Addressing additionality in REDD contracts when formal enforcement is absent

Paula Cordero Salas, Brian Roe and Brent Sohngen

No 6502, Policy Research Working Paper Series from The World Bank

Abstract: The success of reducing carbon emissions from deforestation and forest degradation depends on the design of an effective financial mechanism that provides landholders sufficient incentives to participate and provide additional and permanent carbon offsets. This paper proposes self-enforcing contracts as a potential solution for the constraints in formal contract enforcement derived from the stylized facts of reducing emissions from deforestation and forest degradation implementation in developing countries. It characterizes the optimal self-enforcing contract and provides the parameters under which private enforcement is sustainable when the seller type that is, the opportunity cost of the land, is private information. The optimal contract suggests that the seller with low opportunity cost receives a positive enforceable payment equivalent to the information rents required for self-selection, in contrast to when the buyer knows the seller type in which case all payments should be made contingent on additional forest conservation. When the buyer does not know the seller type, a first-best self-enforcing contract can be implemented if forest conservation is sufficiently productive. If the gains from forest conservation are small, self-enforcing contracts may induce some carbon sequestration by some or all seller types, depending on the value of the shared gains of the relationship.

Keywords: Climate Change Mitigation and Green House Gases; Contract Law; Debt Markets; Common Property Resource Development; Forestry (search for similar items in EconPapers)
Date: 2013-06-01
New Economics Papers: this item is included in nep-agr, nep-cta and nep-env
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Addressing Additionality in REDD Contracts when Formal Enforcement is Absent (2012)
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