Economy-wide impacts of REDD when there is political influence

National-level strategies for Reducing Emissions from Deforestation and Degradation (REDD), financed by international transfers, have begun to emerge. A three-sector model is developed to explore the economy-wide effects of two policies, incentive payments and taxes, implemented by a government participating in REDD. Two sectors utilise forest as an input to production, one in which forest is substitutable for labour and one in which forest and labour are complements. The government factors in two opposing types of general equilibrium effect when determining the efficient payment level: one that changes the relative price of forest and one that results from the income transfer related to the payment. Unlike taxes, payments result in unequal income transfers and a shift in relative prices. With political influence, the forestusing sectors may lobby for lower payments in order to create a larger international transfer. REDD may be less cost-effective than envisioned at the international level.