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October 4, 2007

PES Design Issues II Paul J. Ferraro Department of Economics Andrew Young School of Policy Studies Georgia State University. October 4, 2007. Outline. Supply Issues (Sellers) Demand Issues (Buyers) Property Rights and Contracting Enabling Policies and Legal Framework Intermediaries

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October 4, 2007

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  1. PES Design Issues IIPaul J. FerraroDepartment of EconomicsAndrew Young School of Policy StudiesGeorgia State University October 4, 2007

  2. Outline • Supply Issues (Sellers) • Demand Issues (Buyers) • Property Rights and Contracting • Enabling Policies and Legal Framework • Intermediaries • Case studies

  3. Suppliers: what are they willing to accept? • Should one pay suppliers more than the minimum they require to supply the services? • Is there a tradeoff between maximizing ecosystem service flows and maximizing poverty alleviation impacts?

  4. Outline • Supply Issues (Sellers) • Demand Issues (Buyers) • Property Rights and Contracting • Enabling Policies and Legal Framework • Intermediaries • Case studies

  5. Buyers: what are they willing to pay (and does it matter)? • Identifying potential buyers • Is valuation necessary?

  6. Buyers: what are they willing to pay (and does it matter)? • Getting potential buyers to pay • Unaware of benefits • Free-riding • Uncertainty over delivery of services

  7. Buyers: what do they want to buy? • Multiple services – multiple buyers • Bundling • Strategic incentives among buyers • Tradeoffs in service provision

  8. Outline • Supply Issues (Sellers) • Demand Issues (Buyers) • Property Rights and Contracting • Enabling Policies and Legal Framework • Intermediaries • Case studies

  9. Property Rights – do they matter? • Title versus Tenure, and de jure versus de facto rights. • Rights to what? • Benefits from investment (a necessary condition in any natural resource management program)

  10. Outline • Supply Issues (Sellers) • Demand Issues (Buyers) • Property Rights and Contracting • Enabling Policies and Legal Framework • Intermediaries • Case studies

  11. Enabling Laws and Policies • Can suppliers receive payments in the absence of PES laws? • Can buyers make payments in the absence of PES laws?

  12. Enabling Laws and Policies • Programs without any laws: Ecuador (FONAG), Colombia (Cuaca Valley), two of three case studies • Programs with PES laws: Costa Rica, Mexico

  13. Enabling Laws and Policies More Important Question Do buyers have incentives to make payments in the absence of PES laws?

  14. Outline • Supply Issues (Sellers) • Demand Issues (Buyers) • Property Rights and Contracting • Enabling Policies and Legal Framework • Intermediaries • Case studies

  15. Reducing Transaction Costs Transaction costs are reduced through diverse institutional arrangements that make information acquisition easier.

  16. Institutional Arrangements • Centralizing operations • Forming partnerships and networks • Using intermediaries and brokers • Learning-by-doing • Using or building social capital (e.g., social norms and trust)

  17. Intermediaries Intermediaries can gather and disseminate information and help build social capital, which reduces the cost of contract formation and monitoring.

  18. Outline • Supply Issues (Sellers) • Demand Issues (Buyers) • Property Rights and Contracting • Enabling Policies and Legal Framework • Intermediaries • Case studies

  19. Costa Rica Program de Pagos de Servicios Ambientales • How was the payment price set? • Erroneous analogy of PES to competitive market for private good • High fixed price created problems of additionality

  20. Costa Rica Program de Pagos de Servicios Ambientales • Centralized versus decentralized approaches to coordinating buyers • Centralization allows for easy bundling, but services not necessarily from same areas • Tension in balancing advantages and disadvantages of each approach

  21. Costa Rica Program de Pagos de Servicios Ambientales • Landowners with title, without title, and indigenous people. • Elaborate enabling legislation: what was it good for? • Experimentation with, and incentives for, intermediaries.

  22. Payments for Sea Turtle Nests, Mafia Island, Tanzania • NGO pays for location of turtle nest (3000 TZS) and then per egg hatched (20 or 40 TZS/egg). • Mafia Island: 150 nests, payments = $1000 USD/year ($25K budget), poaching rates cut from 100% to almost 0%.

  23. Payments for Sea Turtle Nests, Mafia Island, Tanzania • Who pays and how much? • Funds from int’l sources • Negotiation determined price • Additionality easier to achieve

  24. Payments for Sea Turtle Nests, Mafia Island, Tanzania • Does anyone own a nest? • How to enforce property claim? • Social norms and trust important • Easy to verify compliance

  25. Payments for Sea Turtle Nests, Mafia Island, Tanzania • No law enabling payments or preventing them. • Experimentation with, and incentives for, intermediaries.

  26. Payments for Soil Erosion Control, Sumberjaya, Indonesia • Pilot in two villages to decrease soil erosion runoff (impure public good) through soil infiltration pits, vegetation strips and ridges • Contracts with 34 families on 25 ha (out of 82 eligible families with 70 ha), $4000 USD in payments, compliance high.

  27. Payments for Soil Erosion Control, Sumberjaya, Indonesia • How to determine payment levels? • Negotiations or stated preferences? • Farm budget simulations? • Auctions as revealed preferences?

  28. Source: Leimona, Jack and Ferraro, 2007

  29. Demand 3.1 1.6 Source: Leimona, Jack and Ferraro, 2007

  30. Payments for Soil Erosion Control, Sumberjaya, Indonesia • Who is the buyer? • International agent stands in for buyer while the institution is developed through a pilot. Then buyers are approached.

  31. Payments for Soil Erosion Control, Sumberjaya, Indonesia • Payment tied to action, not service (all actions assumed same value) • Property Rights: de facto • No law enabling PES payments

  32. Payments for Soil Erosion Control, Sumberjaya, Indonesia • Can an international institution be an effective intermediary?

  33. Conclusions • Price discovery mechanisms are important, but still rudimentary in practice • Potential tradeoff exists between ecosystem services and poverty alleviation • Coordination among buyers not straightforward • PES does not mitigate the free-riding problem

  34. Conclusions • Property rights important (as in all NRM programs), but unlikely to be a substantial barrier in many PES cases • Enabling legislation can facilitate PES, but is not a necessary condition in many cases • Intermediaries with local presence and knowledge can reduce transaction costs

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