The state of the world's forests 2022


4.3 Aligning incentives, regulations and markets with sustainability can catalyse a transformation towards inclusive and sustainable green economies

Sections 4.1 and 4.2 concluded that domestic public finance is the most significant source of finance for forests and that private investments, although hard to quantify, have potential for scaling up the pathways.

Increasing investment also depends on the strategic use of various policy instruments to reorient fiscal and non-fiscal incentives and boost green markets and financing through enhancers such as carbon markets, sustainable finance and related regulatory instruments, sustainable value chains and sustainability certification.l Governments can incentivize the three forest pathways by:

  • repurposing agricultural subsidies to reward the sustainable management of forests and farmlands;

  • introducing environmental taxation that encourages forest conservation and generates income;

  • promoting fiscal incentives that offer tax deductions for companies that meet the required sustainability standards;

  • allocating ecological fiscal transfers to subnational governments that demonstrate improved management of forest assets; and

  • putting in place standards, regulations and due-diligence requirements and improving data and financial regulation and supervision to ensure that the private sector manages risks adequately.

Each of these is discussed further below.

Repurposing agricultural subsidies – currently almost USD 540 billion per year – to include agroforestry and forestry could help avoid the harmful impacts embodied in 86 percent of such subsidies

Agricultural support policies can be redesigned to avoid incentives for land expansion and instead encourage sustainable intensification,372,373 agroecological systems, agroforestry,374 and the sustainability of forest-based value chains.375,376 In 2021, FAO, the UN Development Programme and the UN Environment Programme estimated the value of support for agricultural producers globally at almost USD 540 billion per year and noted that this support is heavily biased towards measures that are distorting (thus leading to inefficiency), unequally distributed, and harmful for the environment and human health.377 Price incentives (e.g. border measures that affect trade and domestic market prices) and fiscal subsidies tied to the production of specific commodities (which can promote the overuse of inputs and overproduction) are considered the most distorting and environmentally and socially harmful forms of producer support and are estimated to account for about 86 percent of total support.378 Thus, producers are disincentivized to behave in a manner that is efficient, sustainable and climate-friendly, and there is insufficient backing for public goods such as agricultural research and advisory and extension services.

Environmental taxation, fiscal incentives and ecological fiscal transfers can encourage investment in the forest pathways

Domestic fiscal policies for land-use sectors can provide contradictory incentives or promote deforestation and other socially and environmentally harmful effects.379,380,381 Under French tax law, for example, the presence of trees on farmland decreased the surface area eligible for subsidies until a reform in 2010.382

Variable tax rates are increasingly available as a policy instrument to forest fiscal administrators. For example, there has been substantial development in monitoring, reporting and verification (MRV) systems since the creation of REDD+ and, in some countries, these are now sufficiently developed to implement environmentally responsive fiscal policies such as ecological fiscal transfers (EFTs; see below). The recent growth of other instruments – particularly third-party sustainability certification schemes such as those of the Forest Stewardship Council (FSC) and the Programme for the Endorsement of Forest Certification (PEFC) – enables policy combinations that may also work for governments with relatively low MRV capacity. For example, Brazil and Peru levy lower concession fees and rebates for certified operations. In Gabon, a lower area tax is imposed on certified concessions.383

EFTs are additional allocations of tax revenues to subnational governments that demonstrate improved ecosystem management; in 2020, they amounted to USD 23 billion globally, which is about 20 times the ODA for forestry.410 Brazil, China, France, Portugal and, most recently, India make use of this mechanism. In India, states receive a portion of central revenues based on the percentage of forest cover; about USD 37 billion was transferred as EFTs to states on this basis in the period 2016–2020.384 Other indicators can be used, such as the quality of ecological services provided, reductions in forest fire, avoided or reduced deforestation, and areas certified under forest management plans or those with third-party sustainability certification. For some indicators, the necessary data might already be available; for others, the use of EFTs would first require investment in adequate MRV systems.

