2.1. Assessing REDD+ potentials

A number of studies (e.g. Houghton et al., Reference Houghton, Byers and Nassikas2015) demonstrate that protection and restoration of tropical forests can buy vital time to navigate the decarbonization of the global economy. Houghton and Nassikas (Reference Houghton and Nassikas2018) estimate that, under an aggressive scenario for conserving and restoring tropical forests, fossil fuel emissions would need to fall to zero by 2045–50, rather than by 2035 in the case with business-as-usual (BAU) forest emissions.

While these studies quantify the mitigation potential from reducing tropical deforestation and increasing reforestation in the tropics, here, we quantify the economic value of exploiting this potential. By using an IAM, we derive implications for the mitigation portfolio and its cost. We consider three types of scenarios: a reference scenario without any REDD+ abatement, a climate policy scenario with REDD+ efforts limited to emissions reductions from tropical forest conservation, and several policy scenarios with REDD+ that also allow for carbon removal from the atmosphere (also known as carbon dioxide removal or negative emissions) via tropical reforestation.

Drawing on updated analyses of tropical forest emissions (Houghton & Nassikas, Reference Houghton and Nassikas2018), Table 1 presents our assumptions for the BAU emissions from tropical deforestation and reforestation (i.e. BAU sinks from temperate and boreal forests have not been included) during 2020–2100 that are part of the reference case. Table 1 also shows the maximum mitigation potentials we consider under policy scenarios for reducing forest emissions and increasing forest sequestration in tropical regions.

Table 1. Total emissions from tropical forests under business-as-usual (BAU) and maximum mitigation scenarios over 2020–2100 (Gt CO₂)

Note: Mitigation and removals denoted by a negative sign. Cumulative net emissions are calculated by progressively adding in each component, as one moves down the rows of the table.

We consider three potential global climate policy targets and corresponding emissions budgets for the period 2018–2100, corresponding to 1.8 °C, 2 °C, and 3 °C estimated temperature increases. The emission budgets were calibrated based on the IPCC's Fifth Assessment Report (AR5) and the UN Environment's Emissions Gap Report (IPCC, Reference Edenhofer, Pichs-Madruga, Sokona, Farahani, Kadner, Seyboth, Adler, Baum, Brunner, Eickemeier, Kriemann, Savolainen, Schlömer, von Stechow, Zwickel and Minx2014; UN Environment, 2018).

Using recent estimates of the global costs of reduced emissions from deforestation and carbon sequestration from reforestation in tropical countries based on Busch et al. (Reference Busch, Engelmann, Cook-Patton, Griscom, Kroeger, Possingham and Shyamsundar2019), we obtain BAU emissions and the corresponding potential abatement supply for the period 2030–2050 (see Supplementary Table S1). We employ MACCs from REDD+ for the years 2025, 2035, and 2045 from Busch et al. (Reference Busch, Engelmann, Cook-Patton, Griscom, Kroeger, Possingham and Shyamsundar2019) that represent median estimates of annual abatement supply at given carbon prices over the corresponding decades. The estimates are derived econometrically with a consistent methodology and indicate higher costs of reduced deforestation and expanded reforestation relative to previous studies (Busch et al., Reference Busch, Engelmann, Cook-Patton, Griscom, Kroeger, Possingham and Shyamsundar2019). Thus, our estimated REDD+ potential is conservative.

We also are conservative in our estimates of supply in that we only consider mitigation potentials up until US$100/tCO₂ from both reduced deforestation and reforestation. This is in line with past literature where the marginal abatement costs of REDD+ typically show a ‘hockey stick’ shape, with prices of US$100/tCO₂ on the asymptotic part of the curve (e.g. Kindermann et al., Reference Kindermann, Obersteiner, Sohngen, Sathaye, Andrasko, Rametsteiner, Schlamadinger, Wunder and Beach2008). Since the IAM (see Section 2.2) covers the period 2020–2100, we include an additional estimate of emissions and removals that take place after 2050. Our numerical analysis provides a conservative estimate of the potential for reduced deforestation and increased reforestation (see Supplementary Materials). For the potential to reduce deforestation, we extrapolate trends from the global land-use modeling cluster of the International Institute of Applied Systems Analysis (IIASA), as described in Gusti et al. (Reference Gusti, Khabarov and Forsell2015). For reforestation, we assume no additional reforestation after 2050 and include only the carbon removal on already reforested land.

