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“The black box is a problem for everybody.” Benoît Bosquet comments on McKinsey’s cost curves

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Earlier this month, Greenpeace released a report slamming McKinsey’s work on REDD – in particular the McKinsey cost curve.

On 14 April 2011, David Ritter, a Biodiversity Campaigner at Greenpeace UK, gave a presentation about McKinsey’s role in promoting deforestation (pdf file 85.4 KB) at the Civil Society Policy Forum of the Spring Meeting of the World Bank in Washington DC. The Bank’s reaction was fascinating.

One of the most extraordinary aspects of McKinsey’s cost curves is that no one outside McKinsey appears to know what data or assumptions lie behind the apparently precise graphs and figures that company produces. One of Greenpeace’s recommendations to McKinsey is that the company must:

Immediately publish all the data, assumptions and analysis underlying the international and national versions of its cost curve and include such disclosures in all future publications.

McKinsey has not contacted Greenpeace since the report was published. But Benoît Bosquet, Coordinator of the Forest Carbon Partnership Facility (FCPF) at the World Bank, who was in the audience listening to Ritter’s presentation, confirmed that McKinsey’s secrecy is problematic. Here’s how Ritter described Bosquet’s response:

At the end of the presentations, Mr Bosquet admitted that the concerns over McKinsey’s secrecy about their method were widely shared, noting that ‘the blackbox is a problem for everybody’. Mr Bosquet also emphasised that forest plans should be informed by good economics – presumably in contrast to the false assumptions and mathematical errors that characterise the ones McKinsey have a hand in.

The World Bank Institute is currently carrying out a series of workshops titled “Estimating the Opportunity Costs and Implementation Costs of REDD+ for the National Planning Process.” The third meeting will take place in Colombia from 16-20 May 2011. All of which raises an interesting question: Will the World Bank be using McKinsey-type cost curves to estimate the costs of REDD?

The World Bank has produced a 262-page training manual to accompany its workshops: “Estimating the Opportunity Costs of REDD+ A training manual” (pdf file 8.8 MB).

In a section titled “What is an abatement cost curve?” the report looks at a “supposed example of a national abatement cost curve, for Indonesia,” which was produced by McKinsey in 2009. Having noted that “this ‘abatement cost curve’ only considers direct, on-site opportunity costs,” the report comments as follows:

The fact that such a widely shared and well-publicized analysis is not actually of REDD+ abatement costs highlights the importance of reviewing methodological assumptions.

But having critiqued McKinsey’s cost curve for Indonesia, the Bank decides to use it anyway:

Despite actual abatement costs being higher, arising from implementation and transactions costs, the graph is useful for illustrative purposes.

Two paragraphs follow explaining what the cost curve shows and the cost curve itself is illustrated.

58. Reduction options associated with REDD+ are highlighted by red boxes. Their relative contribution is measured by the width of the respective bars. For example, abatement of forest conversion to smallholder agriculture would reduce emissions by approximately 250 MtCO2e per year, whereas avoiding timber extraction would reduce about 90 Mt CO2e per year. Reforestation could reduce emissions by approximately 100 MtCO2e per year (Dewan Nasional Perubahan Iklim and McKinsey & Co., 2009).

59. The differences in opportunity costs can be substantial. The vertical height of each bar represents the cost of each option. While reducing forest conversions to low productivity slash-and-burn agriculture is estimated to cost less than €2 per tCO2e, the opportunity cost of reforestation is approximately €10 per tCO2e and reduced forest conversion to intensive agricultural production can cost over €20 per tCO2e. Such cost difference affect feasibility of abatement options within national REDD+ programs.

Note the precision of the figures used. And note that the Bank is using these figures fully aware that they are not accurate. Even worse, the additional costs (that the Bank acknowledges are important) will not be the same for each of the options being considered. The figures are thus inaccurate and not in proportion to each other. The graph is only useful to demonstrate how not to estimate the costs of REDD.

The Bank’s training manual “focuses on estimating direct, on-site opportunity costs,” excluding, “social-cultural costs” (which could include, for example, loss of livelihood and knowledge as indigenous peoples and local communities are forced to stop swidden agriculture) and indirect, off-site costs (increases in prices of food, for example, as less land is available for agriculture and increases in prices of timber as less forest is logged). Having acknowledged that these could “represent significant opportunity costs,” the Bank’s training manual ignores them:

For the sake of brevity, the term opportunity cost will refer to direct, on-site opportunity costs throughout this manual.

In Chapter 7 of the training manual, the Bank explains how to “Generate an opportunity cost curve of REDD.” The first (and only) example in the chapter is McKinsey’s cost curve for Indonesia.

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  1. Well of course the World Bank has to fudge the question of the REAL cost of REDD because a/ it hasn’t got a clue what it really is and b/ if the no-doubt substantially higher real costs are used instead of just the absurd McKinsey ‘on-site opportunity costs’, then it could possibly start to look like the whole engagement in, and promotion of, REDD by the Bank is sheer folly, and based on profoundly incorrect economic and developmental assumptions.

    So, talking of “black boxes”, could Benoit Bosquet please show us what rationale and analysis there is underpinning the World Bank’s promotion of forest carbon trading through the FCPF?

    As per a previous comment on this site, what evidence does the Bank have to believe that there will ever be sufficient demand for the carbon credits so generated? Where from? Or that the immense technical and governance problems of bringing forests into carbon markets can be overcome? Or that there will not simply be a ‘race to the bottom’ of pricing for forest carbon credit generated by competition amongst all the tropical countries that the FCPF is now running ‘readiness’ programmes in? That most of the revenues from forest carbon trading will not simply be captured by middle-men and traders rather than actually helping to avoid deforestation in the tropics?

