Trading REDD Credits in International Carbon Markets: Interactions among International Trade, Carbon and Agricultural Markets

Abstract

While several economic studies have looked into the role of REDD in climate policy, the interlinks between climate policy, international trade and agricultural markets have been only marginally considered. This paper adds to that discussion by developing a policy simulation exercise in which REDD credits can be traded in an international carbon market using a recursive dynamic computable general equilibrium model. The model was extended to incorporate abatement cost curves of avoided deforestation from a partial equilibrium study, and to account for the corresponding induced effects on land and timber markets. We conclude that REDD may significantly reduce policy costs. A large number of REDD credits entering the carbon market would allow regions pertaining to the climate policy agreement to systematically emit above their targets. These results confirm that policy design may require limits to the use of REDD credits along with the creation of long-term incentives to promote a greener economy. Finally, when international competitiveness effects are taken into account, we show that the use of REDD as a means to foster developing countries’ participation in climate policy may not be sufficient.