Subsidies, taxes, fees and trading schemes

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include market price support, support per unit output, and unconstrained support per unit input. These agricultural subsidies are the most trade distorting and potentially harmful for the environment and they are the most common financial instruments used (OECD, 2020[68]). These measures encourage producers to keep their production practices and produce beyond market demand. Input support also encourage the excessive use or misuse of potentially polluting pesticides and fertilisers (OECD, 2020[70]; OECD, 2019[71]). The use of agricultural subsidies across the world is declining because they can be disruptive and create perverse incentives to overproduce or move towards monocultures (OECD, 2020[68]). Sud (2020[72]) argues that “countries need to review support that directly or indirectly incentivises excessive input use in order to provide the right signals to producers and free up finances that can then be redirected towards other uses”. Non-output related support (decoupled from production) like payments for conservation areas, wildlife or biodiversity, has proven effective at improving biodiversity and is increasingly being used in European countries (Sud, 2020[72]). Reform should consider its possible unintended outcomes. For instance, removal of agriculture subsidies may deprive small-scale farmers of key financial capital and they may shift to slash-and-burn agriculture, generating additional deforestation (OECD, 2017[73]).

Subsidies, taxes, fees and trading schemes

Economic instruments implemented by governments, such as environmentally-motivated subsidies, payments for ecosystem services schemes, taxes, fees and tradable permits, provide price signals to both producers and consumers to behave in a more environmentally-sustainable way (OECD, 2020[74]). As DeBoe (2020[65]) defines them, economic instruments create or alter the relative incentives faced by farmer, so that at least some farmers voluntarily choose to improve their environmental performance. Taxes and other instruments that impose a price for performing a negative behaviour and some subsidies also provide continuous incentives to innovate in order to achieve objectives in a more cost-effective manner, and most are also able to generate revenue (OECD, 2020[74]).Economic instruments are the so-called “positive incentives” embedded in the 2011-2020 Aichi Biodiversity Targets, notably Target 3.

Subsidies for sustainable land use and Payments for ecosystem services

A number of subsidies are used to promote sustainable land use. Examples include subsidies for sustainable practices on-farm (organic or environmentally friendly agriculture, for pesticide-free cultivation), land and native vegetation conservation, forest management and reforestation, and for structural adjustment towards “greener” agricultural systems (DeBoe, 2020[65]). For instance, farmers are sometimes subsidised for purchasing “green” technologies such as fuel-efficient farm machinery or waterefficient irrigation systems. The net environmental impact of such subsidies depends on the programme design (DeBoe, 2020[65]). Often multiple subsidies are in place at the same time (see Box 3.5.). There are currently 183 environmentally motivated subsidies directed at land management in force across 25 countries13 (OECD, 2020[74]; DeBoe, 2020[65]).

13 The existence of an instrument does not guarantee its enforcement. Moreover, the level of stringency might not be adequate for the desired environmental outcome (OECD, 2020[75]).

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Box 3.5. Agricultural subsidies in Belgium

In Flanders (Belgium) for instance, environmentally related grants include: investment support for sustainable and organic farming (investment in physical capital), subsidies for buffer management, subsidies for mechanic weed control, subsidies for recovery, development and maintenance of small landscape elements, subsidies for the reduction of pesticide and fertiliser use in ornamental crops cultivation, subsidies for voluntary cutback of the pig herd and public funding for the investigation and remediation of contaminated soils.

Source: (OECD, 2020[75])

Programmes that exchange value for land management practices intended to provide or ensure ecosystem services14 are increasingly used worldwide. These include Payments for ecosystem services (PES), Biodiversity offsets and Land conservation agreements. They are detailed below.

