Payments for environmental services – Carbon finance options for smallholders’ agroforestry in Indonesia

Up to 25 percent of all anthropogenic greenhouse gas emissions are caused by deforestation, and Indonesia is the third largest greenhouse gas emitter worldwide due to land use change and deforestation. On the island of Sulawesi in the vicinity of the Lore Lindu National Park (LLNP), many smallholders contribute to conversion processes at the forest margin as a result of their agricultural practices. Specifically the area dedicated to cocoa plantations has increased from zero (1979) to nearly 18,000 hectares (2001). Some of these plots have been established inside the 220,000 hectares of the LLNP. An intensification process is observed with a consequent reduction of the shade tree density. This study assesses which impact carbon sequestration payments for forest management systems have on the prevailing land use systems. Additionally, the level of incentives is determined which motivates farmers to desist from further deforestation and land use intensification activities. Household behaviour and resource allocation is analysed with a comparative static linear programming model. As these models prove to be a reliable tool for policy analysis, the output can indicate the adjustments in resource allocation and land use shifts when introducing compensation payments. The data was collected in a household survey in six villages around the LLNP. Four household categories are identified according to their dominant agroforestry systems. These range from low intensity management with a high degree of shading to highly intensified systems with no shade cover. At the plot level, the payments required for inducing the adoption of more sustainable land use practices are the highest for the full shade cocoa agroforestry system, but with low carbon prices of €5 tCO2e-1 these constitute 5 percent of the cocoa gross margin. Focusing on the household level, however, an increase up to 18 percent of the total gross margin can be realised. Furthermore, for differentiated carbon prices up to €32 tCO2e-1 the majority of the households have an incentive to adopt the more sustainable shade intensive agroforestry system. Additionally, the results show that the deforestation activities of most households could be stopped with current carbon prices.