Recent work has suggested that tropical forest and savanna represent alternative stable states, which are subject to drastic switches at tipping points, in response to changes in rainfall patterns and other drivers. Deforestation cost studies have ignored the likelihood and possible economic impact of a forest-savanna critical transition, therefore underestimating the true social cost of deforestation. We explore the implications of a forest-savanna critical transition and propose an alternative framework for calculating the economic value of a standing tropical forest. Our framework is based on an average incremental cost method, as opposed to currently used marginal cost methods, for the design of optimal land-use policy or payments for ecosystem services. We apply this framework to the calculation of the social cost of deforestation of the Amazon rainforest.
Table 1 shows estimates for the present value of the foregone economic benefits from one hectare of Amazon deforestation. These are marginal values in that they represent the change in value for a small change in the forest area, at current deforestation levels.
Most of the numbers in this table are derived from estimates from two deforestation cost studies of the Brazilian Amazon, Andersen et al. (2002) and Margulis (2004). In order to make these estimates comparable and accessible, the collected values were updated to 2016 US$ values (i.e., adjusted for inflation), and converted into present values using a common discount rate, 2.5%, based on survey results in Pindyck (2016). In addition to the sources for each estimate, Table 1 also shows the method used for each calculation.
In order to estimate the economic loss from a forest-savanna transition, it is necessary to estimate the change in average economic value of a representative hectare of forest that undergoes the state transition.
The estimates for the average direct use values of forest are the same as the ones for the direct use values shown in Table 1. Given that the characteristic tree cover of savanna is approximately 25% of the characteristic tree cover of forest (Hirota et al. 2011), and sustainable timber harvesting is responsible for a great share of the forest total direct use value, the estimates for the average direct use values of savanna are 25% of the average direct use values of tropical forest.
The average indirect use value from carbon storage is the product of the average carbon stock per hectare of forest/savanna and the average social cost of carbon. For forest, the average carbon stock was obtained by averaging the rates indicated in Andersen et al. (2002) and Margulis (2004), of 150 tC/ha and 100 tC/ha respectively, yielding 125 tC/ha.
For savanna, the average carbon stock was assumed to be 25% of the average carbon stock of forest, that is 31.25 tC/ha. For the average social cost of carbon, we use US$80/tC, as suggested in Pindyck (2016).
The indirect use values linked to water resources can be consolidated into a single economic benefit, water resource values, including the regulation of water flows, precipitation and river discharge.
These ecosystem services provide a series of economic benefits to the region, in large measure related to agricultural outputs and electric power generation, mostly in the vicinity of the forest, but also in distant areas by cycling atmospheric water in the form of aerial rivers to the southeast and center of the South American continent (Fearnside 2003). For forest, the average indirect use value linked to water resources was drawn from the average estimate in De Groot et al. (2012). Here we assume that the forest-savanna transition would reduce evapotranspiration by 75%, further reducing forest precipitation by 37.5%, so that the estimate for the average indirect use value linked to water resources after the forest-savanna transition is 62.5% of the estimated value for forest. With regards to hydropower generation, Stickler et al. (2013) analyzed the effect of large-scale deforestation on the Amazon region’s water cycle, and concluded that a loss of 40% of the Amazon rainforest would reduce the mean annual energy generation of the Belo Monte energy complex by 38%. We estimate that if the forest-savanna transition causes a 60% reduction in the annual hydroelectric generation in the Amazon and Tocantins basins, and a 20% reduction in the Paraná basin, the loss of hydroelectric potential will account for approximately 44% of the total change in the indirect use value linked to water resources.
The average option value was obtained from Margulis (2004). We used information in De Groot et al. (2012) to calculate the ratio between the median values of the gene pool protection/conservation service provided by tropical forests and woodlands. This ratio was multiplied by the estimate for the average option value of forest, in order to find the estimate for the average option value of savanna, and the change in average economic value of a representative hectare of forest that undergoes the state transition.
Table 2 summarizes the estimates for the change in average economic value of a representative hectare of forest that undergoes the forest-savanna transition. These are average values in the sense that they represent the change in value for a large change in the forest area. The numbers in this table are derived from estimates provided by Andersen et al. (2002) and Margulis (2004), the social cost of carbon in Pindyck (2016), averages of ecosystem service values summarized in De Groot et al. (2012), and our calculations. All of these estimates were updated to 2016 US$ values and converted into present values using a 2.5% discount rate.
... From the perspective of the Amazon region, ... the marginal social cost of deforestation varies with the proportion of deforested area, ignoring and then taking into account a tipping point. First, ignoring the tipping point (as current cost studies do), the present value of the foregone economic benefits from one hectare of deforestation remains constant until the ecosystem reaches the forest-savanna tipping point, at which point the foregone economic benefits jump to $3.0 trillion....
by Sergio L. Franklin, Jr. and Robert S. Pindyck
National Bureau of Economic Research (NBER) www.NBER.org
NBER Working Paper No. 23272; Issued in March 2017