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Designing contracts for reducing emissions from deforestation and forest degradation

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  • Cordero Salas, Paula

Abstract

Reduction of carbon emissions from deforestation and forest degradation has been identified as a cost effective element of the post-Kyoto strategy to achieve long-term climate objectives. Its success depends primarily on the design and implementation of a financial mechanism that provides land-holders sufficient incentives to participate in such scheme. This paper proposes self-enforcing contracts (relational contracts) as a potential solution for the constraints in formal contract enforcement derived from the stylized facts of the implementation because relational contracting relies upon mutual private self-enforcement in a repeated transaction framework. The paper derives an opportunity cost function for land use and characterizes the optimal self-enforcing contract as well as provide the parameters under which private enforcement is sustainable. The optimal payment scheme suggests that all payments should be made contingent on the carbon offsets delivered, that is, at the end of the contracting period. Thus, the optimal contract does not observe any ex ante payment. Self-enforcement is more difficult to sustain the higher the opportunity cost of forest conservation is relative to the value of the carbon offsets from the contract. Necessary extensions to the relational contracting model are also discussed.

Suggested Citation

  • Cordero Salas, Paula, 2013. "Designing contracts for reducing emissions from deforestation and forest degradation," Policy Research Working Paper Series 6503, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6503
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    References listed on IDEAS

    as
    1. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    2. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo Group Munich.
    3. Paula Cordero Salas & Brian E. Roe, 2012. "The Role of Cooperation and Reciprocity in Structuring Carbon Sequestration Contracts in Developing Countries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(2), pages 411-418.
    4. Karan Capoor & Philippe Ambrosi, "undated". "State and Trends of the Carbon Market 2008," World Bank Other Operational Studies 13405, The World Bank.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Climate Change Mitigation and Green House Gases; Environmental Economics&Policies; Debt Markets; Forestry; Climate Change and Environment;

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