Eco-budget in Karnataka: Opportunities and challenges

In its 2022-23 budget, the government of Karnataka announced an allocation of Rs. 100 crore to compensate for the negative impact of natural events and human activities on forests. In this post, M Balasubramanian contends that while this is a welcome step, the financial allocation – based on an evaluation of the economic loss of forest ecosystem services – is insufficient. He highlights the need to improve data and methods used for estimating losses.

A rapid decline in biodiversity has been observed in recent years – this has consequences for the functioning of terrestrial, aquatic and aerial ecosystems. Recent international reports¹ have highlighted the negative impact of biodiversity loss and degradation across the world on various aspects of human well-being. For example, rich biodiversity and forest ecosystems are essential for maintaining stable climate conditions, as well as sustainable economic growth and livelihoods for certain populations. However, the current environmental losses have led to a reduction in the stock and flow of forest ecosystems’ services²(Whitehead et al. 2017), which can cause disturbances like financial loss and physical risk (Dasgupta 2021).

While the importance of biodiversity and ecosystem services have been recognised for the past 20 years (Duffy et al. 2012), efforts towards sustainable utilisation and conservation have not been very effective. In particular, the degradation of forest ecosystems is a critical issue at the local and national levels, but the process of ecological restoration is still at a nascent stage.

Karnataka’s eco-budget

In the Union Budget 2022-23 speech, the Finance Minister spoke of the negative externalities of climate change affecting India and other countries. In the same year, the Government of Karnataka announced in its state budget that “an eco-budget of Rs. 100 crore will be allocated to compensate the negative effect caused to the forest system due to natural and human interventions over the past five years.” By doing so, the state government initiated, for the first time, a discussion on the economic value of degradation of forest ecosystem services in the budget.

Loss and degradation of forest ecosystem services is a major socioeconomic and ecological challenge in the state of Karnataka. Forest degradation may be caused by events such as floods, droughts, landslides etc., or economic development activities like mining, quarrying, road and railway construction, irrigation projects, hydroelectric and wind power projects, among others. Forest fire incidents are another critical issue, as they cause substantial loss and degradation of forest ecosystem services such as recreation and tourism, as well as climate regulation, (Balasubramanian 2022a).

The introduction of the eco-budget by Karnataka in 2022-23 could be attributed to national and international commitments in the recent past. India is committed, at the highest level, to meeting its pledges under the Nationally Determined Contributions (NDC) made to the international community under the Paris Agreement of 2015. In a 2019 report, the Ministry of Environment, Forest, and Climate Change (MoEFCC) has identified Karnataka as having the second-highest potential of creating more carbon sink through additional forest and tree cover by 2030.

What is an eco-budget?

There is no formal definition of eco-budget. Following the Paris Agreement, the Organisation for Economic Co-operation and Development (OECD) introduced the concept of a “green budget” described as “using the tools of budgetary policymaking to help achieve environmental goals”. This includes “evaluating environmental impacts of budgetary and fiscal policies and assessing their coherence towards the delivery of national and international commitments.” Further, green budgeting aims to “design new, innovative tools to assess and drive improvements in the alignment of state expenditure and revenue processes with climate and other environmental goals.” (Cremins and Kevany 2018).

Eco-budget may be defined as an estimate of the value of forest loss and degradation, and the compensation of the same through financial allocation for ecological restoration, in order to achieve better environmental outcomes and mitigating the impact of negative environmental externalities – with the ultimate goal of enhancing human well-being.

Estimating the economic value of loss of forest ecosystem services

Estimations of the economic loss of forest ecosystem services have been carried out by the Institute for Social and Economic Change (ISEC), using different types of secondary data and applying a variety of environmental valuation methods. For example, the ‘revealed preference method’ is based on the observation of individual choices in existing markets that are related to the ecosystem service that is subject of valuation, while the ‘stated preference method’ involves simulating a market and demand for ecosystem services by means of surveys on hypothetical, policy-induced changes in the provision of these services (Pascual and Muradian 2010). Other methods include the ‘market price method’ (price of commodities such as vegetables, which are produced by the ecosystem and sold in a market), ‘alternate cost method’ (the community’s willingness to pay for ecosystem services, as a basis for regulation), ‘damaged cost method’ (cost associated with the hypothetical damage avoided due to the existence of ecosystem services), and ‘benefit transfer method’ (adapting value estimates from past research to assess the value of similar but separate change in a different resource) (Ninan and Kontoleon 2016).

For the previous six years, the calculated loss of key categories of forest ecosystem services is shown in Figure 1 below; these add up to Rs. 3,831.28 crore.

Figure 1. Economic loss of forest ecosystem services (in Rs. cr), 2015-16 to 2020-21

Source: Balasubramanian (2022).

Note: (i) The first bar refers to the loss of carbon sequestration in vegetation. (ii) SO2 and NO2 refer to the loss of the services of forest cover in reducing pollutants in the air. (iii) NTFPs indicates the loss of non-timber forest products.

