The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMP or IMF policy_ Working Papers describe research in progress by the author(s) and are_p~blished to elicit comments and to further debate. This paper examines the role and impact of taxation on sustainable forest management. It is shown that fiscal instruments neither reinforce nor substitute for traditional regulatory approaches. Far from encouraging more sustainable forest management, fiscal instruments such as an inappropriate tax policy can actually undermine it. The paper uses the arguments at the root of the Faustmann solution to draw conclusions on the incentives for sustainable tropical forest exploitation. The paper also proposes a bond mechanism as an alternative market-based instrument to encourage sustainable forest logging while reducing monitoring costs.
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