Deforestation of tropical forests contributes approximately 10–20% of global greenhouse gas emissions. This paper reviews various options proposed by countries to address reducing these emissions, including market-based approaches to fund activities to make these reductions. The paper explores some of the opportunities and pitfalls of market-based mechanisms, including such concepts as permanence, measurement, additionality, undermining the carbon market and sovereignty concerns. Possibly the greatest difficulty with market-based approaches is the issue of emissions displacement – a concept often called ‘leakage’. One cause of leakage is the growing market for tropical timber, particularly in China. Options to address leakage are considered, including a new concept relating to carbon deficits as part of a demand-side management approach. Non-market mechanisms are also explored. Elements of the United Nations Framework Convention on Climate Change (UNFCCC)'s Bali Action Plan, such as conservation, sustainable management of forests and the enhancement of carbon stocks, are also examined. The paper concludes that a step-by-step approach is needed to build the capacity of developing countries to meet the challenges of reducing emissions from deforestation in developing countries (REDD).