FFTC Agricultural Policy Platform (FFTC-AP)

ABSTRACT

The transition toward sustainable agriculture has intensified debate over whether environmentally friendly or green farming practices enhance or constrain farmers’ income. While their environmental benefits are well established, evidence on income effects, particularly in developing-country contexts, remains fragmented. This paper examines how green practices affect smallholder income by synthesizing conceptual frameworks, policy instruments, field evidence from Indonesia, and relevant literature. Using the 3P framework (Planet, People, and Profit), the study identifies several income pathways, including productivity gains, cost reductions, price stability, market premiums, and non-market incentives. Field evidence from Indonesia includes farmer-group mentoring in Parikesit, Ciamis, involving 40 farmers on approximately 20 hectares over two seasons, and individual farmer mentoring in Karawang involving 1.5 hectares of rice fields. These cases suggest that green practices can improve income through higher yields, lower input dependency, healthier product positioning, and better farm-gate prices when supported by technical assistance, collective organization, and market facilitation. The paper argues that green practices tend to enhance income quality and stability rather than guarantee immediate income growth. For FFTC member economies, the key policy lesson is that green agricultural transformation should be accompanied by accessible incentives, farmer mentoring, credible product differentiation, and intermediary institutions that reduce transaction costs for smallholders.

Keywords: green practices; smallholders; farmers’ income; policy incentives; sustainable agriculture; Indonesia

INTRODUCTION

The global shift toward sustainable agriculture is underscored by policy frameworks that seek to achieve environmental sustainability and economic viability, particularly by supporting smallholder farmers’ livelihoods and resilience. According to FAO (2018), sustainable food and agriculture systems must address profitability, environmental health, and social equity, including economic opportunities for rural producers, while OECD (2020) emphasizes that agricultural policies and practices are increasingly oriented toward reducing environmental footprints without compromising productivity. Consequently, environmentally friendly or “green” agricultural practices have become an important policy focus.

While green practices are widely regarded as delivering environmental benefits such as improved soil health and reduced greenhouse gas emissions in sustainable agriculture and land management, their effects on farmers’ income remain debated (FAO, 2017; IPCC, 2019). Some studies suggest that such practices enhance productivity and reduce long-term risks, whereas others point to short-term trade-offs related to transition costs, yield variability, and market access constraints (Pretty et al., 2018; Jayne et al., 2019). Whether green practices improve farmers’ income therefore remains a central policy question.

Policy responses increasingly combine market-based mechanisms with public incentives, including agri-environment schemes, Payments for Ecosystem Services (PES), and carbon-related instruments, to ensure that environmental stewardship does not undermine farm income (OECD, 2019; FAO, 2020). However, empirical evidence on the effectiveness of these approaches, especially in developing-country contexts, remains fragmented.

In Indonesia, initiatives such as the Low Carbon Development Initiative (LCDI), the Economic Instrument for Environmental Protection (IELH), and the Carbon Economic Value (NEK) framework signal growing policy support for sustainable agriculture. Yet, systematic evidence on how green practices translate into income gains through productivity, prices, cost reductions, or non-market incentives is still limited.

This paper synthesizes conceptual perspectives, policy frameworks, field evidence, and relevant literature to examine the income effects of green agricultural practices. By identifying the conditions under which sustainability and income objectives can be aligned, the paper offers policy-relevant insights for designing incentive schemes, farmer mentoring systems, and institutional support mechanisms in Indonesia and other Asian developing economies, in line with FFTC's policy knowledge-sharing mandate.

HOW GREEN PRACTICES AFFECT FARMERS’ INCOME: CONCEPTUAL AND POLICY FRAMEWORK

Conceptual overview: The 3P framework

The impact of green agricultural practices on farmers’ income is multidimensional and cannot be assessed through productivity indicators alone. To capture this complexity, this study adopts the 3P framework—Planet, People, and Profit—as originally proposed by Elkington (1997) and widely applied in sustainability-oriented agricultural and food policy analysis (FAO, 2017).

