Is reducing emissions from deforestation financially feasible? A Panamanian case study

Since 2005, negotiations aiming at reducing emissions from deforestation in developing countries (REDD) are ongoing in the UN Framework Convention on Climate Change. Two breeds of proposed REDD mechanisms are examined: market- or fund-based. Using Panama as a case study, the comparative ability of these types of mechanisms is assessed for addressing developing countries' concerns. In Panama, the protection of 5,000 ha of forest land corresponds to an annual reduction in emissions of 3,320,000 tCO2e with a break-even opportunity cost of US$3,678,594. The additional costs of protection, transaction and administration would augment the overall cost by 25%. The total yearly cost of REDD for Panama would be comparable to the country's total spending for protected areas in 2005 of ?US$3.5 million. Thus, implementing a REDD programme would double the conservation expenses of that country, underlying the crucial need to identify sufficient funding sources to sustain REDD. Our analysis suggests that none of the currently proposed mechanisms can provide the necessary incentives and flexibility to stimulate action. The proposed market-based approaches are likely to be too risky, while funds-based mechanisms lack explicit replenishment mechanisms. Alternative financial options must urgently be identified to give credibility to the ongoing efforts aimed at REDD.