Palm oil plantation (photo by Tim Cadman)

Governing the forests: how fiscal instruments can act as a (dis)incentive to reducing emissions

In recent years, the concept of ‘governance’ rather than ‘government’ has become a popular term for describing the interactions between stakeholders in the sustainable development policy arena. In this context, especially in the arena of forest management, it is used to describe the structures and processes that steer, or co-ordinate the relations between multi-stakeholders (government, business, civil society). Usually, governance refers to human actors, but there are other forces that exercise influence over how forests are managed. One of the most important of all these, is that most essential resource: money. This brief report outlines the role that public finance, and most importantly the fiscal instruments developed by governments, can have a considerable influence over the fate of the world’s forests.

Research undertaken by the author in 2016-2017 investigated the extent to which fiscal incentives encouraged, or discouraged, private sector involvement in the United Nations Framework Convention on Climate Change (UNFCCC) initiative known as REDD+ (“Reducing emissions from deforestation and forest degradation and the role of conservation, sustainable management of forests and enhancement of forest carbon stocks in developing countries”).

In Indonesia, REDD+ has been recognized as a potentially significant source of revenue, while at the same time providing an important incentive to contribute to reductions in global deforestation. However, in a series of interviews and surveys, forest-based business stakeholders identified a number of issues impacting on their ability to undertake activities that would lead to reducing deforestation and forest degradation, and emissions.

The research revealed:

  • The damaging impact on profitability of the competition between the native forest and plantation sectors, and between the forest sector and palm oil companies. This negative impact can be traced back to Indonesia’s 2001 timber export ban, and subsidies to palm oil;
  • Fees, charges and funds levied on the forest sector did not meet the objectives, for which they were established. In addition, the high fees and the charges at the different jurisdictional levels (national, provincial, district), as well as informal charges, all acted as constraints on the viability of most types of forest concession holders (native forests, plantations, ecological restoration, and carbon);
  • For the forestry sector, fiscal instruments also acted as disincentives to practicing sustainable forest management (SFM), as did the competing objectives of different silvicultural practices.
  • Participants in the research also identified a lack of policy clarity around the objectives of SFM and REDD+, and between REDD+ and broader carbon policy, which in turn was impeded by a high degree of uncertainty.

The research findings further suggested that there is a need for:

  • Greater coordination of land use practices (native and plantation forestry, and palm oil);
  • More collaboration between forest users – notably extractive and non-extractive forest-enterprises, and local community smallholders;
  • More flexibility on when and how fees and charges should be levied, and the need for incentive-based approaches rather than revenue raising. This was particularly the case for carbon and ecological restoration concession holders who must pay (often large) charges up-front, while realising income from these activities remains a long way off;
  • Closer linkages between SFM, REDD+ and carbon policy. At present, the policy uncertainty surrounding the future of REDD+ in the wake of the 2015 UNFCCC Paris Agreement is also disrupting the development of clear rules around the relationship between the sustainable management of forests, emissions reduction activities, and carbon markets.

The government of Indonesia needs to consider providing incentives for the non-exploitation of forests by businesses engaged in the provision of environmental services as well as carbon transactions. This could take the form of private investments, private public partnerships or civil society engagement in forestry and land use change, and may include incentives such as payment for ecosystem services and for forest ecosystem restoration. Specifically in the forest and land use sector, the government aims to encourage investments in sustainable forest management involving policies that put higher value on sustainable forests through: economic instruments (for example, royalties and fees); enforcement (control of illegal logging, forest fires and forest land conversion); and policies affecting demand (for example, expanding the use of wood certification and accreditation systems and benefits associated with corporate social responsibility); as well as reducing risks associated with unclear land ownership. This will also thus entail addressing institutional issues related to governance and capacity building in all government levels, given Indonesia’s high degree of decentralization, to ensure policy effectiveness.

When considering the subsidies, funds and incentives that exist in the palm oil sector, any reforms to the existing forest-based fiscal instruments that may be undertaken to reduce emissions from deforestation and forest degradation are likely to be less effective than they might, unless there is greater cross-sectoral coordination. Providing incentives for businesses to collaborate with local communities and smallholders in forest-based, emissions reducing activities – notably ecosystem services, reduced impact logging, rehabilitation and restoration – in the form of reduced fees, charges or taxes commensurate to the number, and scale of activities, also merits consideration. Without such reforms, the continued dominance of the palm oil industry will continue to drive deforestation, and encourage local communities and smallholders to clear forests in order to benefit from the money that can be gained from converting forests to palm oil plantations.

Report based on the Chapter “Incentives and Disincentives for Reducing Emissions under REDD+ in Indonesia” by Fitri Nurfatriani, Mimi Salminah, Tim Cadman, and Tapan Sarker, contained in Pathways to a Sustainable Economy Bridging the Gap between Paris Climate Change Commitments and Net Zero Emissions, edited by Moazzem Hossain, Robert Hales, and Tapan Sarker, and published by Springer, to be released in early 2018. The research was funded by ACIAR, Project: FST/2012/040 (Enhancing smallholder benefits from Reduced Emissions from Deforestation and Forest Degradation in Indonesia).

For an interactive visualisation of the UNFCCC, access the Climate Regime Map via https://www.climateregimemap.net/ (best viewed using Google Chrome via an Apple desktop or laptop; not suitable for mobile devices and tablets).

Written by timcadman

Tim Cadman is a writer, academic and public intellectual with an interest in governance, sustainability, climate change, natural resource management including forestry, and responsible investment.

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