Insufficient financial allocation for conservation of ecological services

The economic loss of forest ecosystem services in Karnataka has been estimated based on the ‘benefit transfer’ method. However, there is a lack of scientific estimation due to limited data and knowledge of methodology. For instance, the estimation has taken into account only nine ecosystem services from Figure 1 for a period of six years. There is a need for a wider evaluation of unsustainable economic development activities at the local level, for which forest area conversion takes place (Figure 2). The financial allocation based on this estimation is not enough to invest in any large-scale ecological restoration projects.

Figure 2. Hectares of forest land converted to non-forestry purposes, 2015-16 to 2020-21

Source: Annual Reports, Forest Department, Government of Karnataka.

Under the eco-budget, the Government of Karnataka has allocated Rs. 100 crore for seven eco-restoration programmes under the Forest Department: (i) barren hillock restoration, (ii) restoration of degraded forest area, (iii) mangroves afforestation in coastal areas, (iv) shelter belt in coastal area, (v) ecosystem restoration of the Krishna river, (vi) management of landslides and landslides-prone areas, and (vii) agro-forestry in the eastern Bayaluseeme areas (Karnataka Forest Department Annual Report, 2022-23). The compensation provided by the state government is welcome in the context of economic valuation of forest ecosystem services recognised in the decision-making process. However, the cost of loss and degradation has not been fully compensated.

Fiscal transfer for forest conservation

Chakraborty (2021) points out that fiscal transfer is among the key economic tools of forest conservation. The transfer of public revenue between governments within a country based on ecological indicators is termed as Ecological Fiscal Transfer (EFT) (Busch et al. 2021). Several countries such as France, China, Brazil, Portugal, Poland and Indonesia, have proposed this economic tool for the conservation of nature (Droster et al. 2017). In India, the 12^th and 13^th Finance Commissions recognised the need for forest conservation, and made allocations of Rs. 1,000 and 5,000 crore, respectively, for the states. Further, the 15^th Finance Commission (FC15) highlights the significance of conditional and unconditional fiscal transfers for achieving climate change commitments. FC15 states that “the forest cover maintained by states provides wider ecological benefits, it also imposes opportunity costs that need to be compensated” and “the forest and ecology criterion has been factored in both the ecological services being provided by the State’s Forest cover to the country as well as the cost disabilities” (Finance Commission India, 2020). Accordingly, the Commission considers two mechanisms – compensation (for economic opportunities foregone due to maintenance of forest cover) and incentive (for governments to provide more ecological services).

Way forward

In India, 11,467.83 hectares of forest land have been converted to non-forestry purposes such as drinking water provision, irrigation, mining, road and railway, transmission line and other economic growth and development-oriented projects (MoEFCC, 2020). Therefore, ecosystem services loss should be estimated and integrated into the sub-national accounts for sustainable financial allocations. Further, the recent report on the System of Environmental Economic Accounting stated that loss and degradation of forest resources has changed the ecosystem conversion as “there is a change in the ecosystem type involving a distinct and persistent change in the ecological structure, composition and function which, in turn, is reflected in the supply of a different set of ecosystem services” (United Nations, 2020).

Eco-budget is a crucial device for the conservation of forest ecosystems. The focus of the eco-budget should be circulated among all line departments in the state, particularly those pertaining to the forestry sector, for preparation of an annual database on ecosystem services loss due to natural and human-made factors at the district level. At the same time, systematic efforts should be made to identify opportunities for investing in nature in order to enhance the quality of human life.

First, an ecological compensation programme of fiscal transfers towards environmental and natural resource management can balance economic growth and environmental conservation in the same direction.

Second, nature-smart policies help reduce the risk of ecological damage. For instance, there is a need to reform subsidies, such as for water consumption, based on a consideration of their harmful impact on biodiversity and ecosystem services at the local levels. OECD (2019) estimated environmentally harmful subsidies for fossil fuels at US$500 billion every year globally. Therefore, harmful subsidies are the greatest challenge to the sustainable supply of ecosystem services to human beings (Dasgupta 2021).

Third, nature-based solutions – defined as “actions to protect, sustainably manage and restore natural or modified ecosystems to addressing societal challenges, while at the same time ensure human well-being and biodiversity benefits” (Pulgar-Vidal et al. 2021) – are a key tool for climate change mitigation and adaptation. Recent studies have found that nature-based solutions have a highly positive impact on reducing CO₂ (carbon dioxide) emissions as well as maintaining global temperatures based on various scenarios (Griscom et al. 2017).

Finally, the eco-budget framework needs to be improved, incorporating various factors with respect to socioeconomic and environmental impacts. Hence, this is the right time for restoration and conservation as also for fulfilling various national and international commitments such as the Paris Agreement, Bonn Challenge, and the Global Biodiversity Framework – towards preserving the forest ecosystem services in Karnataka and beyond.

I4I is now on Substack. Please click here (@Ideas for India) to subscribe to our channel for quick updates on our content.

Notes:

For instance, see Dasgupta (2021), Johnson et al. (2021), and the 2019 Report of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES).
Following the ‘Millennium Ecosystem Assessment’ (2005), ecosystem services are defined as “…benefits people obtain from ecosystems. These include provisioning services like food and water; regulating services such as flood and disease control; cultural services such as recreational, spiritual, and cultural benefits [and] supporting services such as nutrient cycling that maintain the conditions for life on Earth.”