Files
Abstract
The clearing of forests for agricultural land and other marketable purposes is a welltrodden
path of economic development. With these private benefits from deforestation
come external costs: emissions from deforestation currently account for 12 per cent of
global carbon emissions. A widespread intervention in reducing emissions from
deforestation will affect the paths of agricultural expansion and economic growth of lower
income nations. To investigate these processes, this paper presents a general, dynamic,
stochastic model of deforestation and economic growth. The model is shown to generate
unique deforestation and investment paths and a model without reduced deforestation
policy is shown to have a stationary distribution of income and landholdings. There are
three main findings. First, in the short run national output growth falls with compensation
for reduced deforestation. Second, deforestation rates are reduced through compensating
either reduced deforestation directly or the stock of forests; however, compensating the
stock of forests is likely to be prohibitively expensive. Finally, by offering a fixed
compensation rate, as opposed to a compensation rate tied to a stochastic carbon price,
further reductions in deforestation can be achieved.