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

Arthur A. van Benthem and Suzi Kerr

No 96813, 2010 Conference, August 26-27, 2010, Nelson, New Zealand from New Zealand Agricultural and Resource Economics Society

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: Agricultural and Food Policy; Community/Rural/Urban Development; Environmental Economics and Policy; Land Economics/Use (search for similar items in EconPapers)
Pages: 48
Date: 2010-08
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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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Persistent link: https://EconPapers.repec.org/RePEc:ags:nzar10:96813

DOI: 10.22004/ag.econ.96813

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