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Performance payments can play an important role in providing visible and meaningful incentives to reduce deforestation, according to a new CGD working group report. That’s important because the benefit to the global climate from keeping trees standing is huge.  Tropical forests store so much carbon that cutting them down releases more greenhouse gases annually than the entire European Union from all sources. Avoiding deforestation keeps that carbon out of the atmosphere, and regrowing forests that have been cut down or damaged can remove tons more. Doing both could reduce gross annual global emissions by as much as 30 percent.

So forests really, really matter if we want to hold global temperature increases to two degrees Celsius or less.

REDD+ is how but finance is lacking

Since 2008 climate negotiators, forest countries, aid donors, and private companies have lined up behind the idea of just paying tropical forest countries to reduce their (steadily rising) rates of deforestation.  It’s called REDD+: reducing emissions from deforestation and forest degradation.  The goal is to slow climate change but also to take advantage of the many other contributions that healthy forests contribute to development and poverty reduction, especially for people who live in and near forests.  These include protecting watersheds from erosion, reducing the impacts of natural disasters like hurricanes and violent storms, avoiding loss of biodiversity, and other services.

Yet seven years after the idea of REDD+ was agreed in Bali, funding to protect and restore forests is only a fraction of total finance for development and climate.  Funding for REDD+ between 2006 and 2014 totaled $10 billion, a fraction of annual ODA funding of around $130 billion and annual climate finance that reached $62 billion in 2014.  And the amount offered to reward performance — to just pay forest countries for their progress in reducing emissions by keeping trees standing — is only about a third of total REDD+ funding. For years, most funding has gone for “readiness” and capacity building to get countries ready to receive performance payments.  But now more forest countries are taking ownership of forest-preservation programs and strengthening their own forest governance, and traditional funders are finding ways to manage the fiduciary, social, and other risks they face when they support the REDD+ pay for performance approach. It’s good news that payments for performance are on the rise.

How hard could it be to just pay countries to reduce deforestation? Not very. In fact, the government of India earlier this year launched a fiscal transfer scheme that will transfer $6 billion to states based on how much forest they’ve maintained, as monitored by India’s 2013 Forest Survey. When the formula is recalculated in five years, states can expect their share of tax revenue to go up or down based on how much forest they’ve conserved or replanted.

So if the government of India can set up a simple performance transfer scheme to reward forest conservation, what is holding climate funders, aid donors, and private companies back from paying for results? That was the question that we set out to answer in a CGD working group on “Scaling Up Performance Payments to Reduce Deforestation.” The working group, co-chaired by CGD president Nancy Birdsall and former prime minister of Peru, Pedro Pablo Kuczynski, brought together forestry experts, development experts, academics, and the private sector to examine the technical, bureaucratic, financial, and political challenges limiting funding. 

Scaling up performance payments

The final report of the working group was launched at a CGD public event on October 15.  The main recommendation of “Look to the Forests: How Performance Payments Can Slow Climate Change” is that developed countries need to provide certainty to tropical forest countries that their actions to reduce deforestation will actually be rewarded by performance payments from the international community.  The report recommends that the public sector scale up its funding commitments, that the private sector scale up the geographic coverage of their programs, and that forest countries provide more details on how many tons of carbon they would be willing to cut through reduced deforestation and how much it would cost.  Specific suggestions are included to encourage funders to move from funding readiness to funding results and to manage risks. Many funders hesitate to provide performance funding because of concerns that forest countries need support for “governance” (land titling, cadasters, etc.) or systems to measure, verify, and report emissions (MRV).  In fact, performance payments provide incentives for forest countries to develop such systems.  Increasing evidence shows that countries with performance agreements also provide benefits for Indigenous Peoples (IPs) as well: Brazil has expanded lands held for IPs and Indonesia has issued a court ruling strengthening IP rights.

In commenting on the report at the launch event, working group member Juliana Santiago from Brazil’s development bank, BNDES, emphasized the importance of high level political commitment, which was crucial in enabling Brazil to reduce deforestation by 75 percent in the last 10 years. While Norway provided performance transfers of $1 billion, the total value of Brazil’s deforestation was as much as $16 billion, demonstrating that performance transfers can play an important signaling role. Harrison Karnwea of Liberia, also a member of the working group, emphasized the importance of getting funds flowing quickly to counter pressures on government from the logging industry. The World Bank’s Benoit Bosquet, who was engaged with REDD+ from the earliest days, noted that getting REDD+ up and running had required a learning process, that is still ongoing, and development of trust between funders and forest country partners. As Benoit said, the goal is “to ‘verify and invoice’ and get out of the kitchen.”

As we head to the upcoming climate summit in Paris we hope that the ideas in the report will encourage funders to substantially scale up their financial support for forests and to do it through performance-based approaches, as India has done so dramatically. The working group report makes that case that performance transfers can provide visible and financially meaningful incentives to forest countries to increase results in reducing deforestation. In their Paris pledges, countries providing climate finance to developing countries should make performance payments to reduce deforestation a key part of their pledge.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.