Financing Land Restoration: Challenges and What Needs to be Attempted

Compiled by V Santhakumar and Apoorva Bose based on the discussions leading to a conference on land restoration organised jointly by G 20 Global Land Initiative and Azim Premji University

The problem

Nearly one-fourth of the world’s land surface is subjected to some form of land degradation^[1]. It is estimated that land degradation leads to a loss of USD 2 trillion per year, while also reducing the value of land and forests. Currently, about 2 billion hectares of forest land offers very little economic value due to degradation^[2].

There are notable social and economic benefits of restoring land. According to Ding et al (2017)^[3], every dollar invested in restoring degraded forests can yield between USD 7–30 in economic benefits^[4]. Restoring 150 million hectares of degraded agricultural land could generate USD 85 billion in net benefits to national and local economies, raise USD 30–40 billion a year in extra income for smallholder farmers, and provide additional food for close to 200 million people^[5]. Despite these potential benefits, only a small proportion of the money needed for this purpose has been allocated towards land restoration. There are a number of traditional challenges in this regard.

Traditional challenges

Entities investing in land restoration may not get full returns on their investments, due to the issue of positive externalities. A major part of the benefits of investment in restoration is in the form of public goods (or other services), which are gained by others. Further, certain outcomes of restoration, such as ecosystem services, do not have a market value. This ‘absence of markets’ can be yet another deterrent for investors in restoration.

1. Although governments should be investing in land restoration due to the public goods (or public benefits) and positive externalities it generates, many governments, especially in less developed countries, have competing uses for their limited public resources. As a result, such countries may not be investing adequately in restoration.
2. The users of land may not have secure land rights in certain contexts. This significantly diminishes their incentives to invest in land, since they are unsure of capturing the returns on investment, which may be realised over a longer term.
3. Small landholders in many parts of the world may have to use land in a way that yields short-term returns (like growing food grains) due to low incomes, limited access to capital, inadequate social security, etc. Practices employed in such cases may be incompatible with land restoration measures.
4. Many investors prefer to focus on short-run returns, or they may need to divest in the short- or medium-term to ensure liquidity. The gains from land restoration, on the other hand, are deferred and may take 20-30 years to materialise.
5. The benefits of regenerating land cover are not known widely. Lack of awareness and information is a primary cause of inadequate investment in land restoration.
6. Even when individuals stand to gain from investing in restoration, it may warrant collective action. However, issues such as free-riding and lack of coordination may lead to several hindrances, and lead to an increase in cost for investors to facilitate collective action. This may act as a deterrent to making adequate investments towards restoration.
7. In some instances, the limited understanding and irrational attitude of potential investors may restrict efforts towards restoration even if they stand to gain from it.
8. Many land restoration projects are relatively small in scale. Potential investing entities may face higher transaction costs in funding or dealing with a large number of small projects, thus, disincentivising such investments.
9. Although there are altruistic funding avenues available for restoration purposes, these may be inadequate due to the limited overall size of such funding and competing demands for such funds.

New financing mechanisms 

Several new financing mechanisms have evolved and are in practice to address these traditional challenges. These include the following:

1. Payment for ecosystem services
Payment for ecosystem services (PES) channelises the benefits from those gaining from conservation to those who bear its cost. For instance, hydroelectric companies benefit from increased water supply in reservoirs during summer due to the conservation efforts of farmers in upper catchments. These companies can share the benefits with farmers, either through direct payment or with the state acting as a mediator by taxing the beneficiaries and paying those who bear the cost. However, PES faces the following challenges:

a. If direct users of land have a high stake in employing land use practices leading to degradation, then the compensation needed to incentivise moving away from such land use may be relatively higher. Many developing countries may not be able to mobilise sufficient resources for this purpose.

b. In countries which intend to implement the PES, governance and the functioning of its institutions need to be reasonably transparent. In low-income countries, in particular, a notable part of the transfer, even under ordinary social security schemes, may not reach intended beneficiaries.

c. If the PES is attempted or mediated by the government, the degree of availability of public resources may affect its effective implementation. For example, even if governments collect a specific tax with the intention of implementing PES, the scarcity of public resources may prompt them to redirect the utilisation of such taxes for other purposes.

2. Carbon credits
Land restoration can lead to carbon sequestration. This can be financed by entities that are interested in earning carbon credits to reduce their carbon emissions. This may include financing by developed countries aiming to reduce their carbon emission, or others which can sequester carbon dioxide through land restoration.

Although, theoretically, carbon credits can be a major source of capital needed for land restoration and can address the illiquidity problem that prevents the flow of conventional finance towards restoration, there are two major barriers in this regard. First, many agencies – governmental and non-governmental – which may carry out restoration projects, particularly in developing countries, may not have the capacity to meet the requirements of carbon finance. Second, the intermediation in this regard, especially that of carbon sequestration certification, may need to acquire a higher level of credibility. Any erosion in the credibility of these agencies may reduce the flow of funds towards restoration.

3. Private investments
Investment banks or other companies may pool resources from individual investors and invest the money in land restoration activities, thereby generating returns (for instance, by cultivating timber and extracting it on a sustainable basis without causing land degradation).

