EEP 101/econ 125:Market for Environmental services (ES) and poverty

DAVID ZILBERMAN

Conservation&Preservation Conservation&Preservation Storage and stabilization ( e.g Storage and stabilization ( e.g

water,carbon )water,carbon ) Risk reduction ( flood control, protection Risk reduction ( flood control, protection

form fire)form fire) Natural resources quality enhancement ( Natural resources quality enhancement (

soil,water)soil,water) Amenity creation-Restoration, Amenity creation-Restoration,

Enhancement Enhancement

What are we talking about?Categories of Environmental Services (ES)

Example 1: water Example 1: water cleanup cleanup

The New York water utility considered The New York water utility considered investing $2 billions in water filteringinvesting $2 billions in water filtering

The water was contaminated by waste of The water was contaminated by waste of 20000 cows that grazed in the water 20000 cows that grazed in the water catchments of the city’s reservoircatchments of the city’s reservoir

The benefit per cow annually is $1000The benefit per cow annually is $1000 It will cost $500 million to invest in in water It will cost $500 million to invest in in water

quality if the cows will not graze.quality if the cows will not graze. After negotiation with the local farmer each After negotiation with the local farmer each

land owner will receive $1500 per land owner will receive $1500 per cow/annually not to grazecow/annually not to graze

The lawyers received $50million and stuff paid The lawyers received $50million and stuff paid another $10 to reach a dealanother $10 to reach a deal

Example 1: water Example 1: water cleanup IIcleanup II

If the rate of discount is 5% If the rate of discount is 5% Ne Ne Net benefits of PEMNet benefits of PEM 2,000,000,000 saved2,000,000,000 saved Minus 20000*1000/.05 400,000,000 cow feedMinus 20000*1000/.05 400,000,000 cow feed Minus 500,000,000 investMinus 500,000,000 invest Minus 60,000,000 transac. Minus 60,000,000 transac.

CostCost Value of ES 1040,000,000,000Value of ES 1040,000,000,000

Benefits were shared dairy gain receive 600 Benefits were shared dairy gain receive 600 milmil

IssuesIssues Monitoring and enforcement of no grazing Monitoring and enforcement of no grazing

agreementagreement

Example 2: Flood control Example 2: Flood control by wetlandsby wetlands

Probability Probability damagedamage

Without Without wetlandwetland

.05.05 10,000,000,0010,000,000,0000

Small WetlandSmall Wetland

Big wetlandBig wetland.02.02

.01.015,000,000,0005,000,000,000

1,000,000,0001,000,000,000

Wetland cost small 50,000,000 big 120,000,000Value of wetland 10,000,000,000 *.05=500,000,000Minus damage small 100.000,000 big 10,000,000Minus cost small 50,000,000 big 120,000,000 Total gain small 350,000,000 big 370,000,000

Example 3:Forest Example 3:Forest preservation preservation

Forest communities cut forest to gain income Forest communities cut forest to gain income from lumber sale and range activitiesfrom lumber sale and range activities

That leads to erosion, loss of biodiversity, That leads to erosion, loss of biodiversity, carbon release, existence value losscarbon release, existence value loss

Forest vary by quality and likelihood of Forest vary by quality and likelihood of deforestationdeforestation

The government wants to slow deforestationThe government wants to slow deforestation It established a purchasing fund to pay forest It established a purchasing fund to pay forest

communities for preservationcommunities for preservation One program has the government ask One program has the government ask

communities to provide proposal of communities to provide proposal of conservation activities that will lead to conservation activities that will lead to preservation of forest in the next 15 yearspreservation of forest in the next 15 years

Forest purchasing fundForest purchasing fund There is a large number of forest There is a large number of forest

communities entitled to participatecommunities entitled to participate Candidate to the program has to provide Candidate to the program has to provide

a bid-a bid- How much area they want to preserveHow much area they want to preserve How much they want in annual payHow much they want in annual pay Features of the forest to be preservedFeatures of the forest to be preserved

