**5.1. Types of risks facing REDD+ and project financing**

The key to successful implementation of REDD+ is the implementation of carbon conservation activities properly and correctly. Carbon conservation activities will have a major impact on the economy and the environment. The carbon conservation effort will have an

Sufficient knowledge of the source of leakage is important to develop a clear strategy for dealing with leakage issues. The risk of this leak may increase in line with: (1) opening of new business land for agricultural purposes and offsite plantations. Such encroachment activities may occur in other locations, and (2) the occurrence of encroachment or illegal logging activities tend to occur outside of the locations devoted to REDD+. The risk of non-permanence is associated with increased carbon emissions resulting from reduced management commitments to maintain REDD+ activities during the project or post-project completion. This can happen as a result of the project manager's ability to reduce carbon emissions. One of the factors driving irresponsibility is the absence of long-term financing planning. This leads to uncertainty in financing activities. This inadequacy increases in line with the increased cost of logging or the value of land for agriculture or plantation or other higher land use. In addition, this lack of permanence is also driven by the lack of clarity on incentive mechanisms and the benefits of REDD+ activities. This condition is usually exacerbated by the weakness of law enforcement. Increased dependence on increased forest resources is a result of declining public purchasing power due to the absence of alternative livelihoods among the project-related communities. Successful implementation of REDD+ is highly dependent on developer access to capital or financing sources. In addition, the seriousness of the developers also depends on how the implementation of REDD+ is able to compete with other uses, especially plantations and agriculture. This problem is related to the

From Forest Biomass to Carbon Trading http://dx.doi.org/10.5772/intechopen.80395 17

risk of failure of REDD+ implementation by leakage of non-permanence.

ate verified carbon credits [27].

**5.2. Strategy to overcome leakage and non-permanent risk**

As with other land-based carbon business activities such as the forestry CDM, REDD+ implementation faces long-term financing issues. Given that REDD+ is a long-term program and requires huge financing. The availability of long-term financing is an indicator of developer commitment in REDD+ implementation. This is related to the risks faced by the developer of leakage and non-permanence. With regard to financial flow, there are currently two alternative incentive mechanisms, namely input-based mechanism (IBM) and result-based mechanism. Both are donors funding flows to REDD+ implementers or developers. IBM is a stream of funds tailored to the needs of REDD+ implementation. The amount of funds is not related to the emission reduction performance achieved. While RBM is a stream of funds whose amount depends on the amount of emission reductions achieved. The amount of carbon credits generated in this RBM is highly dependent on the additionality obtained. If project financing occurs through RBM, then the receipt of the developer will depend on the applicable price or the deal price of the buyer. In this situation, the developer must be a company that has strong capital and has a strong commitment to conservation activities so that the company is able to gener-

The REDD+ and socioeconomic conditions around the project site define the developer strategy in addressing the risks in order to ensure that it. Increasing public demand on land due to decreasing public purchasing power as a result of rising food prices. In addition, higher competitiveness of other land-based enterprises such as plantations, mining, and agriculture is the driving force behind non-permanence. Considering that REDD+ is an activity with national and subnational approach and is related to national commitment to reduce GHG emission, financing certainty is required. Based on stakeholder perception, the first strategy

**Figure 1.** The effect of transaction costs on the price and quantity of carbon.

impact on the presence of carbon co-benefits such as biodiversity, community empowerment, employment creation, and other livelihood creation. However, there are also negative impacts such as "reducing access" of the community or the private sector in the management of forest resources. In general, the risks faced in implementing REDD+ are leakage and non-permanence. Leakage illustrates the occurrence of emissions that occur outside the project site. Leakage that occurs will reduce the amount of carbon credits generated. The opposite of leakage is additionality, which means increasing the amount of carbon produced. To facilitate the understanding of leakage and additionality, illustrations are presented in **Figure 2.**