From the Planet perspective, green practices seek to reduce soil degradation, greenhouse gas emissions, and environmental pressures arising from intensive input use. Sustainable land management and climate-smart practices can improve soil health and help mitigate emissions over the medium to long term (FAO, 2017; IPCC, 2019).

The People dimension emphasizes income stability, exposure to production and market risk, and household resilience. Green and sustainable practices can strengthen long-term resilience by improving resource use and reducing dependence on volatile input markets, but adoption may be constrained by localized knowledge requirements and investment needs (FAO, 2017; Jayne et al., 2019).

The Profit dimension focuses on farm-level economic outcomes, including productivity, cost efficiency, and output prices. Some studies suggest that sustainable and redesigned agricultural systems may offer opportunities to co-produce economic and environmental outcomes, including potential efficiency gains under certain conditions, but benefits vary by context and scale (Pretty et al., 2018).

Overall, the 3P framework highlights that income effects do not arise from environmental practices in isolation. Rather, they depend on the interaction between environmental performance, social resilience, and economic incentives.

Main income pathways

The income effects of green agricultural practices operate through several interconnected pathways that link environmental performance to farm-level economic outcomes. These pathways determine whether environmental improvements translate into tangible income gains for farmers. Each pathway reflects a different mechanism for monetizing or compensating environmental value.

The first is the market-based pathway, through which farmers may capture income gains via certification, green marketing, and price differentiation. Environmentally differentiated products can access higher prices or niche markets, but benefits often accrue unevenly across farmer groups due to differences in access to information, certification systems, and supply chains (Pretty et al., 2018). As a result, market rewards for green practices are often unevenly distributed.

The second is the policy-based pathway, which functions through public incentives such as Payments for Ecosystem Services (PES), agri-environment schemes, and carbon-related incentives. These instruments compensate farmers for providing environmental services and reduce income risks during the transition to greener practices (Engel et al., 2008; Wunder et al., 2018). Policy support therefore becomes critical in contexts where market-based incentives are insufficient to reward environmental stewardship.

The third pathway involves trade-offs and transition costs, including compliance costs, certification expenses, temporary yield reductions, learning costs, and liquidity constraints. Without careful policy design, these costs may disproportionately affect smallholders and exacerbate inequality, because better-resourced farmers can absorb short-term risks and adjustment costs more easily (Pannell et al., 2006; Knowler & Bradshaw, 2007). Evidence from Indonesia further suggests that poorly designed green transitions can exclude smallholders and reinforce structural inequalities when policy support is insufficient (World Bank, 2025).

In conclusion, whether green practices enhance or constrain farmers’ income depends on how effectively market mechanisms and policy instruments convert environmental benefits into economic returns. This underscores the central role of complementary institutions in shaping outcome of the inclusive and sustainable income. Institutional design therefore mediates the link between environmental ambition and farmer welfare.

Policy instruments supporting green practices

In Indonesia, several policy instruments provide a basis for linking environmental practices with farmers’ income, although their operational connection to smallholder agriculture still needs strengthening. Government Regulation No. 46/2017 on Environmental Economic Instruments (EEI) establishes that environmentally sound practices may be supported through economic incentives, compensation, and other environmental economic instruments. For smallholders, this framework implies that green practices should not be treated merely as compliance obligations but should be accompanied by practical incentives that reduce adoption costs.

Presidential Regulation No. 98/2021 on Carbon Economic Value (CEV) further strengthens this linkage by enabling low-emission activities to be recognized within performance-based climate mitigation instruments. In principle, this framework creates opportunities for low-emission agricultural practices to become future sources of carbon-related incentives. However, translating carbon economic value into farmer-level income requires clear measurement, aggregation, verification, and benefit-sharing mechanisms accessible to smallholders.

In the European Union, the Common Agricultural Policy (CAP) embeds income protection within environmental compliance. Under the CAP conditionality framework, farmers continue to receive income support as long as they meet minimum environmental requirements, reflecting the principle that environmental compliance should not reduce farmers’ income. This approach is further strengthened through CAP eco-schemes, where green practices are explicitly compensated, treating environmental stewardship as an activity that merits direct financial remuneration rather than an uncompensated obligation.

