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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.

Suggested Citation

  • Engel, Stefanie & Palmer, Charles & Taschini, Luca & Urech, Simon, "undated". "The Design of Payments for Avoided Deforestation Under Uncertainty: Insight from Real Option Theory," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114816, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae11:114816
    DOI: 10.22004/ag.econ.114816
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    References listed on IDEAS

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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 620-638, June.
    2. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    3. 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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    Cited by:

    1. Fortmann, Lea & Cordero-Salas, Paula & Sohngen, Brent & Brian, Roe, 2016. "Incentive Contracts for Environmental Services and their Potential in REDD," International Review of Environmental and Resource Economics, now publishers, vol. 9(3-4), pages 363-409, September.

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