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Abstract
This paper analyses the impact of introducing REDD credits into a carbon market following the Copenhagen Accord. This is done by means of an extended recursive dynamic CGE model that incorporates avoided deforestation abatement cost curves from a partial equilibrium study, taking also into account land and timber effects resulting from avoided deforestation activities. Various policy scenarios considering different levels of restrictions to the use of REDD credits are analyzed. We conclude that REDD may significantly reduce carbon prices and policy costs. When no limits are imposed, the large number of REDD credits entering the carbon market allows the regions pertaining to the climate policy agreement to systematically emit above their targets. While it is economically sounding that abatement is shifted to lower abatement costs activities, these results confirm that policy design requires limits to the use of REDD credits along with the creation of long term incentives to promote a greener economy. On the other hand carbon prices are sufficiently high to guarantee substantial reductions in deforestation rates. Regions selling avoided deforestation credits without a binding emission reduction target may benefit from carbon leakage and be better off when the selling of REDD credits is not allowed.