Instrument choice for sustainable development: an application to the forestry sector

The paper addresses the problem of the choice of policy instruments for sustainability in a privately operated forestry industry. Sustainable forestry affects many aspects of operations. Sustainability conditions are exogenous to project appraisal and should appear as constraints on project design. As applications of broader policies, sustainability requirements do not possess a monetary value independently of the policy they are derived from. Efficient instrument choice entails a trade-off between control and compliance costs. Marketable instruments are unlikely to be efficient in forestry. Where policy failure results in irreversible effects, the Polluter Pays Principle should not be applied. Efficient instrument choice in the presence of irreversibility requires that the agent be rewarded for contributions to achieving the policy objective.