TreesTrees LocationLocation Wildlife Wildlife Soil erosion protection and water purificationSoil erosion protection and water purification

Management activities :Forest ES Management activities :Forest ES fundfund

Ranking proposalsRanking proposals Likelihood of deforestationLikelihood of deforestation Value of contribution of forest Value of contribution of forest

Are the tree rareAre the tree rare Soil erosion and water purification contributionsSoil erosion and water purification contributions Wild life and biodiversity contributionWild life and biodiversity contribution

Poverty of the community ( ES is used to reduce Poverty of the community ( ES is used to reduce poverty)poverty)

The benefits are then compared to costs to rank bids The benefits are then compared to costs to rank bids Selecting the highest ranked given the budgetSelecting the highest ranked given the budget Payments are annual ( budgets are annual)Payments are annual ( budgets are annual) Behavior of forest communities are monitored Behavior of forest communities are monitored

and penalty established for violationsand penalty established for violations

value of tree unit 1

value of erosion 1 Budget

area tree quality erosion bid/land value value/$ 24000

500 8 6 9 14 1.56 4500 4500300 3 9 8 12 1.50 2400 2400400 5 7 9 12 1.33 3600 0250 6 4 6 10 1.67 1500 1500300 2 9 7 11 1.57 2100 2100500 6 4 7 10 1.43 3500 0250 9 5 9 14 1.56 2250 2250450 6 6 6 12 2.00 2700 2700350 3 7 4 10 2.50 1400 1400250 2 8 5 10 2.00 1250 1250500 3 6 7 9 1.29 3500 0400 6 7 6 13 2.17 2400 2400350 8 8 9 16 1.78 3150 3150

total 34250 23650

value of tree unit 1

value of erosion 0.5 Budget

area tree quality erosion bid/land value value/$ 24000

500 8 6 9 11 1.22 4500 4500300 3 9 8 7.5 0.94 2400 0400 5 7 9 8.5 0.94 3600 0250 6 4 6 8 1.33 1500 1500300 2 9 7 6.5 0.93 2100 0500 6 4 7 8 1.14 3500 3500250 9 5 9 11.5 1.28 2250 2250450 6 6 6 9 1.50 2700 2700350 3 7 4 6.5 1.63 1400 1400250 2 8 5 6 1.20 1250 1250500 3 6 7 6 0.86 3500 0400 6 7 6 9.5 1.58 2400 2400350 8 8 9 12 1.33 3150 3150

total 34250 22650

Issues of Forest ES Issues of Forest ES programprogram

Monitoring- through remote sensing and Monitoring- through remote sensing and random physical inspectionrandom physical inspection

Enforcement= how do you punish Enforcement= how do you punish violations by poor forest communitiesviolations by poor forest communities Are leaders personally responsible?Are leaders personally responsible? What about control of crime that endanger What about control of crime that endanger

forests?forests? Distribution- who receives the money? Distribution- who receives the money?

The community leadership or the forest The community leadership or the forest dwellers that may lose earning dwellers that may lose earning opportunities? opportunities?

US ag conservation US ag conservation programsprograms TThe Conservation Reserve Programhe Conservation Reserve Program (CRP) pays (CRP) pays

rents and cost-share assistance for long-term, rents and cost-share assistance for long-term, land conversion from farming conservationland conversion from farming conservation

EQIPEQIP pays for adoption of conservation pays for adoption of conservation practices in livestock or agriculture.practices in livestock or agriculture.

The Wetlands ReserveThe Wetlands Reserve Program is offering Program is offering landowners the opportunity to protect, restore, landowners the opportunity to protect, restore, and enhance wetlands on their property. and enhance wetlands on their property. 

Conservation security programConservation security program CSP provides CSP provides financial and technical assistance to promote financial and technical assistance to promote the conservation and improvement of soil, the conservation and improvement of soil, water, air, energy, plant and animal life, and water, air, energy, plant and animal life, and other conservation purposes on Tribal and other conservation purposes on Tribal and private working lands. private working lands.