**Figure 2.** (a) Baseline, (b) Leakage, and (c) Additionality.

Sufficient knowledge of the source of leakage is important to develop a clear strategy for dealing with leakage issues. The risk of this leak may increase in line with: (1) opening of new business land for agricultural purposes and offsite plantations. Such encroachment activities may occur in other locations, and (2) the occurrence of encroachment or illegal logging activities tend to occur outside of the locations devoted to REDD+. The risk of non-permanence is associated with increased carbon emissions resulting from reduced management commitments to maintain REDD+ activities during the project or post-project completion. This can happen as a result of the project manager's ability to reduce carbon emissions. One of the factors driving irresponsibility is the absence of long-term financing planning. This leads to uncertainty in financing activities. This inadequacy increases in line with the increased cost of logging or the value of land for agriculture or plantation or other higher land use. In addition, this lack of permanence is also driven by the lack of clarity on incentive mechanisms and the benefits of REDD+ activities. This condition is usually exacerbated by the weakness of law enforcement. Increased dependence on increased forest resources is a result of declining public purchasing power due to the absence of alternative livelihoods among the project-related communities. Successful implementation of REDD+ is highly dependent on developer access to capital or financing sources. In addition, the seriousness of the developers also depends on how the implementation of REDD+ is able to compete with other uses, especially plantations and agriculture. This problem is related to the risk of failure of REDD+ implementation by leakage of non-permanence.

As with other land-based carbon business activities such as the forestry CDM, REDD+ implementation faces long-term financing issues. Given that REDD+ is a long-term program and requires huge financing. The availability of long-term financing is an indicator of developer commitment in REDD+ implementation. This is related to the risks faced by the developer of leakage and non-permanence. With regard to financial flow, there are currently two alternative incentive mechanisms, namely input-based mechanism (IBM) and result-based mechanism. Both are donors funding flows to REDD+ implementers or developers. IBM is a stream of funds tailored to the needs of REDD+ implementation. The amount of funds is not related to the emission reduction performance achieved. While RBM is a stream of funds whose amount depends on the amount of emission reductions achieved. The amount of carbon credits generated in this RBM is highly dependent on the additionality obtained. If project financing occurs through RBM, then the receipt of the developer will depend on the applicable price or the deal price of the buyer. In this situation, the developer must be a company that has strong capital and has a strong commitment to conservation activities so that the company is able to generate verified carbon credits [27].

#### **5.2. Strategy to overcome leakage and non-permanent risk**

**Figure 2.** (a) Baseline, (b) Leakage, and (c) Additionality.

presented in **Figure 2.**

16 Renewable Resources and Biorefineries

impact on the presence of carbon co-benefits such as biodiversity, community empowerment, employment creation, and other livelihood creation. However, there are also negative impacts such as "reducing access" of the community or the private sector in the management of forest resources. In general, the risks faced in implementing REDD+ are leakage and non-permanence. Leakage illustrates the occurrence of emissions that occur outside the project site. Leakage that occurs will reduce the amount of carbon credits generated. The opposite of leakage is additionality, which means increasing the amount of carbon produced. To facilitate the understanding of leakage and additionality, illustrations are

