario, G2, in which a total of 2 per cent ofglobal GDP is allocated to a green transformation of a range of key sectors.The results of this scenario, in which the 2 per cent is additional to currentGDP, is generally compared to a corresponding scenario in which anadditional 2 per cent of global GDP is allocated following existing businessas-usualtrends, BAU2. In the case of the forestry sector, there is no significantdifference between the BAU2 scenario and the BAU scenario, which alsoprojects a business-as-usual path but without additional investments (see theModelling chapter for more explanation of the scenarios). Hence the greeninvestment scenario (G2) can be compared to the BAU which also representsthe model’s projections of future trends on a business as usual path.Under business-as-usual, the projection is for a steadydecrease in forest cover from 3.9 billion hectares in 2010to 3.7 billion hectares by 2050. As a result, carbon storagein forests will decline from 523 Gt in 2009 to 431 Gt in2050. The contribution of the forest sector to global GDPand employment is projected to grow at 0.3 per cent peryear between 2010 and 2050 to reach US$ 0.9 trillion and25 million jobs by 2050. This is in line with growth rates inthe sector between 1990 and 2006 (FAO 2009).4.3 Investing to reduce deforestationThe cost of avoiding deforestation is assumed to startat US$ 1,800 per hectare, increasing to US$ 2,240 perhectare by 2050. This is based on the global averagevalue added per hectare of crop production plus thevalue added of forest products per hectare (measuredin constant 2010 US$ prices), which is taken to representthe opportunity cost if forests are conserved with noextraction of forest products or clearing. This approachto estimating opportunity cost is somewhat differentfrom that taken in a number of studies on this topic (e.g.Grieg-Gran 2006; Börner et al. 2010), which add togetherthe present value of agricultural revenues net of costdiscounted over several years and the stumpage fees fortimber, but the result is within the range of most suchestimates. 7 It can be considered a generous estimateof the opportunity cost as in many locations thereturns to converting forests to smallholder agriculture,subsistence and cash crops and to cattle ranching areconsiderably lower than US$ 1,800 per hectare. Thisfigure is more representative of higher-value land usessuch as oil palm (see Grieg-Gran 2006; Chomitz et al.2006; Börner et al. 2010).Nevertheless, the cost of designing and administering apayment scheme, the so-called transaction costs, can beconsiderable, particularly in developing countries andin remote forest areas. While existing national-level PESschemes in Costa Rica and Mexico have administrationcosts of well below 10 per cent of the overall amountspent (Wunder et al. 2008), analysis of the Bolsa Florestascheme in Amazonas state in Brazil indicates a muchhigher proportion, around 40 per cent (Viana et al. 2009).The cost figure used in this model is high enough toincorporate some provision for transaction costs.7. It is equivalent to the cost of purchasing the land or the cost of makingannual payments (as in PES schemes) to compensate for forgone annualreturns to land over an appropriate time period (30-50 years) discountedat an appropriate rate.181