The Woods Hole Research Center (WHRC)

The “stock-flow with targets” approach by WHRC proposes a new allocation mechanism to address concerns in existing proposals. Cattaneo builds on the “compensated reduction” approach in a way that avoids the implicit penalty imposed on countries with a historically low rate of deforestation, and proposes an approach that is along the lines of the “combined incentive” approach, but with a stronger underlying economic rationale.

Since countries’ participation in REDD will be voluntary, the design of the incentives has to take into consideration both the environmental target to be reached and how to distribute rents to encourage broad participation. Trying to do both with just the baseline as a parameter can be difficult because there are implicitly two objectives: reaching an environmental target among participating countries and maximising country participation.

The basic “stock-flow” approach uses two instruments, the baseline and withholding level, to pursue these two objectives. Countries’ baselines are set to historical emissions so that all emitting countries have an immediate positive incentive to lower emissions. The withholding rate, relative to the price of carbon, generates the funds to be distributed as dividends. To maximise incentives in the REDD mechanism, the “stock flow with targets” approach introduces a third instrument, the “target”, below which the withholding rate will not apply. This approach is more effective because stock funds are still available for countries with low rates of deforestation, but the marginal incentive to reduce deforestation beyond the target for high deforesting countries is greater.