**Figure 1.** The effect of transaction costs on the price and quantity of carbon.

The REDD+ and socioeconomic conditions around the project site define the developer strategy in addressing the risks in order to ensure that it. Increasing public demand on land due to decreasing public purchasing power as a result of rising food prices. In addition, higher competitiveness of other land-based enterprises such as plantations, mining, and agriculture is the driving force behind non-permanence. Considering that REDD+ is an activity with national and subnational approach and is related to national commitment to reduce GHG emission, financing certainty is required. Based on stakeholder perception, the first strategy applied is through the implementation of disincentives for developers who cannot guarantee permanence of activities. This is related to the commitment of REDD+ developers. Efforts are needed to facilitate the implementation of the strategy, then the government can issue a policy that regulates the status of REDD+ project location as a protected area. Implementation of this strategy encourages developers to ensure certainty of performance reduction of carbon emissions achieved. The next strategy is to implement an adaptive payment scheme, in which payments received by the developer are in line with the dynamics that occur. This strategy is linked to REDD+ financing mechanisms. This adaptive payment is a combination between IBM and RBM. Developers are eligible to receive early or periodic or annual payments as per performance results for REDD+ activities. Other strategies that can be pursued are to optimize the management and utilization of existing co-benefits within the site and set up the reserve area to cover potential losses [27]. The commitment of developers of REDD+ activities will be maintained if REDD+ funding distribution is acceptable to developers effectively and efficiently. Funding certainty for REDD+ activities will work effectively if it has a clear institutional funding distribution. The effectiveness of the channeling can be achieved if using existing government channels in the form of fiscal transfers. Donors can channel their funds through government agencies (national and subnational), then the government agencies channel them to developers. The second strategy is the transfer of funding through a REDD+ agency verified by the national government. The involvement of government agencies is believed to minimize transaction costs faced by developers. This transfer mechanism requires the establishment of a REDD+ financial institution first. The third strategy is the same as the second strategy, but incoming and transferred funds must be verified first by an independent third party. Nevertheless, this strategy will have the opportunity to bring in high transaction costs.

existing carbon markets will lead to over carbon credits in the carbon market, resulting in lower carbon prices. The amount of carbon credits from REDD+ is equivalent to a decrease in deforestation and forest degradation rates. Of course, it will be burdensome for developing countries. It is not worth the sacrifice of a developing country if the carbon credits generated by nobody pay primarily from developed countries. In our opinion, the implementation of REDD+ still involves a lot of harm, especially for developing countries associated with leakage, permanence, and additionality. Even Conservation bytes [28] calls these three things

From Forest Biomass to Carbon Trading http://dx.doi.org/10.5772/intechopen.80395 19

The problem with REDD is that it is a wonderful thing to be given on some niggly issues that basically revolve around trust. Ah yes, bugbear from every business transaction. As "buyers" of carbon credits (companies or nations or individuals who want to offset their carbon output by "buying" carbon uptake provided by intact forests), we definitely want to make sure that all the money we spend to offset our carbon is actually just that, not just ending up in the hands of some corrupt officials, or even worse, are used to produce an industry that produces higher emissions! Of course, as a buyer we want to attract investors to give us a lot of money. If we interrupt the transaction, we will not have any more investors who come knocking on our door. Enter an unholy trinity of leaks, permanence, and additions. Imagine we are legislators and must make sure that buyers and sellers do not do anything clever and fall into one or all of the leak, eternal, or additional traps. Sounds like a terrible job, and probably not possible. How do we manage it and how long is "permanent"? How do we prove "what will happen"? So, basically we can imagine this unholy trinity has dropped many proposed REDD projects, and even kill that has been going on for some time. Like communism, that's a good idea, but REDD is almost impossible to make a job in the real world for many of the same reasons that communism fails—human greed and pettiness. Efforts to force such obstacles in the sky to avoid leaks and ensure timelessness and addition are actually more dangerous than good because so many programs fail even to get started. Further REDD+ implementation

needs to be improved by including an insurance policy element called iREDD [28].

term plan of the relevant government agency? Is that against anything?

iREDD basically functions as follows: Before changing hands, the buyer and seller request an insurance brokerage service to assign premiums based on a priori assessment of any issues that may be related to leakage, immortality, and additions. Here, the Likert scale is used to rate proposals based on five criteria: (1) government structure—are the institutions reputable? Do they have a good business history?; (2) management plan—is the plan for managing REDD forests detailed enough to account for unforeseen events?; (3) project liquidity—do the institutions involved have sufficient cash flow to ensure they can meet the objectives of the management plan?; (4) acceptance—is the project acceptable to the community in the region? Do other groups support it?; and (5) purchase-politics—is the project included in the long-

Once a rating is made, certain components of the money invested are used to purchase a scaled insurance policy against the identified (and approved) risks. If the seller (i.e., the recipient of funds and forest managers) fails to keep the forest intact, or it is subject to a destructive forest

"Unholy trinity of leakage, permanence and additionality."

