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briefing
maRCh 2009
Financing REDD: meshing
markets with government funds
briefing
Deforestation accounts for roughly 17 per cent of global greenhouse gas
emissions. So it is no surprise that in the runup to the December 2009 climate
talks in Copenhagen, REDD – reduced emissions from deforestation and
degradation – is emerging as a strategy with big potential for mitigating climate
impacts. With REDD, local communities can be rewarded for conserving their
forests, so the approach works for poverty alleviation as well as emissions
reduction. Evidence is showing that REDD is simple and workable. Funding is
Policy an altogether more complex issue, however. Looking at the roles of market and
briefing
pointers government, is a combined approach to financing REDD feasible?
REDD and climate change after 2012, are searching for a consensus on how
challenges to include a provision for REDD – reduced emissions
from deforestation and degradation. The Bali Roadmap
n Government-to-government Deforestation is a major driver of climate change, for the new international climate change agreements
funding alone is not at the releasing billions of tonnes of carbon dioxide (CO2) includes a focus on REDD.
right scale, or efficient and and other greenhouse gases into the atmosphere. The REDD can simultaneously reduce emissions and
effective enough, to lower Intergovernmental Panel on Climate Change (IPCC) alleviate poverty by rewarding local communities for
emissions. Market-based – the 2000-plus scientists who analyse the evidence on conserving their forests. As a relatively new alternative
finance alone will fall climate change – estimates that the forestry sector is method for reducing emissions, it is now much in the
short. A dual mechanism responsible for 17.4 per cent of global greenhouse gas spotlight, and is expected to feature prominently at
combining both is needed. emissions, putting it above global emissions from the the Conference of the Parties to the UN Framework
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n An agreement to finance transport sector of just over 13 per cent. So it is clear Convention on Climate Change (UNFCCC) in December
REDD this way could be the that to reduce emissions of CO2 and other greenhouse 2009 in Copenhagen, where the post-Kyoto regime is
key landmark decision of the gases to safe levels (see ‘Two degrees’), action to halt due to be designed. As a concept REDD has now gained
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2009 climate talks and may deforestation will be necessary. much acceptance, and the question is not whether, but
also allow for deeper cuts in The first commitment period of the Kyoto Protocol how, it will be implemented.
overall emission targets. (2008-2012) did not include any targets or credits Debate has raged round REDD for some time, focusing
n REDD may become for emission reductions from deforestation. Ongoing on issues to do with methodology, local communities
the most important negotiations for the second commitment period, and indigenous people, and finance mechanisms.
mechanism for financing
forest conservation and
poverty alleviation in Two degrees: the safe limits that to achieve that limit, atmospheric greenhouse gas
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the tropics, where most of emissions emissions should be lowered to 350ppm. However,
deforestation occurs. today’s atmospheric concentration of these gases is
n To implement REDD The Intergovernmental Panel on Climate Change estimated to be 433ppm and current ‘business as
effectively and ensure (IPCC) concludes that Earth’s atmosphere needs to usual’ scenarios suggest that a dangerous level of
benefit sharing to local be stabilised at 445 to 490 parts per million (ppm) atmospheric CO2 will be reached in 2030 rather than
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people, certification and of atmospheric greenhouse gases. They have also in 2040, as was formerly thought. The evidence is
independent monitoring stated that the safe level for global temperature more than enough to back calls for urgent action on a
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are key. increase is 2 Celsius. Conservative estimates suggest massive scale to reduce greenhouse gas emissions.
Download the pdf at www.iied.org/pubs/display.php?o=17053IIED
Pilot projects have shown, however, that methodological institutions such as the World Bank have viewed
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issues such as baseline, additionality, permanence and investment in the forest sector as too risky. Net flows
leakage (see ‘Jargon buster’) can all be dealt of foreign aid from rich countries in the Development
with satisfactorily. Assistance Committee of the OECD amounted to
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Among the biggest REDD US$104 billion in 2006, but only a small fraction of
Financing REDD: successes is the Juma Sustainable that went to deforestation-related projects.
Development Reserve Project in Future finance: the two basic
meshing markets with Amazonas, Brazil’s largest state.
This is the first REDD project in approaches
government funds Brazil to comply with the Climate, The two basic approaches to REDD financing are
Community & Biodiversity Alliance government funding and market-based instruments.