Payments for ecosystem services (PES) are increasingly discussed as a tool to promote

sustainable agriculture practices. PES services schemes are incentive mechanisms introduced to account for positive externalities or characteristics of public goods that existing markets do not account for. Suppliers of an ecosystem service with positive externality are paid to keep providing this service. PES schemes targeted towards sustainable land use15 are increasingly used and cover a wide range of scales, time-frame and contexts: international programs are implemented in the EU with the agri-environmentclimate measures (DeBoe, 2020[65]), national-scale programs16 are implemented in Canada, China (see Box 3.6.), Costa Rica (Pagiola, 2008[76]), Ecuador (Wunder and Albán, 2008[77]; De Koning et al., 2011[78]), France, Mexico (Muñoz-Piña et al., 2008[79]), Tasmania, the United States (OECD, 2019[80]), Scotland (Smith et al., 2013[81]) and several Brazilian and Australian states (Pagiola, Carrascosa von Glehn and Taffarello, 2013[82]). Most countries in Latin American have some sort of smaller PES (usually watershedscale), like Colombia (Blanco, 2006[83]) and Nicaragua (Pagiola, Honey-Rosés and Freire-González, 2017[84]). Many cities have PES scheme to purchase upstream watershed forest protection to ensure the city’s ongoing access to clean water. Well-known examples are New York city and the City of Yokohama (FAO, 2019[67]).

PES-type schemes signed for period of over twenty years or in perpetuity or upon satisfaction of

specified conditions are usually referred to as Land Conservation Agreements (covenants or easements). They can use fixed price offers or, more commonly, a market-based approach, such as competitive tender (Smith et al., 2013[81]). Competitive tender type agri-environmental mechanisms based on an environmental performance index have been used by governments to purchase ecosystem services. The most studied example is the USDA Conservation Reserve Programme, a competitive tender17 type agri-environmental mechanism based on an environmental performance index (OECD, 2019[80]). Australia

14 An ecosystem is a dynamic complex of plant, animal, and microorganism communities and the non-living environment, interacting as a functional unit. Ecosystem services are the benefits people obtain from ecosystems (Millennium Ecosystem Assessment (Program), 2005[136]). 15 Including via the use of environmental cross-compliance mechanisms or agri-environmental schemes 16 considered “hybrid” because they embed regulatory-type requirements into a broader policy mechanism that a farmer can choose to participate in (DeBoe, 2020[65]). 17 A tender is a sealed bid purchase auction.

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is another leader in auction type schemes and the best known in Australia is the BushTender scheme for vegetation protection in Victoria (Rolfe, Whitten and Windle, 2017[85]). Conservation Covenants in Tasmania are another case of successful implementation of combined fixed price offers and tenders (Smith et al., 2013[81]).

PES schemes funded by the private sector are usually implemented at smaller scale than

government schemes. An example of private sector PES is that of South West Water and the Westcountry Rivers Trust who combine use restrictive covenant to structure a payment to farmers for implementing upstream watershed protection practices18 in England (Smith et al., 2013[81]).

Overall, PES can be effective to incentivise sustainable land use if certain factors are taken into

account:

The selection process should be designed carefully. Tender-type PES have been found to be more cost-efficient than simpler PES approaches such as funding eligible proposals in the order in which they are received (Smith et al., 2013[81]). The market-based approach to PES increased the ecosystem benefits significantly (Smith et al., 2013[81]). Regarding tenders ranked based on an environmental performance index, it should be noted that once all the most cost-effective tenders have been signed in the earlier stages of the scheme, cost-efficiency of the overall scheme diminishes with the participation of less cost-effective offers (Smith et al., 2013[81]).

Practices encouraged by the scheme should be, once adopted, financially viable without

payment. Because one of the challenges of PES is that bad practices (e.g. deforestation) often resume when payment (e.g. for conservation) stops (Etchart et al., 2020[86]), a key to success is to pay for good and productive land-use practices (e.g. silvopastoral practices), as demonstrated in Nicaragua (Pagiola, Honey-Rosés and Freire-González, 2017[84]) and Colombia (Pagiola, HoneyRosés and Freire-González, 2014[87]). Landowners who received the payment adopted environmentally beneficial practices and continued after payments ceased. Leakages19 should be controlled for. For instance, some evidence suggest that Viet Nam national-scale reforestation programs led to the displacement of forest extraction to other countries equivalent to 39% of the regrowth of Viet Nam’s forests from 1987 to 2006 (Meyfroidt and Lambin, 2009[88]) and approximately 50% of these wood imports were illegal (Lambin and Meyfroidt, 2011[89]). Long-term PES (e.g. Land Conservation Agreement) have duration specific challenges: (1) Costs to monitor and enforce the agreements over time are often high (Smith et al., 2013[81]). (2) In case the design of agreements is not adapted to the way societal needs and preferences evolve over time, amendments may be needed are they are costly (Smith et al., 2013[81]).

