Jean-Louis COMBES

Pascale COMBES MOTEL

Romain PIRARD

English

Research Papers in Economics

CERDI, Etudes et Documents, E 2009.02 
 
  1 
 
 
 
Document de travail de la série 
Etudes et Documents 
E 2009.02 
 
 
A response to the commentary on  
“Compensated Successful Efforts” 
 
 
Pirard, R.
a, * 
Combes, J-L.
b, Combes Motel, P.
b 
 
 
 
 
 
 
 
 
 
This version: January 28, 2009 
Forthcoming: Ecological Economics 
8 p. 
 
 
 
 
 
a Institute for Sustainable Development and International Relations (IDDRI), 27 rue Saint-
Guillaume, 75337 Paris Cedex 07, France.  
b Centre d’Etudes et de Recherches sur le Développement International (CERDI-CNRS), 
Clermont Université, Université d’Auvergne, 65 boulevard François Mitterrand, 63000 
Clermont-Ferrand, France ; Fax: +33 4 73 17 74 28 
* Corresponding author: Email: romain.pirard@iddri.org; Fax: +33 1 45 49 76 85. CERDI, Etudes et Documents, E 2009.02 
 
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We welcome the commentary by Luca Tacconi on ‘Compensated Successful Efforts’. His 
remarks highlight important arguments that we are pleased to discuss. It also provides an 
opportunity to clarify the potential applications and policy implications of our proposal in 
response to the issues raised in the commentary.  
The initial paper focused on the methodological aspects of a new proposal (Compensated 
Successful  Efforts,  CSE),  which  seeks  to  determine  how  financial  resources  can  be  best 
distributed to support activities against deforestation in the context of the emerging REDD 
mechanism. Indeed, a key question is: which countries should have access to and benefit from 
the money made available at the international level due to their voluntary actions to reduce 
emissions from deforestation? 
In this response, we discuss the political and financing aspects of CSE in greater length. At 
the same time it should be made clear that we have never assumed that analyses published in 
academic journals must directly influence on-going negotiations. We therefore consider that 
criticism based on an alleged irrelevance of our proposal in the current political context is not 
particularly well founded. We will return to this important point below, but wish to stress here 
that  researchers  have  a  duty  to  work  independently  rather  than  adhere  to  the  rapid 
developments that take place in the negotiation arena, as their arguments are applicable to a 
broad range of stakeholders, including researchers, NGOs, indigenous groups, international 
donors and many others. 
Furthermore, prejudging the outcomes of the negotiations while the REDD mechanism has 
yet to be agreed upon or established, is precisely what we strive not to do. This is especially 
true for the REDD debate where comments have tended to be extrapolated or misinterpreted 
over time. This occurs because elements of ambiguity are inevitable in such a complex and 
sensitive debate, but also because deliberate distortion can serve the purposes of a variety of 
interests outside tropical forests and their direct beneficiaries. Let us give two brief examples. 
Firstly, “incentives” are usually presented as associated to a market mechanism, whereas they 
can in fact be distributed outside markets as well: incentives are not a specificity of markets 
but a characteristic of the deals with beneficiary (countries or agents) Secondly, the word 
“compensation”  should  only  be  used  to  refer  to  the  distribution  of  financial  resources CERDI, Etudes et Documents, E 2009.02 
 
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equivalent to the costs of reducing emissions. In the case of a market mechanism, where 
payments to countries are proportional to the future price of carbon credits and stocks of 
carbon per hectare, it would be more correct to use the word “reward”, as it infers that results 
are independent of costs.  
The key arguments raised in Luca Tacconi’s commentary on CSE are addressed below: 
 