(CCBA) standard. It has also been validated by the There is considerable debate over which is best. A
international certification body TUV SUD, and gone possible solution is a mechanism incorporating both.
through the additionality test of the Voluntary Carbon
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Standard (VCS) Program. The 2008 Eliasch Review on financing global forests
The project at Juma also involves a benefit sharing estimates that US$17-33 billion must be invested
mechanism for local communities (through the forest annually to halve greenhouse gas emissions from
conservation grant programme Bolsa Floresta), who deforestation by 2030. One scenario modeled suggests
receive 100 per cent of the benefits obtained in the that the global carbon markets could supply around
Jargon US$7 billion per year to reduce deforestation by 2020.
voluntary carbon markets. This may vary according to the stringency of the
buster This is simple and effective: each person is given a emissions reduction targets, the level of supplementarity
widely accepted debit card in exchange for conserving allowed and the carbon price.
their forests, along with additional benefits through This scenario would leave a funding gap of around
investment in sustainable income generation, support US$11-19 billion per year. The suggestion is that
To be effective as a strategy for to grassroots organisations and social programmes such funding would come from governments of the
reducing emissions, REDD has (education, health, communication and transport). relatively rich Annex I countries party to the UNFCCC.
to satisfy a number of criteria, The key for the ultimate success of REDD is, however, An example is Norway’s Climate Change and Forestry
including the following. how it will be financed. mechanism, which has an initial budget of
Baseline: An established The underfunding of US$2.5 billion for the next five years.
benchmark against which any Raising funds under
reduction in emissions can reduced deforestation
be calculated. Tropical deforestation is a consequence of land use each approach
Additionality: Proof that any dynamics that vary among and within regions. Drivers Government funding This mechanism would be
reduction in emissions from of deforestation include conversion to agriculture, financed by governments, mainly from funds derived
a REDD project is genuinely illegal logging, land grabs, poor public policy and from the auction of emission allowances in the European
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additional to reductions that poor governance. Deforestation is largely driven Union’s Emissions Trading Scheme and others, as well
would occur if that project by stakeholders’ perception of economic gains, not as developmental assistance funds and other funds such
were not in place. by ignorance, irrationality or stupidity. So stopping as Norway’s.
Permanence: The long-term deforestation demands the creation of a different
viability of reduced emissions rationale for all stakeholders involved: forests need to be Each rainforest nation would monitor deforestation at
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from a REDD project. This seen as worth more standing than cut. the national level against a generally agreed baseline.
is heavily dependent on the Initiatives to reduce deforestation in tropical areas have Payments would be made on the basis of deforestation
forested area’s vulnerability focused on two general approaches: regulations and reductions at country level. Each country would set up
to deforestation and/or law enforcement, and incentives for forest management its own strategy to invest these funds to continue to
degradation. and conservation. Historically, greater emphasis receive annual transfers.
No leakage: Leakage is a has been given to regulations and law enforcement. Market-based This mechanism would be financed by
reduction in carbon emissions Recently, economic incentives for forest management allowing companies in Annex I countries to offset part of
in one area that results in and conservation, especially payment for environmental their emission reduction obligations through REDD.
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increased emissions in another services, have received increasing attention. Project owners and developers would validate and
– for example, where curbing International and national efforts to reduce deforestation certify projects under generally agreed guidelines and
clearfelling in one forest have lacked appropriate funding. International approved methodologies. Each project would invest the
region drives farmers to organisations such as the UN Forum on Forests and the carbon credit revenues according to local and regional
clearfell in another. Global Environmental Facility have either underfunded conditions. These results would be inspected periodically
forest projects, been too bureaucratic, or both. Financing by independent auditors at project level.
briefing
Pros and cons: analysing ‘fit’ a twinned system for REDD funding
briefing
Linking market and government funding approaches
first demands a close look at their advantages Market Government
and disadvantages. mechanism mechanism
These can be analysed using three sets of criteria, the
briefing Percentage $$ Monitoring and
so-called ‘three Es’. Is the mechanism achieving its REDD credits reporting
greenhouse gas emission targets (effectiveness)? Is Carbon Other
this target achieved at the minimum cost (efficiency)? markets funding
What are the distributional implications and co-benefits $$$ Support $$$
(equity and co-benefits)?
