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

Abstract

AbstractReducing 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.