Accessing Money For REDD: Public Finance or Market?
November, 2010. Promode Kant. IGREC Web Publication No. 15/2010. 5 pages
Of the two possibilities of Public Finance and Market Mechanism for funding REDD, the former would mean contribution by developed countries into a Multilateral Fund requiring approval by national parliaments that might pose insurmountable difficulties in these times of recession. On the other hand money in market for REDD credits would come from business entities, and not from the exchequers, making it a politically attractive option. It is argued that a market mechanism would be efficient, effective and enhance equity while reducing governance risks and keeping costs low.
But in the REDD market where producers abound and buyers dominate it is unlikely to result in greater equity as the two externalities of biodiversity and the concern for indigenous people, both critical for equity, remain stubbornly outside. Nor would the market be effective in meeting the REDD objectives as the credibility of carbon credits generated would suffer from high uncertainties of leakage and fears of impermanence. The market will discount this low credibility reducing economic returns particularly in poor and poorly governed countries further hurting equity. Also the market mechanism does not reduce overall global emissions and is merely a translocation of green house gas emissions from the poor countries to the rich.
Settling on interim solutions, when final solutions prove elusive, could be a good strategy. One such interim solution could be the setting up of public financing for REDD confined only to LDCs. This would be politically acceptable in the developed countries provided the LDCs agree to a dominant role for the donor countries in planning as well as MRV processes in the initial years which could taper as the governance and the technical capabilities of the LDCs improve. In the case of the emerging economies an interim step could be a market mechanism for REDD that takes the shape of an enlarged CDM in which additional activities of forest management, conservation and enhancement of carbon stock are also included and making it mandatory that 20 percent of emission reduction requirements be met from forest based mitigation efforts. There is an urgent need of making compromises on all sides in order to move forward quickly.
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Keywords: Other Publications, q. Economics of Forest Carbon, r. Financing & Distribution/ Markets, financing, market, public finance, REDD