The choice of structural variables and their exogenous 
characteristics 
Surveys  have  been  conducted  to  investigate  and  classify  the  causes  of  deforestation  (e.g. 
Angelsen  and  Kaimowitz,  1999).  One  such  classification  that  is  often  cited  involves  the 
identification  of  proximate  and  underlying  factors,  and  others  such  as  predisposing 
environmental  factors  and  social  triggers  (e.g.  Geist  and  Lambin,  2002).  Our  own 
classification is motivated by a different purpose: to isolate policy from structural factors. 
These structural issues are relatively easy to identify and model because there is a general 
consensus among experts over what these factors are, and also because they are quantifiable 
over  time,  which  is  in  contrast  to  the  numerous  causes  of  deforestation  associated  with 
policies, governance and the functioning of markets for forest and agricultural products and 
services (e.g. the pricing of environmental services). This point is at the foundation of our 
efforts to draw a clear distinction between the “structural causes” of deforestation and those 
related to domestic policies and market failures. We acknowledge that our list of the structural 
causes  of  deforestation  is  not  definitive  and  should  be  revised  as  understanding  of 
deforestation drivers improves. However, a limited list of causes should be agreed upon by 
participant countries in order to make the methodology more straightforward, transparent and 
easier to apply. 
From  a  technical  point  of  view,  the  relevance  of  an  econometric  model  depends  on  its 
accurate specification, i.e. the list of included exogenous variables. The method, i.e. panel 
estimation with time and country fixed effects, strongly improves confidence in econometric 
results with respect to a simple cross-country analysis: it allows controlling for country and 
temporal heterogeneity. The fixed country effects catch unobserved time invariant country 
heterogeneity due to differences in their geographical and environmental characteristics; the CERDI, Etudes et Documents, E 2009.02 
 
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time  fixed  effects  catch  unobserved  period  heterogeneity  generated  by  international 
environment modifications.  
We agree with the observation in the commentary stating that domestic policies have the 
capacity to modify structural causes of deforestation. However, this fact does not invalidate 
our approach, which is based on a distinction between domestic policies and structural causes. 
Indeed the capacity to modify structural factors exists only to the extent that economic and 
development objectives are sought by domestic policies (in contrast to forest conservation). 
Obviously, economic and demographic growth depends on domestic government initiatives. 
We  however  make  the  case  that  structural  variables  should  be  considered  as  strictly 
exogenous in our model, in the sense that reduced deforestation cannot be  regarded  as  a 
trigger for their modification: governments will not refrain from boosting the economy for the 
sake  of  lower  deforestation.  Moreover,  structural  variables  as  used  in  our  model  are 
characterized  by  a  strong  inertia  and  are  thus  less  prone  to  the  influence  of  reduced 
deforestation policies.  
 
The distinction between Annex 1 and developing countries 
Tacconi’s  commentary  raises  an  issue  that  is  frequently  on  the  agenda  -  that  developing 
countries participating in a REDD mechanism (or other sectoral approaches) might find it 
unfair to be held accountable for their emission reduction activities, domestic redistribution of 
wealth and their active role in the reduction of deforestation (indeed Annex 1 countries that 
have engaged in a cap-and-trade system within the Kyoto Protocol do not have to report their 
domestic activities). But this statement apparently pays little attention to the fact that Annex 1 
countries  have  to  achieve  emission  targets  with  their  own  resources,  while  developing 
countries would benefit from external financial support, for instance in the form of tradable 
carbon credits. Developing countries are not therefore expected to bear the burden of their 
domestic emission reductions, as Annex 1 countries will pay and “compensate” their costs, as 
is clearly proposed with a REDD mechanism. In our opinion, a difference in treatment is thus 
strongly justified by the fact that the costs of emission reductions are born by industrialized 
countries.  CERDI, Etudes et Documents, E 2009.02 
 
