Forest Carbon Incentives in Climante Policy: Understanding the Economonics

A dimension that can greatly influence how international forest carbon policies work is the source of financing to pay for emission reductions. Compensation will likely come either from using part of the global carbon market a flexible compliance mechanism for those countries that face a mandatory cap on their emissions, some other nonmarket transfer of funds to the country achieving the reductions (often called the fund approach), or a mix of the two. This report directly assesses the consequences of including demand from a compliance market as the source of international forest carbon compensation. This does not presuppose or advocate the policy outcome (market or fund); rather, it uses the results of economic modeling to inform the discussion, including how the inclusion of forest carbon might affect the carbon market price and the distribution of abatement efforts across sectors and countries.