Implementation

Fully integrating deforestation into the carbon-trading mechanism involves complex issues of implementation that need to be solved. Here we obviously do not claim to deal with these issues in detail; we limit our analysis to providing hints about the feasibility of the approach. There are two types of implementation issues: (1) “macro” issues, which relate to the provision of incentives to the LDCs in general, and in particular to Latin America, to become involved in a world system of carbon trade and to accept limits on their CO₂ emission rights; and (2)“micro” issues, which relate to implementation at the national and local levels to assure that the deforestation reduction goals are achieved.

“Macro” Issues. Though the use of some form of historical benchmark in setting each country’s carbon quotas is inevitable, it should include all sources of CO₂ emissions. That is, LDCs, and the region in particular, should receive carbon quotas for all their emissions in 1990, including fossil-fuel sources, deforestation, and other biomass-burning sources. As is shown in Table 3, this more than doubles the emission credits that Latin America would receive if only fossil-fuel emissions were accounted for.

To facilitate the incorporation of LDCs into the global system with tradable country carbon quotas, the industrialized countries need to recognize that, given that LDCs currently have much lower per capita emissions, the quota allocations should permit, if not convergence in per capita emission rights, at least a gradual process in that direction. This may be translated, for example, into a 0.5% per annum increase in emission rights to the South with a corresponding reduction in the North. Thus, LDCs, and Latin America in particular, would make a sizable contribution to reducing CO₂ emissions from deforestation in the short run for which they would obtain significant rents, but through time most of the efforts to cut emissions further would have to be made by the industrialized countries.

The quota trading system should be flexible enough to permit the leasing or borrowing of quotas. This would decrease the risks for LDCs related to permanently forgoing their rights to CO₂ emissions. It would also reduce concern that LDCs might lose the least expensive abatement options.

Monitoring issues are also very important. The Northern countries should perfect a system of monitoring forest losses through remote sensing and other techniques. The North and the South need to establish a system of technical collaboration to create an accurate system of measuring deforestation by geographic regions. Additionally, a survey process that would make it possible to measure average carbon content for the various forest types should be implemented.

“Micro” Issues. One of the factors that have exacerbated tropical deforestation in the past has been the lack of development of local institutions that permit internalizing the value of the forests. It can be argued that one of the main reasons why such institutions have not been developed is that there were not enough economic incentives. Evidence of rapid institutional development in LDCs where such incentives are in place is plentiful (Baland and Platteau, 1996), but in most frontier forest areas this has not occurred. The reason is that, given the extremely low value of the standing forest recognized by the market (despite its very high social value from a global perspective), neither local governments, local communities, nor the private sector were likely to spend resources on resolving property rights. The consequence was that standing natural forests became a resource that could be exploited under a mostly open access regime.

If carbon trading gives a much larger market-recognized value to standing forests, the economic incentives to develop new institutions with well-defined rights to them increase dramatically. This is likely to induce a spontaneous process of institutional build-up that will considerably facilitate their protection and management. Not only will the private sector and local communities now have incentives to expend efforts on establishing rights over forests, but also local and other governments would have much greater incentives to channel and organize the process and to involve themselves directly in the protection of forests. Given the right incentives, conservation is likely to become a more important source of growth than exploitation in tropical areas.

Another related issue concerns the degree of decentralization of the quota allocations. In order to maximize the likelihood that the incentives for institutional development are effectively transmitted, deforestation quotas in settled areas should be directly allocated to local governments, local communities, NGOs, individuals, and firms that are in actual or potential control of the forests. Central governments would have a role in protecting areas not yet settled, and would commit themselves to a moratorium on road and infrastructure construction in the core forest areas. Local agents would lease or sell their quotas domestically or internationally, undertaking to prevent deforestation and CO₂ emissions within their geographic jurisdictions.

This decentralized mechanism means that rural communities could directly benefit from CO₂ trade without the mediation of the central government. An infusion of several billion dollars per annum into these communities might make a large contribution towards reducing rural poverty in Latin America. A significant part of the forest fires are caused by subsistence farmers who could earn a much higher income, simply by devoting part of their time to preventing further deforestation.