US conservation programUS conservation program CRP-Originated in soil conservation programCRP-Originated in soil conservation program

Initially targeted cheapest landsInitially targeted cheapest lands Now use an index based on mixture of attributesNow use an index based on mixture of attributes

Spending 2005Spending 2005 CRP 1.9 BillCRP 1.9 Bill EQIP 1.0 BillEQIP 1.0 Bill CSP .2 BillCSP .2 Bill WRP .3 BillWRP .3 Bill Other .2 BillOther .2 Bill

Payments are targeted to regions where there Payments are targeted to regions where there is political pressure not environmental needis political pressure not environmental need

IS it a subsidy or a genuine program?IS it a subsidy or a genuine program?

Alternative Approaches to Alternative Approaches to Wetland ProtectionWetland Protection

Land retirementLand retirement Working landsWorking lands

CarrotCarrot CRP, WRPCRP, WRP EQIPEQIP

StickStick SwampbusterSwampbuster

Conservation Reserve Conservation Reserve Program:Program:BackgroundBackground The CRP is a land retirement program. It aims The CRP is a land retirement program. It aims

to reduce farm acreage so to increase supply to reduce farm acreage so to increase supply and to increase farm income.and to increase farm income.

The biggest program of U,S. Agriculture is The biggest program of U,S. Agriculture is excess supply. Another problem has been soil excess supply. Another problem has been soil erosion. Conservation programs traditionally erosion. Conservation programs traditionally paid farmers to take erosive land out of paid farmers to take erosive land out of production production

Conservation programs are “Green” policies, Conservation programs are “Green” policies, and are looked favorably by international trade and are looked favorably by international trade agreements aimed to reduce farm support. agreements aimed to reduce farm support. They are likely to increase in importance. They are likely to increase in importance.

CRP-Basic FeaturesCRP-Basic Features CRP provides owners or operators with an annual CRP provides owners or operators with an annual

per-acre rental payment and 1/2 the cost of per-acre rental payment and 1/2 the cost of establishing a permanent land cover for retiring establishing a permanent land cover for retiring cropland from production for 10- to 15-years.cropland from production for 10- to 15-years.

Producers can offer land for competitive bidding Producers can offer land for competitive bidding based on an Environmental Benefits Index (EBI) based on an Environmental Benefits Index (EBI) during periodic signups.during periodic signups.

Producers can automatically enroll more limited Producers can automatically enroll more limited acreages in practices such as riparian buffers, acreages in practices such as riparian buffers, field windbreaks, and grass strips on a continuous field windbreaks, and grass strips on a continuous basisbasis

Enrollees in selected practices program receive Enrollees in selected practices program receive enhanced rental rates, 50-percent cost-sharing enhanced rental rates, 50-percent cost-sharing and a per-acre maintenance payment. and a per-acre maintenance payment.

CRP RentsCRP Rents

CRP Rental Rate (Dollar/Acre)

12 - 4040 - 5050 - 6060 - 7070 - 113No CRP

CRP Historical CRP Historical BackgroundBackground

CRP Established in its current form in 1985 to be CRP Established in its current form in 1985 to be administered by USDA’s Farm Services Agency (FSA) administered by USDA’s Farm Services Agency (FSA) ad funded through Commodity credit corporation.ad funded through Commodity credit corporation.

In 1996, CRP was reauthorized, limiting enrollment to In 1996, CRP was reauthorized, limiting enrollment to 36.4 million acres at any time.36.4 million acres at any time.

In 2000, enhanced incentives for continuous signup:In 2000, enhanced incentives for continuous signup: A signing incentive payment of $100 to $150 per A signing incentive payment of $100 to $150 per

acre acre A practice incentive payment equal to 40 percent A practice incentive payment equal to 40 percent

of cost-sharing for all continuous signup practicesof cost-sharing for all continuous signup practices As of October 2001, about 1.5 million acres had been As of October 2001, about 1.5 million acres had been

enrolled in the continuous signup, enrolled in the continuous signup, The 2002 Farm Act increased the enrollment limit to The 2002 Farm Act increased the enrollment limit to

39 million acres.39 million acres.

