The REDD Scheme to Curb Deforestation: A Well-designed System of Incentives?^*

The need for a global agreement to the problem of tropical deforestation has led to the REDD (Reducing Emissions from Deforestation and Degradation) scheme, which proposes that the developed countries pay developing countries for CO₂ emissions saved through avoided deforestation and forest degradation. The remaining issue is specifying the rules defining payments to countries that reduce their deforestation levels. This article develops a game-theoretic bargaining model, simulating the on-going negotiation process which is currently taking place within the Convention on Climate Change, after the Copenhagen agreement of December 2009. It shows that the conditions under which developing countries are left to bargain over the allocation of the global forest fund may lead to an ineffective system of incentives. Below a given level of contributions from the North, the mechanism fails to curb deforestation. Beyond this level, it induces perverse effects: the larger the North's contribution, the larger the deforestation decisions. Consequently, the mechanism is most effective only at a specific threshold, which, given the unobservability of countries’preferences, can only be found by a repeated “trial and error” implementation process.