Efficient Contracts for Carbon Credits from Reforestation Projects

Motu Working Paper No. 03-12

18 Pages Posted: 12 Jan 2004

See all articles by Suzi Kerr

Suzi Kerr

Motu Economic and Public Policy Research Trust

Date Written: July 2003

Abstract

This paper tackles the complex issue of how buyers and sellers within a domestic carbon credit system designed to include regenerating indigenous forest would optimally design contracts for trades of the new good, "carbon sink credits". The paper begins by briefly defining the constraints that sink projects must meet. This implicitly shows the freedom we have in designing contracts. In the context of a simple numerical example I discuss the constraints that the market puts on contracts. In particular I consider the interests of the buyers and sellers, and how they can maximise and share gains through contract design. I outline the sources of risk and discuss who has advantages in dealing with these risks. The best contract designs impose the risk on those most able to address or absorb it. I illustrate the potential gains from sink contracts with a range of conditions and contracts.

Keywords: Contracts, carbon credits, reforestation, projects

JEL Classification: Q25, Q28

Suggested Citation

Kerr, Suzi, Efficient Contracts for Carbon Credits from Reforestation Projects (July 2003). Motu Working Paper No. 03-12. Available at SSRN: https://ssrn.com/abstract=485504 or http://dx.doi.org/10.2139/ssrn.485504

Suzi Kerr (Contact Author)

Motu Economic and Public Policy Research Trust ( email )

Level 1, 93 Cuba Street
P.O. Box 24390
Wellington, 6142
New Zealand
+64 4 383 4250 (Phone)
+64 4 383 4270 (Fax)

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