Thursday, October 18, 2012
PUBLICATION: Conservation Payments under Uncertainty when Nonuse Benefits have Market Value
A new working paper by researchers at ETH Zürich and the London School of Economics:
The decision of whether to retain tropical forest or convert to another land use such as agriculture is affected by uncertainty over future land-use returns. A model of land-use change is developed to investigate the design of incentive payments to landowners under uncertainty. With the aim of conserving forests over time, payments comprise fixed and variable components. The latter are either indexed to the returns from forest conversion, principally agricultural production, or to a market value associated with forest non-use benefits. Payment size depends on the dependency structure between the two competing land returns and the relative volatility of the underlying returns. It is lower the higher the correlation between the returns from the indexed component and the returns from the alternative land use, and the greater the volatility of the returns from forest conservation relative to the alternative. The general model is simulated 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.