Integration of REDD into the international carbon market : implications for future commitments and market regulation

Integrating reduced emissions from deforestation and degradation (REDD) into a post-Kyoto intergovernmental carbon market could significantly decrease global carbon prices and the costs of mitigating climate change. We investigate this impact by simulating the impact of the supply of REDD units on the international carbon market in 2020 under unlimited and restricted exchange conditions. We find restricting supply or demand of REDD credits reduces such price impacts, but comes at the cost of economic efficiency. The introduction of deeper Annex I emissions reduction commitments reduces the impact on global carbon prices, but entails substantial compliance costs and wealth transfers. While REDD provides large economic benefits for tropical rainforest regions, any REDD fungibility scenario which results in a reduction in the international price of carbon also reduces transfers to the CDM host countries. Our modelling indicates unrestricted exchange of REDD units reduces the international carbon price by half and cuts Annex I compliance costs by roughly one third if projected emissions reduction commitments are unchanged. Alternatively, Annex I reduction commitments could be increased by around 60 percent at constant carbon prices. The findings of this research have relevance for policy makers and academics seeking to understand carbon market implications of supply variability and policymakers considering the introduction of REDD market mechanisms.