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Complexity of the CSE approach compared to the simplicity of 
output-based proposals 
Tacconi argues that a CSE approach based on econometrics is far too complex at a time when 
negotiators seek the simplest tools to arrange the financial transfers to developing countries in 
exchange  for  reduced  emissions.  This  argument  is  very  important  and  deserves  much 
consideration. We are fully aware that simplicity is a real quality in negotiations and to some 
extent a prerequisite to achieve a deal between Parties to the Convention. Nevertheless, for a 
mechanism that will have implications for many millions of people and will help determine 
the effectiveness of urgent measures against climate change, we should be careful not to rely 
overly  on  “simplistic”  solutions  and  agreements.  We  believe  that  it  is  not  excessively 
complicated to hold preliminary discussions with participant countries to agree on selected 
structural factors that are not under their control, and to decide on formulae for assessment 
under  the  partial  authority  of  independent  experts.  Indeed,  these  steps  are  certainly  not 
complex  in  comparison  to  the  on-going  negotiation  process,  the  implementation  of 
measurement  methodologies  according  to  IPCC  standards,  the  negotiation  of  safeguards 
against undesirable means of reducing deforestation, or the creation and management of a 
market for forest carbon credits with all the associated insurance issues. In other words, there 
is  no  valid  reason  why  “complexity”  should  be  encouraged  for  some  aspects  (e.g. 
measurement of carbon stocks) but rejected for others (e.g. estimation of reference levels) as 
all of these issues will determine the success and fairness of the REDD mechanism. 
In some instances simplicity is not a viable way forward, as the World Bank seems to have 
concluded  with  the  Forest  Carbon  Partnership  Facility  (FCPF),  a  forerunner  for  REDD. 
Although the FCPF was established with the dual goal of helping developing countries to 
firstly  prepare  (readiness  component),  and  then  to  purchase  their  carbon  credits  once 
deforestation has been reduced (carbon finance component), it has now expanded its activities 
to the direct financing of policies (Forest Investment Fund) and the assessment of national 
strategies. CERDI, Etudes et Documents, E 2009.02 
 
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Political influence 
The author of the commentary points out that our approach would not be free of political 
influence over the distribution of financial resources to developing countries. We stated that 
the available proposals for a distribution of credits in proportion to measured results in terms 
of reduced emissions were subject to political influence because targets would be negotiated 
by each country, whereas our CSE approach would be more explicitly based on a transparent 
calculation  derived  from  an  agreed  formula.  Admittedly,  there  is  still  room  for  political 
influence  at  two  levels:  the  design  of  the  formula,  and  the  decisions  on  the  amounts  of 
financial  resources  to  transfer  to  each  participant  country,  as  these  would  not  be  strictly 
proportional to emissions reductions (but to activities implemented). We concede that these 
concerns are beyond the scope of our paper and were not therefore addressed. It is worth 
noting however that these concerns would be true for any program of development assistance 
under the authority of national or multilateral aid agencies. But a range of sound criteria can 
be used to direct these resources to the most appropriate countries, relating to the credibility 
of national strategies, governance, the emissions at stake or any other relevant factors. These 
concerns will be at the heart of our future papers that focus on the concrete application of the 
CSE, in the context of development assistance managed by a Fund (e.g. the Global Forest 
Carbon Mechanism proposed recently by the European Commission).  
 
Fund/market and the availability of financial resources  
We  strongly  disagree  with  the  statement  in  the  commentary  that:  “there  is  increasing 
acceptance  […]  that  a  market-based  mechanism,  or  a  hybrid  one,  should  be  adopted  to 
successfully implement REDD, given the significant amount of financial resources required”. 
This statement is certainly representative of the arguments commonly cited by the proponents 
of  a  market  mechanism  for  REDD,  but  it  does  not  rely  on  sound  evidence.  Instead  this 
viewpoint stems more from a common belief and ideology, and also an acceptance that there 
exists  insufficient  political  leadership  to  impose  financial  contributions  onto  Annex  1 
countries  in  order  to  effectively  fight  tropical  deforestation.  Furthermore,  it  assumes 
implicitly that the private sector’s financial contributions via the carbon markets and the use 
of offsets would be disconnected from national budgets in Annex 1 countries. This is not 
correct. Such offsets would translate into less profit for sectors with emission commitments in CERDI, Etudes et Documents, E 2009.02 
 
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industrialized countries. Indeed the purchase of carbon credits to meet commitments would 
lead to a transfer of wealth to developing countries to compensate for fewer national emission 
allowances to be distributed to the sectors with commitments. This in turn would ultimately 
reduce national budgets in industrialized countries through, for instance, lower taxation of 
profits.  The  use  of  proceeds  from  emission  allowances  to  finance  the  fight  against 
deforestation, as proposed in Europe, would also have similar effects in principle on national 
budgets  and  the  sectors  with  emission  commitments.  Markets  are  by  no  means  a  magic 
solution,  and  all  depends  on  the  political  will  in  industrialized  countries.  In  any  case,  a 
decision to base REDD on the markets would mean that these countries would have to give up 
part of their public financial resources. 
 
