Economics Seminar - "Averting Deforestation at Scale: The Macroeconomics of Payments for Ecosystem Services"

Payments for Ecosystem Services are a tool for reducing carbon emissions from deforestation by paying households to conserve forest. Empirical evaluations have found small-scale subsidy interventions to have a large impact on deforestation. However, little is known about the general equilibrium effect of implementing these policies at a larger scale. I develop a tractable model of smallholders with dynamic incentives for land use to study the general equilibrium impact of at-scale forest subsidies. The quantied model implies that an at-scale intervention has only one-sixth of the impact on the level of forest of an otherwise-identical local intervention. This is because the intervention increases the equilibrium price of wood products, increasing households' incentive to deforest. However, the duration of subsidy payments is a crucial determinant of their cost-effectiveness: Comparing long-term and short-term interventions with the same total cost, long-term interventions can more than double the increase in the level of forest. Next, at scale, equilibrium forces make more households marginal to the subsidy and reduce the cost-effective degree of targeting. Finally, at-scale interventions are more progressive than local interventions because equilibrium price changes favor households with low land productivity.