Cost-effective payments for reducing emissions from deforestation under uncertainty
AbstractThe paper analyses the implications of landowners’ option values in land allocation and derives policy recommendations for payments for Reducing Emissions from Deforestation and Forest Degradation (REDD). Given that REDD will not represent a permanent change in the cumulative flux of carbon dioxide to the atmosphere, payment scheme design is motivated by the need to secure forest carbon sinks over time (the ‘permanence criterion’) while remaining relatively cost-effective. Alternative payment schemes, combining fixed and variable components, are considered in a framework with two competing land uses, forest and agriculture. Cost-effectiveness depends on the dependency structure between the returns from the indexed component of the payment and the returns from the alternative land use, the relative volatility level of the underlying returns, and the relative combination of fixed and variable payments. After developing the general model, it is is applied to REDD policy scenarios in Parana State, Brazil.
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Bibliographic InfoPaper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 72.
Date of creation: Feb 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-AGR-2013-04-06 (Agricultural Economics)
- NEP-ALL-2013-04-06 (All new papers)
- NEP-ENV-2013-04-06 (Environmental Economics)
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