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What do rising food prices mean for REDD?

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The theory behind REDD sounds so simple. We just have to make forests worth more standing than logged. The big REDD idea is to increase the value of forests by putting a price on the carbon stored in the forest. The recent surge in food prices sheds some light on some of the many problems lurking behind this apparently simple idea.

Global food costs have been increasing steadily since June 2010 and in December 2010, the FAO Food Price Index exceeded its highest monthly value since records began in 1990. The previous high-point was in June 2008.

One of the factors responsible for the increase in food prices is a series of extreme weather events, (probably) caused by the planet’s changing climate. According to the US National Oceanic and Atmospheric Administration (NOAA), 2010 was the hottest year on record and the wettest. Fires in Russia, floods in Australia and drought in Argentina all helped push up the price of various food commodities. Meanwhile, the price of palm oil is increasing partly as a result of heavy rains in southeast Asia.

But extreme weather was not the only factor pushing up food prices last year. Another major factor is speculation on food prices. IPS journalist Stephen Leahy notes that “Nothing but price speculation can explain wheat prices jumping 70 percent from June to December last year when global wheat stocks were stable.”

In July 2010, Harper’s Magazine published an article by Frederick Kaufman titled “The Food Bubble: How Wall Street starved millions and got away with it.” The article goes into detail about how Goldman Sachs started investing in food (or to be more accurate, started betting on future prices of food) in 1991. There’s an obvious contradiction here: if prices of food go up, it’s good for Goldman Sachs and its investors, but that’s bad for the rest of us as food gets more expensive to buy.

Here’s an interview with the author, Frederick Kaufman, on Democracy Now! (transcript available here):

There are two major problems here for REDD.

First, the price of food affects the cost of implementing REDD. For forests to be worth more standing than converted to industrial food crops such as oil palm, sugar or soya plantations, then the carbon stored in the forests has to be worth more than the price of the crops that could be planted in place of the forests.

This week, the Jakarta Globe reported that Indonesia’s State Enterprises Ministry was

pushing the 14 government-run plantation companies to speed up their expansion plans to capitalize on rising prices and growing demand for agricultural commodities in the international market.

An expansion of the area of plantations threatens millions of hectares of forest in Indonesia. A recent press release from Greenomics Indonesia states that “3 million hectares of natural forest in Papua are earmarked to be cleared for the development of industrial forestry plantations by 17 companies”. Higher prices for food commodities such as palm oil means more pressure to convert forests to plantations.

The second problem relates to carbon trading as the way of funding REDD. Trading carbon as a commodity is just as problematic as trading food as a commodity. The vast majority of carbon trading on the EU’s Emissions Trading Scheme is in futures, not in spot trading of carbon credits. The trade consists, in other words, of bankers betting other people’s money on the price of carbon at some point in the future. Derivatives are available that are so complicated that they are beyond regulation.

If the carbon market were ever to take off, it would be very likely to become exactly the same kind of bubble market as the technology dot-com bubble, the stock market bubble, the sub-prime mortgage bubble and the food bubble.

Here’s what Rolling Stone magazine’s Matt Taibbi had to say about Goldman Sachs and carbon trading on Democracy Now! (he was on the same programme as Frederick Kaufman):

Goldman Sachs is heavily invested in businesses involving carbon credits. The carbon credit thing is basically just a tax on pollution, but instead of doing it as a straight tax, they are going to create this new commodities market and they are just going to outsource the tax collection to a brand new commodities market and Goldman is probably going to be at the forefront of the companies that are going to be trading in these credits. They are going to stand to make an enormous amount of money off the creation of this new market.

But putting aside these problems with carbon trading, just for a moment, there is another elephant in the room. In order to address climate change, pro-carbon traders and other proponents of market solutions tell us, we need to put a price on carbon. The price has to be sufficiently high to make it worth while to develop alternative, green forms of energy, instead of oil. But as the price of carbon increases, so too does the price of oil. As the price of oil increases, oil companies make windfall profits and invest more money in finding new sources of oil and extracting them.

Meanwhile, high oil prices mean high prices of just about everything (at least until there has been a complete overhaul of the world’s energy supply), including food prices. Planting more food crops doesn’t reduce the price of food because the price is no longer determined by supply and demand, but by billions of dollars of speculation. The cost of REDD increases. As the price of carbon increases along with other commodities, the price of oil is driven up even further and the carbon bubble gets a bit closer to bursting point.


UPDATE – 27 January 2012: REDD-Monitor would like to thank Down to Earth for translating this article into Bahasa Indonesia: “Apa arti peningkatan harga pangan bagi REDD?”.
 

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  1. Chris,
    nice article! And more important the last paragraph: “the price no longer determined by supply and demans, but by billions of dollars of speculation.”

    It’s widely known – and it’s also good to emphasise – that the food price doesn’t follow the “offer-demand” concept. Several sources have pointed out how we’ve been wasting food (http://www.derbygripe.co.uk/foodwste.htm, http://www.eatoutmagazine.co.uk/online_article/Sustainable-Restaurant-Association-breaks-down-food-waste-figures/12067).

    Now, a question raises: Within this context, will REDD need a market in order to move forward?

    Cheers,
    Victor.

  2. @Victor (#1) – Thanks for your comment. The article has to do with the fact that the price of food is now determined by a bunch of bankers whose primary motivation (as Frederick Kaufman notes on Democracy Now!) is to get access to “very large pools of cash for themselves. They are after accumulating huge pools of money that they can do with whatever they like on a day to day basis.” I’m afraid that has nothing to do with food waste from restaurants (unpleasant as that may be).

    Your question “Will REDD need a market in order to move forward?” also somewhat misses the point. My concern is that hitching the protection of the world’s forests to the trade in a commodity (carbon), the price of which is controlled by the same bankers that are currently driving millions of people into starvation, seems like an extremely risky proposition.

    Oh and thanks for quoting the typos – I’ve corrected them….

  3. This graph is interesting – there seems to be a close correlation between the price of oil and the price of food – although it is not clear exactly what the link is. Paul Chefurka, who produced the graph comments that

    changes in the Food Price Index appear to lead changes in the price of oil by a few months. Since food prices don’t drive oil prices as far as I know, this implies that they are both responding to the same underlying situation, but that food prices are a more sensitive indicator.

  4. Paul Krugman has a different view for the causes of rising food prices: “Soaring Food Prices“. He says overall grain production is down – as a result of extreme weather events, particularly in the former Soviet Union.

  5. According to FAO, the price hike cannot be explained by variations in supply or demand. In fact, we had a major price increase in 2007-08, without having a decline in cereal production. In the case of the current food crisis, climate change probably has a role on this but with all the speculation it is hard to ascertain the link between production and prices.
    Your final point is correct but there’s a caveat: this happens because we’re addicted to oil. If we look at the 2008 oil price hike, we see that just about everyone continued to use their cars, and oil companies started investing in dirty fuels, like tar sands, and biofuels. If, on the other hand, alternatives to private transportation exist, then a carbon or energy tax can have a major impact on reducing oil consumption. With carbon trading, however, it’s a different story, as one never knows how the price will evolve.