Countries are adopting standards, regulations and due-diligence requirements to divert financial flows away from projects and investments that are harmful to forests

The growing deployment of environmental standards (and related certification and labelling) means that buyers, consumers and users increasingly have access to information on the environmental credentials of the processes involved in producing the forest goods and services they purchase. By influencing market access and participation in value chains, certification and due-diligence requirements and systems can reassure consumers and investors alike that environmental and social standards have been adhered to. Certification, standards and due-diligence requirements are shaping not only market access385,386 and trade (Box 21) but also investments in agrifood commodities.

Box 21Building verification systems for legal and sustainable wood products – experiences in forest law enforcement, governance and trade

Asserting that wood comes from legal and sustainable sources requires an adequate verification system. Over the last decade, demand-side action has focused on trade regulations that require importers to apply due diligence to ensure the legality of their sources. Significant efforts have been made to build cost-effective systems that can provide assurance in wood value chains, and this trend is extending into other agricultural commodities such as cocoa, coffee and palm oil. Private sector associations and producer organizations have developed systems to facilitate raw-material sourcing and to demonstrate the legality and sustainability of products. Efforts have included clarifying legal frameworks, increasing transparency and independent monitoring and strengthening the participation of civil society and the private sector in governance processes.

For example, the European Union, the United States of America and other timber-importing countries have put regulations in place to limit trade in illegally sourced timber and forest products, in part to reduce deforestation and degradation caused by unsustainable forest use. Fifteen tropical countries are negotiating or implementing voluntary partnership agreements (VPAs) with the European Union, the aim of which is to ensure that all exports of timber products comply with national laws and regulations. The VPA partner countries account for 25 percent of the world’s tropical forest cover and 80 percent of the European Union’s tropical timber imports. VPA processes have improved transparency, participation, legal clarity, accountability and other aspects of good forest governance.387

The introduction and implementation of such systems can inadvertently discriminate against smaller and community-based producers, processors and traders by increasing the cost of production or simply by excluding rather than including them in formal supply chains. Analysis, open dialogue with such stakeholders and adequate safeguards are needed to minimize the risk of adverse impacts.

Karsenty (2021) outlined a range of potential uses for standards and regulations, including the following:409

  • Governments could include sustainability criteria in tendering processes for forest harvesting contracts. In Sarawak, the Malaysian Timber Certification Scheme (the national system, endorsed by the PEFC) will become compulsory by 2022. In Gabon, all concessions should be certified by the FSC by 2022 (although this deadline may be postponed to 2025). The Congo’s new forest law mentions compulsory certification for forest concessions.

  • Public timber procurement policies could favour certified legal or certified sustainable timber.

  • Environmental compensation mechanisms could be put in place, such as in Brazil, where a percentage of private land – called “legal reserves” – must be kept under natural vegetation (in the case of forests, such areas may be used for sustainable timber production). Compliance with this legal provision is essential for owners wishing to register in the rural environmental cadastre, which allows access to various financial benefits and authorizations. If a property does not meet these environmental requirements, however, owners may compensate for this missing area by acquiring environmental reserve quotas from another rural property.

There are many opportunities for applying standards, regulations and due-diligence processes to encourage sustainable forestry. One of the obstacles to their implementation, especially in tropical countries, is a lack of human resources in companies.388 The adoption of incentives must therefore be accompanied by efforts to strengthen the capacity of potential change agents.

A different set of rules concerns financial requirements that influence financial flows. First steps in this direction would include clarifying sustainable forestry as an “investable asset”; bringing considerations relevant to the forest pathways to dialogues on disclosures/taxonomies; and embedding recommendations from the Taskforce on Nature-related Financial Disclosures and the Task Force on Climate-related Financial Disclosures in the practices of companies and investors. Similarly, the development of sustainable finance frameworks such as the European Union Sustainable Finance Taxonomy present opportunities for channelling more investment towards nature-based projects, including the forest pathways. The Coalition of Finance Ministers for Climate Action comprises fiscal and economic policymakers from over 60 countries with the intention of shaping the global climate response and securing a just transition towards low-carbon, resilient development. All these initiatives, which bring together high-level decision-makers from the public and private sectors, have transformational potential if forest pathways and goals are properly considered.