To evaluate the impact of exploiting these different potentials, we consider one reference scenario (without any forest mitigation) and two mitigation scenarios summarized in Table 2.

Table 2. Calibration of parameters for Monte-Carlo simulations

* Endogenous afterwards.

2.2. Quantifying REDD+ gains

For the numerical analysis of the economic implications, we adopt a traditional IAM, namely the 2016 version of the DICE model (Nordhaus, Reference Nordhaus2013). This integrates economics and climate science, with a simplified representation of the carbon cycle. We also conduct an uncertainty analysis using an envelope of estimates from DICE. GDP is modeled as a response surface function and emissions are modeled as a function of GDP and abatement efforts. We consider a cost-effective solution rather than optimizing for emissions based on the costs and benefits of mitigation. Thus, a total emission budget is pre-determined in each scenario, and we solve for the least cost solution to meet the emissions target. The shadow prices for CO₂ resulting from constraining the emissions can thus be interpreted as a measure of policy cost to society without explicitly valuing avoided damages.

Many processes and sectors in the DICE model are simplified, but this also makes it more transparent than other IAMs. As a result, it has often been used to generate climate stabilization pathways and provide first quantifications of particular aspects, thus informing the discussions around climate policy (e.g. Nordhaus, Reference Nordhaus2017). An advantage is that it delivers tractable results, which can be further explored with more complex methods of analysis, e.g. for the impact of climate risk on financial assets (e.g. Dietz et al., Reference Dietz, Bowen, Dixon and Gradwell2016). Our analysis demonstrates the importance of including REDD+ in climate policy modeling. However, one implication of our analysis is that approaches with more spatial detail, land-use change, and other land-based mitigation options will be needed to derive more precise policy recommendations in the future. The outcomes of our study should therefore be understood as exploratory, as IAMs like DICE have been criticized for their level of abstraction and assumptions circumventing uncertainties, and may create an unwarranted ‘perception of knowledge and precision’ (Pindyck, Reference Pindyck2013). Nevertheless, we believe that the analysis is useful for initial estimates of the economic value of REDD+.

Explicit consideration of catastrophic climate outcomes, which have been identified as the most important omission in standard IAMs (Pindyck, Reference Pindyck2013; Stern, Reference Stern2013), may even enhance the REDD+ value we determine here. Recent efforts to address some of these deficiencies identified in previous DICE analyses have focused on updating (i) the economic damage functions, (ii) the underlying climate science, (iii) social discount rates, (iv) assumptions on non-CO₂ greenhouse gas emissions and feasibility of carbon removals, and (v) constraints on the feasible speed of decarbonization (Hänsel et al., Reference Hänsel, Drupp, Johansson, Nesje, Azar, Freeman, Groom and Sterner2020). These improvements reconcile DICE results with the Paris targets, but do not consider the role of forest mitigation potential, as addressed in this paper.

In addition to these structural issues with the DICE model, there is a wide range of fundamental uncertainty around critical parameters such as the cost of abatement technologies, timing of climate policy implementation, and productivity of the global economy. To address these uncertainties, we run Monte-Carlo simulations using the extended DICE 2016 version described above. Following Dietz et al. (Reference Dietz, Bowen, Dixon and Gradwell2016) and Gillingham et al. (Reference Gillingham, Nordhaus, Anthoff, Blanford, Bossetti, Christensen, McJeon and Reilly2018), we focus on the parameters summarized in Table 2 for our uncertainty analysis. For the policy delay scenarios, we add assumptions about initial carbon prices in 2020 and 2025.

