Abstract:
Analyses were carried out on financial compensation to avoid loss of tropical forests and related carbon (C)
emissions when marginal financial yield declined for land-use options with extended areas, and when a riskaverting
perspective (modeled according to financial theory around the capital asset pricing model) is
assumed. The approach in this study was to consider natural forest, forest plantation, pasture, and cropland
simultaneously to investigate how an optimized land-use distribution may reduce the amount of
compensation necessary to avoid C emissions from forest loss.
The financial compensations derived were as high as US$ 176 per hectare per year when comparing natural
forests only with the most profitable alternative (croplands). However, compensation decreased to US$ 124
for risk-neutral decision-makers, who would strive for optimized land-use allocation, and to only US$ 47 per
hectare per year for risk-avoiders, who would look to maximize the reward-to-variability ratio. Sensitivity
analyses indicated that the compensation under risk-aversion increased much less than under risk-ignoring
when increased productivity of agricultural land-use or growing demand for agricultural products was
simulated. It was concluded that considering appropriate diversification strategies and the well documented
human behavior to avoid risks is an important step in developing cost-effective compensation policies.