One of the most important results of the 1997 Kyoto meetings was the agreement to develop an international system of trading in carbon emission permits. Developed countries agreed to participate in such a system on the basis of the establishment of binding quotas by country, using 1990 as a benchmark year. Less-developed countries (LDCs) are not at present willing to participate directly in such a system and do not accept binding emission quotas.

This paper argues that if all carbon emissions, including both fossil-fuel and biomass emissions, are considered, LDCs, and Latin America in particular, can attain large economic and environmental gains by joining in carbon trading. In Latin America deforestation, particularly through forest burning, is the most important source of global warming gases. If the country allocation of carbon permits included the 1990 emissions associated with deforestation, the region as a whole would acquire emission permits equivalent to more than 200% of its current emissions from industrial sources. The quota values related to the carbon-retention function of the forests would increase the value of the standing forests dramatically. This could substantially increase the incentives for reducing deforestation if the new market value of the forest was allowed to affect the behavior of the local agents of deforestation. If Latin America reduces deforestation significantly, it can immediately start obtaining large quota rents, much greater than the forgone income related to forest clearing, without affecting its future growth potential.