Environmental Services

1. Environmental Services David Zilberman University of California Berkeley

2. Categories of Environmental Services (ES) • Pollution Prevention. Farmers may be paid to modify environmental damaging activities and engage in sustainable practices(farmers may have implicit historical rights to pollute that have to be bought). • Conservation. of natural resources, life styles, ecosystems etc. Including forest resources and wetland, agricultural communities ( slow urban sprawl), traditional varieties and species, etc. • Amenity creation-restoration and built up of natural resources Include clean up activities, planting of forests, restoration of wetlands etc.

3. Environmental Services & Land Use • Most ES are embodied in land use and management • In situ conservation of crop bio-diversity • Soil carbon sequestration through no tillage • Provision of habitat in wetlands • ES can be attained by • Working land programs-promoting green practices • Transition to IPM • Conversion of lands to “greener” use • From farming to forest • prevention of land use conversions • Controlling development

4. The Multidimensionality of ES • The same land may provide a multitude of ES • No tillage sequesters carbon and reduced soil erosion • A wetland may purify water and support wild life • ES may be complementary or substitutes • Growing Wetland acreage may areas with native plants • Reduction in runoff may be accompanied in less wind erosion • ES may provide regional, national & global benefits • Benefits of ES vary across individuals &groups • Bird watchers & hunters benefit from better bird habitat • All citizens gain from flood control-but the risk reduction vary by location

5. The Dimensions of Wetland Services

6. Public &Private Sectors &Wetland Management • Responsibility and finance of wetland should correspond to nature of their benefits • Government should concentrate on providing public good aspects- utilized by many No exclusion - e.g Existence value • Private agencies have important role in financing wetland aspects that benefit their members-wildlife habitat. • Private action is indication of willingness to pay for wetland services- it may be understated because of public good aspects • There is a role for public-private cooperation • Matching fund • Tax credit

7. Mechanism to Obtain ES • Aggregate targets of ES with Tradable permits • No reduction target led to wetlands banking in U.S. • Kyoto targets may be attained by CO2 Sequestration • Purchasing Funds-target & buy assets or pay for ES • Nature conservancy buys lands & development right • USCRP pays for farmland use modification for a period • Utilities pay for carbon sequestration in Costa Rica &Iowa • Incentives-payments for ES, penalties for damages • Direct controls • Zoning: restricting land use to certain activities • Permitting:conditional approval of development activities

8. Institutional Setup to Create ES • Private parties may invest in excludable amenity creating ES (habitat to birds or fish,recreation area) • NGO’s may finance and control specialized ES • National & Local governments may • Pay directly for or subsidize private provision of amenity creating ES • Establish legal framework to require generation of resource conserving or pollution preventing ES • Global ES may be generated & controlled by • International agreements (Kyoto, Debt for nature) • Voluntary agreements initiated by NGO’s

9. Management of Purchasing Fund • Heterogeneity -ESbenefit &cost per acre vary • Consider first the case with the No Scale effects- • Suppose there are N locations, identified by n=1,N . • An= Land of location n, • Bn = Benefits per acre of location n. • Cn = Costs per acre( value of land in alternative use) • Targeting criteria • Acreage maximization Buy the lands with the lowest Cn (regardless of benefits) given the budget • Benefits targeting Purchase the highest quality lands (lands with highest Bn) within budget • Benefit /cost Targeting Purchase lands with the highest Bn/Cn (highest benefit cost ratio) given the budget

10. benefit targeting Alternative Forms of Targeting Benefit per acre Cost targeting benefit cost targeting Cost per acre

11. Implication of Targeting Schemes • Benefit cost targeting are optima,Maximizing ES for budget • Cost targeting maximize acreage &preferred by land owners. • Benefit maximizing result in lowest acreage reduction • The importance of correlation when low cost lands has high ES (negative correlation of Bn and Cn) the welfare loss of cost targeting is small. It is big in case of positive correlation. • The Importance of variability Benefit targeting is optimal when benefits are positively correlated to costs &variability of benefit is much larger than of costs Cn 1 2 3 4 5 6 7 8 9 10 11 Budget = 21 Bn1 1 3 5 7 9 12 15 18 20 24 28 Optimal policy-Buy Highest Q Bn2 1 2 2 3 3 3 3 3 3 4 4 Optimum -Maximize Acreage (in particular n ≤ 6 )

12. Scale Effects • When ES/acre increases with size targeting may radically change with budget When Budget is 8 Buy 2 units type 2 Benefits 12 When Budget is 10 Buy 2 units type 2 &1type1 Benefits 14 When Budget is 12 Buy 1 unit type 3 Benefits 24 When budget is 15 buy 1 unit type 3 & 1 type 1 Benefits 26

13. Difficulties of Trading in ES • Trading requires quantifiable observable commodities- it is not always feasible with ES • Quantification of output is difficult when ES are aesthetic values or bio-diversity.It is easier for soil carbon. • .When benefits are random (flood control) or unobservable directly (sequestration) agreements for estimation of benefits are needed. A critical element is establishing a bench mark- benefits are improvements • Monitoring & enforcement are problematic-especially given that ES require large areas at remote locations • The ability to trade in ES improves with scientific knowledge- need to quantify&measure: benefits of wetlands, bio-diversity gains,reduced risks etc.

