Estimating the Break-Even Price for Forest
Protection in Central Kalimantan
Yuki Yamamoto∗and Kenji Takeuchi†
August 2011

Abstract
This paper estimates the break-even price in Central Kalimantan province, Indonesia and evaluates the eﬀectiveness of a REDD+
mechanism in this area. On the basis of data collected through a ﬁeld
survey, we found that the break-even price is $17.14 per ton of carbon or $4.68 per ton of carbon dioxide. The ﬁgure can be even lower
when we take the peat thickness of the area into account. Our analysis shows that the current level of carbon price can provide adequate
compensation for Indonesian farmers.

∗

Graduate School of Economics, Kobe University yuuki00007@hotmail.com†

Graduate School of Economics, Kobe University takeuchi@econ.kobe-u.ac.jp1

1

Introduction

The Reducing Emissions from Deforestation and Degradation plus (REDD+)
mechanism is central to an international discussion of carbon emissions control. Tropical deforestation and forest degradation contribute to 1.6 Gt, or
20% of worldwide carbon emissions into the atmosphere every year (IPCC
2007). Forest protection, therefore, should be considered a critical part ofthe solution to climate change.
Indonesia can supply as much as 11.8% of the world’s carbon credit
through REDD+ (Deveny et al. 2009). Forests in Indonesia have rapidly
been disappearing and have emitted huge amounts of carbon over the lasttwo decades: forestland has decreased substantially from 121 million hectares
in 1990 to 100 million hectares in 2005 (Hansen et al. 2009). A key characteristic of forestland in Indonesia is in its peat thickness. At least 55 Gt ofcarbon are stored in Indonesian peatlands (Jaenicke et al. 2008). Indonesia
accounted for 82% of the carbon emissions from decomposition of drained
peatlands in Southeast Asia in 2006 (Hooijer et al. 2010). For these reasonsIndonesia is an important place for a REDD+ mechanism.
REDD+ provides rewards for forest protection. Still, while it would makea signiﬁcant contribution to mitigating climate change, it can cause the lossof a chance for regional economic development: local farmers, for example

2

would lose the opportunity to proﬁt from additional agricultural activity.
To design a workable REDD+ mechanism, revenues from forest protections
must be higher than the revenues sacriﬁced by refraining from deforestation.
The right compensation for protecting a given forest depends on the carbon
ﬁxation achieved in the area and would not be higher than the carbon pricein a global market like the EU Emissions Trading Scheme (EU ETS). We
deﬁne the break-even price of carbon (BEP) as a carbon price satisfying
the minimum needed to compensate for a forgone chance of development.
This paper estimates the BEP in Central Kalimantan province, Indonesia,
and evaluates the eﬀectiveness of a REDD+ mechanism in this area. Our
analysis shows that the current level of carbon price can provide the necessarycompensation to Indonesian farmers.
There have been many attempts to estimate the BEP needed to protect
forestland in various countries. One of the earliest studies, by Osborne &Kiker (2005), estimated the BEP in Guyana to be $0.71 per ton of carbon.
They considered that logging was the only factor for deforestation in thatarea. Bellassen and Gitz (2008), estimated the BEP in Cameroon, focused on
the role of shifting cultivation in deforestation and estimated the BEP to be$10.44 per ton of carbon. Studying Indonesia, Butler et al. (2009) estimatedthe BEP in regard to oil palm plantation to be $3, 835-$9, 630 per hectare.
Although oil palm plantation has been a signiﬁcant factor in deforestation,3

this threat most likely has decreased as a result of a moratorium agreement
between the Indonesian and Norwegian governments signed on 20 May 2011.
The BEP for Indonesia in regard to small-scale agriculture is summarized in
Grieg-Gran (2008), but the ﬁgure given in this study is based on the relatively
old data given in Tomich (1998).
The contribution of our study is twofold. First, we focus on the Indonesian forestlands, which have a potentially large impact on carbon emissions;
successful implementation of REDD+ in this area would be important ina global climate policy. Second, we estimate the BEP in regard to smallscale agricultural activity based on original ﬁeld research: information on
the net revenue from rice and rubber cultivation collected by a ﬁeld survey
in three villages in Pulang Pisau Regency in Central Kalimantan Province,
helps to calculate an up-to-date and adequate compensation for protecting
the forestland in this area.

