Payment for Environmental Services: Not so Simple

1. Payment for Environmental Services: Not so Simple

2. Outline • PES: why, what and how • Getting what you pay for • PES and poverty alleviation • Possible perverse outcomes • Conditionality, collective action, and the type of “payment” • Some evidence from Indonesia and Mexico

3. Why PES? • Response to earlier failed NR protection efforts • Incentive-based • Addresses opportunity cost of conservation • Appeals to an interest in helping the poor

4. What is PES? • a voluntary transaction where • a well-defined ES (or a land-use likely to secure that service) • is being ‘bought’ by a (minimum one) ES buyer • from a (minimum of one) ES provider • if and only if the ES provider secures ES provision (conditionality). (Wunder, 2004)

5. Conservation with payment for service NR degradation Conservation Payment Benefits to land users Costs to downstream populations How PES Works Source: Stefano Pagiola, World Bank

6. www.fonafifo.com

7. Payments for what services? • Carbon sequestration • Watershed protection • Biodiversity conservation • Scenic beauty • Others

8. 2. Getting what you pay for

9. How do typical markets work?

10. What about environmental markets?

11. Will we get environmental services if we offer money for them? • Scenario: • Forest area with many owners • Lots of deforestation • Government considering PES to stop it

12. High transaction costs • Identify, monitor, negotiate, establish contracts, enforce, pay. • Transaction costs for CDM carbon sequestration projects ranged from $1.48 to $14.78 per tCO2 (Michaelowa and Jotzo, 2005) • Since 2004 Chicago Climate Exchange prices have ranged From $0.10 to $7.50 per tCO2

13. Moral of the story • Even the simplest aspects are complicated • Much easier on a tiny scale where you really know what’s going on • Not necessarily the best option

14. 3. Can PES help poverty alleviation?

15. Transaction costs favor working with large landholders • Cost is similar for 10 hectares or 10,000 hectares

16. PES may not be profitable for subsistence farmers • Subsistence farmers need food • Easier to set aside half your land for PES if you have 2000 hectares than if you have 2 ha

17. Evidence Costa Rica study: • Nonparticipants’ avg. farm size: 35 ha • Participants’ avg size: 85-200 ha (depending on type of contract) (Zbinden and Lee 2005) • 10 additional hectares  27% greater likelihood of participating

18. May be difficult to operate under common property or where land rights aren’t clear • Contracting party might be hesitant • May be high transaction and monitoring costs within the grou • Costa Rica program: land ownership is normally required for participation

19. Marginal lands become more valuable • Landowners may evict squatters or renters • Powerful people may grab land with insecure property rights

20. 4. Conditionality & Collective Action

21. Collective action • PES may require group contracts • Transaction costs • Threshold effects • Watersheds, biodiversity • Community-managed resources

22. Reducing Emissions from Deforestation and Degradation (REDD) • 22% of developing country forests are community owned • Groups will initiate new collective action for the prospect of earning money • They will absorb many transaction costs internally

23. Motivations for collective action • Individual rational utility maximization • Social rational utility maximization • Reciprocation • Look after those close to us • Pure altruism (Vatn 2007)

24. Social norms • Part of a social cost-benefit calculus? • Or do they have independent motivating power? (Cleaver 2000)

25. New groups vs. old groups • Common property theory focuses mainly on old groups • Ostrom’s design principles (Ostrom 1990, 2005) • These groups often operate on basis of norms • But what about new groups or new collective action? • Happens slowly (Meinzen-Dick 2007) • Must build trust (Dietz et al. 2003)

26. Effects of monetary incentives on collective action

27. Norms & intrinsic motivation may not mix well with monetary incentives • Crowing out intrinsic motivation (Deci 1971) • Swiss nuclear facility (Olberholzer & Gee 1997) • Israeli day care center (Gneezy & Rustici (2000)

28. Money may not be a good way to initiate collective action • Indian watersheds (Kerr 2002) • World Bank Community Driven Development

29. Different if money is the basis for collective action

30. Implications for PES • What if money interferes with collective action? • Can we find alternative incentive types that: • Promote collective action? • Are consistent with conditionality?

