Payment mechanisms, distribution and institutional arrangements

The objective of REDD payment distribution mechanisms is to support policies and measures that reduce deforestation and degradation through transfer of revenues from international REDD funds or carbon markets to (or within) national levels. This will provide benefits of three types: a) Shared responsibility for reducing a major driver of global climate change, b) Financial payments and coinvestment that exceed the economic opportunities foregone from decisions to maintain carbon stocks, and c) Co-benefits through the other environmental service functions that well-maintained forests can provide. To ensure demonstrable results on emission reduction, these mechanisms must be effective in targeting the wide range of agents involved in deforestation and degradation. They must reward good performance and incentivise improved performance compared to reference scenarios, and adequately compensate agents that suffer losses from changed practices. International payments are likely to be performance based, both in terms of emission reduction at national scale and the environmental and social impacts of the system, meaning that accountability, transparency, risk management, adequate benefits transfer and administration mechanisms will be essential for attracting investment. Indonesia will be effectively competing for attention and REDD funds with other countries with currently high emissions and/or large forest areas. A strong international ‘bargaining position’ requires that internal conflicts and strategic positioning be overcome. This paper is organised in four sections. The first section outlines the underlying challenges in establishing REDD payments systems that meet the primary objective of reducing deforestation and degradation in Indonesia, and the principles on which a national REDD payments system should be established. The second section reviews existing experience with regulatory, fund and market based incentive mechanisms in Indonesia. The third section combines the principles, existing learning and the constraints arising from possible REDD carbon market frameworks to outline the main options and safeguards for establishing a national REDD system. The final section describes a possible process for establishing REDD pilot projects in Indonesia.

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