Funding of REDD is indirect compared with funding for afforestation and reforestation under the CDM

Unlike project development in the case of afforestation and deforestation where the investment is relatively direct, that is the process of establishing and monitoring tree plantations, the incentive packages under a REDD

scheme would need to be multifaceted, taking account of the idiosyncratic proximate and indirect drivers of the deforestation and degradation which is to be halted. The returns from the sale of REDD credits would need not only to contribute substantially to the opportunity costs to producers, but also to the costs of government agencies to promote the scheme's training programs for communities in alternative agricultural practices and in forest stewardship. The costs of ongoing monitoring of the forest, including the prevention of illegal logging of the forest, now forming part of the forest carbon inventory of the developed country, would also need to be covered by sales of credits.

Where logging is to be terminated the incentive payments may need to be made not only to the landowner and government recipients of logging proceeds but also to the multinational logging companies whose activities and profits are reduced (Hunt, 2002). Likewise, in the prevention of deforestation by avoiding the establishment of plantations or smallholder oil palm there may be demands not only from farmers and oil palm mills for compensation but also to the myriad businesses that service the oil palm industry who also forgo income. The multiplier effect of logging and oil palm and other agricultural crops is completely ignored in most estimates of opportunity costs. Given the likely complexity of arrangements to compensate for reducing deforestation, REDD is unlikely to be cheap, or indeed quick, as claimed by Stern (2006).

The returns from REDD credits would need to be sufficient to generate a margin over and above costs of compensation sufficient to make it profitable for the private sector to invest. However, the stringency of future binding targets on developed countries post-2012, which will determine the price of REDD credits, is unknown.

The difficulty of linking funding with the result in terms of REDD credits generated, the issue of which is controlled by the government of the developing country, throws doubt on whether the private sector would have an incentive to invest specifically to acquire REDD credits. It is far more likely that the private sector's role would be in the investment in projects that are tendered by governments as part of their REDD programs. As pointed out above, these will vary from the organization of simple compensation payments to landowners, to retraining activities, to preventing illegal logging. The funding of government and community efforts to clarify, assign and enforce property rights are also a precondition for effective REDD in many countries (Chomitz et al., 2007).

The form of the credits generated by REDD needs to be established. Will credits generated be temporary, like those under the CDM and as advocated by Mollicone et al. (2007)? It is salutary to examine the very small contribution of A/R under the CDM, as illustrated in Chapters 2

and 7. The small role of A/R is due partly to the absence of the US and the EU from the market for CERs and its late start, but it is also due to costs of mounting such projects, combined with the low prices for CERs forced down by their temporary nature, making investment in them unattractive to investors and leaving the World Bank as the largest investor. A developing country will be loath to invest in REDD if its returns on the sale of REDD credits are low, relative to costs, as a result of price discounting linked to their risk and temporary nature. The issues of accounting for REDD carbon, devising baselines, preventing leakage and guaranteeing permanence are all subject to work in progress. Yet these issues need to be resolved if a scheme is to be agreed upon by the countries subject to a cap plus the majority of forested developing countries.

There is also a risk that, if certified REDD credits did flow in sufficient volume to make a measurable difference to the rate of deforestation and forest degradation, they would undermine the price of emissions allowances by capped countries and thus undermine the rewards of adopting other types of non-forestry carbon-saving initiatives. On the other hand, there is no guarantee that the cuts and the consequent price of offsets will be high enough to provide a stimulus to tropical developing countries and, indirectly, the private sector to invest in REDD. The price of REDD offsets will be dependent on the price of emissions allowances, and this in turn will be determined by the deepness of the cuts in emissions by capped countries, as already emphasized, but this is yet unknown.

Given the multiple difficulties and risks of proceeding with a mechanism linked to demand by capped countries for REDD offsets, a conclusion is drawn that the direct funding of REDD by international agencies and governments is a much more certain route, at least in the near future.

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