Overall, these policy instruments reflect a broader shift from traditional input-based support toward performance-based and incentive-based approaches that seek to internalize environmental values while safeguarding farmers’ income. For FFTC member economies, the key challenge is not only whether green policies exist, but whether their design enables farmers, especially smallholders, to access incentives with manageable transaction costs.

A similar logic underpins policy design in the United Kingdom through the Sustainable Farming Incentive (SFI). Under this scheme, farmers receive regular payments for implementing environmentally friendly practices, signaling that environmental protection and income support are treated as joint and mutually reinforcing policy objectives.

At the international level, the Food and Agriculture Organization (FAO) promotes Payment for Ecosystem Services (PES) schemes, under which farmers receive cash payments or other incentives alongside long-term productivity benefits. The underlying policy implication is that green practices should increase total household income rather than merely deliver environmental outcomes. More broadly, agri-environment schemes (AES) applied across various countries aim to safeguard farmers’ income by compensating for additional costs and labor associated with environmental practices, highlighting that incentive design is a critical determinant of whether net farm income ultimately increases.

Table 1. Policy instruments linking green practices and farmers’ income

Policy / Instrument	Mechanism linking to farmers’ income	Policy implications
Government Regulation No. 46/2017 – Environmental Economic Instruments/EEI (PP No. 46/2017 – Instrumen Ekonomi Lingkungan Hidup/IELH)	Economic incentives or compensation can reward environmental practices, ensuring they do not impose additional cost burdens on farmers.	Green practices should be accompanied by economic incentives to enable sustainable adoption.
Payments for Environmental Services (PES) – Ministry of Environment and Forestry / BPLH (Pembayaran Jasa Lingkungan Hidup (PJLH) – KLHK/BPLH)	Farmers or local communities implementing conservation practices receive direct payments.	Green practices are directly linked to additional income streams.
Presidential Regulation No. 98/2021 – Carbon Economic Value/CEV (Perpres No. 98/2021 – Nilai Ekonomi Karbon/ NEK)	Low-emission agricultural practices may receive performance-based incentives.	Green practices become a new source of income (carbon-related income).
Low Carbon Development Initiative (LCDI – National Long-Term Development Plan 2025–2045) (Pembangunan Rendah Karbon/LCDI – RPJPN 2025–2045)	Encourages incentives for farmers adopting sustainable practices.	Green practices are positioned as part of a broader strategy to improve farmers’ welfare.

Taken together, these policy instruments show how environmental objectives can align with farmer welfare through various incentive mechanisms. Table 1 summarizes their key features and implications for farmers’ income.

SOURCES OF INCOME GAINS FROM GREEN PRACTICES: FIELD EVIDENCE

The field evidence presented in this section is illustrative rather than statistically representative. It draws on farmer mentoring, demonstration plots, and direct field observation to highlight plausible income pathways associated with green agricultural practices. The main group-based case comes from Parikesit Farmer Group in Ciamis District, involving 48 farmers managing approximately 24 hectares of rice fields. The mentoring spanned two seasons, covering both the rainy and dry seasons. Before receiving technical assistance in organic rice farming, farmers’ productivity generally ranged from approximately 4–6 tons per hectare.

After adopting organic-oriented rice cultivation practices, including improved organic input management and healthier crop management, productivity increased to approximately 7–8 tons per hectare.  The study compared farmers participating in the mentoring program qualitatively with nearby farmers who did not receive technical assistance. Bank Indonesia supported the mentoring program, and the group later placed second in a regional competition involving several assisted farmer groups in Java. This recognition indicates that the case was not merely an isolated demonstration plot, but part of a broader farmer development and institutional facilitation process.

Income gains also emerge through price- and market-based mechanisms. In the Ciamis case, farmers adopting healthier and environmentally friendly rice cultivation practices obtained a farm-gate price premium of approximately IDR 1,000 (USD 0.63) per kilogram of paddy compared with conventional paddy. Local green marketing, healthier product positioning, and product branding supported this price premium and strengthened farmers’ bargaining power. These arrangements improved price stability and reduced income risk.