Equally key is the ‘U’ criterion: urgency. This is needed, Project-based Governance
activities
in the light of the potential role of REDD in providing
rapid, large-scale greenhouse gas emissions as a bridge
strategy for reducing near-term emissions while buying
time to move into a fully fledged global low-carbon Reduction of deforestation,
economy (see ‘Weighing up government and market poverty eradication and
finance for REDD’). sustainable development
The major difference between government and market 12
approaches is the time they take to set into motion. activities at both project and national levels. This
Government can be slow; the carbon market can way of working is seen as the most flexible, but the
respond relatively quickly. But both have distinct pluses challenge is how to harmonise the government and
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that can be harnessed for a dual approach. market levels.
Four areas of focus are necessary to construct the
how a dual approach would work building blocks of an effective dual mechanism.
Some have argued that a ‘nested’ approach would First, governments should receive financial incentives
be the most appropriate, to allow countries to start to implement public policies aimed at reducing
Weighing up government and market finance for REDD
Effectiveness Efficiency Equity Urgency
Government
+ strong support of rainforest + lower international + facilitates international - slow implementation of
governments encourages sound transaction costs transfers between rich and intergovernmental funding
policies poor countries
- limited effectiveness of - higher domestic costs - favours middle-income - slow implementation of
government-based policies countries government programmes
+ captures domestic leakage + greater incentives for - risk of domestic distribution
governmental policies inequities
- does not capture international - greater risk of policy and
leakage governance failure
- limited attractiveness to + lower monitoring costs
private funders
Market-based
- weak support to encourage - higher international + increases funding from + quicker implementation of
sound policies by rainforest transaction costs for small market to forest communities project-based activities
governments projects in poor countries
+ greater effectiveness of field + lower bureaucracy and + does not favour middle- + quicker impacts on
project-based activities administrative costs income countries reduction of deforestation and
degradation
- does not capture domestic - smaller incentives for + smaller risk of inequitable
leakage governmental policies distribution of benefits to local
communities
+ increases area of forests + smaller risk of policy and - potential risk of inequitable
under protection with positive governance failure distribution of benefits to
impacts on international forest local communities if project
leakage certification schemes are
ineffective
+ greater attractiveness to - greater monitoring costs
private funders
briefing
deforestation. Secondly, project-based funding should be The way forward
encouraged to deliver on-the-ground incentives. Thirdly,
briefing In the negotiations for the post-2012 commitment
both government and market-based funding should period of the UNFCCC, figures under discussion for
have a social and sustainability focus. And finally, the reducing greenhouse gas emissions relative to 1990
dual government/market mechanism should allow levels vary by between 20 and 40 per cent.
coexistence, in perpetuity, of finance from both sources.
briefing
The government side – a focus on governance What is proposed here is that in the carbon market,
In a dual system, the government-based mechanism buyers will have to purchase 10 per cent of their carbon
should aim at improving governance, policy coherence, offsets as REDD. Emission reduction targets should be
efficacy and effectiveness related to forest conservation, increased to 40 per cent of 1990 levels.
poverty eradication and sustainable development. The Having a 10 per cent quota for REDD would provide
main focus should be on monitoring, law enforcement, programmes and projects to reduce deforestation and
land tenure policies, expansion and implementation degradation with significant amounts of funding. With
of protected areas and indigenous lands, reduction the carbon market around US$118 billion a year, REDD
of impacts of infrastructure projects, agricultural credits could total US$11.8 billion a year. This figure is
and economic policies to increase the value of at the scale of investment needs in international forestry
standing forests to local communities and indigenous estimated by the Stern Review and the Eliasch Review,
populations, and social programmes with a special among others.
focus on education and health. A dual financing mechanism for REDD may provide a
Government funds should be financed primarily by simple solution to a much-debated issue on the road to
intergovernmental transfers from Annex I countries. Copenhagen. If rainforest governments are supported by
Additional funding could also come from multilateral governments of Annex I countries, and if forest projects
organisations, private foundations and a levy on are financed by carbon markets, REDD can become one
carbon markets. of the most effective mechanisms to deliver rapid, large-
The market side – a focus on forests and peoples scale reduction of greenhouse gas emissions.
