It appears that Malaysia and other similar countries with significant forest cover may end up as winners out of the ongoing 15th Conference of the Parties to the United Nations Framework Convention on Climate Change in Copenhagen. Whether these set of countries will be net winners are another matter altogether but as far as compensation for maintaining forest cover, or within the context of COP15, carbon sink goes, reports are coming out that this is one aspect that is going pretty well.[1]

The economics behind such compensation is as sound as the economics behind carbon tax or cap and trade. It is about pricing externality.

The difference between such compensation and carbon tax or cap and trade is that the former addresses positive externality while the latter addresses negative externality. That is in econolese. In English, it means paying someone for doing something that affects others in a good way and penalizing someone for doing something that affects others in a bad way. It is about accounting for spillover effect. In a way, it is a full cost accounting.

While I am excited at seeing an economic theory being put into practice, I am curious at how exactly will it be implemented. The biggest issue here is related to opportunity cost. The compensation will have to be big enough to address the problem of opportunity cost faced by owners of forest.

Some forested land may not be opened even without compensation. That put the opportunity cost of such land very low. I would imagine, some countries would not admit to that and instead, would overestimate their opportunity cost. It is not hard to come up with a plan to open up new land, project its economic value to some monstrous value that could be outrageous compared to actual situation and have that as the opportunity cost.

I know, forest has its inherent value. I am sympathetic to that argument. Inherent value however is hard to measure, and no one will pay for it despite all the sound moral argument defending it. The best way to price forest by its concrete opportunity cost: what other alternatives are possible to have a covered land and what is the value of that alternatives?

While I do support such compensation, these concerns must be resolved conclusively. Else, the arrangement will be a farce that only redistribute wealth unfairly.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — COPENHAGEN — Negotiators have all but completed a sweeping deal that would compensate countries for preserving forests, and in some cases, other natural landscapes like peat soils, swamps and fields that play a crucial role in curbing climate change. [Climate Talks Near Deal to Save Forests. Elisabeth Rosenthal. New York Times. December 15 2009]

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