18 limiting livestock numbers, planting cover crops after harvesting, refraining from planting maize in sensitive areas, and maintaining specified uses of manure stores or other infrastructure (Smith et al, 2013) 19 Leakage happens when a degrading land-use practice relocates outside of the area of PES intervention.

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Box 3.6. The government-driven China’s Conversion of Cropland to Forest Programme, also known as the Sloping Land Conversion Program or “Grain for Green”

Launched in 1999 in response to widespread flooding in 1998, China’s government operates the largest publicly funded watershed conservation project in the world: the Conversion of Cropland to Forest Programme, also known as the Sloping Land Conversion Program or “Grain for Green”. Its goal is to mitigate the effect of soil erosion and restore ecosystems by planting trees on former steep areas of cropland or uncultivated barren land. China has invested billions of dollars for afforestation and to provide compensation for participating farmers. Like in a PES scheme, 32 million farming families receive annual subsidies to plant and manage trees on their (mostly low productivity) agricultural lands totalling 28 million hectares (Zhang et al., 2017[90]). Uchida, Xu and Scott (2005[91]) pointed out that the success of such programmes in the developing world depends on their ability to reduce erosion and sustain income of participating farmers by means of a cost-effective and sustainable change. According to FAO (2019[67]), the clear policy directive supporting it, the important allocation of resources, and effective institutional arrangements at all scales to implement and monitor it made this programme successful in addressing soil erosion on private land. However, the program has mixed results in terms of biodiversity because it promotes monoculture tree plantation among others. Recommendations based on empirical research are to (1) promote the conservation and expansion of native forest and (2) mixed-plantation arrangements over monocultures (Wang et al., 2019[92]).

Sources: (Wang et al., 2019[92]; Zhang et al., 2017[90]; FAO, 2019[67]; Uchida, Xu and Scott, 2005[91])

Biodiversity offsets20 are measurable conservation outcomes that result from activities designed

to deliver additional biodiversity benefits in compensation for losses. They are based on the polluter pays approach (OECD, 2016[93]). There are three types of offsets (one-off project based; payment in-lieu; banking). There exists a considerable body of literature on biodiversity offsets. A market-based approach to biodiversity offsetting means that, in order to offset their biodiversity impacts, project developers can purchase conservation or offset ‘credits’ attached to wildlife sites registered by landowners. Biodiversity offsets include habitat creation or restoration (Smith et al., 2013[81]). In 2016, there were at least 100 biodiversity offset programmes (some of them being close forms of compensatory conservation) in at least 56 countries among which Australia, Brazil, Canada, the People’s Republic of China, Colombia, France, Germany, India, Mexico, New Zealand and South Africa (OECD, 2016[93]). Governments have introduced biodiversity offsets in the European Union, Australia, Canada, South Africa) (OECD, 2016[93]).

Biodiversity offsets are usually mandatory when used by governments, and usually implemented

voluntarily by the private sector. Developers for instance may voluntarily purchase biodiversity offsets to compensate for the impacts of their development projects. Voluntary biodiversity offsets are often used by infrastructure construction or extractive industries that have visible and significant negative impacts on biodiversity. Biodiversity offsets are sometimes required by financial institutions as a condition to fund a project (OECD, 2016[93]).

20 Payments for Ecosystem Services can be distinguished by a particular focus on the ‘beneficiary pays principle’, whereby the beneficiaries of ecosystem services provide payment to the providers of ecosystem services. Conversely, Biodiversity Offsetting is based on the ‘polluter pays principle’, since developers pay for the provision of compensatory habitat expansion or restoration elsewhere (Smith et al, 2013).

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Taxes

Taxes on property, agricultural inputs and natural resources use can efficiently incentivise

sustainable land use. The use of taxes for biodiversity has been increasing across the world. There are currently 206 biodiversity-related taxes in force across 59 countries21 and 96 taxes directed at land management in force across 9 countries (OECD, 2020[74]). Based on the polluter pays principle, biodiversity-related taxes embody the negative externality generated by the use of natural resource or the emission of a pollutant. In doing so, they incentivise more sustainable and environmental-friendly behaviours. Additionally, governments can redirect revenue from their land-use related taxes towards conservation activities like forest protection, reforestation, agroforestry and sustainable forest management. This is what Colombia and Costa Rica are already doing with their carbon tax revenue (WEF, 2020[94]).