Table 2. Field-based sources of income gains from green practices

Source of income gains	Main mechanism	Impact on production	Impact on price	Impact on farmers’ income
Soil fertility restoration	Improved organic matter, microbial activity, nutrient cycling, and water efficiency	Sustained productivity improvement	Indirect	Higher income through yield increases
Productivity gains from green practices	Healthier soils and better crop response	Yield increased from around 4–6 tons/ha to 7–8 tons/ha in the Ciamis case	Indirect	Higher income from larger output volume
Price premiums for green products	Quality perception, healthier production practices, and lower chemical dependency	Neutral	Around IDR 1,000 (USD 0.63)/kg higher than conventional paddy	Income increases through price effects
Green marketing and local branding	Product differentiation and local identity	Neutral	More stable and premium prices	Higher income and lower price risk
Input cost reduction	Reduced dependence on chemical fertilizers and pesticides	Maintained or improved	Neutral	Higher margins with stable prices
Access to niche markets or dedicated buyers	Informal contracts and specialized traders	Neutral	Greater price certainty	More stable income
Non-market payments and support	Environmental incentives, PES, green programs, CSR, or institutional support	Indirect	Indirect	Additional income sources

A similar price premium was also observed in Karawang District. Field observation in Karawang focused on one assisted farmer managing approximately 1.5 hectares of rice fields. The production process was monitored through to the selling stage, where the farmer obtained a price approximately IDR 1,000 (USD 0.63) per kilogram higher than conventional paddy because traders actively sought paddy produced through healthier cultivation practices. This case suggests that consumer interest in healthier rice is increasingly visible in local markets, encouraging traders to search for paddy produced with lower chemical dependency and better environmental practices.

Although the evidence presented here is illustrative rather than statistically representative, it highlights several practical pathways through which green practices can improve farmers’ economic outcomes. These pathways and their implications for farm income are summarized in Table 2.

Cost reduction and income stability constitute another important channel through which green practices contribute to farmer welfare. Partially replacing chemical fertilizers and pesticides with organic and bio-inputs, along with adopting Integrated Pest Management (IPM), lowered production costs and improved farm margins even when output prices remained relatively stable. Nonetheless, structural constraints persist, as policy support for farmer-level organic and biofertilizer development remains limited, particularly for licensing, quality assurance, and formal product recognition.

Non-market income sources also play a supportive role, especially during the transition toward green practice adoption. Payments for Ecosystem Services (PES), carbon-related incentives under the Carbon Economic Value (CEV) framework, and other environmental schemes can provide supplementary income to offset transition costs. In practice, funding often comes from local governments, central banks, or CSR programs, while non-profit and community-based organizations often lead implementation, with public support typically following—rather than initiating—field-level success.

Field experience from farmer mentoring initiatives further illustrates the diversity of income pathways associated with green practices. Based on Yayasan Jamu Bumi's experience in Ciamis District, where the author was directly involved, farmer assistance for organic-oriented practices included hands-on training in producing high-quality organic fertilizers. This process not only reduced production costs and improved crop productivity but also encouraged the formation of farmer groups that produced organic fertilizers for sale to surrounding farmers, generating additional off-farm income. In contrast, field experience in Karawang District shows that income gains came primarily from reduced input costs, improved yields, and higher selling prices, without fertilizer production emerging as a supplementary income source. In both locations, farmers benefited from a combination of on-farm efficiency, healthier product positioning, and stronger market demand.

EVIDENCE FROM LITERATURE: INCOME PATHWAYS AND POLICY IMPLICATIONS

The literature indicates that the income effects of green practices operate through multiple pathways and are highly context-dependent. Market-based mechanisms—such as price premiums and differentiated green markets—can generate positive income effects. However, their magnitude and durability depend on market structure, consumer awareness, certification costs, and farmers’ bargaining power (Pretty et al., 2018; Jayne et al., 2019). Consequently, income gains through market channels are often uneven and contingent on enabling institutional and market conditions.

