Tanzania is participating in the United Nations (UN) climate change mitigation strategy of reduction in Greenhouse Gases (GHGs). The strategy is implemented through both Reducing Emissions from Deforestation and forest Degradation (REDD+) and Clean Development Mechanisms (CDM) initiatives. In implementing programmes, the country developed pilot projects whereby there are preliminary findings that can be used to analyse the progress of the establishments. This study uses the findings from these pilot areas to draw policy implications on how carbon trade in the country can be enhanced to meet the UN set objectives as required by the Kyoto protocol. The findings suggest that for the sustainable carbon trade enhancement the country needs to set the institutional environment for carbon trade right. Such undertakings are not costless and that the transaction costs that would be incurred for the process need to be institutionalised to reduce the private costs in the carbon market. Moreover the policy process should be informed that at the market level there are multiple objectives that should be understood to avoid what is termed as optimization in standard economic theory, instead there should be clear definition of the specific objectives for various stakeholders involved in the carbon trade. Besides, within the carbon market framework not all stakeholders incur the same costs since natural resource transactions involve externalities. These externalities need to be identified and internalised to equally distribute the costs and benefits among the stakeholders.
Carbon trade originates from the Kyoto Protocol where a number of industrialised countries signed the protocol in December 1997 committing these countries to reduce their emissions of the main Green-House Gases (GHGs). Research confirms that these gases are responsible for the observed major changes in the climate. The climate change is ultimately affecting a number of life forms and general countries’ economies in a various ways [
Although the efforts toward reduction of these GHGs focus on six gases [
While CDM programmes are more geared towards reduced emissions of all GHGs, REDD+ on the other side is more focused on reduction of CO2 emissions. The REDD+ implementation was accelerated when the concept was adopted and the strategies set by UN under UN-REDD. UN-REDD Programmes were created in September 2008 to assist developing countries to build capacity to reduce emissions and to participate in a future REDD+ mechanism [
Tanzania is among developing countries that have signed the Kyoto protocol and is participating in both REDD and CDM initiatives with financial assistance from what are termed as Annex I parties in the UNFCCC-Kyoto protocol. Meanwhile almost all projects in Tanzania are financed by the Royal Norwegian Government. In implementing both REDD+ and CDM the country has developed pilot projects. While there are quite few studies focused on CDM, there are preliminary findings in REDD+ that can be used to analyse the progress of the establishment. This paper therefore intends to do some economic analyses that would lead to policy implications, using some preliminary empirical findings from the REDD+ pilot projects. The analyses would help to inform the policy process on how the carbon market under REDD+ can be improved to achieve the set objective as intended by the Kyoto Protocol. The theory adopted for such analyses is that of New Institutional Economics (NIE). The theorists in this school of thoughts believe that for an appropriate conclusion to be made for any economic analyses two important things must be considered: 1) Institutions do matter in all economic analyses. 2) The determinants of institutions are susceptible for analysis by the tools of economic theories.
Theoretical and Conceptual Frame WorkThis study is framed in the theories of NIE. Different from standard economic theory, it is the belief in institutional and NIE theories that transaction costs are pervasive and may explain the fact that not all transactions are undertaken in market institutions [
Within the framework of NIE as described by [
Although Williamson in his model recommends the use of neo-classical economic theories in the analysis of third order of economizing level, [
The study used both qualitative and quantitative surveys to understand the nature of transactions; associated costs and benefits of the transactions in carbon market framework. The surveys were conducted in Kilosa District in Morogoro region which was one of the pilot study areas on REDD+ project in Tanzania under the Climate Change Impact Assessment and Mitigation (CCIAM). The sample consisted of 200 households that were randomly selected to represent Kilosa District local communities who implemented the project under the supervision of Tanzania Forest Conservation Group (TFCG/MJUMITA), community based organization.
Besides, the study also used secondary data, grey and published journal articles which were sourced in internet web sites, SUA library and government offices. The study used both revealed and stated preferences to evaluate the transaction costs of carbon trade in Tanzania.