Property taxes

Property taxes are a common economic instrument used in land-use policy. They are recurrent ad valorem tax on real estate owned. It is commonly collected by the local authority often on both land and land improvements. Lower tax rate in areas beyond the greenbelt induce the creation of lower density urban areas further away from the first urban centre, beyond the greenbelt (OECD, 2018[49]). Such development comes with longer commuting distances, and thus increased greenhouse gas emissions and costs of transportation.

Taxes on agricultural inputs

Because of low elasticity in pesticide demand, studies have shown that high tax rates on specific pesticide may lead to more significant behavioural changes than low taxes on a large range of pesticides (Sud, 2020[72]). However, targeting pesticides with higher environmental and health risks involves high transaction costs (Sud, 2020[72]). A recent study from Sud (2020[72]) reviews many examples of pesticide taxes in OECD countries. Revenue from taxes on pesticides and fertilisers is sometimes earmarked to promote sustainable agriculture or to compensate for distributional effects on farmers (see section on distributional impacts).

Fees and charges

Entrance fees to national parks, mining or quarrying charges could also incentivise sustainable

land use. There are currently 179 biodiversity-related fees and charges in force in 48 countries and only 58 directly directed at land management in force across 9 countries (OECD, 2020[74]). The idea behind inlieu fee schemes is close to an offset: entities pay a fee that will be used for conservation activities which offset the activities undertaken by the fee-paying entities (DeBoe, 2020[65]).

Tradable permit systems

Tradable permits are market-based policy instruments that set a limit on the total amount of a natural resource that can be exploited. Users can be granted individual permits which they can trade. Permit allocation is conducted through auctions or can be grandfathered (i.e. allocated to existing users of the resource free of charge, typically in perpetuity). There are four broad types of permit systems: 'quota' system (also referred to as cap-and-trade programmes), a 'credits' system, with 'averaging' of limit values for similar products manufactured and 'transferable usage rights' licensing the use of natural resources

21 Biodiversity-related taxes generate approximately a revenue of USD 7.5 billion a year (average 2016-2018)

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(OECD, 2001[95]). For instance, tradable development rights allow a right to develop a parcel of land to move from one parcel to another (OECD, 2001[95])(see Box 3.7). Based on the OECD database (OECD, 2020[75]), most common environmental domains of the tradable permit systems are : fishing, hunting, water, energy and greenhouse gas emissions. There are currently 42 active biodiversity-related tradable permit schemes in 26 countries (OECD, 2020[74]). At least 4 of these schemes allow for the auctioning of part or all permits (OECD, 2020[74]). The largest system is the EU Emission Trading Scheme (EU ETS) for CO2 and CO2/Carbon but similar schemes are in place also in other countries or regions (like China, India or New South Whales). There are currently only 6 tradable permits systems strictly directed at land management (e.g. for landscape preservation) in force in France, New-Zealand and the United States (OECD, 2020[74]).

Key benefits of tradable permit system include certainty over total negative externalities and their

possible revenue raising potential. If they are auctioned, tradable permits can generate finance. In Alberta, for instance, a minimum of 60% of funds generated by the hunting auction are to be invested in projects for the long-term benefit of Rocky Mountain bighorn sheep (OECD, 2020[74]). The use of clearing permit (rather than a clearing ban for instance) allows the government to control the total amount of land clearing as well as to ensure the high agricultural value of the land cleared (Rolfe, Whitten and Windle, 2017[85]). Indeed, farmers with valuable agricultural land can buy permits from farmers with less valuable agricultural land (Rolfe, Whitten and Windle, 2017[85]). In some cases, high monitoring costs make the use of trading scheme particularly complex (OECD, 2001[95]). Initial allocation of tradable permits and subsequent behaviour (in terms of emissions and abstractions) must be precisely monitored (OECD, 2001[95]). Some ecosystem services are particularly difficult to quantify (and thus to monitor) with meaningful and robust indicators (Balvanera and al., 2017[96]). Similarly, agricultural emissions have so far been excluded from the EU ETS (except NO2 emissions from the production of chemical fertilisers) due to concerns surrounding the accuracy of monitoring, reporting and verification (European Commission, 2018[97]).