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Abstract
This paper analyzes carbon leakage due to reduced emissions from deforestation (RED). We find
that leakage with RED is good because the policy induces afforestation that contributes to a
further carbon sequestration. By ignoring the domestic component of carbon leakage, the
literature can either overestimate or underestimate leakage, depending on the magnitudes of the
numerator and the denominator of the leakage formulas. Unlike the literature, we include the
land and agricultural markets in the analysis of carbon leakage with forestation policies. In this
model, carbon leakage depends on: (1) supply and demand elasticities of timber production and
consumption, respectively in the country introducing a RED policy (Home country) and in the
rest of the world; (2) Home country's production and consumption share in the world timber
production and consumption, respectively; (3) prices of land and crop products in the Home
country and the rest of the world; (4) initial allocation of land between forestry and agriculture;
(5) share of total forest area set aside under RED; and (6) relative carbon sequestration potential
of the forest planted on an afforested land and of the forest withdrawn from timber harvest.
These potentials depend heavily on the forest species as well as on timing of the policy, and on
the discount rate and time path of increasing carbon prices.