3 - The private sector, market mechanisms, and deforestation in Kalimantan

Presentation Abstract
Tropical deforestation, in Kalimantan as elsewhere, produces significant negative cross-border externalities as a contributor to global climate change. This justifies a certain amount of state intervention and international cooperation in order to internalize the effects and, ideally, achieve a socially optimum inter-temporal level of forest extraction vis-a-vis other economic uses of the land. Much of the discussion on mitigation policies focuses on the roles of states and their international policies (or lack thereof) in fixing such maket failures. In this paper, I take a different direction and will examine the possible roles of private sector actors and market mechanisms in regulating forest use in Kalimantan, motivated by the fact that most of the time government failures seen to be as rampant as market failures in this context. I will address the roles of the private sector in three policy settings: as recipient of payment for environmental services, as enforcer of forest conservation (i.e. environmental standard requirements), and as investor in the currently growing carbon-trading market. The recent Indonesian government initiative for developing carbon trade exchange is also of special interest and raises an important question: will assigning private property rights and internalizing this previously "missing market" help in reducing deforestation in Kalimantan? Drawing mostly on secondary data and literature, I will provide a descriptive analysis of the intensity of private sector roles in forest conservation efforts in Kalimantan through the three above-mentioned mechanisms, and identify the existing constraints on those roles.