Tropical ForesTs and climaTe
                                            Filling the REDD Basket:  
                                            Complementary Financing Approaches
                                                     he set of policies known as REDD                REDD market, or required purchases of REDD-
                                                     (Reducing Emissions from Deforestation          specific units as in Greenpeace’s TDERM.2 
                                                     and forest degradation in Developing 
                                                     countries) offers significant potential for     Voluntary. Finally, voluntary funding provided 
                                            Treducing global warming emissions, but                  by countries or individuals is not connected to 
                                            financing approaches for REDD have become                their cap-and-trade markets. Voluntary contribu-
                                            an issue of active debate. Often the discussion of       tions can be made at all levels. Official development 
                                            financing approaches is seen as “market versus fund,”    assistance (ODA), such as Norway’s $ 2.6 billion 
                                            but here we identify and discuss three major cate-       commitment announced at Bali, is an example of 
                                            gories of potential funding for REDD: direct car-        national scale voluntary action. Companies and 
                                            bon market, market-linked, and voluntary sources.        consumers can also purchase credits that, once 
                                            All three sources have their particular advantages,      purchased, are no longer used for emissions 
                                            and all have a role to play in reducing emissions        compliance in carbon markets. 
                                            from deforestation.
                                                 With many such financing options emerging,          The Advantages and Disadvantages 
                                            there is a growing consensus on the “Basket of           of Each Approach
                                            Approaches” idea,1 which would combine diffe-            Direct carbon market credits lower the cost of 
                                            rent sources of financing for different aspects of       reductions globally, and likely have the largest 
                                            REDD in different time periods. Below is a dis-          potential to generate funding for REDD—many 
                                            cussion of what can go into the “REDD Basket.”           tens of billions of U.S. dollars per year. On the 
                                                                                                     other hand, these REDD offsets purchased from 
                                            REDD Financing Approaches                                developing countries lead to higher levels of emis-
                                            Direct Carbon Market. In direct carbon market            sions in industrialized countries. Thus, the net effect 
                                            funding, companies in industrialized countries           on global emissions is zero, at best. Because of the 
                                            purchase REDD credits for use as emissions               zero-sum nature of offset credits, it is critical to 
                                            allowances in their national cap-and-trade systems.      ensure that the REDD credits correspond entirely 
                                            Through REDD, they purchase the right to emit            to real and verifiable reductions—those that are 
                                            more domestically than their caps allow, and in turn     fully additional and not reduced by leakage. If 
                                            prevent emissions from deforestation in develop-         reductions are not real, selling the credits in the 
                                            ing countries. Direct carbon market funding has          carbon market actually risks a net increase in 
                                            included such programs such as the Clean Develop-        heat-trapping emissions.
                                            ment Mechanism (CDM) forestry projects, and                   Market-linked mechanisms could generate 
                                            would likely also include national-baseline REDD         funding in the range of tens of billions of dollars 
                                            credits if they were accepted into the post-2012         annually. Unlike direct carbon market offsets, they 
                                            carbon market.                                           are not likely to significantly lower compliance costs 
                                                                                                     in developed countries. However, the reductions 
                                            Market Linked. Market-linked approaches                  funded are in addition to those made by developed 
                                            generate funding by using auction revenues or            nations. Therefore, verification problems such as 
                                            allocated allowances for REDD from cap-and-trade         leakage and additionality do not risk increasing net 
                                            systems, or by establishing dual market systems in       global emissions. Furthermore, they can finance 
                                            which REDD credits are not fungible with indus-          REDD-related costs such as capacity building, 
                                            trial country allowances. In these systems, funding      measuring and monitoring, or stabilization of low 
                                            increases as cap-and-trade markets grow but the          deforestation rates in areas such the Congo Basin. 
                                            REDD credits are not offsets. Examples of market-        These qualities can help ensure the success of 
                                            linked financing proposals include Germany’s pro-        REDD overall. 
