Saturday, March 22, 2008

Carbon capitalism: Coasian bargains or efficient rent seeking?

This week's New Scientist talks about paying countries to maintain forest cover. The idea has generated a fair amount of interest, and for good reason. Considering that the world's forests hold 50% more carbon dioxide than the atmosphere as a whole and that maintaining forests costs about half as much (about $10 per ton) as replacement technologies for coal, keeping the forest cover we have seems like a bargain. But who should pay for maintaining the forests? This is a classic free rider problem, and one that is perfect for thinking about Coasian bargains and efficient rent seeking.

Currently, one program buys off the cooperation for maintaining forests. That group is the Coalition of Rainforest Nations and the program is Reducing Emissions from Deforestation and Degradation (REDD). It is a non-governmental organization that pays countries not to deforest. The countries then distribute the revenue to companies. Is this an efficient bargain? At first glance this seems like an assignment of property rights over environmental concerns, namely deforestation and emissions, in a way that allows for contracts and bargains to compensate all parties. In short, a perfect Coasian outcome where transaction costs were internalized (and privatized) and property rights were clearly defined, which in turn limits transaction costs. Yet this may not be the case.

Apparently Indonesia really likes this program. Maybe too much. Indonesia really likes the $3.75 billion it might receive every year from this plan. Is this a case of a Coasian bargain or is it a case of rent seeking? I'm not convinced it matters because the outcome is efficient (though not Pareto efficient) in either case. I think this is efficient rent seeking, where governments act in their own selfish interest. In this case Indonesia is exploiting the global community, but they are ultimately doing what is asked, namely not destroying their forests. In any event, it seems that because property rights have been assigned (in this case by REDD), transaction costs are reduced to the point that a bargain can be reached that achieves everyone's goals. Indonesia is not getting something for nothing (or are tribes along the Amazon). Rather, they are receiving payment as compensation for not being able to exploit their resources as they wish.
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