A market-based mechanism in the dual system should Such mechanism should be implemented with caution The International Institute for
be directed at local projects, with a focus on investing so that all concerns about benefit sharing with local Environment and Development
in activities that improve the sustainability of forest communities and indigenous peoples are dealt with (IIED) is an independent,
management and reduce deforestation in ways that appropriately. Experience of field-based certification nonprofit research institute
provide social, environmental and economic benefits in the forest sector, such as that offered by the Forest working in the field of
to local communities and indigenous peoples, assure Stewardship Council, could be a useful reference. sustainable development.
monitoring of these benefits at project level, and ensure Although REDD financing may become a catalyst IIED provides expertise and
transparency and accountability for resource use. of change towards tropical forest conversation and leadership in researching
Market-based financing should be directed to projects, sustainable development, it should not be seen as and achieving sustainable
with measurable boundaries, and subject to field a panacea. There are political, human rights and development at local, national,
verification and certification. Projects should allocate a environmental issues that require a multitude of regional and global levels. This
percentage of the carbon revenues to special-purpose mechanisms. REDD can be one, but not a substitute briefing has been produced
government funds of rainforest nations. for all. with the generous support
n VIRGIlIo M. VIANA of Danida (Denmark), DFID
Virgilio Viana is director-general of the Amazonas Sustainable (UK), DGIS (the Netherlands),
Foundation, Manaus, Brazil, and is an IIED Visiting Fellow. Irish Aid, Norad (Norway),
SDC (Switzerland) and Sida
Notes (Sweden).
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n Mitchell, A. et al. 2008. Forests NOW in the Fight against Climate Change. Forest Foresight Report 1.v3. Global Canopy CONTACT: Virgilio Viana
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Programme, Oxford. n Stern, N. 2007. Stern Review on the Economics of Climate Change. HM Treasury, London. n IPCC Virgilio.viana@fas-amazonas.org
Working Group I. 2007. Couplings between changes in the climate system and biogeochemistry. In Climate Change 2007: The 3 Endsleigh Street,
Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the IPCC. Cambridge University
4 London WC1H 0DD, UK
Press, Cambridge. See www.ipcc.ch/pdf/assessment-report/ar4/wg1/ar4-wg1-chapter7.pdf. n Hansen, J. et al. 2008. Target
atmospheric CO : Where should humanity aim? Open Atmospheric Science Journal. 2:217-231. See http://arxiv.org/ftp/arxiv/ Tel: +44 (0)20 7388 2117
2
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papers/0804/0804.1126.pdf. n Eliasch, J. 2008. Climate Change: Financing global forests. The Eliasch Review. Earthscan, Fax: +44 (0)20 7388 2826
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London. See www.occ.gov.uk/activities/eliasch.htm n Viana, V. M. et al. 2008. The Juma Sustainable Development Reserve Website: www.iied.org
Project: Reducing greenhouse gas emissions from deforestation in the state of Amazonas, Brazil. See www.fas-amazonas.org/arquivos/
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juma_executive_summary.pdf n Chomitz, K. M. et al. 2006. At Loggerheads? Agricultural expansion, poverty reduction, and
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the environment in the tropics. The World Bank, Washington DC. n Viana, V. M. 2007. As Florestas e o Des-envolvimento da
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Amazonia. Valer, Manaus, Brazil. n Rojas, M. and Aylward, B. 2003. What Are We Learning from Experiences with Markets for
Environmental Services in Costa Rica? A review and critique of the literature. IIED, London. See www.iied.org/pubs/pdfs/9247IIED.
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pdf n Lele, U. et al. 2000. The World Bank Forest Strategy: Striking the right balance. The World Bank, Washington DC.
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n Aid. 21 February 2009. The Economist. See www.economist.com/markets/indicators/displaystory.cfm?story_id=E1_TDSPPDTT. International
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n Pedroni, L. et al. 2007. The Nested Approach: A flexible mechanism to reduce emissions from deforestation. CATIE, Costa Institute for
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Rica. n Angelsen, A. (ed.) 2008. Moving Ahead with REDD: Issues, options and implications. CIFOR, Bogor, Indonesia. Institute for
Environment and
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