The mean values of the parameters in Table 2 equal the values of the corresponding parameters in the DICE-2016 model, which are approximately the same as those used in the studies mentioned above. Standard deviations were calculated using the same coefficients of variability as tested in Gillingham et al. (Reference Gillingham, Nordhaus, Anthoff, Blanford, Bossetti, Christensen, McJeon and Reilly2018). The major difference in our study is the application of lognormal distributions instead of normal distributions used in previous studies of Total Factor Productivity (TFP), the cost of the back-stop technology and the initial rate of decarbonization. A lognormal distribution better characterizes the nature of the underlying uncertain process. In particular, the cost of the backstop technology should behave in the same way as the price of goods and services, and uncertain prices are usually represented with a lognormal distribution.

We also introduce uncertainty around exogenous initial carbon prices in 2020 and 2025. The carbon price in 2020 is assumed to be positively correlated with climate sensitivity – under the assumption that climate policies will be more stringent if climate impacts are more severe – and the price in 2025 is assumed to be correlated with the carbon price in 2020. The carbon price in 2020 is exogenous in all policy scenarios and endogenous thereafter. The carbon price in 2025 is exogenous only in the case of policy delay up until 2030, as described in the next section.

For the uncertainty analysis, we constrain the optimization to respect the corresponding carbon budgets specified in Table 3 and add REDD+ to the original settings of the model. A simplified optimization routine (minimizing cost to meet the target) is embedded into the Monte-Carlo simulations. For each draw of a set of realizations of the underlying uncertain parameters, the optimization algorithm calculates the abatement, the corresponding CO₂ price, and the present value of total abatement costs.

Table 3. Stylized global climate policy scenarios

Note: Core policy scenarios highlighted in bold and counterfactual scenario in italics.

* Optimization starts in 2025. The carbon price in 2020–2024 is exogenous.

^† Optimization starts in 2030. The carbon price in 2020–2029 is exogenous.

^‡ For modeling multiple delay scenarios, we apply the methodology from Golub et al. (Reference Golub, Lubowski and Piris-Cabezas2020). They show that, responding to climate policy uncertainty, buyers in the global carbon market will heavily discount future carbon prices. Over time, as confidence in climate policy increases, each jump in the carbon price represents an increase in confidence in the policy target. For modeling purposes, we adopt the annual average price increase of about 8%.

3.1. Policy scenarios

We evaluated a set of stylized policy scenarios representing varying ambitions of global action on climate change. These scenarios mirror three different levels of the globally admissible carbon budgets reflecting both policy and scientific uncertainties. The other dimension is the timing of climate policy implementation to achieve a given budget; we vary the speed of increase in ambition to study the impact of delay. Our nine stylized policy scenarios are presented in Table 3.

The stylized policy scenarios described in Table 3 differ with respect to their expected feasibility. As barriers to the implementation of an aggressive emissions target, we consider both the total cost of climate policy and the spike in the cost (illustrated by the carbon price as a proxy) accompanying the announcement and implementation of tighter emission targets.

Based on anticipated political feasibility, we selected four core policy scenarios highlighted in Table 3 in bold:

1. 1. 2 °C-consistent carbon budget with some climate action undertaken during 2020s and 2030s, but major policy adjustment delayed until 2030 (2C, PD2030);

2. 2. 1.8 °C-consistent carbon budget, with some climate action undertaken during 2020s and 2030s, but major policy adjustment delayed until 2030 (1.8C, PD2030);

3. 3. 2 °C-consistent carbon budget, with some climate action undertaken during 2020s and 2030s, with major policy adjustment in 2030 that is insufficient to meet the target, such that sequential tightening of the budget is needed until 2050 (2C, MPD);

4. 4. 3 °C-consistent carbon budget with some climate action undertaken during 2020s and 2030s, but major policy adjustment delayed until 2030 (3C, PD2030).

We also include the scenario shown in Table 3 in italics of a 2 °C-consistent carbon budget with immediate implementation in 2025. This provides a ‘counterfactual’ policy scenario against which to demonstrate the cost of delay.

Based on these core global climate policy scenarios, Figures 1–4 depict three different carbon price trajectories for situations (a) without REDD+ (abatement of fossil fuel emissions only, labelled ‘reference’), (b) reduced deforestation, and (c) reduced deforestation and reforestation. This decomposition of the abatement supply helps to better understand the role and value of the individual components.

