Conservation Payments under Uncertainty

The decision of whether to retain forest or convert to another land use is affected by uncertainty over future land-use returns. This paper examines the design of con- servation payments to landowners under uncertainty. Payments are indexed to the returns from forest conversion (agriculture), or to a market value associated with for- est non-use benefits. Payment size depends on the dependency structure between the two competing returns and their relative volatility. In simulating payments for reduc- ing emissions from deforestation and degradation (REDD) in Brazil, low correlation and greater volatility are shown to have opposing effects on landowners’ returns from market-based carbon payments.