2

Compensated Reduction and the Break-Even
Price

Compensated Reduction is one of the REDD+ mechanisms currently discussed in the UNFCCC negotiations (Bellassen and Gitz 2008). Under this4mechanisms, developing countries that voluntarily reduce their national carbon emissions from deforestation would be authorized to sell carbon credit
using their historical rate of deforestation as a baseline. It assigns monetary value to carbon stored in standing trees and soil, thereby providing aﬁnancial incentive for forest protection to stakeholders. Funds for Compensated Reduction would be supplied from the global carbon market or fromdeveloped countries.
The actual amount of reduced deforestation in a developing country
should be measured by comparing the realized deforestation rate with abaseline deforestation rate. Once a developing country receives carbon credits and sells them on the global market, it must commit not to increase
its deforestation rate. Consequently, emission reduction must be measured
and veriﬁed continuously during the commitment period. Although Compensated Reduction assigns a value to a tropical forest with carbon dioxide
ﬁxation, it does not take into account the total value of a tropical forest in
the ecosystem, which includes maintaining biodiversity, supporting the local
climate, and providing elements of local livelihood such as agricultural andpharmaceutical products.
At what carbon price would conservation compete with agricultural development? To answer this question, it is necessary to calculate the BEP
as the price of carbon at which conserving forests become ﬁnancially attrac5

tive for farmers. In case of Central Kalimantan, we consider rice and rubber
production as a driving force of deforestation. Once compensation according
to BEP paid, forest protection would provide revenue to farmers at least as
much as proﬁtable from rice and rubber production. We deﬁne the BEP asa minimum price that farmer receive in order to make carbon ﬁxation more
attractive than rice and rubber production.

3

Field survey

To collect information on the net revenue from rice and rubber cultivation, we
conducted a ﬁeld survey in three villages in Pulang Pisau Regency, Central
Kalimantan, in June 2010. We visited 189 randomly chosen households living
in Bawan Village, Garantung Village and Maliku Village. The response rate
was 71%, thus we have 134 samples for analysis.
Bawan Village is located the in northern part of Pulang Pisau Regency,
where the Dayak tribe has traditionally lived. Maliku Village and Garantung
village are located in the southern part of the regency. Many people living in
Garantung Village came from Java during the Mega Rice Project in the 1990s
that was planned to turn one million hectares of unproductive peat swamp
forest into rice paddies but ﬁnally failed. Table 1 summarizes the numberof samples of our ﬁeld survey. “Target” households means the number of6households in the area targeted for random sampling in the village. Since
the population of Maliku village is widely spread out over a large area, thenumber of households targeted in the village was set lower than in the othertwo villages.
We asked households how much rubber and rice they harvested in the previous year. On average, the amount of rice harvest per hectare was 1071.5kg
and the rubber harvest per hectare was 2,336.1kg (see Table 2). There isconsiderable variation in the average rubber harvest among the three villages: 780kg for Garantung, 1,170kg for Maliku, and 2,344.9kg for Bawan.
The diﬀerence would be due to the fact that rubber trees in Garantung andMaliku are still young and not yet ready for tapping. Many farmers in thesetwo villages started to plant rubber trees only in recent year. As the trees
continue to grow, the income of farmers will increase. We also asked thenumber of labor force and labor hours for planting and harvesting the riceand for harvesting the rubber. From this information, we estimated the net
revenue from rice and rubber cultivation per hectare.