Fig. 1. CO₂ price for 2 °C-consistent (1170 Gt emissions) budget with policy implemented by 2025 (2C, PD2025 scenario) with and without REDD+.

Fig. 2. CO₂ price for 2 °C-consistent (1170 Gt emissions) budget with policy delay until 2030 (2C, PD2030 scenario) with and without REDD+.

Fig. 3. CO₂ price for 1.8 °C-consistent (970 Gt emissions) budget with policy delay until 2030 (1.8C, PD2030 scenario) with and without REDD+.

Fig. 4. CO₂ price for 2 °C (1170 Gt emissions) budget with multiple policy delays before and beyond 2030 (2C, MPD scenario) with and without REDD+.

Figure 1 summarizes the carbon prices for the counterfactual scenario assuming no further delay beyond 2025 of switching to the 2 °C trajectory. Reducing deforestation mitigates a spike in the carbon price such that instead of jumping from about US$10/tCO₂ in 2020 to $121/tCO₂ in 2025, the price stays below US$100/tCO₂ (US$97/tCO₂).Footnote ⁱ The incremental contribution of reforestation is comparatively minor due to a relatively inelastic supply of land for reforestation. Therefore, a focus on reduced deforestation is an important priority for emerging global climate policy.

Given the current political climate, an immediate ‘full steam ahead’ implementation of the global climate policy even by 2025 looks unlikely. To test the impact of this, we consider a delay until 2030 with the same 2 °C-consistent (1,170 Gt emission) budget as the most likely scenario. Figure 2 shows that without reducing tropical deforestation, the CO₂ price will jump from about US$25/tCO₂ up to $160/tCO₂ within 5 years (2025–2030). The price level in 2030 will be kept below US$130/tCO₂ (see Figure 2) by incorporating reductions in tropical deforestation, buffering at least part of the price shock and potentially enhancing the political feasibility.

An even more dramatic tightening of the emissions target to limit temperatures below 2 °C will be exceedingly challenging without reducing deforestation and forest restoration. The carbon price would have to quadruple over the 5-year period between 2025 and 2030 to over $200/tCO₂ to converge to a 1.8 °C-consistent (970 Gt emissions) budget (see Figure 3).

Given the uncertainty in the response of the climatic system to greenhouse gas accumulation, a 1.8 °C target may even require a further tightening of the carbon budget in the future, which would further increase the policy cost. The results imply that large-scale efforts to reduce deforestation and reforestation are likely to dramatically enhance the chance of reaching this more ambitious emissions reduction target.

REDD+ provides some relief concerning the upward pressure on prices in the scenarios examined. However, this may not be enough to contain prices to socially acceptable levels in the face of both policy delays and tightening of the emissions budget consistent with even 2 °C. The Multiple Policy Delays Scenario (MPD) in Table 3 indicates there could be a relatively modest initial tightening of the target, followed by further, sequential adjustments as described in Golub et al. (Reference Golub, Lubowski and Piris-Cabezas2017). We consider an MPD that produces the price path presented in Figure 4.

In this scenario, policymakers postpone climate policy adjustments reducing the magnitude of an initial price shock but requiring greater subsequent increases of carbon prices of 8% per year (see Figure 4). In the 2C MPD Scenario, reduced deforestation helps to cut the price increase by about 70% which is especially important by 2050 when the price gap between the reference scenario and the reduced deforestation and reforestation scenarios has built up. Instead of reaching US$460/tCO₂, the price stays below US$270/tCO₂ when tropical forest mitigation options are fully included.

Figure 5 compares the price paths for different policy scenarios assuming the realization of the full modeled potential for reduced deforestation and reforestation. Switching to the optimal policy in 2025 yields the lowest carbon price by 2050 among scenarios with a 2 °C policy target, but such an abrupt switch to full-scale implementation of stringent global climate policy may still entail an unacceptable transition cost.

Fig. 5. CO₂ price for different policy scenarios, with full reduced deforestation and reforestation potentials.