    Open the Bank’s own black-box, please, Mr Bosquet!

  2. The World Bank black box agenda is simple.
    1 control land tenure of forest nations and ( as much of the planet as possible)
    2 use countries to do the dirty work ( example for one “Norway “)pay-per-results( or bribery)
    4 brain wash the planet to pay annually for a carbon responsibility (footprint) with a (carbon price)
    5 The World Bank and UNFCCC have not enough funds at present to exist, this is their swan song to survive into what ever future the planet has.

  3. There is a big fat elephant in the room. Payments for environmental services are based on the Coase theorem, which starts at “assuming zero transaction costs”. No FPIC workshop is going to overcome that.The amount of time and energy spent on REDD+, an instrument that simply does not exist, is criminal. This is all just a very elaborate smoke screen, because the real solution to the issue lies in the hands of the developed countries. Stop buying unsustainable forest products! It all reminds me of the drug trade, where the Americans wreak havoc in Latin America to avoid dealing with their own consumption problems at home.

  4. This “PES is based on the Coase theorem” economics professor post misses the point. Many PES implementers have never heard of Coase and pay for their transaction costs because they believe it is worth it. How long do you want to wait for consumers in developing countries to stop buying unsustainable forest products? I wonder what the transaction costs would be of making my granny aware of the difference between a good and a bad soybean. What about the social and economic impact of stopping to buy forest products (almost all of them require some sort of degradation) in developing countries? At least as potentially sickening as all REDD proposals I have come across as of yet…

  5. @ Jan

    Reasonable point – that the costs of dealing with the consumption of forest (land) products would likely be very high. The trouble is, though, that unless such consumption is dealt with, then the likelihood is that PES/REDD is not going to work anyway. We already seem to be seeing examples of the feebleness of REDD in the face of powerful agro-commodity industries such as palm oil in Indonesia, or timber production in Guyana.

    But what this means is that the ‘transaction cost’ of also tackling consumption has to be added IN ADDITION to all the other transaction costs of doing REDD – and of course such cost assessment is nowhere to be seen in the analysis of the likes of McKinsey, the World Bank etc.

    The main point about this is that the opportunity cost methodology was one of the main analytical tools which seemed to show that REDD was a highly competitive option in comparison to other carbon abatement options – but this conclusion is now starting to look decidedly shaky. If REDD is not the ‘low hanging fruit’ of carbon abatement that Nicholas Stern and lots of conservationists would have had us believe, then the governments of rich nations are going to have to go back to the drawing board, and work out what they need to be doing at home, rather than relying on spurious emissions reductions to be gained overseas from REDD.

  6. Agreed on almost all accounts: I just do not buy into the argument that the first-best result of going back to the drawing board is no REDD at all. There is lots of goods things being done with REDD money too! Think about deforestation monitoring systems, tenure regularization campaigns, community support for alternative income opportunities. Its just that the bad guys always appear too when there is money involved.

    Let REDD turn out to lie somewhere in the middle (not at the beginning) of a true total cost abatement curve – any money that helps lifting the value of forests vis-à-vis non-forest uses is good money and ultimately will make unsustainable forest products more expensive – a much more intelligent way of reducing their consumption that to simply put a ban on them.

    What the folks at the drawing board need to get their heads around is that it does not make sense to create a cap-and-trade scheme based on a given expected amount of supply and then change the rules of what qualifies for supply. Introducing REDD requires a more restrictive cap and incentives to invest in clean technologies would remain in place….

  7. Climate Change is not a tool for the World Bank , UN , and Governments to use as a tax system or reason to charge numerous costs to the planet.

    Regardless , emitters must be responsible and be prepared to admit and pay for their present and past emissions and be ‘regulated’ by the WB , UN , and their respected Governments to ‘realise’and reduce.

    Methodologies for auditing emissions and Environmental damage is far to less.

    Climate Change has nothing to do with Politics and Climate Change has no place or logically any right to be managed by Politics.

  8. Interesting. When we talk about consumption, we always talk about gently coaxing people into “more sustainable lifestyles”. We have been so greenwashed that we forget that we could regulate. Why is a legal instrument less intelligent than a market instrument? Why is it ok to forbid deforestation and not ok to forbid consumption?

    Although I do agree that creating incentives to “make forests worth more standing” is a good thing, there clearly isn’t enough money for that. Commodity prices won’t stop rising. As someone who works with conservation, and a lot on REDD+, it is really good to see this renewed interest in conservation. And some of the money has indeed gone to really good use. I just wish the issue would be looked at in its full complexity, and that so much money wouldn’t be wasted on a hokey new instrument. I’ve been to countless “workshops”, seen too many “readiness plans”.

    Counting trees as carbon sticks is a gross and dangerous oversimplification. Let’s not forget that the drought in the Amazon is causing huge emissions. And there are billions of people in the world who rely on forest resources to make a living. 70% of the world’s poor. What solutions are we going to find to allow these people to make a living sustainably? Is it fair to restrict their right to development while the West emits lavishly?

    Climate change is a systemic issue that has to do with unsustainable growth models. I just feel like creating REDD+ carbon credits is like putting a band-aid on a bullet wound.

  9. Of course it is “ok” to regulate (cap-and-trade is one way of regulating), but it is definitely not “fair” to go on for decades nurturing an unsustainable forest economy and then say: “Hey we don’t want your stuff anymore, find yourself another way to make ends meet” – that’s arguably much more of a band-aid solution than trying to bring as many countries to the table as possible to negotiate emission reductions. I agree that it is sickening to watch them doing so with so little progress, but it is rather hard to imagine any agreement without some sort of international compensation mechanism – call it what ever you want.