REDD in the Carbon Market: A general equilibrium analysis

Deforestation is a major source of CO2 emissions, accounting for around 17% of total annual anthropogenic carbon release. While the costs estimates of reducing deforestation rates considerably vary depending on model assumptions, it is widely accepted that emissions reductions from avoided deforestation consist of a relatively low cost mitigation option. Halting deforestation is therefore not only a major ecological challenge but also a great opportunity to cost effectively reduce climate change negative impacts. In this paper we analyze the impact of introducing avoided deforestation credits into the European carbon market using a multiregional Computable General Equilibrium model – the ICES model (Inter-temporal Computable Equilibrium System). Taking into account political concerns over a possible “flooding” of REDD credits, various limits to the number of REDD allowances entering the carbon market are considered. Finally, unlike previous studies, we account for both direct and indirect effects occurring on land and timber markets resulting from lower deforestation rates. We conclude that avoided deforestation notably reduce climate change policy costs. Unlimted availbility of REDD credits reduce European policy costs in approximately 83.24%, while limiting the use of these credits to 20% ot total european emissions reductions decreases costs in 23.01%. Given the relatively small scale of the european carbon market, avoided deforestation credits may drastically reduce carbon prices. Policy makers may, however, effectively control for this imposing limits to avoided deforestation credits use. In addition, avoided deforestation has the additional positive effect of reducing carbon leakage of an isolated European climate change policy. Finally, land price changes resulting from lower deforestation rates are found to be relatively more important in Sub Saharan Africa regions.