Conditional Incentives for Improving Smallholder Farmer Welfare and Protecting Tropical Forests

Smallholder farmers, who play an essential role in global agricultural commodity production, often struggle with low incomes and limited productivity. To enlarge their farmlands and improve their incomes, these farmers may engage in tropical deforestation, a practice with significant environmental repercussions. To tackle these challenges, large multinational commodity buyers and governmental agencies have been increasingly making dual commitments to halt tropical deforestation while enhancing the livelihoods of smallholder farmers.

The paper presented in this Decarbonisation Seminar examines the extent to which conditional incentives, comprising financial rewards combined with forest protection requirements, can help fulfill these dual commitments. It develops game theoretic models that encapsulate the crucial decisions made by smallholder farmer communities confronted with various types of conditional incentives. The findings indicate that group-level conditional incentives are more effective than individual-level ones, and that the optimal choice of conditions or requirements is highly dependent on the priorities of the interested party and on field conditions. Utilizing data from the Indonesian palm oil supply chain, the study reveals that current price premiums might not be adequate to achieve the dual commitments uniformly across all regions. However, a modest carbon price could be sufficient, considering the considerable CO2 emissions that could be mitigated.