The Wetland Reserve The Wetland Reserve ProgramProgram

WRP was authorized under the 1985 Farm Act. WRP was authorized under the 1985 Farm Act. Under the 2002 Farm Act, the acreage cap is Under the 2002 Farm Act, the acreage cap is

increased from 1.075 million acres to 2.275 million increased from 1.075 million acres to 2.275 million acres. acres.

Objective is to enroll 250,000 acres per yearObjective is to enroll 250,000 acres per year Options: a permanent or30-year conservation Options: a permanent or30-year conservation

easement or a 10-year cost-share restoration easement or a 10-year cost-share restoration agreementagreement

USDA pays 100 percent of restoration costs for USDA pays 100 percent of restoration costs for permanent easements, and 75 percent for 30-year permanent easements, and 75 percent for 30-year easements and restoration cost-share agreements. easements and restoration cost-share agreements.

Conservation vs restoration .Conservation vs restoration . was around $1,300 was around $1,300 per acre. The study also concludes that the WRP per acre. The study also concludes that the WRP achieves restoration at around $600 per acre. achieves restoration at around $600 per acre.

Retirement Program and Retirement Program and WetlandsWetlands

The 2002 Act expands land retirement by The 2002 Act expands land retirement by 4 million acres, WRP enrollment cap more 4 million acres, WRP enrollment cap more than doubles, from 1.075 million acres to than doubles, from 1.075 million acres to 2.275 million,. In the CRP, 500,000 acres 2.275 million,. In the CRP, 500,000 acres could be used to enroll farmed wetlands could be used to enroll farmed wetlands and associated buffer acreage. and associated buffer acreage.

CRP serves to support farmers income-not CRP serves to support farmers income-not environmental needs. Has limits as environmental needs. Has limits as wetlands policy framework. wetlands policy framework.

Working LandWorking Land Working land conservation programs can Working land conservation programs can

benefit wetlands mostly indirectly by benefit wetlands mostly indirectly by reducing agricultural pollution.reducing agricultural pollution.

$5.7 billion is available from 2002-2007 $5.7 billion is available from 2002-2007 and $12 billion from 2002-11 for the and $12 billion from 2002-11 for the Environmental Quality Incentives Environmental Quality Incentives Program (EQIP), Wildlife Habitat Program (EQIP), Wildlife Habitat Incentives Program (WHIP), and Incentives Program (WHIP), and Conservation Security Program (CSP).Conservation Security Program (CSP).

The Environmental The Environmental Quality Incentives Quality Incentives

Program EQIPProgram EQIP*EQIP-Provides technical assistance, cost*EQIP-Provides technical assistance, cost

sharing (up to 75 percent), and incentive sharing (up to 75 percent), and incentive payments to assist livestock and croppayments to assist livestock and crop

producers with environmental improvements.producers with environmental improvements.

*60%of EQIP's funding earmarked for *60%of EQIP's funding earmarked for livestock producers, livestock producers,

No size limits on livestock operations,No size limits on livestock operations,

Payments are limited to a total of $450,000 Payments are limited to a total of $450,000 per operation over the 6-year life of the per operation over the 6-year life of the Act. Act.

Conservation Security Fund & Conservation Security Fund & The Wildlife Habitat Incentives The Wildlife Habitat Incentives

ProgramProgram The Conservation Security Program will focus The Conservation Security Program will focus

on land-based practices and specifically on land-based practices and specifically excludes livestock waste-handling facilities. excludes livestock waste-handling facilities. Producers can participate at one of three Producers can participate at one of three tiers; higher tiers require greater tiers; higher tiers require greater conservation effort and offer higher conservation effort and offer higher payments. The lowest cost practices that payments. The lowest cost practices that meet conservation standards must be used.meet conservation standards must be used.