7

Table 1: Details of ﬁeld survey
Population

Households Target

Visited Responded

Bawan

829

211

148

79

54

Garantung

2,916

790

458

63

44

Maliku

3,424

918

79

47

36

Total

7,169

1,919

685

189

134

Table 2: Average harvest per hectare
Average rice harvest (kg) Average rubber harvest (kg)
Bawan

660

2344.9Garantung1085.3

780

Maliku1060.2

1170

Total

1071.52336.1

4

Empirical analysis

In Central Kalimantan, rice and rubber cultivation have been two of themain causes of deforestation. According to Grieg-Gran (2008), these activities have accounted for 49% of deforestation, with oil palm plantation andcassava cultivation accounting for the rest (32% and 19%, respectively). This
paper assumes that rice and rubber cultivation are sole factors of deforestation in this area. Although oil palm plantation can be another major factor8

of deforestation, we omit this possibility because of the moratorium agreement between the Indonesian and Norwegian governments. We calculate theeconomic revenue from deforestation as the Net Present Value (NPV) of agriculture over a commitment period discounted at the rate of 10%. To obtain
the BEP, The total NPV is divided by the total carbon density of a hectareof forestland.
The average agricultural revenue per hectare (R) is obtained by using thefollowing formula (Bellasen and Gitz 2008):
R = V1 + θ

T
∑
t=0

(

1
1+γ

)t

× Vs + (1 − θ)

T
∑
t=k

(

1
1+γ

)t

× Vg ,(1)

where T is the commitment period of forest protection, V1 is the one-time net
revenue from logging per hectare, Vs is the net revenue from rice cultivation
per hectare, Vg is the net revenue from rubber cultivation per hectare, θ ∈[0, 1] is the ratio of rice cultivation per hectare of expanding agriculturalland, and γ is the discount rate. We assume k = 11: the revenue fromrubber production is generated after 11 years.
The net revenue from rice cultivation per hectare (Vs ) is obtained by thefollowing formula:∑Vs =i (Ysi × Ps − Lsi )

∑

i Msi

,

(2)

where Ysi is the yield of rice by the farmer i, Ps is the price of rice, Lsi isthe labor costs for rice production at the land of the farmer i, and Msi is the9total agricultural land for rice production used by the farmer i.
The net revenue from rubber cultivation per hectare (Vg ) is obtained by
the following formula:∑Vg =j (Ygj × Pg − Lgj )

∑

j Mgj

,

(3)

where Ygj is the yield of rubber by the farmer j, Pg is the price of rubber,
Lgj is the labor costs for rubber production at the land of the farmer j, and
Mgj is the total agricultural land for rubber production used by the farmerj.
The net revenue from agricultural land is the diﬀerence between the valueof output (Y × P ) and the cost of labor force (L). The labor costs for riceproduction, the amount that a farmer could earn from an alternative job, isobtained by the following formula:
Lsi = W × (Nsi × Hsi + Nhsi × Hhsi ) ,(4)

where W is the minimum wage in Central Kalimantan province, Nsi and Hsi
are the number of labor force and the labor hours for planting rice, Nhsi and
Hhsi are the number of labor force and the labor hours for harvesting rice.
The labor costs for rubber production can be represented by the following
formula:Lgj = W × (Nhgj × Hhgj ) ,10(5)where W is the minimum wage in Central Kalimantan, Nhgj is the numberof labor force and Hhgj is the labor hours for harvesting rubber.
The revenue from forest protection per hectare (Rf ) is obtained by thefollowing formula:
R f = C × Pc ,(6)

where C is the carbon density of land per hectare and Pc is the carbon price.
To protect a hectare of forestland, net revenue from forest protection should
be at least as large as forgone net revenue from agricultural development.
R = R f ⇔ R = C × Pc ⇔ Pc ∗ =

R
= BEP
C

(7)

Table 3: Parameters used in analysis
Parameter

Estimate used in models

γ

Discount rate10%θ

Share of rice production per hectare

1/3TCommitment period of forest protection

30 years

Ps

Price of rice$0.32/kg

Pg

Price of rubber$0.87/kg

W

Minimum wage

$0.68/hourC

Carbon density

225t/ha11

We used the producer price of rice and rubber in Indonesia in 2008 asreported by FAO (2010), and estimated what it would be in 2010 by applying
the inﬂation rate.

