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The Design of Payments for Avoided Deforestation Under Uncertainty: Insight from Real Option Theory

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  • Engel, Stefanie
  • Palmer, Charles
  • Taschini, Luca
  • Urech, Simon

Abstract

The objective of this paper is to analyse the implications of landowners’ option values in land allocation and derive policy recommendations for payments for Reducing Emissions from Deforestation and Forest Degradation (REDD). We examine the determinants of landowner participation in REDD implementation and consider particularly the effect of alternative designs of REDD payment schemes on permanence of emission reductions. It is shown that the common practice of making either fixed payments per hectare or linking payments to carbon markets is not a cost-effective approach. A given level of permanence can be achieved at considerably lower cost to the REDD service buyer if REDD payments are linked to an agricultural commodity index that correlates with landowners’ opportunity costs.

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Bibliographic Info

Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 114816.

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Date of creation: 02 Sep 2011
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Handle: RePEc:ags:eaae11:114816

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Keywords: Resource /Energy Economics and Policy;

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  1. Dixit, Avinash K, 1989. "Entry and Exit Decisions under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 620-38, June.
  2. Dangl, Thomas & Wirl, Franz, 2004. "Investment under uncertainty: calculating the value function when the Bellman equation cannot be solved analytically," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1437-1460, April.
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