**5.3. Unholy trinity of leakage, permanence, and additionality**

Carbon markets are believed to be effective and efficient mechanisms in providing these financing sources. In carbon markets, prices are decisive in generating carbon credits. Higher carbon prices will cause more carbon credits to be generated. Nevertheless, carbon trading from REDD+ is found to be a concern especially for developing countries that is the risk of leakage and non-permanence. Transactions that occur in the carbon market are based on the amount of carbon credits traded. In fact, the resulting forest carbon credits are difficult to verify because a strong measurement methodology is required. Thus, the amount of carbon credits generated depends largely on: baseline and measurement methodology, additionality, sustainability or permanence, and leakage rates.

This condition is particularly difficult for developing countries because there is still a need for development in the country that still requires forest conversion for other uses, for example, urban development, expansion of infrastructure, transportation, expansion of agricultural land and plantations, settlements, and others. Seen from the demand side of the carbon market, the success of REDD+ implementation is also highly dependent on the commitment of developed countries that are obliged to reduce greenhouse gases. In its development, demand for carbon credits is dominated by carbon credits from non-land-based sectors. It turns out that carbon credits in the market globally are dominated by the energy sector. This will lead to an oversupply of carbon credits in the European carbon market. As a result, there is a tendency to decrease the value of carbon credit transactions not only in the European carbon market but in all carbon markets. It is feared that increasing carbon credits from REDD+ to existing carbon markets will lead to over carbon credits in the carbon market, resulting in lower carbon prices. The amount of carbon credits from REDD+ is equivalent to a decrease in deforestation and forest degradation rates. Of course, it will be burdensome for developing countries. It is not worth the sacrifice of a developing country if the carbon credits generated by nobody pay primarily from developed countries. In our opinion, the implementation of REDD+ still involves a lot of harm, especially for developing countries associated with leakage, permanence, and additionality. Even Conservation bytes [28] calls these three things "Unholy trinity of leakage, permanence and additionality."

## **5.3. Unholy trinity of leakage, permanence, and additionality**

applied is through the implementation of disincentives for developers who cannot guarantee permanence of activities. This is related to the commitment of REDD+ developers. Efforts are needed to facilitate the implementation of the strategy, then the government can issue a policy that regulates the status of REDD+ project location as a protected area. Implementation of this strategy encourages developers to ensure certainty of performance reduction of carbon emissions achieved. The next strategy is to implement an adaptive payment scheme, in which payments received by the developer are in line with the dynamics that occur. This strategy is linked to REDD+ financing mechanisms. This adaptive payment is a combination between IBM and RBM. Developers are eligible to receive early or periodic or annual payments as per performance results for REDD+ activities. Other strategies that can be pursued are to optimize the management and utilization of existing co-benefits within the site and set up the reserve area to cover potential losses [27]. The commitment of developers of REDD+ activities will be maintained if REDD+ funding distribution is acceptable to developers effectively and efficiently. Funding certainty for REDD+ activities will work effectively if it has a clear institutional funding distribution. The effectiveness of the channeling can be achieved if using existing government channels in the form of fiscal transfers. Donors can channel their funds through government agencies (national and subnational), then the government agencies channel them to developers. The second strategy is the transfer of funding through a REDD+ agency verified by the national government. The involvement of government agencies is believed to minimize transaction costs faced by developers. This transfer mechanism requires the establishment of a REDD+ financial institution first. The third strategy is the same as the second strategy, but incoming and transferred funds must be verified first by an independent third party. Nevertheless, this strategy will have the opportunity to bring in high transaction costs. Carbon markets are believed to be effective and efficient mechanisms in providing these financing sources. In carbon markets, prices are decisive in generating carbon credits. Higher carbon prices will cause more carbon credits to be generated. Nevertheless, carbon trading from REDD+ is found to be a concern especially for developing countries that is the risk of leakage and non-permanence. Transactions that occur in the carbon market are based on the amount of carbon credits traded. In fact, the resulting forest carbon credits are difficult to verify because a strong measurement methodology is required. Thus, the amount of carbon credits generated depends largely on: baseline and measurement methodology, additionality,

