Efficient payments in a two-tiered REDD mechanism : theory and illustration from Sumatra

This paper develops an analytical model of a REDD+ mechanism with an international payment tier and a national payment tier, and calibrates land users' opportunity cost curves based on data from Sumatra, Indonesia. We compare the avoided deforestation and cost- effciency of government purchases across two payment types (fixed price_ and _opportunity cost_), and across two government types (_benevolent_ and _budget maximizing_). Our pa- per shows that fixed-price payments are likely to be more effcient than opportunity-cost compensation payments at low international carbon prices, when the government is _benevolent,_ or when variation in opportunity cost within land users is high relative to variation in opportunity cost across land users. Thus, a program which pays local communities or land users based on the value of the global climate service provided by avoided deforestation may not only distribute REDD revenue more equitably than an opportunity cost-based payment system, but may be more cost-effcient as wel