The Economic Analysis of Carbon TradeOur analyses on carbon trade in Tanzania are based on first, second and third levels as identified in the framework of the New Institutional Economics as conceived by [
In this section we shall briefly look at the historical evolution of the two concepts of REDD and CDM and frame through which they operate. The REDD concept was initially introduced in 2005 where the focus in the beginning was on reducing emissions from deforestation. Under the initial concept, the participating countries were required to reduce deforestation below historic rates to receive compensation from an international mechanism. As negotiations and research continued on the topic, countries realized that forest degradation1 was also a significant source of emissions. To reduce forest degradation various strategies must be engaged including activities such as reduced impact logging, sustainable forest management, fuel-wood management, and firewood management. It was from this understanding that the concept of REDD was framed where it was argued that reducing emissions from deforestation and forest degradation are both resulting into what was termed REDD [
As negotiations on REDD continued to evolve, other activities were included such as forest conservation, sustainable management of forests, and enhancement of forest carbon stocks. While these concepts have not been fully defined yet, forest conservation generally refers to the protection of standing forests that have not historically been under threat of deforestation. Sustainable management of forests refers to activities which increase carbon stocks and/or reduce carbon emissions from forests by changing the way in which they are managed. Management changes may include implementing harvest methods that result in less damage to remaining trees, extending harvest rotations thereby leaving more carbon stored on the land, increasing the stocking of poorly stocked forests by encouraging growth of denser/healthier trees and converting previously harvested forests to no-cut protected areas. Enhancement of forest carbon stocks may include forest restoration, reforestation, and/or forestation. These activities, when added to REDD are referred to as REDD+. Finally, some countries would like to include carbon emissions from all land-use types, including agricultural land, wetlands, and others. When these activities are included, it is often referred to as AFOLU (agriculture, forestry, and other land uses) [
The CDM, just like REDD originates from the Kyoto Protocol [
Emissions trading schemes in CDM allows Annex I countries to buy CERs and to invest in emission reductions sectors including forestry [
At the first level of analysis we shall look at the institutional arrangement (property rights) of the carbon trade in Tanzania. It is worthy to note that up to this moment Tanzania does not have its own independent policy on carbon trade beside the country adopting the REDD+ and CDM practices on voluntary basis as they are required by the Cancun Agreement [
While REDD is piloted in Tanzania on voluntary basis as required by the Cancun Agreement [
CDM establishment on the other side unlike REDD+, its practices are a little bit clear since there is a guideline which has to be followed for the parties to qualify for the carbon payments. Under the UNFCCC Kyoto Protocol, CDM projects that reduce emissions or remove carbon dioxide from the atmosphere generate CERs. The CDM project developer receives CERs after the project has successfully undergone the project cycle for CDM. The developer then sells the CERs to an operator i.e. a company or a government (Annex I entity) that requires additional CERs or EU Allowances (EUA) under the EU Emission Trading Scheme (ETS) trade and cap agreement. The operator can then request the conversion of the CERs into the corresponding amount of EUAs through an International Transaction Log. So far the country has only one operator/company called Green Resources certified for the carbon payment [
However, a number of weaknesses of the CDM have been identified [
Beside, in both of these practices between REDD+ and CDM, the case studies (e.g. [
Forests and land are the main resources transacted in REDD+ and CDM carbon trade. It follows that if the institutional arrangement for both these transacted resources are not clearly defined in reference to carbon trade that by itself will jeopardise the carbon trade sustainability. It is a well established fact within the NIE theories that the good institutional environment determines (i.e. clearly defined property rights) the efficacy of economic transactions within any established institution including markets. This is in fact the first order of economizing level when it comes to all kinds of transactions understood within the NIE framework. Moreover the creation or rather the definition of such institutionalised transactions referred to as property rights2 are not cost less. It is this which differentiates the neoclassical economic theories from NIE [
Since the definition/creation of such property rights as explained in this section is not cost less, there are certain information required to be gathered and certain negotiations to be engaged among the stakeholders involved in the trade. All such transactions involved in the gathered information and negotiations are referred to as economics of transaction cost.