Reduced deforestation and tropical reforestation slightly mitigate an initial price jump, but not enough to completely avoid a large price increase. The relatively more ‘relaxed’ policy target of 3 °C unsurprisingly generates a slightly lower price path.

Based on these results, aggressive policies to reduce tropical deforestation, as well as restoring tropical forests, constitute a critical strategy to mitigate price shocks without compromising the global emission budget. Switching from the 2 °C-consistent carbon budget until 2100 to the 3 °C-consistent budget reduces the carbon price by about 43% in a scenario with policy delay till 2030. In comparison, achieving the full potential of reduced emissions from tropical deforestation and reforestation can dampen the price increase in 2030 by more than 30%, while holding cumulative emissions within the 2 °C budget, thereby providing about 70% of the carbon price containment.

3.2. Policy cost of reaching 2 °C (1170 Gt emissions budget) until 2100

Carbon prices indicate the marginal cost of abatement and provide a proxy for policy costs. We also compare total abatement costs of different mitigation policies, including – when relevant – the costs of reducing emissions from tropical deforestation and reforestation, as an expected present value of the total cost of climate policy for different scenarios at a discount rate of 3%.

The average benefit of reduced deforestation and reforestation (in terms of the discounted value of cost savings relative to the case without tropical forest mitigation) is in a range of US$6–40 trillion for the period 2030–2070 across the scenarios (see Table 4). This represents the largest savings across scenarios, especially in the case of policy delay. To put these savings into perspective, they could reach about 0.6% of global output for the same period.

Table 4. Net cost savings for different scenarios (US$ trillion, mean values) including tropical forest mitigation potential

Notes: The table summarizes the discounted value (at 3%) of net abatement cost savings of including REDD+ in trillion US$ for the period 2030–2070. Savings are net of the costs of the forest mitigation activities.

Depending on the policy scenario, the savings in abatement cost are between 15% and 22% of the total discounted abatement cost relative to the scenario case without tropical forest mitigation potential. Reduced tropical deforestation delivers about 81–87% of the savings, with reforestation accounting for the remaining 13–19%.

Under the 2 °C scenario with a delay until 2030 (2C, PD2030), the estimated present value of abatement costs from tropical forest mitigation total US$6.2 trillion, with US$2.7 trillion and US$3.5 trillion from reducing deforestation and restoring forests, respectively. The overall gross savings in terms of global abatement cost attributed to REDD+ is US$33.5 trillion (mean value). One dollar invested in REDD+ yields about $5.4 in savings on abatement of fossil fuels emissions. Reforestation yields incremental savings of US$9.6 trillion with a corresponding return of about US$2.7 per one dollar invested in reforestation.

3.3. Uncertainty analysis

From a financial perspective, delaying abatement implies a short position on abatement relative to anticipated climate policy scenarios. Closing this short position will require additional abatement efforts. Given the uncertainties of abatement costs, the potential downside of holding on to an uncovered short position on abatement could be excessively risky (Golub et al., Reference Golub, Lubowski and Piris-Cabezas2020). A typical finance instrument to cover short positions is known as an American call option, i.e. the right, but not the obligation to exercise the option to buy. Applied to abatement, such a call option would provide the possibility of tapping into the REDD+ supply to bridge any shortfall in emissions reductions when stringent climate policy suddenly drives up the CO₂ price (Golub et al., Reference Golub, Fuss, Lubowski, Hiller, Khabarov, Koch, Krasovskii, Kraxner, Laing, Obersteiner, Palmer, Piris-Cabezas, Reuter, Szolgayová, Taschini and Wehkamp2018).

We use option valuation in order to estimate risk-adjusted costs. The risk-adjusted abatement cost equals the expected value of abatement cost, plus the value of the at-the-money option on abatement. In particular, valuing the call option and adding the expected value of abatement allows us to assess risk-adjusted costs by adding the two together (Anda et al., Reference Anda, Golub and Strukova2009). For the option value calculation, we apply the Bachelier option pricing formula: the value of the at-the-money option is approximately equal to 0.4 times the standard deviation of abatement costs. The same methodology was applied in Cooke and Golub (Reference Cooke and Golub2020). Table 5 summarizes the results for our principal scenario of a 2 °C (1170 Gt emissions) budget and delay until 2030.

