Institutional financing structures
Finance can be channelled through an independently managed fund, attracting both public and private sector funding earmarked for specific purposes.
Such funds have better outcomes if they have specific allocation policies and a multistakeholder board that decides programming.
Indeed, climate finance mechanisms may benefit from being subject to the functional internal audit institutions of the state.
The concept of the Amazon Fund was first floated by Brazil’s negotiators at the 2006 UN climate talks in Nairobi. Formally established two years later, the Amazon Fund supports projects in four categories: sustainable production; monitoring and control; land-use planning; and scientific and technological development.
The Amazon Fund is managed by the Brazilian Development Bank (BNDES), which is responsible for raising and investing funds, monitoring projects, rendering accounts and communicating results. The Fund has captured and attracted many donors for REDD+ projects in Brazil with its specific guidelines for encouraging contributions and engagement from a diverse range of stakeholders for REDD+ projects. These factors have contributed to Brazil’s position as the top country in receiving REDD+ financial support, and it has the greatest number of REDD+ projects and partnerships (Shin et al. 2022). Since 2009, the Amazon Fund approved financial support for over 102 projects, totalling USD 545 million, a significant pool of resources to combat deforestation and to promote sustainable forest use (Amazon Fund 2022).
Lack of private sector interest in investing in forest conservation in Mexican states, possibly due to continued support of industry drivers of deforestation
In the Mexican states of Jalisco and Chiapas, competing interests could explain the low international interest in financing conservation efforts. Jalisco’s REDD+ programme specifies inter-institutional coordination, including cooperation agreements to promote sustainable development as part of the state’s strategy for reducing deforestation, and while such agreements have been developed and implemented, measures have been insufficient in driving reductions in deforestation or controlling leakage. Similarly, in Chiapas, most emissions are from the expansion of the agricultural frontier for the beef, palm oil and coffee sectors, with the lack of regulation playing a role. The state of Chiapas’ efforts to address deforestation have been limited by low multisectoral coordination and continued interest by the national and state governments in investing in the state’s cattle ranching and agriculture sectors, which diverts financial resources away from environmental programmes. The competing interests to conservation in both Jalisco and Chiapas likely contribute to the low interest of international donors and investors in the jurisdictions for REDD+ programmes (Stickler et al. 2020).
Through government budgets
A key question in the design of the sharing of REDD+ benefits concerns the ways in which REDD+ revenues will be allocated by governments.
There are two main scenarios in which this question becomes relevant to REDD+:
- When central governments receive payments from international sources, and decisions need to be made on how they should be distributed to subnational levels;
- When central governments obtain taxes and fees collected from REDD+ activities, and decisions need to be made on how to redistribute them to subnational levels.
An advantage of using existing budget systems is that doing so fosters increased government ownership and minimizes transaction costs. However, there is a risk that monitoring is only nominally independent.
The extractive industries sector provides key lessons on revenue allocation that can be useful for REDD+ projects. The idea of revenue redistribution is generally accepted in the extractive industries sector (mining, oil and gas), but the way it should be done less so. The relevant questions for redistribution involve how central governments share the revenues from extractive industries with different levels of subnational government and how governments distribute revenues across extractive and non-extractive localities.
There are two main justifications used for the design of revenue redistribution: “fairness” and “equality.” In the case of fairness:
1a. Some countries allocate revenues in proportion to the localities’ level of production (derivation): In the case of REDD+, this would translate into revenues being allocated according to the level of carbon emission reduction and would thus correspond to a performance-based approach, which rewards the efforts of that locality.
1b. Some countries allocate revenues to compensate for negative impacts: In the case of extractive resources this is often framed in terms of environmental compensation and will therefore vary depending on the nature of the resource. Some examples: in Peru communities in mining areas compete with companies for resources and are directly impacted, while in Chile most mining occurs in sparsely populated areas. In Brazil, most extractive resources are located offshore. In the case of REDD+, such revenue could be framed around the compensation of both opportunity and implementation costs.
