31/03/2009 (Carbon Positive) - Financial markets to preserve rainforests must be incorporated into mandatory emissions trading schemes if they are to offer a viable economic alternative to palm oil in tropical agriculture, a study finds.

Only then are the prices for avoided deforestation carbon credits likely to approach the level needed to make preservation as profitable as clearing forest for palm plantations. That’s the conclusion drawn by ETH Zürich ecologists Lian Pin Koh and Jaboury Ghazoul along with Rhett A Butler from their analysis published in the journal Conservation Letters.

The UN, national governments, and a range of conservation groups are working to construct a workable and equitable financial mechanism to incentivise forest preservation and cut high rates of tropical deforestation. The initiative is known as REDD, or Reduced Emissions from Deforestation and Degradation. It is hoped a system will be developed in time for use from 2013 under a new global climate treaty.

The trio constructed models to compare land-use returns under both alternatives and found that in tropical countries like Malaysia and Indonesia the net present value of a 30-year palm oil concession was $3800 to $9600 per hectare. This compares to just $614 to $994 per hectare net present value that could be expected under a REDD mechanism in the voluntary carbon market.

However, if REDD were incorporated into robust compliance markets such as the EU ETS and enjoyed the same status as other carbon offsets, much higher prices would be garnered for these avoided deforestation credits. Returns would rise to between $1570 and $6600 per hectare, levels that would begin to compete with palm oil. The study authors say that if carbon credits were front-loaded to the first eight years of projects, then the NPV of returns could be raised to $11,700.