Two types of costs incurred by a REDD+ trial payment project were identified for analysis in this study. The first category was transaction cost incurred by TFCG/MJUMITA project in monetary terms during implementation of a REDD+ trial payment project. They include monitoring and verification, REDD+ readiness, start up and baseline setting costs which were obtained as secondary data. The second category was transaction cost incurred by villagers in terms of time and resources spent by households during implementing REDD+ trial payments activities. Payments include transaction costs of operation, preparation and cost of individual households in attending meetings. The study revealed that transaction costs of forest management for REDD+ is relatively high (TZS 497,714 ha−1∙year−1) compared to TZS 211,358 and 61,362 as transaction costs of VLUP and CBFM processes and REDD+ meetings respectively (
While this study’s finding is based on the operational level transaction costs, the mid-term review [
Main category | Sub-category | Total value (TZS) | Total transaction cost (TZS∙ha−1∙yr−1 [%]) |
---|---|---|---|
To project | Monitoring and Verification | 166,421,389 | 1411.0 (52.20) |
Start up cost | 123,672,000 | 1049.0 (38.80) | |
REDD readiness cost | 28,000,000 | 237.0 (8.70) | |
Baseline setting | 50,000 | 0.4 (0.01) | |
Sub-total | 318,143,389 | 2697.4 (99.71) | |
To villagers | Operation cost | 497,714 | 4.2 (0.20) |
Preparation cost | 211,358 | 1.8 (0.07) | |
REDD+ meetings | 61,362 | 0.5 (0.02) | |
Sub-total | 770,434 | 6.5 (0.29) | |
Grand total | 318,913,823 | 2704.0 (100) |
Source: Field surveys 2015.
at last the project credit delivery. Besides the whole process being long and cumbersome, it is very expensive for a developing country. However in the absence of transaction cost economics these costs are assumed to be zero. The basic idea here as explained by [
In this part of economic analysis we looked at the concept of buyers and sellers in reference to neo-classical economic theory. When we consider such economic analyses and link them to the carbon trade, we must therefore establish what the scope of this trade is. Literature suggests that a core idea underlying carbon trade (REDD+ & CDM) is to make performance-based payments, that is to pay forest owners and users (when we make reference to REDD+) and CDM operators, to reduce emissions and increase carbon sequestration. In this section we considered two cases such that TFCG/MJUMITA project which is this study’s case and the second is that of [
While this study used transaction cost economic theory to analyze the economics of the establishment [
Year | Cost | Benefit | Net benefit | NPV at r =: | |||
---|---|---|---|---|---|---|---|
15% | 23% | 31% | 33.7% | ||||
1 | 133,350,434 | 0 | −133,350,434 | −115,956,899 | −108,414,987 | −101,794,224.4 | −99,738,544.5 |
2 | 77,187,118 | 82,747,800 | 5,560,682 | 4,204,674.48 | 3,675,511.931 | 3,240,301.847 | 3,110,750.97 |
3 | 74,456,271 | 82,747,800 | 8,291,529 | 5,451,814.91 | 445,775.5444 | 368,992.6253 | 347,086.204 |
4 | 16,960,000 | 82,747,800 | 65,787,800 | 37,614,388.2 | 28,742,525 | 22,338,817.54 | 20,588,264.28 |
5 | 16,960,000 | 82,747,800 | 65,787,800 | 32,708,163.6 | 23,367,906.5 | 17,052,532.47 | 15,398,851.37 |
Total | 318,913,823 | 330,991,200 | 12,077,377 | −35,977,858 | −52,183,268.02 | −58,793,579.95 | −60,293,591.68 |
Year | Cost | Benefit | Net benefit | NPV at r =: | |||
---|---|---|---|---|---|---|---|
15% | 23% | 31% | 33.7% | ||||
1 | 133,350,434.00 | 29,357,768.00 | −103,992,666.00 | −90,428,405.22 | −84,546,882.93 | −79,383,714.50 | −77,801,493.45 |
2 | 77,187,118.00 | 112,630,568.00 | −10,795,650.00 | −8,163,062.38 | −7,135,732.69 | −6,290,804.73 | −6,042,535.89 |
3 | 74,456,271.00 | 128,630,568.00 | 54,174,297.00 | 35,620,479.66 | 29,112,396.00 | 24,097,911.07 | 22,685,530.98 |
4 | 16,960,000.00 | 128,630,568.00 | 111,670,560.00 | 63,848,005.12 | 48,788,587.88 | 37,918,706.27 | 34,984,814.86 |
5 | 16,960,000.00 | 128,630,568.00 | 111,670,568.00 | 55,520,008.43 | 39,665,521.45 | 28,945,579.38 | 26,173,682.66 |
Total | 318,913,823.00 | 527,880,040.00 | 162,727,109.00 | 56,397,025.60 | 25,883,889.70 | 5,287,677.48 | -0.80 |
Both the findings of [
Two important things we learn from these case studies which have also been established within Williamson’s model; The inclusion of bounded rationality 1) and the acceptance of positive information and transaction cost; 2) What does this mean? It means the clearer the property rights are in their institutional arrangement the more it would be easier to identify the transaction costs and the more it would be easy for the decision on the viability of the projects. However in explaining Williamson’s model [
Further to this, another important message the policy process is informed from [
It is therefore important for the policy process not to focus their attention to only the price and the quantity of the resource (the carbon sequestered/stored) without considering the proxies used to calculate the opportunity costs of a particular place. A carbon sequestered in a tree grown in a catchment area for example, cannot be valued the same as that which is grown in barren land even if the two trees would have the same capacity to sequester carbon. Moreover it would be important for the information about the nature and characteristics of the environmental goods used for the transactions involved in carbon trade to be gathered and the information used to standardise the proxies for calculating opportunity costs of the sequestered/stored carbon. So far this information is lacking in the Tanzanian carbon market.