An input-based approach and the negotiation context  
The CSE proposal is undeniably (but not solely) an input-based approach, and as such differs 
from most of the current proposals for REDD. This has implications for the nature of the 
mechanism,  because  the  role  of  markets  would  be  marginalized  if  quantified  emission 
reductions  are  not  used  as  the  main  criterion  to  determine  the  transfer  of  resources  to 
participant developing countries. In spite of this, there should be no confusion regarding the 
role of performance as a measure for these financial transfers, because performance-based and 
input-based approaches are not necessarily incompatible (in fact the CSE proposal intends to 
combine both). While quantified results achieved in terms of reduced deforestation could be 
part of the scheme, there is no reason why they have to be the only criterion used to initiate 
international  transfers.  If  the  CSE  approach  was  ever  used  to  determine  the  financial 
assistance to developing countries, we argue that it would constitute (i) a suitable framework 
for real collaboration towards the design of national strategies against deforestation, and (ii) 
the basis for predictable transfers to countries engaged in ambitious long-term policies and 
measures that aim for sustainable development that is compatible with the urgent need for 
action on climate. 
We do not believe that a purely market-oriented REDD mechanism would provide the right 
conditions  for  the  predictability  of  financing  and  for  the  encouragement  of  long-term 
domestic action in developing countries (market volatility being one among other reasons, as 
illustrated by the current financial crisis). We argue that indicators of performance, political CERDI, Etudes et Documents, E 2009.02 
 
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will and the capacity to act effectively, of which the CSE may be one element, will best serve 
the interests of tropical forests, climate and the populations that depend on them.  
To conclude, we must consider that carbon markets per se are unlikely to lead to significant 
shifts in deforestation trends, and that alternative approaches will thus remain relevant in the 
negotiation process.  
 
Technical problems 
Any econometric analysis relies on a certain level of dataset quality. Random measurement 
errors affecting the dependent variable do not bias the results. We deal with idiosyncratic 
errors in the residuals when only considering and discussing residuals that are statistically 
different from zero.  
Our results are not likely to be subject to autocorrelation problems, as claimed by Scriecu 
(2007), in so far as we deal with average values rather than annual values. The autocorrelation 
issue becomes crucial only when the frequency of data is increased. Nevertheless, we ran the 
model with an autocorrelation correction, i.e. white period standard errors and covariance 
correction, which did not alter the significance of our estimates.  
 
 
References 
Angelsen,  A.  and  Kaimowitz,  D.,  2000.  Rethinking  the  Causes  of  Deforestation:  Lessons 
from Economic Models. World Bank Research Observer, 14 (1), 73-98. 
Geist,  HJ.  and  Lambin,  EF.  2002.  Proximate  Causes  and  Underlying  Driving  Forces  of 
Tropical Deforestation. BioScience, 52 (2), 153-150. 
Scrieciu, SS. 2007 “Can economic causes of tropical deforestation be identified at a global 
level?” Ecological Economics, 62 (3-4), 603-612. 
Tacconi,  L.  “Compensated  Successful  Efforts  for  Avoided  Deforestation  vs  Compensated 
Reductions” Ecological Economics, this issue. 

Can economic causes of tropical deforestation be identified at a global level?”

Proximate Causes and Underlying Driving Forces of Tropical Deforestation.

Rethinking the Causes of Deforestation: Lessons from Economic Models.

A response to the commentary on “Compensated Successful Efforts”

http://publi.cerdi.org/ed/2009/2009.02.pdf

A response to the commentary on “Compensated Successful Efforts”

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