Environment and Development Economics

Theory and Applications

Reduced deforestation and the carbon market: the role of market regulations and future commitments

Niels Angera1, Alistair Dixona2 and Erich Livengooda3

a1 Centre for European Economic Research (ZEW), P.O. Box 10 34 43, 68 034 Mannheim, Germany. Email: niels.anger@gmail.com

a2 KEA 3 Limited, New Zealand. Email: alistair.dixon@kea3.co.nz

a3 KEA 3 Limited, New Zealand. Email: erich.livengood@gmail.com

Abstract

Reducing emissions from deforestation and degradation (REDD) has been proposed as an economic and extensive source of emission abatement to supplement other long-term climate policies. However, critics suggest an excess supply of REDD credits may disrupt emerging carbon markets and raise north–south equity concerns. In this context, we investigate the economic implications of REDD regulations and future emissions reduction commitments. Numerical model simulations show that unrestricted exchange of REDD units reduces the international carbon price by half and cuts compliance costs by roughly one-third. Developed nations’ requirements for policy supplementarity, which restrict demand for REDD credits, reduce such price impacts but go at the expense of both economic efficiency and benefits to rainforest areas. Instead, unlimited REDD access facilitates climate policy targets to be tightened by almost a quarter at constant compliance cost, tripling the environmental ambition of the Kyoto Protocol and providing considerable wealth transfers to developing countries.

(Received May 24 2010)

(Revised June 29 2011)

(Accepted January 24 2012)

(Online publication February 24 2012)

Footnotes

The authors would like to thank Rachel Holden for scientific support. Funding by the New Zealand Ministry of Agriculture and Forestry is gratefully acknowledged.