Most companies find it more profitable to clear forests or degrade them than to manage them sustainably. Unless that changes, forests will continue to rapidly vanish.

Policy analysts have proposed five main ways to avoid that outcome:

1) Charge fees for unsustainable forest use

2) Pay forest owners for environmental services and better management practices

3) Establish clear property rights over forest resources

4) Regulate forest use

5) Change non-forest policies such as road building and agricultural credit

Michael Richard’s ’Internalising the Externalities of Tropical Forestry: A Review of Innovative Financing and Incentive Mechanisms’ published by the Overseas Development Institute and the European Commission examines the advantages and disadvantages of each approach. Richards pays particular attention to fashionable topics such as carbon offset trading, timber certification, and bioprospecting. He also discusses several less well-known cases. For example, in Japan water users pay up-stream landowners to protect watersheds. Several states in Brazil have a special value added tax they use to reward municipal governments that achieve environmental objectives. National park entrance fees finance forest conservation in Belize and Nepal.

So far, no one has discovered any magic bullets. Some alternatives seem more likely to succeed than others, but they all have significant drawbacks. Strong vested interests oppose certain policies that might otherwise appear quite attractive. Effectively implementing other potentially interesting policies requires more institutional capacity than most countries possess.

Richards considers carbon offset trading the most promising of the more market-oriented approaches. Nevertheless, he points out that governments that signed the International Convention on Climate Change have still not decided whether to allow payments for carbon offsets involving forest creation and conservation.

Market-oriented approaches alone cannot solve the problem. To make significant progress governments, international agencies, and NGOs will have to tackle the daunting tasks of establishing effective regulatory systems. They will also have to reform existing macroeconomic, agricultural, transportation, energy, and mining policies to reduce pressure on forests.