iREDD hedges against avoided deforestation's unholy trinity of leakage, permanence and additionality

Abstract

Workable financial mechanisms are essential to abate greenhouse gas emissions. Deforestation, which contributes a large proportion of total global emissions, must be avoided as an effective emissions-reduction tactic, and to alleviate biodiversity loss and poverty. However, incentives to reduce emissions from deforestation and forest degradation (REDD) have had mixed and suboptimal success because of opportunity costs and administrative and technical issues, in particular, leakage, permanence, and additionality. We show that these latter concepts can be ambiguous, potentially contrived and in some cases, generate perverse outcomes. Encumbering avoided-deforestation projects with these administrative shackles risks massive increases in global deforestation and a concomitant loss of biodiversity, ecosystem services and emissions-reduction opportunities. We offer a solution built on a proven insurance-based hedging principle, a concept we call iREDD, that could indirectly address specific technical and administrative challenges, whether real or contrived. Project-specific iREDD insurance policies and premiums would be negotiated upfront using a simple assessment of risk based on governance quality, the integrity of management plans, liquidity, monitoring and evaluation frameworks, and political acceptability. iREDD acts as both an incentive for prudent forest management given the seller's potential financial windfall if forests are diligently managed, and guarantees not to disenfranchise the buyer.