Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers

Arthur van Benthem () and Suzi Kerr
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Arthur van Benthem: Stanford University, Department of Economics

No 10_04, Working Papers from Motu Economic and Public Policy Research

Abstract: As part of international climate change policy, voluntary opt-in programs to reduce emissions in unregulated sectors or countries have spurred considerable discussion. Since any regulator will make errors in predicting baselines, adverse selection will reduce efficiency since participants will self-select into the program. In contrast, pure subsidies lead to full participation but require large financial transfers; this is a particular challenge across countries. A global social planner facing costless transfers would choose such a subsidy to maximize efficiency. However, any actual policy needs to be individually rational for both the buying (industrialized) and selling (developing) country. We present a simple model to analyze this trade-off between adverse selection and infra-marginal transfers. The model leads to the following findings. First, extending the scale of voluntary programs both improves efficiency and reduces transfers. Second, the set of individually rational and Pareto efficient policies typically features a combination of credit discounting and stringent assigned baselines which reduce efficiency. Third, if the industrialized countries can be persuaded to be more generous, the feasible policy set can come close to the globally efficient policy to avoid deforestation..

Keywords: Voluntary opt-in; adverse selection; deforestation; offsets; emissions trading; REDD (search for similar items in EconPapers)
JEL-codes: Q54 Q56 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2010-08
New Economics Papers: this item is included in nep-ene and nep-env
References: View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Working Paper: Optimizing Voluntary Deforestation Policy in the Face of Adverse Selection and Costly Transfers (2010)
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