14. Distribution of ES Earnings • Cost of ES may be born by endogenous or local population- who may be constrained & sometimes removed to attain conservation etc. • But they may not receive the earnings that may go to governments, NGOs, or legal owners • Even when they receive earnings they may not gain - they rarely participate in negotiations and their overall cost may exceed benefits • ES gains are not a panacea-soil carbon may result in gross gain of $150 per acre- with much lower net • Average Bio prospecting benefits/acre are likely to be very small- Bio knowledge is crucial to identify a priory location with high potential and target them.

15. Private Sector Regulations and ES • Permitting is major tool to regulate ES (especially wetland) use by private sector. • Criteria for optimal regulation of wetlands Maximization of net public and private benefits Private cost of regulations should be considered in policy design A less ambitious objective Minimize public & private costs of wetland targets Agencies may aim to maximize wetland provisions given the agency budget- ignoring regulation costs leads to inefficiency

16. Institutional Setup for Various ES A wetland with purely local benefit should be regulated by the local government. Differences policy approaches between regions allow for choice given heterogeneity of preferences. Decentralized solutions may be costly in terms of transaction and regulation costs Regional cooperation can * Reduce fixed cost of research and management&design of restoration and conservation of wetlands ` * Reduce transaction cost of regulation * Address issues of spillover of benefit and costs

17. Division of Responsibilities in a Federalist System • ES may provide a variety of benefits across constituencies-All benefits may be considered and compensated for in ES design and management • Funds for managing credits for provision of benefits to National and Global ES may be created. That will require international agreement or national policies, but will provide the right incentives • Activities that compromise ES(wetland modification) activities may be constrained to protect national and global amenities-or be taxed to pay the fund.

18. Regions with Vulnerable Isolated Wetlands(Duck Unlimited study) • Vulnerability is the result of weak law & high concentration of isolated wetlands • Great Basin(excluding California,Oregon& Washington)-Wetlands occur on agricultural land in Nevada and Idaho • Prairie Pothole region( excluding Minnesota and Iowa)-Prairie Pothole Region is located on ag land, especially in Dakotas. • Southern Great Plains- The majority of playa lakes in Texas occur in intensively farmed region of the Panhandle • Gulf Coastal Prairie-,many wetlands occur on farmlands east of Houston,, • Mississippi Alluvial Valley(excluding Tennessee) • Great Lakes(excluding Michigan, Minnesota & Wisconsin) Not much wetland on agricultural land

19. Wetlands in Agricultural Lands • In 5 of the regions isolated wet lands are agricultural lands entitled to CRP-There are 6 millions of wetlands acres in agriculture • 46 millions of the U.S. 300- million acres of the U.S. farm lands are converted wetlands. • A large acreage of wetland occurs in rangelands (the Sandhill region of Nebraska) who are not part of commodity programs

20. Alternative Approaches to Wetland Protection

21. Conservation Reserve Program:Background • The CRP is a land retirement program. It aims to reduce farm acreage so to increase supply and to increase farm income. • The biggest program of U,S. agriculture is excess supply. Another problem has been soil erosion. Conservation programs traditionally paid farmers to take erosive land out of production • Conservation programs are “Green” policies, and are looked favorably by international trade agreements aimed to reduce farm support. They are likely to increase in importance.

22. CRP-Basic Features • CRP provides owners or operators with an annual per-acre rental payment and 1/2 the cost of establishing a permanent land cover for retiring cropland from production for 10- to 15-years. • Producers can offer land for competitive bidding based on an Environmental Benefits Index (EBI) during periodic signups. • Producers can automatically enroll more limited acreages in practices such as riparian buffers, field windbreaks, and grass strips on a continuous basis • Enrollees in selected practices program receive enhanced rental rates, 50-percent cost-sharing and a per-acre maintenance payment.

23. CRP Rents

24. CRP Historical Background • CRP Established in its current form in 1985 to be administered by USDA’s Farm Services Agency (FSA) ad funded through Commodity credit corporation. • In 1996, CRP was reauthorized, limiting enrollment to 36.4 million acres at any time. • In 2000, enhanced incentives for continuous signup: • A signing incentive payment of $100 to $150 per acre • A practice incentive payment equal to 40 percent of cost-sharing for all continuous signup practices • As of October 2001, about 1.5 million acres had been enrolled in the continuous signup, • The 2002 Farm Act increased the enrollment limit to 39 million acres.

