UN-REDD – Fiscal incentives for agricultural commodity production: Options to forge compatibility with REDD+

By Gabrielle Kissinger, consultant at UNEP UN-REDD Programme

Indonesian palm oil production is recognized as a driver of deforestation and source of considerable greenhouse gas emissions, particularly in peat-rich areas. But what are the real drivers for palm oil producers—both large and small—to expand production into forests? Clearly market demand has a role to play, but so do the preferential lending rates, guarantees and tax concessions, streamlined permitting, biofuel blending mandates, and other fiscal incentives that producers can tap into or that motivate decisions to invest.

Agriculture is estimated to be the direct driver for around 80% of deforestation worldwide, and yet in order for countries to reverse this pressure, they must influence the underlying or indirect drivers associated with the production of agricultural commodities, which often include government fiscal policies and incentives that promote direct driver activity. Evidence is growing that fiscal incentives can have powerful adverse impacts on forests, and reforming them is a complex and politically sensitive topic. Despite these challenges, a few countries have started to call out the need to review and reform existing fiscal incentives as part of their REDD+ efforts.

In Indonesia, as in many countries that have sought to bring economic development to their forest frontiers, fiscal incentives and subsidy programs were often put in place to promote resource extraction, to encourage settlers to clear forests and make land productive for other uses. But this paradigm is changing, as our natural capital — forests, agricultural lands, water — are increasingly being understood in the context of building social capital and stable economies.

The post-2015 sustainable development goals highlight the key goals of halting and reversing land degradation and biodiversity loss, sustainably managing forests, ensuring sustainable production and consumption patterns, and promoting inclusive and sustainable economic growth. One sustainable development target specifically calls for the phasing out of inefficient fossil fuel subsidies that encourages wasteful consumption and market distortions. Also, the Aichi Biodiversity Target No. 3 calls for the elimination and reformation of incentives and subsidies harmful to biodiversity by 2020. Income inequality and economic efficiency are important indicators for how far countries are along the pathway towards inclusive economic growth. And yet income disparities have increased within many countries, and risk development futures, with an increasing urban-rural divide. For REDD+ countries, forests do not stand in isolation, but rather are part of rural development and commodity production.

Rather than fiscal incentives that promote agricultural expansion being a problem for REDD+, they can be part of the solution to define low-carbon growth and development. The recent New Climate Economy report notes that many countries subsidize key agricultural inputs, such as irrigation water and fertilizer, in order to boost productivity, but evidence suggests these subsidies can also lead to waste and environmental damage. In Indonesia, while fertilizer subsidies are a significant portion of public spending on agricultural production, they have actually had a negative effect on agriculture sector growth. The country’s National Medium Term Development Plan (RPJMN) of 2015-2019 seeks to increase the competitiveness of agricultural commodities, including oil palm, and also identifies forestry/peat lands and agriculture as two of the five key sectors that are key to meeting Indonesia’s GHG emission reduction target of 26% by 2020. How can Indonesia achieve both these goals? The redesign of fiscal incentives can be a powerful lever in the toolkit, and could simultaneously help achieve the country’s goals of improving smallholder palm oil yields, which are currently very low, and increase the amount of certified production, while also conserving forests.

For REDD+ countries to assess options, there are success stories to consider and examples to follow. However, national circumstances differ and each country will have a varied approach to assessing how their fiscal policies and incentives can overcome inherent conflicts between sectors and competing land uses, and to send the right signals to the private sector. India provides a compelling example of how to overcome the perverse incentives that state and local governments had to undervalue and mismanage forests, and their declining revenue from forests was a concern to some states, due to the implementation of the National Forest Policy. India’s 14th Finance Commission recently made a slight shift to the intergovernmental fiscal transfer system, which will have considerable impact on forest management decisions at the Panchayat and Gram Sabha scales. India took action on two fronts: 1) increasing the amount of revenue allocated to states by 10%, and 2) Assigning a 7.5% weight to forest cover in the allocation formula of revenue going to states. The percentage weight allocated to forest cover is expected to deliver $6 billion a year to Indian states, which is perhaps the largest revenue-neutral fiscal incentive in the world to keep forests standing.

India’s recent fiscal policy decision is a decidedly simple one, yet with large potential impact on forests. Yet, solutions will not always be so streamlined, and rather will require the aligning of incentives (such as tax concessions, access to credit), disincentives (such as moratoria, regulations, fees) and enabling measures (such as adequate governance and enforcement), across scales and sectors, for mutually reinforcing outcomes. We can re-envision fiscal incentives and subsidies to support agricultural production that is compatible with REDD+, and anticipates tomorrow’s pressures on land and forests, with the appropriate tools to meet those pressures.

About the author:

Gabrielle Kissinger is a consultant to the UNEP and the UN-REDD Programme, and also principal of Lexeme Consulting based in Vancouver, Canada. She has worked for over 20 years at the interface between government policy and land use pressures, with various levels of government, companies ranging from start-ups to large timber companies and agribusiness, investors, major donors, and a full range of environmental NGOs.  She focuses on strategies for linking science into policy and decision-making in the areas of global land-use and climate change, REDD+, climate-smart agriculture, finance and investment that supports sustainable land use, government affairs and business solutions to sustainability.