Impacts of carbon-based policy instruments and taxes on tropical deforestation

The impacts of carbon payments and income taxes on curbing tropical forest loss are analyzed under a market equilibrium framework. The supply of cleared forest land was derived by using a two-period utility maximization model when the carbon sequestration of a private forestholder is credited. The land demand was derived from the profit maximization problem of a cash-crop farmer. The model was applied to data from the humid Chaco eco-region of Paraguay. The results indicate that taxes on cash-crop and forestry incomes may in fact be ineffective in curbing forest loss. Carbon payments, however, would effectively reduce forest clearing. In the context studied, a carbon payment of €30 per ton of carbon would limit deforestation to 10% of existing forest cover. A reversible carbon crediting system, in which a forestholder can redeem a credited forest, seems to substantially increase, at least in the short run, the effectiveness of carbon payments. Carbon payments could also complement the tax on cash-crop income in curbing tropical forest loss. An effective policy to combat tropical deforestation should, therefore, jointly consider forestry and cash-crop sectors.