A Nested Approach to REDD+. Structuring effective and transparent incentive mechanisms for REDD+ implementation at multiple scales

Summary

• In order for REDD+ to be successful, incentives will need to reach the actors responsible foraddressing the drivers of deforestation and for shifting land use to a more sustainable and lowcarbonmodel. These actors span multiple scales, from international commodity buyers tonational governments to sub‐national governments to indigenous peoples and forest‐dependentcommunities to individual landowners/users.

• Devising effective and transparent carbon accounting systems and incentive mechanisms thatmotivate both national and sub‐national actors will be critical to successfully implementingREDD+.
• A nested approach to REDD+ is one way to structure such a system. Under a nested approachthe national government could set up a national accounting framework and establish a nationwidemonitoring system. The national government could implement certain policy reforms thatwould lead to verifiable emission reductions and therefore earn incentives from an internationalsystem (or a bilateral arrangement). Meanwhile, implementation of REDD+ activities could alsooccur at the sub‐national level led by local/regional governments, communities, NGOs, orprivate developers. These activities would account for emission reductions at the sub‐nationallevel and earn incentives directly from the international (or bilateral) system based on thosereductions. Under the approach proposed in this paper, the sub‐national accounting would needto be “trued‐up” to the national level (i.e. all credits issued in any given year are based on theperformance of the nation as a whole relative to its reference emission level).
• A nested approach to REDD+ has the potential to address many of the drawbacks of purenational or pure sub‐national approaches by accounting for in‐country leakage, engagingnational governments, and taking advantage of certain economies of scale, while alsomotivating sub‐national actors to participate in REDD+ and attracting greater privateinvestment. A nested approach may also provide for a more transparent distribution of thebenefits from REDD+ since local actors could own and transact credits directly rather thanrelying on a national system of benefit‐sharing. However, a nested approach will likely requiremore complex carbon accounting methodologies, clearly defined systems for sharing riskbetween actors, and defined institutional arrangements for managing the flow of incentives.
• Nested carbon accounting should include the following elements: a clear national referenceemission level, defined sub‐national reference regions (non‐overlapping areas that cover theentire land mass of the country designated based on common drivers of deforestation andpolitical jurisdictions), and, in some cases, nested projects whose reference emission levels addup to the reference region and hence the national reference emission level.
• Under the nested approach we propose in this paper, there is a risk that sub‐national actors maynot receive compensation for successful activities in the event that the country as a whole failsto perform. This risk will need to be minimized in order to promote sub‐national participationand private investment. This paper outlines several options for risk management among actors,including insurance products, a global self‐insurance fund, performance reserve accounts, orcontracts between parties for replacement of REDD+ credits.
• These options could be combined to meet the needs of particular country circumstances. Theset of options chosen could lead to a greater assumption of risk by the national government, aneven distribution of risk between actors, or a greater assumption of risk by sub‐national actors.Several plausible arrangements exist, and the set of options chosen will greatly influence thelevel of sub‐national involvement and private investment.
• Given the potential advantages of a nested approach to REDD+, an international agreement onREDD+ and domestic legislation in the U.S. and other developed countries should allowdeveloping countries the option to pursue a nested approach to REDD+ backed by adequate riskmanagement strategies. Developing country governments should consider a nested approach toREDD+ when devising their national REDD+ strategies.