Private investment flowing towards land restoration also faces several challenges. Although carbon credits can, theoretically speaking, serve as a mechanism to solve the illiquidity issue, the challenges associated with it, as well as other uncertainties, may work against such a solution. In such a case, illiquidity may continue to be a challenge. Moreover, the land-use practices (including harvest practices) of private investors may not be adequately compatible with the requirements of land restoration. There may not be sufficient financing available for biodiversity-enhancing restoration.

Moreover, investors who are interested in ensuring returns on their investments, especially returns that may only be realised over a longer period, may be looking at the governance issues of the specific context. Uncertainties in this regard may diminish investors’ confidence, particularly in cases where investing organisations are unable to acquire private property rights or face difficulties in ensuring the enforcement of contracts. This could be a major limitation, particularly in cases of partnerships between private companies and direct users of land.

4. Partnership between private companies and landowners
There can be partnerships in which private companies can provide capital and technology to enable landowners to move towards restoration-oriented land use. The former may market products from such land use and share the profit with the landowners (or direct users). This may enhance the incentives to practice restorative land use.

5. Raising awareness
The awareness about the importance of land restoration encourages developing countries to allocate money for this purpose. A part of international development assistance is also moving towards restoration.

The increase in the availability of resources for restoration occurs primarily in countries where economic growth successfully generates more resources and where there is greater awareness. Among developing nations, such a phenomenon has been observed only in a few. Even if international assistance is viewed as a substitute for domestic resources, such assistance may be allocated to land restoration only in countries where governance is transparent and where outcomes can be ensured. Similarly, there may be other contexts wherein these enabling factors may not prevail. Further, although philanthropic foundations also invest in land restoration, the funding through this route represents a small percentage of what is needed to adopt restorative practices.

6. Restoration of large areas
Currently, ways to aggregate funds for restoration over a large geographical area are being researched and explored. The ‘Landscape Approach’ is one such, which may reduce the transaction costs involved in funding several small-scale restoration projects in isolation.

The impact of poor governance and issues with ensuring collective action may compound when restoration is carried out over large areas or wider landscapes. This may reduce the expected benefits of large restoration projects in certain contexts.

Therefore, overall, there are two major limitations of the new financing mechanisms, firstly, the overall capital allocated towards land restoration at the global level is currently inadequate and secondly, these newer financing mechanisms are accompanied by challenges of their own.

What can be attempted

1. Enhancing the credibility of carbon sequestration certification for land restoration projects warrants robust indicators of outcomes and effective monitoring and evaluation of projects.
2. More cases of PES can be facilitated by adopting context-specific problem-solving approaches with the help of technology to ensure that resources reach the intended beneficiaries, and they adopt restoration practices.
3. Experiments like `restoration launchpad’ are useful in enhancing the capability of agencies which design and implement land restoration projects to tap carbon finance.
4. International development assistance and altruistic funds which are aimed at restoration should be allocated towards contexts which may not be that attractive to private investments seeking normal returns.
5. There is a need for effective and viable blended-financing models, wherein altruistic and impact investors share the risk with investors who seek normal returns. There may be scope for using sovereign funds for restoration.
6. Developing countries need to allocate more domestic resources for land restoration. In such countries, government resources may partly be used for building the capacity of local organisations, thus enabling them to tap global finance for restoration.
7. There is a need for better models of private-people (farmers) partnerships, particularly those which include effective ways of addressing the challenges associated with collective action and fairer risk-sharing. Moreover, there is also a need for credible intermediaries to facilitate such models.
8. There is a need to build a stronger case justifying the allocation of more resources towards land restoration.
9. To encourage more impact investments for land restoration, better and more robust indicators of the outcome of restoration need to be developed.

How G20 Global Land Initiative can help

1. Showcasing good practices in terms of technologies and financial models which facilitate land restoration. This will encourage developing countries to adopt such practices.
2. Given that the movement of resources under carbon finance towards land restoration is relatively slow and inadequate, the G20 Global Land Initiative may take the following steps:  a. Participate in policy advocacy for enhancing the credibility of carbon sequestration certification.
   b. Work with international/national agencies to enhance the capacity of implementing entities to utilise carbon finance.

AUTHORS

V Santhakumar is Professor at Azim Premji University, Bengaluru

Apoorva Bose is an International Human Rights Lawyer who works as the India Programme Coordinator, Global Initiative G20 at UNCCD. Her areas of expertise range from environmental and humanitarian law to development communications and programme coordination.

References

^[1] United Nations Convention to Combat Desertification, 2022. The Global Land Outlook, second edition. UNCCD, Bonn

^[2] Ding, H., et al (2017) ROOTS OF PROSPERITY: The Economics and Finance of Restoring Land, World Resources Institute, Washington DC

^[3] Refer to Ding, H., et al (2017) ROOTS OF PROSPERITY: The Economics and Finance of Restoring Land, World Resources Institute, Washington DC

^[4] Verdone, M.A., and A. Seidl. 2017. “Time, Space, Place and the Bonn Challenge Global Forest Restoration Target.” Restoration Ecology, 25: 903–911. doi:10.1111/rec.12512

^[5] GCEC (Global Commission on the Economy and Climate). 2014. “Land Use.” In Better Growth, Better Climate, edited by M. Davis and G. Wynn. Washington, DC: World Resources Institute. http://newclimateeconomy. report/2014/land-use/