We model the role of the world's forests as a major carbon sink and consider the impact that forest depletion has on the accumulation of CO2 in the atmosphere. Two types of agents are considered: forest owners who exploit the forest and draw economic revenues in the form of timber and agricultural use of deforested land; and a non-forest-owner group who pollutes and suffers the negative externality of having a decreasing forest stock. We retrieve the cooperative solution for this game and show the cases in which cooperation enables a partial reduction in the negative externality. We analyze when it is jointly profitable to abate emissions, when it is profitable to reduce net deforestation, and when it is optimal to do both (abate and reduce net deforestation). It is shown how the cooperative solution can be sustained by means of a time-consistent payment mechanism.
Published October 2012 , 34 pages