Seeing REDD: A Microeconomic Analysis of Carbon Sequestration in Indonesia

Reducing Emissions through Deforestation and Degradation (REDD) is one of the few interventions to mitigate global warming being pur- sued at a global scale. Its implementation requires knowledge of the willingness to accept land use change contracts and its effectiveness re- quires its application over large areas. In this paper we use data from Sumatra, Indonesia, to contrast two approaches to the elicitation of the supply curve for carbon sequestration: a reverse uniform auction and a budgetary analysis of opportunity costs. The analysis of the supply curves highlights that individual preferences, namely time and risk preferences, but not the opportunity costs, play a significant role in determining the price villagers are willing to accept land use con- tracts that promote high carbon sequestration systems. The results also indicate that there are significant gains from trade to be made through the implementation of this program, as the price requested by land users in the setting we study is much lower than current carbon prices. Finally, we analyse possible targeting techniques, concluding that a combination of geographic and self selection targeting would be the most efficient way to implement this policy.