Economics of Carbon Sequestration Projects Involving Smallholders

Abstract

Afforestation and reforestation projects have the potential to help mitigate global warming by acting as sinks for CO². However, participation in carbon-sink projects may be constrained by high costs. This problem may be particularly severe for projects involving smallholders in developing countries. Of particular concern are the transaction costs incurred in developing projects and measuring, certifying, and selling the carbon-sequestration services generated by such projects. This chapter addresses these issues by analyzing the implications of transaction and abatement costs in carbon-sequestration projects. A typology of transaction costs is presented, and estimates of the five cost types are derived based on a review of existing projects. The influences of project design on abatement costs and transaction costs are explored, and the critical values of a set of three project-design variables (farm price, number of participating farms, and minimum farm area) are identified for any given combination of transaction costs.