Again if we are to agree on the plurality of rationality it means, not all stakeholders can be viewed the same way when it comes to the objective setting. It would be important for such performance to be varied depending on the position the individuals occupy in their specified institutions. In the market institutions there would be buyers and sellers transacting biomass of the trees they own and use for example; but those are just one group of the economic agents in the carbon market institution; others may include government with its linked sectors to the market which has a role of enacting and enforcing the policies.
Although the government intervention in the carbon market reduces a lot of the transaction costs arising from carbon trade, it is worthy to note the objective of the government may differ from that of the private entities involved in the trade. If that is understood then whose performance should be compensated and how? This is an important question to be analysed by the policy process for the sustainability of carbon trade in Tanzania. So far with what is experienced in the pilot projects these objectives are not differentiated, it looks as if all the stakeholders carry the same objective of climate change mitigation. Climate change mitigation might be a global objective but along the process, individuals and other stakeholders involved in the carbon market, depending on their bounded rationality might respond differently. It is therefore important for the policy process to identify such differentiated objectives and set the performance based on what is expected from these differentiated stakeholders.
It is again important to understand that the transactions involved in natural environmental goods and services exhibits externalities of both natures (positive and negative). In the carbon market there would be those who would be incurring more costs and other benefits that are not laboured for. As an example, if a community in an up-stream shall preserve a forest that is located in a catchment area people of the down-stream shall benefit from water that would increase from such forest management option. All the same if the up-stream community may plant trees that would consume more water than it would release to the downstream, people in the downstream might be negatively impacted through the reduced water flows. If such information would be made available and these costs internalized some of the transaction costs might be reduced through internal mechanisms other than inflating the carbon price which is supposed to be paid by the Annex I parties. So far this is not considered in the current setting of the carbon market.
We conclude by saying that for a proper economic analysis of the carbon trade in Tanzania the policy process should consider all levels of economic analysis to make sure the costs and benefits are equally distributed among the stakeholders. Moreover if the core objective of the carbon trade is to reduce emission through Annex I parties to assist the non-annex I countries to offset their emissions then the payments should not only be based on the biomass of the carbon sequestered without considering the whole institutional arrangement and its associated transaction costs. It should be understood that for these trade to be sustainable the institutional environment should be pre-determined which include the creation and definition of property rights which is more costly compared to buying and selling the specified carbon in an established market. However within the government not all sectors incur the same cost, since natural resource transactions involve externalities. These externalities need to be identified and those who enjoy the positive externalities (within the country) need to be compensating the losers through certain agreements including environmental taxes. The same is to the individual stakeholders depending on various targets defined from operation to national levels. For all this information to be availed to the policy makers, a research is needed. It is therefore very important for the whole carbon market establishment to consider the transaction and information costs anticipated for setting the right institutional environment in Tanzania before they think on the carbon to be bought and sold in the established market. Consequently, if there would not be a careful evaluation of the opportunity costs of climate change mitigation, the cost of participation in the trade to some of the stakeholders especially those whose livelihoods depend on natural environment, shall be higher than the benefits of their participation in mitigating the changes.
The authors declare no conflicts of interest regarding the publication of this paper.
Mombo, F., Mrutu, M. and Ngaga, Y. (2018) The Analysis of Carbon Trade Economics and Its Policy Implication to Mitigate Climate Change in Tanzania. American Journal of Climate Change, 7, 508-518. https://doi.org/10.4236/ajcc.2018.74031