Analysis Participation in the world's first clean development mechanism forest project: The role of property rights, social capital and contractual rules Yazhen Gong a, ⁎, Gary Bull b , Kathy Baylis c a School of Environment and Natural Resources, Renmin University of China, PR China b Faculty of Forestry, University of British Columbia, Canada c Department of Agriculture and Consumer Economics, University of Illinois, USA abstract article info Article history: Received 11 May 2009 Received in revised form 11 September 2009 Accepted 3 November 2009 Available online 12 January 2010 Keywords: Guangxi CDM project Transaction costs Property rights Social capital Contractual rules Clean Development Mechanism (CDM) forest projects are perceived as an attractive way to both help mitigate climate change and transfer income to rural poor. However, to engender participation of small-scale producers, a CDM forest project must offer sufficient incentives, while minimizing their costs of participation, all the while respecting the need for additionality. Property rights, social capital and contractual rules are critical in the success of CDM forest projects. In this paper, we ask what factors affect participation in the world's first CDM project, established in Guangxi Province, China. Using village-level surveys, we find that although the project facilitates participation through carbon pooling and a share-holding system, much of the project land remains unforested. We find that the primary reasons for the unforested regions are constrained contractual rules, property rights allocation disputes and low levels of social capital in some villages. © 2009 Elsevier B.V. All rights reserved. 1. Introduction Clean Development Mechanism (CDM) forest projects are intended to be both a Payment for an Environmental Service (PES) and an instrument to facilitate sustainable development in developing countries 1 (Haupt and von Lüpke, 2007; Smith and Scherr, 2003). To facilitate sustainable development, these projects should benefit both the environment and rural land users, provided the land users are willing and able to participate. However, high transaction costs 2 and large uncertainties often bar small-scale and poor land users in developing countries from making what are inherently long-term and often expensive investments in forestry (Pagiola et al., 2005; Wunder, 2005). While project design can partially address these obstacles to participation (Pagiola et al., 2005; Tschakert et al., 2007; Wunder, 2005), the relationship between the buyer and seller of the environmental service is affected by the institutional framework (Muradian et al., 2010-this issue). Using the world's first CDM forest project in Guangxi province in China as our case study, we illustrate how social capital, property rights and contractual rules impact the local land users' willingness to participate. Forest carbon sequestration projects face many formidable obstacles due, in part, to substantial transaction costs, large risk and uncertainties, long time horizons and high establishment costs (Cacho et al., 2005; Griss, 2002; Haupt and von Lüpke, 2007; Keenan et al., 2004; Milne, 1999; van Kooten et al., 2002). Uncertainties arise from ambiguous property rights, vague or rapidly changing government policies and unknown carbon market prices (Griss, 2002; Keenan et al., 2004; Reedy, 2003). Additionally, there is underlying risk from human-induced and natural disasters (Griss, 2002; Keenan et al., 2004; Reedy, 2003). Since many small-scale poor land users in developing countries have only small plots of land and serious cash- flow or liquidity constraints, they cannot easily absorb negative shocks. Thus, risk acts as a formidable barrier to project participation. Pooling or bundling individual activities and signing collective contracts with groups of smallholders spreads transaction costs over a large group and can be a practical means for small-scale land users to participate (Grieg-Gran et al., 2005). Nonetheless, pooling requires collective action, the success of which largely depends on a mix of property rights, contracts and social capital (Ostrom, 1991; Pagiola et al., 2005; Wunder, 2005). These three components are not independent. Contracts operate within a regime of property rights (North, 1990) and social capital can determine individual's ability to enforce contracts through social structures (Kumar and Matsusaka, Ecological Economics 69 (2010) 1292–1302 ⁎ Corresponding author. Mailing Address: School of Environment and Natural Resources, Renmin University of China, 59 Zhongguancun Road, Beijing 100872, P.R. China. Tel.: +86 10 8250 2990; fax: +86 10 6251 1645. E-mail address: ygong.2005@gmail.com (Y. Gong). 1 In theory, CDM can be considered a particular type of PES that uses economic incentives to both enhance the environmental service and provide a global public good (see Engel et al., 2008; Muradian et al., 2010—this issue). 2 Usually a statement of the Coase theorem uses the term transaction costs. Since we refer to transaction costs as a specific set of costs associated with project implementation, and not those costs associated with bargaining, we use the term bargaining costs to capture search, negotiation and, excludability, and costs of establishing property rights needed for a contract to be feasible. 0921-8009/$ – see front matter © 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2009.11.017 Contents lists available at ScienceDirect Ecological Economics journal homepage: www.elsevier.com/locate/ecolecon