This condition is particularly difficult for developing countries because there is still a need for development in the country that still requires forest conversion for other uses, for example, urban development, expansion of infrastructure, transportation, expansion of agricultural land and plantations, settlements, and others. Seen from the demand side of the carbon market, the success of REDD+ implementation is also highly dependent on the commitment of developed countries that are obliged to reduce greenhouse gases. In its development, demand for carbon credits is dominated by carbon credits from non-land-based sectors. It turns out that carbon credits in the market globally are dominated by the energy sector. This will lead to an oversupply of carbon credits in the European carbon market. As a result, there is a tendency to decrease the value of carbon credit transactions not only in the European carbon market but in all carbon markets. It is feared that increasing carbon credits from REDD+ to

sustainability or permanence, and leakage rates.

18 Renewable Resources and Biorefineries

The problem with REDD is that it is a wonderful thing to be given on some niggly issues that basically revolve around trust. Ah yes, bugbear from every business transaction. As "buyers" of carbon credits (companies or nations or individuals who want to offset their carbon output by "buying" carbon uptake provided by intact forests), we definitely want to make sure that all the money we spend to offset our carbon is actually just that, not just ending up in the hands of some corrupt officials, or even worse, are used to produce an industry that produces higher emissions! Of course, as a buyer we want to attract investors to give us a lot of money. If we interrupt the transaction, we will not have any more investors who come knocking on our door. Enter an unholy trinity of leaks, permanence, and additions. Imagine we are legislators and must make sure that buyers and sellers do not do anything clever and fall into one or all of the leak, eternal, or additional traps. Sounds like a terrible job, and probably not possible. How do we manage it and how long is "permanent"? How do we prove "what will happen"? So, basically we can imagine this unholy trinity has dropped many proposed REDD projects, and even kill that has been going on for some time. Like communism, that's a good idea, but REDD is almost impossible to make a job in the real world for many of the same reasons that communism fails—human greed and pettiness. Efforts to force such obstacles in the sky to avoid leaks and ensure timelessness and addition are actually more dangerous than good because so many programs fail even to get started. Further REDD+ implementation needs to be improved by including an insurance policy element called iREDD [28].

iREDD basically functions as follows: Before changing hands, the buyer and seller request an insurance brokerage service to assign premiums based on a priori assessment of any issues that may be related to leakage, immortality, and additions. Here, the Likert scale is used to rate proposals based on five criteria: (1) government structure—are the institutions reputable? Do they have a good business history?; (2) management plan—is the plan for managing REDD forests detailed enough to account for unforeseen events?; (3) project liquidity—do the institutions involved have sufficient cash flow to ensure they can meet the objectives of the management plan?; (4) acceptance—is the project acceptable to the community in the region? Do other groups support it?; and (5) purchase-politics—is the project included in the longterm plan of the relevant government agency? Is that against anything?

Once a rating is made, certain components of the money invested are used to purchase a scaled insurance policy against the identified (and approved) risks. If the seller (i.e., the recipient of funds and forest managers) fails to keep the forest intact, or it is subject to a destructive forest fire or political unrest, the buyer receives at least part of the premium as an out-of-pocket insurance payment. However, if the seller is true to their word (contractual obligations), the premiums and the interest are paid to them other than the money originally invested. In other words, everyone wins. If the seller fails, the buyer is compensated and can invest elsewhere. If the seller is good, they get more money. Most importantly, it increases the likelihood that atmospheric carbon will decrease and forest-related biodiversity will remain [29].

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