31. Types of payments • Cash • Land tenure security • In-kind services & development support • training, employment, market access, infrastructure • Implications for conditionality?

32. Cash • Straightforward and simple • Facilitates annual payments • Divisible and direct • Good for individual-based systems • Possible problem if group contract

33. Conditional land tenure security • Used on illegally settled land • Eviction if service not delivered • It’s indivisible – useful for • group PES systems • Does not facilitate annual • payments • Challenges to conditionality: • May be difficult to revoke in long term even if ES not sustained

34. In-kind services/development support • Could be a form of payment • Questions about enforcing conditionality • Can it be revoked? • Ethical concerns • Could it bring in-migration? • Hypothetical: bonuses and fines on a local development budget

35. How to go forward on a large scale? • Advantages and disadvantages of both cash and noncash • Community development in advance of cash incentive seems important • Feasible? • Need further research with controlled tests of different payment/reward mechanisms

36. 5. Some research findings from Group-based PES in Indonesia and Mexico

37. Specific research questions • Do group members understand their contractual obligations and benefits? • What impact on land use and income? • Do group-level social capital and collective action affect outcomes? • Who gains and who loses? • How do people respond to different incentive types?

38. In 2000: community forestry program (HKm): • Secure tenure through long term lease contracts with farmer groups in protected forest land • farmer groups must: • Plant multi-story coffee agroforestry • Implement soil and water conservation measures • Protect remaining forest area • 16 farmer groups have received 5-year HKm contracts so far in Sumberjaya • 5,200 participants in18 groups on 11,000 ha

39. Data sources • Community survey • All 21 villages in Sumberjaya with government forest land eligible for HKm • Key informant interviews with government officials • Household survey • Stratified random sample of 640 plots and their operators

40. Findings • Leaders mostly understand program, many others do not • More investment in land • People expect land values and incomes to rise • People value being legitimate in eyes of government • Everyone gains so far • Future: can’t say • Tenure security is the reward • Has teeth now, but later? • Development budget? • Group internalizes some of the transaction costs

41. Puebla, Mexico • Mexico has 2nd highest deforestation rate in Latin America • Many forests are considered hydrologically important • Most managed by ejidos in high-poverty areas

42. Payment for Hydrologic Environmental Services (PSAH) • Government program since 2003 • Operates through ejidos • Annual cash payments to employ people to guard forests • Puebla: PSAH operates in 70 of 700 ejidos • Ejidos in study villages have ~100-300 members

43. Puebla forest ejidos in PSAH: two stylized types • One group: • Paper mill concession, small royalty to ejidos, no local management • Illegal logging after paper mill closure

44. Other group: • Stronger history of local management • Sawmills with intensive management • Very important to village economy

45. Data • Case studies of 10 ejidos participating in program • 2 with sawmill • 6 in old paper mill concession area • 1 in between • 1 very close to city • Survey of ~25 people in each one • Experimental activity re: willingness to participate in community work under different incentives

46. Findings: Awareness and Benefits • 25% of ejido members had not heard of the program • 15% of respondents had gained employment under the program • Additional 35% knew someone who had gained employment •  low awareness, apparently skewed benefits

47. Deforestation • Still awaiting data • Anecdotal evidence according to PSAH officials: • Sawmill villages protect forest aggressively • More deforestation in old paper mill forests and near the city

48. Who gains? • Distribution within villages is limited

49. Overall initial findings • Villages that cooperate for business seem to absorb PES very easily • But they would protect the forest anyway • Villages with less tradition of collective action share the money less and appear to protect the forest less • Still need confirmation from data

50. Conclusion • Not clear how to go forward on a large scale • Advantages of both cash and noncash • Community development in advance of cash incentive seems important • Feasible? • Need further research with controlled tests of different payment/reward mechanisms