Cost-Effective Payments for Reducing Emissions from Deforestation Under Uncertainty

Abstract

The decision of whether to retain forest or convert to another land use is affected by uncertainty over future land-use returns. This paper examines the design of conservation payments to landowners under uncertainty. Payments are indexed to the returns from forest conversion (agriculture), or to a market value associated with forest non-use benefits. Payment size depends on the dependency structure between the two competing returns and their relative volatility. In simulating payments for reducing emissions from deforestation and degradation (REDD) in Brazil, low correlation and greater volatility are shown to have opposing effects on landowners’ returns from market-based carbon payments.