How smarter incentives could help save forests—and support farmers

Clearing forests to plant crops makes good business sense in the short term for many farmers in tropical regions, where millions of people rely on healthy forests for food, fuel, and income. What if those farmers had compelling incentives to keep trees standing – without sacrificing their livelihoods? A Stanford team is developing new strategies aimed at doing that, and empowering governments, businesses, and nonprofits to help. Their early findings suggest effective tools may include contracts that pay farmers in proportion to the amount of forest they conserve and platforms that enable price transparency and data-sharing between farmers and buyers.

“This is about creating win-win solutions – approaches that are practical for farmers and effective for conservation,” said co-principal investigator Irene Lo, an assistant professor of management science and engineering at the Stanford School of Engineering. “We’re finding that relatively simple changes to existing incentive structures can make a big difference.”

Rethinking incentives

Traditional incentive programs, referred to as payment of ecosystem services (PES), typically require that all forest on a farmer’s land remain untouched in exchange for compensation. It’s an approach that often falls short, according to Lo and her colleagues. Many farmers find the terms too demanding and opt out entirely.

"One of the most important priorities in nature conservation is to find ways to encourage landowners to conserve the biodiversity on their lands,” said project co-principal investigator Jim Leape, co-director of the Stanford Center for Ocean Solutions. “This research provides crucial insights into how to fashion incentives that work.”

Supported by the Stanford Woods Institute for the Environment’s Environmental Venture Projects program, Lo and other Stanford researchers have instead designed PES contracts that scale payments based on how much forest farmers conserve – a more simple, flexible approach that could significantly increase participation, according to the team’s analyses.

“Conditional contracts sound good in theory, but they’re often too stringent,” Lo said. “By offering payments that are proportional to conservation, we can encourage more farmers to engage and still achieve meaningful environmental benefits.”

Leveraging market dynamics

The team is also studying how market forces could be harnessed to reduce deforestation by small-scale palm oil producers in Indonesia. Current supply chain inefficiencies and uncertainties often push farmers to clear land for quick cash, while buyers hedge their risks in ways that can accelerate forest loss.

The team’s research suggests that platforms facilitating price transparency and data-sharing between farmers and buyers could improve both farmer incomes and buyer profits, while reducing pressure on forests. The idea: when buyers have more reliable information about supply availability or quality, they can provide more certainty about prices and demand, and farmers are therefore less likely to clear additional land for agriculture as insurance against fluctuations. For example, a digital platform from a company called Pempem allows farmers to see daily prices posted by multiple buyers in the region instead of relying on word-of-mouth from the relatively small number of buyers they work with.

“These platforms offer dual benefits,” Lo said. “They help farmers secure better livelihoods and give buyers the information they need to make smarter sourcing decisions. That alignment of interests is key.”

From theory to field

The team combines economic theory, supply chain management, and on-the-ground insights. Graduate students studying each of these disciplines have played pivotal roles in developing the models, simulations, and field studies in rural Indonesia that underpin the findings. Their interviews of farmers have been key to informing the project’s models and informing policies that will work not just on paper, but in practice.

The team’s initial results have attracted interest from organizations like The Nature Conservancy and Pempem. Translating the research into action will require further collaboration between researchers, and organizations that provide payments or operationalize payment schemes on the ground.

“Designing smart incentives is just the start,” said John Weyant, a professor of management science and engineering. “The next challenge is making sure these ideas reach the people and institutions that can put them into action.”

To that end, the researchers plan to continue a field experiment designed to test the effectiveness of incentive schemes within information-sharing platforms for the palm oil supply chain. They also plan to integrate their findings into broader climate models, helping to refine global projections by showing how small-scale policy tools could influence deforestation rates and carbon emissions.

“This is one of those rare opportunities where smart policy design can deliver both economic and environmental gains,” Lo said. “That’s what makes this work so exciting.”

Leape is also the William and Eva Price Senior Fellow at the Stanford Woods Institute for the Environment and Leape a professor (by courtesy) of oceans in the Stanford Doerr School of Sustainability. Weyant is also a senior fellow at the Precourt Institute for Energy.