The REDD Scheme to Curb Deforestation: A Well-designed System of Incentives?

Abstract

The need to find a global agreement to limit deforestation has led to the REDD scheme which proposes that developed countries pay developing countries for CO2 emissions saved through avoided deforestation and degradation. This article describes the issues at stake and demonstrates with a stylized transfer scheme which describes the negotiation between developing countries over the allocation of the forest fund, that there is a threshold in the level of contribution from the North. Below this level, the mechanism failed to curb the deforestation. Beyond this level, the REDD scheme induces perverse effects: the larger the North's contribution, the larger the deforestation rate. Consequently, the mechanism is most effecitve only at a threshold level. Besides, it implies deforestation efforts that generally fall short of the Pareto optimal level. Preliminary version

North/South Contractual Design Through the REDD+ Scheme

“…In the Guyanan case, the real RL regarding the annual average deforestation rate over the 2000-2009 period is bound to 0.03% per year while Guyana has obtained a contractual commitment with Norway on a 0.275% per year basis worth USD250M in compensation transfers. 10 The Guyanan real RL has therefore been inflated and Guyana will probably earn some rents from its private information. Indeed, having a higher effective deforestation rate at 0.275%, its gross benefits will be higher, though their real applied efforts will be lower and less costly.…”

“…• The aim of P is to reduce deforestation to mitigate climate change whilst delegating 10 Guyana did mandate McKinsey & Company to provide reports and economic policy orientation on forest management, as did other developing countries such as Democratic Republic of Congo or Indonesia.…”