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 implemented by a government participating in REDD that differ in how they bring together incentives and benefit sharing: an incentive payment scheme where these are intrinsically linked and taxes where they are separated. Two sectors utilise forest as an input to production, one in which forest is substitutable for labour, producing a carbon externality, and one in which forest and labour are complements and where forest is used sustainably. Two important effects determine model outcomes. First, the government factors in general equilibrium effects when determining the efficient payment level. This implies that the level of international transfers is not fully passed through to the forest-using sectors. Second, even though the sustainable sector receives no incentive payment it can increase in size through the effect of REDD payments on markets. With political influence, where incentives and benefit sharing are linked the forest-using sectors may lobby for lower payment rates for themselves in order to create a larger international transfer. Where there is a separation between incentives and benefit-sharing this effect disappears. The findings indicate that REDD may be less cost-effective than envisioned at the international level.