Incentive Contracts for Environmental Services and their Potential in REDD

Projects for reducing emissions from deforestation and forest degradation (REDD) have not been widely adopted by carbon credit schemes due to the inherent problems with forest carbon credits that often lead to high transaction costs given the complications of measuring, monitoring, and verifying credits. Incentive-based contracts, where it is in the best interest of the environmental service users and providers to comply with the contracts, may be one way to reduce these costs if providers have incentives to uphold their end of the contract. While the literature on REDD is extensive, there is little information available to guide policymakers or investors on what form such contracts should take. After providing an overview of the current status of REDD and its role as a tool for reducing carbon emissions on an international scale, this paper considers the key issues that need to be addressed when implementing REDD projects, and how contracts can be designed to alleviate some of the subsequent problems with carbon credits. We draw from the literature on agricultural contracts, payments for ecosystem services, and other environmental service-related contracts and discuss the various implications associated with their design and implementation.