There are two mechanisms for raising the funding required by REDD initiatives:
Government funding: This mechanism would be financed mainly from funds derived from the auction of emission allowances in the European Union’s Emissions Trading Scheme and others, as well as developmental assistance funds.
Each rainforest nations would monitor deforestation at the national level against a generally agreed baseline. Payments would be made on the basis of deforestation reductions at country level. Each country would set up its own strategy to invest these funds to continue to receive annual transfers.
Market-based: This mechanism would be financed by allowing companies in Annex 1* countries to offset part of their emission reduction obligations through REDD.
Project owners and developers would validate and certify projects under generally agreed guidelines and approved methodologies. Each project would invest the carbon credit revenues according to local and regional conditions. These results would be inspected periodically by independent auditors at project level.
* There are 41 Annex I countries and the European Union is also a member. These countries are classified as industrialized countries and countries in transition
Source: International Institute for Environment and Development (IIED) (March 2009) ‘Financing REDD: meshing markets with government funds’, IIED Briefing, IIED, London.