Table 5. Risk-adjusted abatement cost (US$ trillion) and carbon price (US$/tCO₂) under 2 °C (1170 Gt emissions) budget with policy delay until 2030

Note: Cost savings (net of abatement costs of REDD+ activities) are denoted as negative numbers. Risk-adjusted values are calculated as the sum of the mean value and the value of the at-the-money option that reflects the willingness to pay for hedging further price increases based on estimated distributions.

For a given emissions target, REDD+ reduces both the expected carbon price (‘mean’ in Table 5) as well as the magnitude of price uncertainty (5th versus 95th percentile and standard deviation in Table 5). The policy cost savings through REDD+ reported in Table 5 are calculated on a net basis, i.e. the cost of avoided deforestation is subtracted from the savings in fossil fuel emissions abatement cost.

Not only may REDD+ thus slash abatement cost or help to achieve lower emissions targets at the same cost, REDD+ could also play an essential role controlling fat tail risks helping to avoid the excessively high cost of climate policy. Figure 6 depicts probability density functions for different REDD+ scenarios: REDD+ does not eliminate the tail risk of excessively high policy costs, but it can significantly reduce that risk.

Fig. 6. Probability densities of net climate policy cost savings under 2 °C (1170 Gt emissions) budget and delay until 2030, with reduced deforestation in red and reduced deforestation plus reforestation in blue.

Risk-adjusted values are calculated as the sum of the mean value and the value of the at-the-money option that reflects the estimated willingness to pay for hedging further price increases based on our estimated distributions. Risk-adjusted savings and carbon prices indicate average and marginal benefits of reduced deforestation and reforestation given the uncertainty of major economic variables as listed in Table 2. As shown in the last row of Table 5, we estimate the risk-adjusted savings from reduced tropical deforestation and reforestation at US$30.6 and US$36.4 trillion. The risk-adjusted carbon price falls from US$179/tCO₂ in the reference to $143/tCO₂ and $134/tCO₂ when reduced deforestation and reduced deforestation and restoration potentials are included, implying estimated marginal benefits of US$36/tCO₂ and US$45/tCO₂, respectively, in terms of reducing risk-adjusted carbon prices in 2030. Without reduced deforestation, the cost of climate policy at the 95th percentile equals US$251 trillion, while with the maximum available mitigation potential from tropical forests (reduced deforestation plus reforestation), the 95th percentile of total abatement cost is about US$200 trillion (see Table 5). Thus, REDD+, including principally reduced deforestation as well as a smaller potential from reforestation in the tropics, not only generates multi-trillion-dollar savings on climate policy cost without giving up the strength of the emission target, but also helps to contain the potential distribution of carbon prices in the period 2026–2030 (see Figures 6 and 7).

Fig. 7. Probability densities of carbon prices in 2030 under 2 °C (1170 Gt CO₂) budget and with policy delay until 2030, for selected scenarios (reference case shown in red, reduced deforestation in blue, and reduced deforestation plus reforestation in green)

For future analysis, it will be important to determine the most crucial exogenous parameters and focus on representing them in a more detailed way. The cost of the backstop technology accounts for about 26% of the combined uncertainty of climate policy costs in the scenario with a delay until 2030 (with a positive correlation of about 0.5) and for about 65% of the combined uncertainty of potential savings provided by reduced deforestation and reforestation (with a correlation of about 0.77). The initial rate of decarbonization of the global economy exhibits a negative correlation with both the cost of climate policy (−0.8) and savings (−0.55). This parameter accounts for about 63% of the combined uncertainty of climate policy costs and for about 32% of the combined uncertainty of potential savings. However, uncertainty concerning available carbon budgets may change the balance. In this study, we address this uncertainty in the form of ‘what-if’ scenarios. For future analysis, the carbon budget could be modeled as a probability distribution. Also, we did not model uncertainty related to the supply of reduced deforestation and reforestation. Adding these uncertainties would be an important next step to expand the analysis presented here.