Cost-effective compensation to avoid carbon emissions from forest loss: An approach to consider price-quantity effects and risk-aversion

Thomas Knoke, Otto Emmanuel Steinbeis, Matthias Bösch, Rosa María Román-Cuesta, Thomas Burkhardt

Research output: Contribution to journalArticlepeer-review

65 Scopus citations

Abstract

Analyses were carried out on financial compensation to avoid loss of tropical forests and related carbon (C) emissions when marginal financial yield declined for land-use options with extended areas, and when a risk-averting perspective (modeled according to financial theory around the capital asset pricing model) is assumed. The approach in this study was to consider natural forest, forest plantation, pasture, and cropland simultaneously to investigate how an optimized land-use distribution may reduce the amount of compensation necessary to avoid C emissions from forest loss. The financial compensations derived were as high as US$ 176 per hectare per year when comparing natural forests only with the most profitable alternative (croplands). However, compensation decreased to US$ 124 for risk-neutral decision-makers, who would strive for optimized land-use allocation, and to only US$ 47 per hectare per year for risk-avoiders, who would look to maximize the reward-to-variability ratio. Sensitivity analyses indicated that the compensation under risk-aversion increased much less than under risk-ignoring when increased productivity of agricultural land-use or growing demand for agricultural products was simulated. It was concluded that considering appropriate diversification strategies and the well documented human behavior to avoid risks is an important step in developing cost-effective compensation policies.

Original languageEnglish
Pages (from-to)1139-1153
Number of pages15
JournalEcological Economics
Volume70
Issue number6
DOIs
StatePublished - 15 Apr 2011

Keywords

  • Carbon compensation
  • Endogeneity of tropical land-use
  • Financial modeling of land-use shares
  • Indirect land use change (iLUC)
  • Land diversification
  • Risk aversion
  • Uncertainty

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