Regulatory measures governing traded goods are being put in place to decouple agriculture and deforestation – complementary support for producer countries is needed

A significant and growing share of the commodities produced on new agricultural land feeds international trade.389,390 Regulatory frameworks are being developed in some markets to avoid the placement of products associated with deforestation or forest degradation. Awareness is also growing among countries about the need to address environmental damage while simultaneously increasing food security for all. Some governments, companies and others have committed to addressing this – such as in a 2010 resolution on deforestation by the Consumer Goods Forum, the Amsterdam Declarations partnership and the 2014 New York Declaration on Forests. Box 22 provides other examples of initiatives to address issues related to agricultural commodities and forests.

Box 22Examples of initiatives on issues related to agricultural commodities and forests

  • The Forest, Agriculture and Commodity Trade Dialogues initiative launched by the Presidency of the 26th Conference of the Parties to the UN Framework Convention on Climate Change and the Tropical Forest Alliance to accelerate the transition towards more sustainable land-use practices.

  • The Forest Positive Coalition launched by the Consumer Goods Forum to accelerate systemic efforts to remove deforestation, forest degradation and conversion from key commodity supply chains (palm oil, soy, paper, pulp and fibre).

  • The Sustainable Cocoa Initiative, involving the European Union, Cameroon, Côte d’Ivoire and Ghana.

  • The comprehensive economic agreement signed between Indonesia and the member states of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland).391 Under the agreement, which entered into force in November 2021, Swiss tariffs on palm-oil imports will be reduced by 20–40 percent if the palm oil complies with certain sustainability goals.392

  • The Joint Working Group on Palm Oil between the European Union and certain Association of South East Asian Nations member countries.

  • Action Track 3 of the Food Systems Summit, “Boost Nature-positive Food Production”, and the coalition on “Halting Deforestation and Conversion from Agricultural Commodities”.

  • The Global Environment Facility 7 Impact Program, “Forest Systems, Land Use and Restoration”.

Sources of finance are increasingly requiring more transparency on deforestation in value chains

Sources of finance are increasingly seeking to clarify, eliminate, reduce and mitigate their adverse environmental, social and governance impacts (Box 23). In general, this has moved from being viewed as an expensive approach that is bad for business to a business strategy that is good for long-term growth and risk management.393

Box 23Integrating environmental criteria into financial decisions

To fulfil their role in managing and distributing risks and allocating resources to productive uses, central banks, financial-sector regulators and supervisors are increasingly seeking to integrate environmental criteria into financial decisions, including through environmental risk assessments, increased transparency and the adoption of standards and impact reporting. Action in the following four areas would be transformative:

  1. Taxonomies and labelling. Develop taxonomies for identifying economic activities that contribute to sustainable use and the provision of ecosystem services (such as the European Union’s Sustainable Finance Taxonomy and Mongolia’s Green Taxonomy, which explicitly includes forestry); and promote the standardization and broad use of environmental metrics for impact reporting across sustainable financing mechanisms.
  2. Supervisory and regulatory risk assessment. Develop tools and methodologies to integrate nature-related risks into the financial stability monitoring and supervisory approaches of central banks and supervisors and encourage or require the inclusion of environmental criteria in risk assessments and investment processes in the financial sector.
  3. Disclosure. Promote the disclosure of nature-related information by leveraging the experiences and initiatives of other countries, such as through the Taskforce on Nature-related Financial Disclosures.
  4. International networks. Support networks such as the Network for Greening the Financial System, the Coalition of Finance Ministers for Climate Action and the Sustainable Banking Network to facilitate the standardization of nature and biodiversity risk assessment in supervisory tools and approaches, and help regulators adopt them.

SOURCES: World Bank. 2020. Mobilizing private finance for nature. Washington, DC, World Bank.
World Bank. 2021. Designing fiscal instruments for sustainable forests. Washington, DC. (also available at

The Central Banks and Financial Supervisors Network for Greening the Financial System is investigating the linkages between biodiversity loss, macro-economics and finance.394 The Taskforce on Nature-related Financial Disclosures was established in 2021 with the objective of developing a framework for organizations to report and act on evolving nature-related risks in order to support a shift in global financial flows away from nature-negative outcomes and towards nature-positive outcomes.395

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