25. The Wetland Reserve Program • WRP was authorized under the 1985 Farm Act. • Under the 2002 Farm Act, the acreage cap is increased from 1.075 million acres to 2.275 million acres. • Objective is to enroll 250,000 acres per year • Options: a permanent or30-year conservation easement or a 10-year cost-share restoration agreement • USDA pays 100 percent of restoration costs for permanent easements, and 75 percent for 30-year easements and restoration cost-share agreements. • Conservation vs . was around $1,300 per acre. The study also concludes that the WRP achieves restoration at around $600 per acre.

26. Retirement Program and Wetlands • The 2002 Act expands land retirement by 4 million acres, WRP enrollment cap more than doubles, from 1.075 million acres to 2.275 million,. In the CRP, 500,000 acres could be used to enroll farmed wetlands and associated buffer acreage. • CRP serves to support farmers income-not environmental needs. Has limits as wetlands policy framework.

27. Working Land • Working land conservation programs can benefit wetlands mostly indirectly by reducing agricultural pollution. • $5.7 billion is available from 2002-2007 and $12 billion from 2002-11 for the Environmental Quality Incentives Program (EQIP), Wildlife Habitat Incentives Program (WHIP), and Conservation Security Program (CSP).

28. The Environmental Quality Incentives Program EQIP *EQIP-Provides technical assistance, cost sharing (up to 75 percent), and incentive payments to assist livestock and crop producers with environmental improvements. *60%of EQIP's funding earmarked for livestock producers, No size limits on livestock operations, Payments are limited to a total of $450,000 per operation over the 6-year life of the Act.

29. Conservation Security Fund & The Wildlife Habitat Incentives Program • The Conservation Security Program will focus on land-based practices and specifically excludes livestock waste-handling facilities. Producers can participate at one of three tiers; higher tiers require greater conservation effort and offer higher payments. The lowest cost practices that meet conservation standards must be used. • The Wildlife Habitat Incentives Program provides cost sharing to landowners and producers to develop and improve wildlife habitat.

30. Swampbuster Established 1985 . "Swampbuster" - farmers or ranchers lose eligibility for farm program benefits if they produce an agricultural commodity on a wetland converted after December 23, 1985, or if they convert a wetland after November 28, 1990,. • Swampbuster recognizes four categories of wetlands:. • Wetlands, or areas that contain hydric soils which support mostly hydrophates • Converted wetlands, defined as areas drained or altered after December 23, 1985 • Farmed wetlands, or areas partially drained or altered to produce a crop prior to Swampbuster, but which still retain some wetland characteristics • Prior converted wetlands, or areas that were used for farming prior to Swampbuster and which no longer exhibit any wetland characteristics.

31. Permitting vs. Voluntary Programs • Permitting cuts down on uncertainty. It can lead to a more accurate assessment of the inventory of wetlands. With incentive programs, more work is necessary to measure wetland gains and losses • In a permitting system, applicants must bear significant fixed application costs. With voluntary program, the government pays for targeting • Voluntary program may be captured. • Targeting criteria matters acreage maximization benefits farmers.Should target lands with highest benefit cost ratio. • Slippage-high commodity prices lead to reuse of marginal lands or wetlands-should be considered in design

32. Activities of Private Groups • Easements, Duck Unlimited DU rarely buys wetlands outright, but negotiates conservation easements. These agreements are for 10-years. • The nature conservancy has a diversified approach • Ownership TypeAcres • Conservation Easement 1,400,453 • Management Agreements 1,389,099 • Leases 2,146,745 • Owned by TNC2,098,950 • TOTAL 7,035,246

33. Conservation Partnerships • One such collaboration between DU and the federal government is the River CARE project in which DU and the NRCS have cooperated in implementing the WRP in the Mississippi Alluvial Valley (MAV). By 1998, more than 1,500 private landowners in the MAV were active partners with DU and WRP to provide and restore wildlife habitat on their lands. • TNC’s Glacial Ridge Project, one of 12 habitats targeted in the “Saving the Last Great Places” campaign, received $1.6 million from NRCS as part of the USDA’s WRP program for a partial easement payment to restore nearly 2,800 acres of previously drained wetland and 1,500 acres of tall grass prairie in Minnesota. Saving the Last Great Places,

34. Private vs. Public Approaches • Public sector is not forced to pay attention to factor prices. Private groups have better incentives to target the land with the highest level of environmental amenities per dollar spent. • Private investment in wetland conservation, includes land purchase expenditures and investment in improvement on wetland quality. • From the Corps perspective, the land has no opportunity cost, from a societal perspective the land is valuable in providing other services. This, there may be a tendency to over-regulate and acquire more land than is socially optimal.