In recent years, ‘environmental economics’ has provided the dominant logic underpinning policies for ‘sustainable development’ in the form of government managed price-based and rights-based mechanisms. The advocacy of property rights in environmental management is taken further in the libertarian ‘free market’ approach and this ‘privatisation’ perspective is reflected in the growing use of property rights instruments in climate change policy. This article examines the efficacy of using economic instruments in the environmental context where ‘market ecology’ promotes the commodification of environmental ‘goods’ and ‘bads’ and their management by market forces. It argues that the pricing of ‘nature’ or its useful properties is a crude abstraction that implies ecological values can be alienated, but this is incompatible with the material and relational qualities of such values. The limits of this conceptualisation are further demonstrated through an examination of the Kyoto Protocol’s Clean Development Mechanism (CDM), a price and property rights instrument which enables private project developers in developing countries to produce carbon credits in order to offset greenhouse gas pollution in developed countries. The evident negative social and environmental effects flowing from implementation of the CDM reinforce the limitations of economic logic in the environmental context.

The logic of the Clean Development Mechanism (CDM) and other such ‘carbon (C) offsets’ rests on the notion that the opportunity cost of reducing C emissions is lower in developing countries, creating opportunities for mutually beneficial C trading. While the CDM may offer significant gross financial benefits, there has been little analysis of the opportunity costs of foregone resource exploitation and development opportunities. In addition to assessing the potential for net benefits, this paper also considers the practical implications for design and implementation of C offsets for forest conservation and agroforestation in Indonesia. Virtually nothing is known about these administrative factors, and their associated costs, which can also play a decisive role in feasibility of C offset schemes. Data are from field studies in the lowlands of the Indonesian island of Sumatra, where forests and derived land uses are broadly representative of the lowland humid tropical rainforest systems of insular South-East Asia. These data are the basis for assessing the trade-offs between natural forest protection for C sequestration and conversion to other land uses to meet national development objectives that directly affect people's livelihoods. Carbon stocks are analyzed in terms of ‘time-averaged’ C, an indicator developed for this project. Opportunity costs of land-use alternatives are estimated using standard techniques for economic assessment of investment projects in developing countries. The study finds that imputed timber values are a significant share of the opportunity costs of forest conservation, even for conservative estimates of timber prices. The question of compensating for these foregone values raises complex questions regarding the political economy of Indonesia, since property rights over these resources are highly contentious. These controversies over property rights are also examined within the context of recurrent smoke pollution from land fires in Indonesia, that (among other problems) contribute to greenhouse gas emissions. This smoke is symptomatic of deeper political and institutional problems that raise questions about the permanence of C storage through land-use practices in Indonesia. In comparison to forest conservation, C offsets through agroforestation seem more feasible in Indonesia because property rights over timber from planted trees would be easier to establish and enforce than property rights over timber from natural forests. Although results in this paper look promising, there is still much to be learned about implementation costs, even for the ‘easier’ case of agroforestation.

The proposed Clean Development Mechanism (CDM) of the Kyoto Protocol paves the way for financial and technological transfers to support forestry projects that sequester carbon or protect carbon stocks. From its inception, the concept has been highly controversial. It has been enthusiastically supported by those who believe that conservation of tropical forests will be difficult unless forest owners and managers are compensated for the environmental services of their forests. Others believe that financial transfers supporting ‘carbon farming’ would ignore social concerns and the full range of goods and services of forests. This paper examines the implications of CDM for forest conservation and sustainable use, by drawing on recent literature and the results of a policy dialogue with CDM stakeholders. We conclude that initial estimates of the contribution tropical forestry could make to both climate change mitigation and to forest conservation need to be scaled down. CDM payments for tropical forestry are likely to be received in a far more limited area than initially expected. The cost-effectiveness of forestry projects relative to projects in the energy sector may have been overestimated. In particular few estimates have adequately accounted for the likelihood that the duration of CDM forestry projects is unlikely to be as long as the residency time of carbon in the atmosphere. Also political realities and investor priorities may not have been sufficiently understood. CDM funding for forestry may also decline in future as economically viable clean technologies are increasingly developed in the energy sector. Tropical forests are likely to be an intermediate climate change mitigation strategy for buying time, until more permanent options become available. The most important justification for including forests in CDM may lie in the contribution CDM could potentially make to forest conservation and sustainable use. An analysis of the implications of CDM for forests reveals the importance of involving forest stakeholders more closely in the CDM debate. To prevent perverse outcomes and reduce the risk of ‘leakage’ of emission reduction to areas outside project boundaries, CDM projects may need to be limited to niches which meet certain political and institutional preconditions and where sufficient understanding of local decision-making and the broader context is available. CDM may be more effective if used to remove non-economic impediments to forestry activities that are economically viable and meet local needs. Lessons from the forestry sector in relation to plantations, natural forest management, forest conser- vation and non-timber forest products are discussed to illustrate the dangers of misusing CDM and also to give examples of how CDM could be harnessed for better use of forests. CDM should be seen as one more tool for enhancing the effectiveness of more conventional ways of promoting forest conservation and sustainable use.