- Helps ensure stability of revenue sources for local governments and provides some degree of flexibility on how the funds can be spent at the local level;
- Compensates for costs incurred;
- Reduces resentment by the producing locality;
- Acts as an incentive for production.
- Can increase inequalities across a nation and lead to resentment from non-producing localities about regional imbalances;
- Provides an opportunity for discretionary allocation by central government and can lead to local “resource curse” in the case of large volumes of revenue;
- Decisions on what is a “fair share” require complex political settlements;
- Special agreements can reduce legitimacy of central government.
2. Some countries allocate revenues equally across localities based on development indicators. In the Philippines, for instance, 40% of national revenue collections are distributed to local governments based on indicators such as size of population or land area.
Countries where extractive resources are a large share of the budget (e.g., Nigeria, Bolivia, Indonesia and Mexico) are more likely to redistribute revenues more equally among regions. According to evidence from case studies of Peru and Bolivia, centralized management and allocation of revenues from extractive sectors brings better social outcome indicators, and extreme devolution leads to rent seeking and conflict. However, it is not completely clear from the evidence which redistribution formula has the best outcomes.
- Revenues can be allocated in line with government development and planning goals and can thus be easily integrated into budgets and/or assigned to priority sectors.
- Tensions can arise over the scale of the locality that should receive the revenues and where the boundaries should be located.
Taken from: Luttrell and Betteridge (2017).
India’s domestic ecological fiscal transfers suggest future scope for state governments to protect and restore forests
In 2014, India created one of the first ecological fiscal transfers (EFTs) in the world for forests by including forest cover in the formula to determine how much tax revenue the central government would distribute to its 29 states annually. The level of funding at stake was estimated at USD 6.9 billion to USD 12 billion annually between 2015 to 2019 (Busch and Mukherjee 2017). While research suggests that the introduction of EFTs has not yet led states to increase their forestry budgets, India recently increased the share of revenue states receive from forests from 7.5% to 10%, and this has boosted confidence in state governments that increases in forest cover could be rewarded with increases in funding (Busch et al. 2021). Ultimately, there is scope for state governments to protect and restore forests as an investment in future state revenues.
In Brazil, while the promotion of economic development by the federal government has contributed to an increased rate of deforestation, subnational governments continue to demonstrate interest in working towards REDD+ funding (Santiago 2020). This misalignment in priorities and interest in REDD+ has led to a lack of coherency between federal and state policies, with several Brazilian states having developed their REDD+ policies before the federal government. There need to be more efficient and less bureaucratic structures to attract investments and facilitate access to financial resources, especially by local communities and smallholders applying for projects within official REDD+ frameworks such as the Amazon Fund (Pham et al. 2021).
 Luttrell, C., Betteridge, B., 2017. Lessons for multi-level REDD+ benefit-sharing from revenue distribution in extractive resource sectors (oil, gas and mining). Center for International Forestry Research (CIFOR).
 Bush, J. And Mukherjee, A. 2017. Encouraging State Governments to Protect and Restore Forests Using Ecological Fiscal Transfers: India’s Tax Revenue Distribution Reform. Conservation Letter 11, 2.
 Busch, J., Ring, I., Akullo, M., Amarjargal, O., Borie, M., Cassola, R.S., Cruz-Trinidad, A., Droste, N., Haryanto, J.T., Kasymov, U., Kotenko, N.V., Lhkagvadorj, A., De Paulo, F.L.L., May, P.H., Mukherjee, A., Mumbunan, S., Santos, R., Tacconi, L., Verde Selva, G., Verma, M., Wang, X., Yu, L., Zhou, K., 2021. A global review of ecological fiscal transfers. Nat Sustain 4, 756–765.
 Pham, T.T., Moeliono, M., Yuwono, J., Dwisatrio, B., Gallo, P., 2021. REDD+ finance in Brazil, Indonesia and Vietnam: Stakeholder perspectives between 2009-2019. Global Environmental Change 70, 102330.