One of the biggest challenges in developing a credible system for compensating for REDD in developing countries is that of reducing the risks of leakage. Where REDD is effected in one location there may be a stimulus to greater deforestation in another location. This is a high risk with project-based REDD schemes that have difficulty taking account of trends outside the immediate project area. This issue of indirect effects of REDD was one of the reasons for the exclusion of deforestation in the Marrakesh Accords. The participants at the second UNFCCC (2007) workshop, as well as Mollicone et al. (2007) and Santilli et al. (2005), preferred the adoption of national accounting, rather than project accounting. Any leakage from one area to another would be accounted for in the process of drawing up national accounts for emissions from deforestation.

The problem of international leakage remains, however. Multinational logging and oil palm companies, for example, might respond to constraints on their activities in developing countries that have voluntarily opted for REDD targets by increasing their activities in countries that have not adopted targets. Such a scenario emphasizes the importance of including a large proportion of forested developing countries in a postKyoto REDD scheme. In general an understanding of the proximate and indirect causes of deforestation and forest degradation in any particular situation will enable leakage problems to be anticipated and perhaps countered.

As Ebeling and Yasue (2008) point out, low-cost measures are available such as governments enforcing existing land regulations and conservation regulations, extending indigenous territories and removing subsidies for land clearing. A question arises though whether a REDD scheme would have much impact where profitable logging is followed by conversion to profitable cropping, given that investors and participating countries will be looking to identify projects where emissions reductions can be had at low cost. Where compensation is relatively expensive but there are imperatives for conservation of forests on biodiversity grounds, such as in Borneo and Kalimantan, a combination of REDD and conservation funds could raise the level of compensation sufficiently to make the avoidance of deforestation an attractive alternative to logging and conversion.

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