INCEPTION BRIEFING NOTE
PAYMENT DISTRIBUTION MECHANISMS
The aim of REDD payment distribution mechanisms is to transfer revenues from international REDD funds or carbon markets to (or within) national levels, to support policies and measures that reduce deforestation and degradation rates. To ensure demonstrable results, 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. Payments are likely to be performance based, both in terms of the extent to which emissions have been reduced and the environmental and social impacts of the system, meaning that accountability, transparency, risk management, adequate benefit transfer and administration mechanisms will be essential for attracting investment.
National REDD mechanisms will ultimately be designed by national governments but there are some important factors relating to the international process which will influence the national architecture:
(1)Whether payments or funds are transferred directly to the national government or directly to local governments, private projects or communities, which will influence the contractual relationships between parties;
(2)Whether the revenues come from markets or funds, which will influence the rules by which the national system operates;
(3)Whether markets operate under internationally agreed rules or under independent rules in the voluntary carbon markets, which will influence the stringency and types of rules for establishing projects;
(4)Whether performance is judged against national or sub-national reference scenarios, which will influence who is responsible for achieving emissions reductions.
Depending on which combination of these options is chosen the role of national governments can vary in REDD systems between sellers, buyers, intermediaries and regulators. There are advantages and disadvantages related to REDD mechanisms that are managed by national governments. Advantages include, for example, potentially lower administrative costs and lower liabilities for on communities if emissions reductions do not occur. Disadvantages include factors such as weaker incentives for enforcement because local incentives are limited and lack of local ownership in the system.
There are also a number of ways to reduce deforestation and degradation rates, ranging from direct regulatory changes such as altering land classification systems and withdrawing concession permits, to economic incentive schemes such as payments for environmental services and imposing or changing taxes on certain activities. Within these options, incentive payments or compensation for opportunity costs can be made either directly to individuals or more generally, through local, regional or national development projects.
Indonesia already has some experience with fund and market based mechanisms to support the implementation of policies and measures to address deforestation and degradation at different scales. They include funds (e.g. GERHAN), debt for nature swaps, certification, payments for environmental services, company-community partnerships, conservation concessions and KDP. Lessons learned from these systems have been mixed and some are still in the early stages of evaluation, but they provide important insights into factors which could influence the effectiveness of REDD. Direct regulation and funding mechanisms for example, have suffered from corruption, late payments, lack of reporting and accountability requirements between local assemblies or communities and central government, and a lack of sanctions. Payments for Environmental Service schemes and company-community partnerships have been tried at small scales, but evidence shows that they can suffer from rent seeking among intermediaries, elite capture of benefits, high transaction costs and leakage issues. These experiences indicate that building trust between different players, ensuring adequate legal provisions are in place to establish and defend rights, and mechanisms to guarantee transparency and accountability are essential for these systems to function properly.
Combining what we know about the options for transferring REDD funds, policies and measures and the agents of deforestation, with the lessons from existing experience in Indonesia and internationally, highlights some key considerations for REDD mechanisms in Indonesia. These relate to:
Financial structures: REDD payment mechanisms need to include provisions for upfront funding as these systems will be costly to establish and run, and payments are likely to be made after performance has been verified. The institutional structure of funds needs to be integrated with existing national systems, or policy reforms will be required. In Indonesia this may include integration into the state budget, with existing vertical funds or the creation of new REDD funds. Whoever manages the REDD payments, financial reports must be audited by independent institutions, or the Indonesian Supreme Auditor (BPK), and the results of the audits must be accessible by the public and the Indonesian Ant-Corruption Unit (KPK).
Legal structures: Existing legal structures could influence the design of the payment distribution mechanism. For example, laws describing decentralisation of forest governance define how authority over decisions relating to production and protection forests is divided up. These will need to be streamlined with payment systems to the national government. Forest management and taxation laws will also be important, for example laws governing payments for environmental services which could affect how rights to carbon (and therefore sellers) are defined.
Risk reduction mechanisms: REDD mechanisms are likely to have high risks for both buyers and sellers of carbon. Risks for buyers relate to the possibility that emissions reductions do not occur or are not real, or that projects have negative impacts on people or the environment. Risks for sellers include the possibility of liability for project failure and loss of access to land. Risk reduction mechanisms will therefore be essential in REDD. Standards schemes, insurance schemes, accountability and transparency measures can help reduce risk and assure buyers of the quality of emissions reductions. Mechanisms for land allocation and security and conflict resolution (one of the most important elements of risk in carbon projects) should be considered in REDD systems. These mechanisms include Rapid Tenure Assessment (RaTA), spatial planning (Rencana Tata Ruang) and gazzettement processes.
REDD Institutional structures: Existing institutions will need strengthening and new institutions will need to be created. These will include fund managers for receiving and redistributing funds; registries for tracking emissions reductions credits; legal institutions for adjusting existing laws, enforcing REDD related laws and resolving disputes; monitoring and verification entities for ensuring that emissions reductions are real and achieved in environmentally and socially acceptable ways; implementing and administrative organisations for handling contracts and logistics; and the sellers of carbon themselves who may need to organise internal redistribution mechanisms.
Tradeoffs between fairness and efficiency are likely to arise in these systems. Equity issues surround decisions over who should be paid, particularly in how to distribute payments so that they reward regions or agents who slow rates or maintain low rates, how to deal with illegal agents and accurately identifying opportunity costs to avoid free riders and losers in the system. Experience from existing systems indicates that equity issues are also likely to emerge during the operation of REDD systems. Unequal power relations between actors, complex operational procedures and economies of scale and lack of upfront capital, can result in certain actors being excluded.
Solutions exist for some of these problems that will need to be considered in REDD design. For example, segregated funding mechanisms for ’reduction’ and ’stabilisation’ have been proposed at the international level for dealing with the issue of how to distribute payments to areas with very different track records in deforestation; simplified modalities and procedures for project design have been used to enhance market access by small producers in the CDM; reverse auctions can be used to elicit landholders’ willingness to accept conservation contracts; and multistakeholder forums and legalisation of village organisations have been used in company-community partnerships in Indonesia. Processes for ensuring voice and accountability, information provision, the involvement of civil society organisations, and access to legality in REDD design and operation will clearly be essential in order for REDD systems to function efficiently, effectively and equitably.