The Economic Benefits of Land-Use in Papua New Guinea: Executive Summary

Global discussions on ways to reduce GHG emissions have considered the role of forests. A concept known as REDD (reducing emissions from deforestation and forest degradation) has been proposed.

It is being treated by donors, the World Bank and even some arms of the UN system as an agreed concept. But there is no agreement on what it will embrace. There are numerous practical difficulties in making the concept work in the real world.

A global trade in carbon permits does not look feasible or practical in the foreseeable future. It is highly unlikely there will be agreement on such an ambitious scheme in the upcoming UNFCCC conference in Copenhagen. This means the large revenue benefits claimed by the proponents of the REDD concept may not eventuate.

The purchasing of REDD carbon credits by developed economies looks to be unrealistic. Developed economy aid in exchange for adopting a REDD scheme may be possible but the value of this approach in comparison to the opportunity cost of land use restrictions is highly uncertain.

Policy measures that affect the prospects for rural sector growth need careful assessment. PNG does not have the economic wealth to impose highly restrictive environmental policies that curtail development. Land use management practises in the forestry and agricultural industries are essential for sustainable long-term growth. An appropriate balance is required between development needs and environmental considerations.

The scientific knowledge and technical analysis behind claims about the GHG emissions from forestry land use is not strong enough to make sound policy judgements. A cautious approach would seem prudent.

Most people still live and work in rural areas. Agriculture and forestry are substantial contributors to GDP, a key source of export earnings and provide an occupation for more than 80 per cent of the population. Their contribution to the economy relies on continued access to natural forest lands for development purposes.

Agriculture will remain a central pillar of the PNG economy for the foreseeable future. Over the past decade agriculture sector growth has been limited while the population has grown. Most industries were either stagnant or had negative growth. Oil palm has been the exception and provided a means to redress this imbalance: land suitable for oil palm is limited so policy decisions that lead to land access constraints could erode one of the few bright spots for rural development.

The forestry industry makes a significant contribution to the PNG economy by creating employment opportunities in remote areas. An estimated 10,000 people were directly employed in the forest industry in 2007.

Strong population growth in a rural based society is not compatible with a scheme that restricts land use. Access to land is the critical ingredient for economic development in PNG. Over time a REDD scheme will intensify the land use pressures in the remaining areas. If the opportunities for jobs or cash-based occupations are limited, the pressure for people to migrate from their village areas will rise.

Forestry production is not a major factor in deforestation. Concerns about deforestation and PNG land use in general are not supported by the facts. The amount of agricultural land is just over one million ha, which is just over two per cent of the total land area. Forested land is still the dominant component of the total land area in PNG.

There is no evidence of substantial deforestation. Forested areas have declined since 1990 but the rate of change could not be described as a serious concern. The reality of population growth and the need for economic development is that some natural forest land will need to be used for other purposes.

From an economic development perspective it is crucial to consider the opportunity cost of implementing any schemes that involve leaving land idle. The opportunity cost of participating is the economic returns from the alternative uses of the land.

There has been some research assessing the alternative economic returns of the different land use options for natural forest areas in PNG. The estimates indicate there are high returns from oil palm in PNG at US$9,275 per ha. The estimated returns on pre-plantation timber harvesting are also substantial at US$1,099 per ha. The returns from shifting subsistence agriculture are estimated at US$745 per ha which shows the substantial gains in shifting from subsistence agriculture to commercial oil palm plantations.

Further analysis of the returns from a typical forest concession using a current log price of US$100 per cubic metre gave some illuminating results when compared with the value of the same land as a REDD concession based on selective logging. Using carbon prices of US$1/tonne based on average 2009 prices and a market peak of US$7/tonne in 2008, results show that:

• Returns for timber harvesting were between US$303 and US$500 per ha; and
• Returns as a REDD concession were between US$45 and US$240 per ha.

The implications are straightforward. The carbon price would have to rise substantially from recent levels to compete with sustainable forestry production as the November 2009 price had fallen to US$0.10 per tonne. In comparison to returns on large scale oil palm of US$9,275 per ha the estimates show carbon storage does not give the necessary financial rewards.

If consideration of the REDD concept is to be pursued there is a need for an economic impact assessment that considers the regional development implications and a social impact assessment. In many areas the pressure to revert to a subsistence way of life or to migrate to other rural regions and urban areas would seem a realistic outcome.

Note: The full PNGFIA report can be downloaded here.