By contrast, policy-based pathways provide more consistent evidence of protecting and improving total household income. Instruments such as agri-environment schemes, Payments for Ecosystem Services (PES), and performance-based environmental incentives compensate farmers for the additional costs and risks associated with green practices (OECD, 2019; FAO, 2017). When well-targeted and adequately funded, these policies can stabilize income during transition phases and reduce the risk that environmental compliance translates into income losses, particularly in contexts of policy reform and adjustment (Jayne et al., 2018; OECD, 2020).

More broadly, green development is associated with improvements in income quality and stability rather than guaranteed income growth. Empirical studies indicate that green practices often reduce income volatility by lowering dependence on external inputs, enhancing soil resilience, and mitigating production risks, even when short-term income gains remain limited (Pretty et al., 2018; FAO, 2021). Consequently, policy evaluations that focus solely on income growth may underestimate welfare gains from greater stability and reduced risk.

Across the literature, policy design emerges as a decisive factor shaping income outcomes. High transaction costs, weak targeting, poorly calibrated incentives, or delayed payments can undermine adoption and exacerbate inequality, particularly among smallholders (Engel et al., 2008; Wunder et al., 2018). Moreover, short-term trade-offs such as temporary yield declines, learning costs, and liquidity constraints remain significant without adequate technical and financial support (FAO, 2017; OECD, 2019).

Policy lessons for FFTC member countries

First, green agriculture programs should combine technical mentoring with economic incentives. The Parikesit case shows that farmer-group facilitation over multiple seasons can improve learning, collective confidence, and market positioning. This implies that short training events are insufficient; farmers need sustained assistance until they can manage production, post-harvest handling, and market relationships.

Second, incentive schemes must be simple enough for smallholders to access. PES, carbon-related incentives, and agri-environment schemes can support income stabilization, but only if administrative requirements, verification systems, and payment procedures do not create excessive transaction costs. Aggregation through farmer groups, cooperatives, local NGOs, or village-level institutions can help connect smallholders to incentive programs.

Third, market development should accompany production improvement. The Karawang case suggests that demand for healthier rice can create price advantages when traders and consumers recognize product quality. Therefore, green agricultural policy should not stop at production practices; it should also support local branding, buyer linkages, product credibility, and fair benefit sharing along the value chain.

Fourth, policy evaluation should include income stability, risk reduction, and farmer organization capacity, not only yield or output growth. These indicators are especially important for Asian smallholders, whose adoption decisions are shaped by liquidity constraints, seasonal uncertainty, and the need to protect household welfare.

CONCLUSION AND POLICY IMPLICATIONS

This study finds that green agricultural practices do not inherently reduce farmers’ income; instead, their effects depend on how markets, policies, and institutions translate environmental benefits into economic returns. Field evidence from Ciamis and Karawang shows that green practices can improve income through sustained productivity gains, lower input costs, greater price stability, and, in some cases, better farm-gate prices for healthier rice products.

The literature indicates that market-based mechanisms can generate income gains but are highly context-dependent, while policy-based instruments, such as Payments for Ecosystem Services and agri-environment schemes, more consistently support income stability during transition phases. Overall, green development tends to enhance income quality and resilience rather than guarantee immediate short-term income growth.

From a policy perspective, three implications stand out. First, integrated policy packages should support green practices by combining economic incentives, technical assistance, and risk-sharing mechanisms during transition phases. Second, policy should recognize income stability and risk reduction as legitimate outcomes alongside productivity growth. Third, strengthening farmer organizations and intermediary institutions is essential to reduce transaction costs and ensure inclusive access to green incentives, particularly for smallholders.

For Indonesia and other FFTC member economies, the practical policy message is clear: green agricultural transformation will be more inclusive when farmers are not left to bear transition costs alone. Public agencies, financial institutions, local governments, traders, and civil society organizations need to jointly support farmer mentoring, product differentiation, credible market linkages, and accessible incentive mechanisms so that sustainability becomes a source of better and more stable rural income.

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