5

Result

The parameters used to estimate the BEP is provided in Table 3. We assume
that, on average, one-third of one hectare of additional agricultural expansion
is devoted to rice cultivation and two-thirds to rubber tree cultivation. The
period committed to forest preservation is 30 years. The estimated averagerevenue from rice and rubber production over 30 years is $3,856 per hectare.
We used 225 tons per hectare as carbon density in Indonesia. This ﬁgure is
calculated by 350 ∗ 0.47 ∗ 1.37 = 225, where 350 is a ton of above-groundbiomass for tropical moist forests in insular Asia, 0.47 is the carbon fraction ofabove-ground biomass (tropical and subtropical), and 1.37 is the conversion
rate from above-ground to total biomass in a tropical rainforest (IPCC 2006).
Estimation results are shown in Table 4. The BEP is estimated to be aslarge as $17.14 per ton of carbon or $4.68 per ton of carbon dioxide. As of
13 December 2010, the price of carbon dioxide allowances in the EU ETS is$90.9 per ton of carbon or $24.8 per ton of carbon dioxide. With the highcarbon price in the EU ETS, carbon revenue clearly outweighs agricultural

12

revenue in Central Kalimantan.
Table 4: Estimation result of BEP
Parameter

ResultRice net revenue (Vs )$ 75.1

NPV of rice production$ 783.5

Rubber net revenue (Vg )$1,643.2

NPV of rubber production$5393.7

Average agricultural revenue per hectare (R)$3,856.9

Carbon density (C)225

BEP of carbon (Pc ∗ )$17.14

BEP of CO2$4.68

We extend the analysis and estimate total compensation across Central
Kalimantan Province. The amount of compensation payment is determinedby realized deforestation rate (with REDD+ policy) in comparison with expected deforestation rate (without REDD+ policy). According to the Indonesian Ministry of Forestry, the forest area in Central Kalimantan Province
had been reduced from 9.48 million hectares in 2002 to 8.9 million hectares
in 2003. We therefore assume that the deforestation rate is approximately
6 percent a year. At this rate, the size of the forest area would be 5.75
million hectares in 2010 and 0.88 million hectares in 2040. If Central Kali13

mantan Province successfully prevents the deforestation after 2010, the forest
area maintained would be 5.75 million hectares in 2040. Thus, the size ofprotected forest would be 4.87 million hectares (5.75 hectares minus 0.88
hectares). Multiplying the estimated BEP per hectare by this ﬁgure, thecompensation payment to Central Kalimantan Province amounts to $18.9
billion.
(1000 ha)
10000

7500
With REDD+
5000

Without REDD+
2500

0
2002

2007

2012

2017

2022

2027

2032

2037

Year

Figure 1: Prediction of deforestation with and without REDD+ policy inCentral Kalimantan

6

Sensitivity analysis

The analysis in the above section does not take into account several uncertainties in the parameters. Since there can be considerable variation in these14parameters, it is important to examine how the amount of compensation
should change if we assume diﬀerent parameters. In this section, we conduct
a sensitivity analysis for key parameters in estimating compensation payments. We ﬁnd that several parameters have a signiﬁcant eﬀect on the BEP(Table 5). In particular, a slight variation in the discount rate or the rubber
price would seriously aﬀect the BEP.
The amount of compensation is determined by comparing the realized
deforestation rate with the baseline scenario. In the previous section, thedeforestation rate of Central Kalimantan is assumed to be 6% a year. Depending on the expected deforestation rate, the amount of compensation
would be greater or smaller.
Furthermore, identifyinging carbon contents in crops would also lead toan increase in the NPV of crops. Palm (1999) reported that natural rubber
contains 89.2 ton of carbon. If we take carbon in natural rubber into account, the NPV of rubber become that BEP times 89.2 ton of carbon. Thus
the compensation received by a farmer cultivating rubber becomes $5, 397($3, 596 + $1, 801). Although taking into account the carbon in crops is important for realizing carbon ﬁxation, it may foster monoculture plantationand make conservation of natural forest areas more diﬃcult.

