Distrust, but verify? - Theoretical insights into auditing carbon sequestration in tropical forests
Greenhouse gas emissions abatement costs are of a significant character. Therefore, mitigation activities involving low marginal abatement costs, such as carbon sequestration in tropical forest, are appealing. Challenges related to information, incentives and institutions, however, hinder the implementation of such a scheme. After failing to reach consensus at 2012 climate summit, a decision on the topic of monitoring, reporting and verification is expected to be adopted at the 2013 climate summit.
Generalizing the cost structure of Kofman and Lawarrée (1993), I characterize if and how it is best to audit conservation. In my model, the donor country has to disposal two auditors; An auditor located in the recipient country who is costly and might collude with landholders, and an international and independent auditor who is more expensive but truthful.
When the limited liability constraint of landholders is low and the auditing technology is imperfect, I find that costs of auditing may be so high that one is better-off not doing it. Interestingly, the findings therefore underscore the scope of capacity building. Such activities may facilitate a reduction in costs of auditing. It might become preferable to use an auditor of the recipient country to monitor reports of landholders and then have an independent institution at the international level verifying this information.