Reforming fiscal policies to stimulate sustainable economic growth, food security and reduced deforestation

This blog is slightly adapted from an article written by Gabrielle Kissinger (Consultant, UNEP) on Landscapes.org, with input from Ivo Mulder (REDD+ Economics Advisor, UNEP) and Johan Kieft (Green Economy Advisor, UNORCID) UN-REDD Programme.

The climate negotiations have been dominating media headlines these past weeks (December 2015). One important topic that negotiators will address are emissions from agriculture, forestry and land use change (AFOLU). To that extent, a positive message came out this week when Norway, Germany and the UK pledged US$ 5 billion to combat tropical deforestation. At the same it is important, though, to stimulate and incentivise businesses to decouple production of commodities from forest impacts. One potential way to do this is by looking how to reform agricultural subsidies in a way that ensures continued production and enhance food security, while alleviating pressure on tropical forests. 

Agriculture is estimated to be the direct driver for around 80% of deforestation worldwide. In order for countries to contribute to mitigating climate change in the land use sector, they need to tackle both the directand underlying or indirect drivers associated with the production of agricultural commodities such as palm oil, soy and beef. In many countries these underlying drivers include include government fiscal policies and incentives that directly or indirectly promote agricultural expansion into forests.

Our global population is rising to at least 9 billion people by 2050. We are increasingly coming to understand that the economic and ecological stability we have come to rely on in the past is at risk, as natural capital depletion and increasingly marginal food production circumstances become the norm. Our agricultural systems underperform due to poor and inefficient practices, policies and market signals, and often depend on spatial expansion into forests, rather than increases in yield per hectare, for production increases.

Brazil and Indonesia together provided over $40 billion in subsidies to palm oil, timber, soy, and biofuel sectors between 2009 and 2012, which is more than a hundred times the $346 million these countries received through REDD+ (reducing emissions from deforestation and forest degradation in developing countries as well as stimulating conservation, sustainable management of forests and enhancement of forest carbon stocks).[1] Domestic subsidies or incoherence in fiscal policies causing deforestation vastly outweighs the international REDD+ funding seeking to prevent it. International climate finance will not deliver the intended outcomes unless parallel efforts focus on bringing coherence to fiscal incentive frameworks to align sustainable economic growth, with food production and reduced deforestation.

Fiscal incentives supporting agricultural production, however, have the potential to promote sustainable land use and support multiple land use sector objectives, if they are conceptualized and designed to do so[2]. Decoupling economic growth from deforestation and land degradation is possible, and provides a pathway toward sustainable land use and sustainable inclusive economic growth.

Defining fiscal incentives

Fiscal policy is the means through which governments adjust spending and income through subsidies and taxes, and which can therefore have a large effect on the national economy. The definition of fiscal policies and incentives must be broad enough to capture the range of fiscal instruments that affect land use and forest cover change. Thus, the World Trade Organization’s (WTO), Food and Agriculture Organization of the United Nations (FAO) and Global Subsidies Initiative definitions of subsidies are all applicable (see below).

Why look at compatibility in fiscal incentives across sectors now?

This past September, the United Nations General Assembly, comprised of 193 Member States, adopted the 2030 Sustainable Development Agenda. The 17 Sustainable Development Goals (SDGs) 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 among other goals. One sustainable development target specifically calls for the phasing out of inefficient fossil fuel subsidies that encourages wasteful consumption and market distortions (see box below). In addition, the Aichi Biodiversity Target No. 3 calls for the elimination and reformation of incentives and subsidies harmful to biodiversity by 2020.

The Warsaw framework for REDD+ encourages governments and others to take action to reduce the drivers of deforestation and forest degradation, and reaffirms the importance of addressing these pressures in the context of the development and implementation of REDD+ national strategies and action plans by REDD+ countries, depending on their national circumstances. However, very few countries, if any at present, call out the need to review and reform existing fiscal incentives as part of their REDD+ readiness activities, based on reviewing 43 country REDD+ readiness plans.[3] [4]

However, in order for countries to achieve sustainable economic growth by placing the Sustainable Development Goals (SDGs) at the helm of economic and development planning, fiscal incentives that promote agricultural expansion need to become better aligned with REDD+ objectives. The recent New Climate Economy report for example 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.

What can REDD+ countries do about agricultural fiscal incentives?

There is no one-size-fits-all solution for countries to amend agricultural fiscal incentives. National circumstances differ and each country will have a varied approach to identify how their fiscal policies and incentives can overcome inherent conflicts between sectors and competing land uses, serve multiple objectives, and to send the right signals to the private sector. Success stories of fiscal incentive reform include:

• In Brazil, a change in Central Bank policy prevented US$1.4 billion from being loaned to unsustainable agricultural practices as these loan applications did not comply with Brazilian environmental regulations. This change in policy contributed to a 15% decrease in deforestation in the Amazon between 2008 and 2011. Brazil made deforestation a crime back in 1998, and the ability to access rural credit dependent upon legal compliance with existing laws, guided by a biome-wide management plan and related sector development plans. Noncompliant biome municipalities were blacklisted and denied access to agricultural credit and subjected to product supply embargoes until the municipality registered 80% of its properties in the Cadastro Ambiental Rural mapping system and lowered deforestation rates.
• In Niger, changing a regulatory incentive that encouraged farmers to remove trees from their farms resulted in the regeneration of 4.8 million ha of land and an increase of farmer household incomes of 18 – 24%.
• India sought to overcome the perverse incentives that state and local governments had to undervalue and mismanage forests, and declining revenue from forests due to the implementation of the National Forest Policy. India’s 14th Finance Commission made a slight shift in 2015 to the intergovernmental fiscal transfer system, by: 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 US$6 billion a year to Indian states, which is perhaps the largest revenue-neutral fiscal incentive in the world to keep forests standing.

Indonesia’s peat fires and related haze in 2015 have resulted in one of the worst environmental catastrophes in recent memory. At least 19 deaths have been reported, 550,000 people suffer acute respiratory infections, and daily greenhouse gas emissions have been greater than from the entire US economy. While not entirely to blame, the lack of enforcement of Presidential Decree No.32/1990 mandating no deforestation on deep peat provided in-kind incentives for companies to log on peat soils. Indonesia’s challenge now is to redefine the full suite of land use regulations and fiscal incentives that influence peat clearance. One option is a tax on peat land use, administered as a special tariff of the Land and Buildings Tax for large-scale license holders. As almost 60% of all fires have occurred outside concessions, there is high probability that the intergovernmental fiscal transfer system could incorporate incentives to promote better peat land planning at provincial and regency levels.

Concluding

The prime focus should remain for developing countries to be provided with predictable and adequate support for results-based finance to reduce emissions from deforestation and forest degradation, while stimulating conservation, sustainable management of forests and enhancement of forest carbon stocks (REDD+). At the same time it is important to align (international) public funding to achieve REDD+ results - to the extent possible - with private sector efforts to combat deforestation and potential reform of agricultural subsidies. 

The article is based on a UN-REDD Policy Brief "Fiscal incentives for agricultural commodity production: Options to forge compatability with REDD+"