McREDD: How McKinsey ‘cost-curves’ are distorting REDD

McKinsey & Company has benefited from a series of consultancies, advising governments about REDD. But a new report from Rainforest Foundation UK uses examples from McKinsey’s REDD advice in Indonesia, Guyana and the Democratic Republic of Congo to demonstrate that the advice McKinsey gives is based on flawed analysis and misleading for decision-makers.

The report, “McREDD: How McKinsey ‘cost-curves’ are distorting REDD,” can be downloaded here. McKinsey’s cost-curves plot the cost of reducing emissions from various activities against potential emissions savings. The problem is that McKinsey’s flawed analysis hides the true costs of REDD and could result in increased destruction of forests by logging, oil palm, pulp and paper and soya industries.

McKinsey talks about climate change in terms of “Turning crisis into opportunity“, which may well be true in terms of McKinsey’s profits. But in a press release, Simon Counsell, Executive Director of Rainforest Foundation UK, describes McKinsey’s REDD advice as “junk economic theory”:

“McKinsey’s flawed analysis could be dangerous in the fight against climate change, as it makes it appear much cheaper and easier to tackle tropical deforestation than it would be in reality and it might lead us to postpone the real actions that need to be taken at home to prevent climate change. Priorities for reducing carbon emissions need to be based on the real costs of the different options, rather than on junk economic theory.”

The issue is not only economics – there is also an issue of rights and justice. In the case of Indonesia, Rainforest Foundation UK notes that an oil palm company could receive almost 30 times as much as an indigenous community for protecting 50 hectares of forest.

New report warns of dangers of ‘junk’ economics for global scheme to reduce deforestation

Rainforest Foundation UK Press Release: November 22nd, 2010
EMBARGOED UNTIL: 00.01 THURSDAY NOVEMBER 25TH (GMT)

According to a new report released today by the Rainforest Foundation UK, How McKinsey ‘cost curves’ are distorting REDD, advice given by international consultants McKinsey & Company to governments of forested nations could harm a scheme to stem destruction of the rainforest, known as REDD.

McKinsey has provided services to Brazil, Indonesia, Democratic Republic of Congo (DRC) and Guyana in the context of a global plan to reduce emissions from deforestation and forest degradation (REDD) which may be agreed at the United Nations climate change summit starting next week in Cancun, Mexico. [1] The report says that McKinsey’s advice is based on flawed analysis that hides key costs of programmes to reduce deforestation and could lead to greater destruction of natural forests by logging and agribusinesses, further marginalisation of millions of poor farmers and the weakening of environmental regulations.

Although the proposed REDD programmes are not yet operational, McKinsey’s analysis has been included wholesale into national plans to reduce deforestation in a number of countries, which have been approved for initial financial support by World Bank and UN agencies. [2]

The report says that McKinsey’s model, called the ‘cost-curve’, may substantially understate the real costs of programmes to reduce tropical deforestation, particularly projects targeting subsistence or ‘slash-and-burn’ farmers. This could lead to shoestring programmes that have a devastating impact on hundreds of millions of people who depend on the forest for their daily needs. [3]

“McKinsey claims that huge carbon reductions can be made at minimal cost by targeting ‘slash and burn’ farming, but the sums do not add up. Probably the only way that McKinsey’s supposed bargain-basement carbon savings from programmes to reduce deforestation could be achieved is by evicting millions of people from their subsistence farms.” says Simon Counsell, Executive Director of Rainforest Foundation UK.

The report also shows that McKinsey suggested weakening existing environmental legislation related to logging in Guyana, the heavily forested South American nation [4]; and expanding industrial logging and palm oil plantations in the world’s second largest rainforest in the Congo Basin. [5] Proposals included in a report with the Indonesian government could see wealthier forest users paid many times more than poorer communities for protecting an equal size of forest. [6]

The McKinsey advice is based on a ‘carbon mitigation cost-curve’, a visual representation of the cost and potential of carbon reductions by different means, which has become influential in climate change discussions.

“McKinsey’s flawed analysis could be dangerous in the fight against climate change, as it makes it appear much cheaper and easier to tackle tropical deforestation than it would be in reality and it might lead us to postpone the real actions that need to be taken at home to prevent climate change. Priorities for reducing carbon emissions need to be based on the real costs of the different options, rather than on junk economic theory”, says Simon Counsell.

The report’s key recommendation is that McKinsey’s cost-curve, in its current form, should be abandoned as a tool for designing national plans to reduce deforestation, which should be created through genuine consultation with all stakeholders, especially communities dependent on the forest, and analysis of the real costs of avoiding deforestation.

The full report is available by clicking here.

Notes to Editors

[1] The sixteenth Conference of the Parties (COP 16) of the United Nations Framework Convention on Climate Change (UNFCCC) will be held in Cancun, Mexico from November 29th to December 10th.

[2] The national plans to reduce deforestation are known as RPPs (REDD Preparation Plans). A 14 point draft national strategy to reduce deforestation prepared by McKinsey for the Democratic Republic of Congo was included, virtually word-for-word, in the country’s RPP which was approved for $3.6 million of funding from the World Bank’s Forest Carbon Partnership Facility (FCPF) and $5.5 million from the UN-REDD programme in February to March 2010.

[3] McKinsey have suggested that billions of tonnes of greenhouse gas emissions can be reduced through programmes targeting ‘slash and burn’ agriculture at “very inexpensive” costs. This would equate to approximately US $ 720 per family of subsistence farmers, in one example, which is likely to be a substantial underestimation of the real cost and could worsen the situation of hundreds of millions of forest-dependent people worldwide.

[4] A report produced by McKinsey with the Guyanese government suggests introducing a “more permissive regulatory regime” in the country – that would allow up to 40 m3 of timber per hectare to be harvested instead of the current 20 m3 per hectare which would allow logging companies to gain greater benefits from REDD payments.

[5] A report produced by McKinsey for the Ministry of Environment of the Democratic Republic of Congo includes a proposal to grant 10 million hectares of new logging concessions and 1.6 million hectares of palm oil concessions, as part of the national strategy to ‘reduce emissions from deforestation and forest degradation’.

[6] If figures included in a report produced by McKinsey with the Indonesian government were used to set compensation for protecting forests, subsistence agriculturalists would receive $36,000 whereas palm oil plantation owners would receive $1 million for protecting 50 hectares of rainforest; nearly thirty times more.

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