Can forestry carbon sink pledge financing improve the quality of forest management?

In this paper, we study a forestry operator facing financial constraints and a financial institution that provides pledge financing, using the expected revenue rights from forestry carbon sinks and the management rights of transferred forestland as collateral. Output uncertainty in forestry carbon sinks and government subsidies are explicitly considered. The problem is formulated as a Stackelberg game. We derive the forestry operator’s optimal decisions on forest quality and the financial institution’s optimal pledge rate, and investigate the effects of key factors such as the probability of deforestation disasters and the carbon sink price. Numerical analyses are also presented. The main findings are as follows. First, infrequent deforestation disasters do not affect forest quality or the pledge rate, whereas frequent disasters reduce incentives for forest management and increase financing difficulty. Second, expanding the scale of forest management increases profits, but may lead to lower forest quality and a reduced pledge rate. Third, an increase in the economic value of transferred forestland management rights does not affect forest quality but reduces forestry profits. Moreover, the impact of this economic value on the pledge rate depends on the carbon sink price. Finally, when the probability of deforestation disasters is relatively low or very high, pledge financing can improve forest quality. In addition, under certain conditions, pledge financing can also enhance the forestry operator’s profits.