15

Table 5: Results of the sensitivity analysis
Parameter

Initial value Change in value

Change in BEP

Discount rate (γ)

10%

+2%

-66%

Rate of rice expanding (θ)

1/3

−1/3

+40%

Carbon density (C)

225

+75

-25%

Value of logging (Vl )

0

+$830

+22%

Price of rice (Ps )$0.32+$0.68+66%

Price of rubber (Pg )$0.92+$3.08+409%

7Discussion

Osafo (2005) estimated the BEP for Ghana and found a higher amount than
our analysis ($29.59). Silva-Chávez (2005) found a smaller BEP of $4.43
for Ghana. One of the reasons diﬀerent estimates of a BEP are generated
is the assumption made in regard to carbon density. For example, Osafo(2005) used 60 tons of carbon density and Silva-Chávez used 200 tons ofcarbon density for the area, while we use 225 tons of carbon per hectare.
Furthermore, if we were to take oil palm plantation into account, the NPVof land development would increase. Butler et al. (2009) estimated that the
NPV of oil palm agriculture in Indonesia is between $3, 835 and $9, 630.

16

15

10

5

0
B efore 2004 2005

2006

2007

2008

2009

2010

Figure 2: Number of households commencing rubber tree planting
In our ﬁeld survey, we found that 46 out of 51 farmers planted rubber
trees after 2005 (Figure 2). Because of this, a relatively large number ofhouseholds in Garantung and Maliku have rubber trees that are still young
and not yet ready for tapping (Table 6). Since the international rubber pricehas been increasing recently, this might aﬀect the crop choice of farmers. An
increase in rubber planting means increasing the NPV (rubber becomes more
proﬁtable) in this area. We must take the change in farmers’ behavior into
account when designing a workable implementation of REDD+.
The estimated BEP might be drastically cheaper if we consider the peat
thickness of Central Kalimantan. The below-ground biomass used in ourmodel is based on IPCC (2006). However, this underestimates the amountof below-ground biomass in this area. For example, Jaenicke et al. (2008)17

Table 6: Number of households by condition of rubber trees
Holding

Still young

Ready for harvest

Failed, etc

Bawan

47

18

21

8

Garantung

32

28

1

3

Maliku

18

15

2

1

Total

97

61

24

12

reported that carbon storage of Sebangau peat domes in Central Kalimantan
is 2.3Gt at 734, 700 hectares. If we simply divide the former ﬁgure by thelatter, we have 3,130 tons per hectare. This carbon density is more than ten
times higher than the ﬁgure we assumed in our analysis.

8Conclusion

This paper investigated the eﬀectiveness of a REDD+ mechanism in Central
Kalimantan. The BEP in Central Kalimantan is estimated to be $17.14 per
ton of carbon and this is below the carbon price today in the EU ETS. So a
carbon ﬁxation activity is more proﬁtable than rice and rubber plantation.
REDD+ would provide an alternative to stakeholders and has a great potential to generate forest protection in this area. As well as reducing carbon
emissions, REDD+ holds out the prospect of providing economic gain to18

Central Kalimantan that exceeds the current revenue from rice and rubber
plantations.
As our ﬁeld survey suggests, increases in the price of rubber would lead to
deforestation. To achieve the goal of reducing carbon emissions worldwide,
attention should be paid to the impact of natural resource prices on farmers’
behavior in developing countries. A REDD+ mechanism can oﬀer developing
countries an incentive to participate in international negotiations. Combining this mechanism with other policy tools that can help protect forests
would contribute to reducing carbon emissions and to building sustainable
development.

Acknowledgements
We thank Aswin Usup, Ferrawanti Tusthenes, and Towa Tachibana for their
help in conducting the ﬁeld survey. This work was supported by JST/JICA
SATREPS project “Wild Fire and Carbon Management in Peat-Forest inIndonesia” and the Asahi Glass Foundation.

19

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