                                            posed use of auction revenues, the U.S. Lieberman-            Voluntary approaches have the least potential 
                                            Warner Climate Security Act’s proposed use of            for generating substantial and reliable funding. They 
                                            allowance allocations, the Center for Clean Air          are likely to be limited to hundreds of millions of 
                                            Policy’s “Dual Market” proposal for a separate           dollars per year, and are subject to the fluctuations 
            Characteristics of REDD Financing Methods
                                                      Direct Carbon Market                   Market-linked                          Voluntary 
             Examples                             REDD credits sold as offsets       Auction revenues, allowance        Official development assistance, 
                                                  to developed-country emitters        allocations, dual markets           voluntary offset purchases 
             Potential funding                                 Large                            Medium                                Small  
                                                 (many $10s of billions/year)*           ($10s of billions/year)            ($100s of millions/year)
             Effect on Annex 1 costs                         Lowered                              None                                 None
             Reliable funding                                   Yes                                Yes                                  No
             Effect on net global emissions                    Zero                       Additional reduction                Additional reduction
             Funding for stabilization                          No                                 Yes                                  Yes
             Funding for capacity building                      No                                 Yes                                  Yes
             Mobilizes voluntary efforts                        No                                 No                                   Yes
             Availability                           After reductions are made          When cap-and-trade starts                   Immediately
            * Boldface indicates particularly desirable properties of each of the three approaches.
            All three approaches to REDD have desirable qualities; therefore using all three financing mechanisms provides the greatest benefit.
            of government budgets in donating                 Expected Evolution of Funding Needs
            countries. Like market-linked mechanisms, 
            voluntary approaches are in addition to 
            those made by developed countries, and                   Voluntary                                                 In the short-run,  
            offer the flexibility to fund capacity                                                                             the flexibility of 
            building, stabilization, and other REDD-                                                                           voluntary approaches 
            related activities. They also help mobilize                                                                        presents the quickest 
            the willingness of countries, companies,                                                                           way to build up 
            and individuals to reduce deforestation,                                                                           capacity. However, 
            beyond what they might do for solely                                Market-Linked                                  during the 2020s 
            economic reasons. While the level of                                                                               direct carbon market 
            available funding does not automatically                                                                           financing could 
            grow as cap-and-trade markets expand,                                                                              become the largest 
                                                                                                Direct Carbon Market           source of funding  
            voluntary approaches can provide a fun-                                                                            for REDD.
            ding path for countries that have not yet 
            implemented carbon market systems.                2010                         2020                       2030
            Matching Financing  
            Timing to Needs                                   share of financing to both directly reduce       or larger amounts of funding for countries 
            In the short-run, the flexibility of volun-       deforestation and help avoid the leakage         with varying needs that change as the 
            tary approaches presents the quickest way         and non-additionality. Finally, in the           REDD process evolves. All three REDD 
            to build up capacity. Because deforestation       2020s—with built-up capacity, a broad            financing approaches should go in the 
            reductions take several years to verify, the      experience base, and near-global partici-        basket, producing a system best able  
            need for funding to purchase credits in           pation—the direct carbon market should           to grow and develop as the world’s  
            initial years is low. Approaching 2020,           become the largest source of funding             needs change.
            more funding will be needed, but risks of         for REDD.
            leakage, non-additionality, and monitoring             REDD financing must address the 
            errors will constrain how much can come           unique objectives of different time periods.     1   Discussed by the Coalition for Rain Forest Nations 
            directly from the carbon market. During           Each method—direct carbon market,                    and the World Resources Institute, among others.
            this time period the market-linked ap-            market-linked, and voluntary funding—            2  Tropical Deforestation Emission Reduction 
            proaches can provide an increasing                plays an important role, providing smaller           Mechanism
                                                                  Doug Boucher, Ph.D., (Director, Tropical Forest and Climate Initiative,  
                                                         Union of Concerned Scientists) prepared this summary with assistance from Diana Movius  
                                                                  and Carolyn Davidson. © August 2008 Union of Concerned Scientists.
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                                                         Available online at www.ucsusa.org/REDD.html.