North / South Contractual Design through the REDD+ Scheme

Abstract

Climate change is a worldwide issue that needs to be tackled. One of the primary source of carbon emissions is deforestation and forest degradation responsible of anthropogenic GHG emissions in a range of 12% (Van der Werf et al. (2009)) to 15-20% (IPCC (2007a, 2007b)). To deal with the deforestation and forest degradation issue, the international community has been promoting the Reducing Emissions from Deforestation and Forest Degradation + (REDD+) scheme to design the post-Kyoto architecture. There is currently an ongoing debate with regards to the REDD+ scheme in terms of rewards given to developing countries. The first objective of our article is to theoretically ground the REDD+ scheme as a contractual relationship in the light of the theory of incentives, either through a performance-based contract or through a conditionality-based contract. The second objective is to show that a conditional approach can be designed through actions or effective domestic efforts in developing countries towards avoided deforestation. In our analytical framework, we get a few important results. Firstly, we can state that, like in any contract dealing with hidden information, there is an information rent / efficiency trade-off within a REDD+ scheme. If the contract is performance-based, information rents are awarded to countries with the ex ante lowest deforestation in order to incite them to induce the highest efficiency whilst coping with deforestation. A puzzling result emerges: resulting avoided deforestation through effective domestic efforts can be decreasing with the baseline announced. If the contract is conditionality-based, this does play in the opposite way as information rents are awarded to countries with the ex ante highest deforestation, and therefore the optimal scheme implies to tackle forest areas where deforestation is per se the highest. Secondly, whilst comparing these contracts, there is a baseline threshold in terms of effciency towards less deforestation.

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