Time Preference of REDD+ activities: need for discounting and present valuing

Recognition of the value of forests for the fight of climate change is resulting in a revival of activities related to REDD+. Over the last few years, a series of high profile REDD+ initiatives have been proposed and pursued, adopting different approaches that range from zero deforestation pledges (e.g., Consumer Goods Forum, New York Declaration on Forests, Brazilian Coalition of Climate, Forests and Agriculture) to large-scale forest restoration efforts (e.g., the Bonn Challenge).

These different REDD+ approaches vary widely in their social, economic, and environmental benefits, and result in different on costs, greenhouse gas (GHG) mitigation, biodiversity protection, and social benefits.

Irrespective of other aspects, it is extremely important that different approaches are compared for their actual climatic benefits. While figures for overall carbon benefits are often calculated, the difference in timing of when carbon storage or sequestration occurs can result in highly different climatic impacts.

There is a need to calculate the Carbon Net Present Value of these initiatives to be able to compare their climate benefits and prioritize efforts and resources.

Accounting for time (Discounting)

The timeframe of project benefits can affect their attractiveness. Projects that bring benefits at an earlier stage should be favored, as they would bring climatic benefits at an earlier date – i.e., based on time preference. Time preference relates to the preference of society to benefits that accrue at an earlier rather than a later stage.

In the context of climate change, time preference can be used to introduce a sense of urgency in relation to GHG emission mitigation measures. Not using it implies an endorsement of the assumption that a GHG mitigation activity can be postponed indefinitely without any effect on the overall objective of reducing the impacts of GHG concentrations in the atmosphere.

To account for the value of time and include the concept of time preference, the discounting method was proposed (Moura Costa 1996; Fearnside, Laschof and Moura Costa 2000). It consists of using a discount rate to calculate the present value of the total amount of carbon stored over the lifetime of a project, according to the following equation:

equation 3

where i is the discount rate and n is the project’s timeframe (usually in years).

Discounting favours activities that prevent the release of carbon, such as avoided deforestation or reduced impact logging, instead of activities which actively remove carbon from the atmosphere over a longer period (e.g., forest restoration). This is because the climate benefits of avoided deforestation are ‘front-loaded’, preventing the release of large amounts of carbon at the beginning of the project cycle, therefore suffering less from the effects of discounting.

One problem of using discounting, however, relates to the selection of an appropriate discount rate to reflect climatic, financial (interest rates), economic or social degrees of time preference attached to the carbon mitigation benefits of a project. High rates favor projects that create results in the short term, discouraging approaches based on long-term sustainability. Too low rates discourage efficiency and approaches that promote more rapid results.

 

References

Fearnside, P.M., D.A. Lashof and P. Moura-Costa, 2000: Accounting for time in mitigating global warming. Mitigation and Adaptation Strategies for Global Change.

Moura-Costa, P.H., 1996: Tropical forestry practices for carbon sequestration. In: A. Schulte and D. Schone (eds.), Dipterocarp Forest Ecosystems – Towards sustainable management, pp 308-334. World Scientific, Singapore.