The Wildlife Habitat Incentives Program The Wildlife Habitat Incentives Program provides cost sharing to landowners and provides cost sharing to landowners and producers to develop and improve wildlife producers to develop and improve wildlife habitathabitat..

Swampbuster Swampbuster EstablishedEstablished 19851985

. . "Swampbuster" - farmers or ranchers lose eligibility for "Swampbuster" - farmers or ranchers lose eligibility for farm program benefits if they produce an agricultural farm program benefits if they produce an agricultural commodity on a wetland converted after December 23, commodity on a wetland converted after December 23, 1985, or if they convert a wetland after November 28, 1985, or if they convert a wetland after November 28, 1990,.1990,. Swampbuster recognizes four categories of wetlands:.Swampbuster recognizes four categories of wetlands:. Wetlands, or areas that contain hydric soils which Wetlands, or areas that contain hydric soils which

support mostly hydrophatessupport mostly hydrophates Converted wetlands, defined as areas drained or altered Converted wetlands, defined as areas drained or altered

after December 23, 1985after December 23, 1985 Farmed wetlands, or areas partially drained or altered Farmed wetlands, or areas partially drained or altered

to produce a crop prior to Swampbuster, but which still to produce a crop prior to Swampbuster, but which still retain some wetland characteristicsretain some wetland characteristics

Prior converted wetlands, or areas that were used for Prior converted wetlands, or areas that were used for farming prior to Swampbuster and which no longer farming prior to Swampbuster and which no longer exhibit any wetland characteristics.exhibit any wetland characteristics.

Permitting vs. Voluntary Permitting vs. Voluntary ProgramsPrograms Permitting cuts down on uncertainty. It can lead Permitting cuts down on uncertainty. It can lead

to a more accurate assessment of the inventory of to a more accurate assessment of the inventory of wetlands. With incentive programs, more work is wetlands. With incentive programs, more work is necessary to measure wetland gains and losses necessary to measure wetland gains and losses

In a permitting system, applicants must bear In a permitting system, applicants must bear significant fixed application costs. With voluntary significant fixed application costs. With voluntary program, the government pays for targetingprogram, the government pays for targeting

Voluntary program may be captured.Voluntary program may be captured. Targeting criteria matters acreage maximization Targeting criteria matters acreage maximization

benefits farmers.Should target lands with highest benefits farmers.Should target lands with highest benefit cost ratio.benefit cost ratio.

Slippage-high commodity prices lead to reuse of Slippage-high commodity prices lead to reuse of marginal lands or wetlands-should be considered marginal lands or wetlands-should be considered in designin design

Activities of Private Activities of Private Groups Groups

Easements, Duck Unlimited DU rarely buys Easements, Duck Unlimited DU rarely buys wetlands outright, but negotiates conservation wetlands outright, but negotiates conservation easements. These agreements are for 10-easements. These agreements are for 10-years.years.

The nature conservancy has a diversified The nature conservancy has a diversified approachapproach

Ownership TypeOwnership Type AcresAcres Conservation EasementConservation Easement 1,400,453 1,400,453 Management AgreementsManagement Agreements 1,389,0991,389,099 LeasesLeases 2,146,7452,146,745 Owned by TNCOwned by TNC 2,098,9502,098,950 TOTALTOTAL 7,035,2467,035,246

Conservation Conservation PartnershipsPartnerships

One such collaboration between DU and the federal One such collaboration between DU and the federal government is the River CARE project in which DU government is the River CARE project in which DU and the NRCS have cooperated in implementing and the NRCS have cooperated in implementing the WRP in the Mississippi Alluvial Valley (MAV). the WRP in the Mississippi Alluvial Valley (MAV). By 1998, more than 1,500 private landowners in By 1998, more than 1,500 private landowners in the MAV were active partners with DU and WRP to the MAV were active partners with DU and WRP to provide and restore wildlife habitat on their lands. provide and restore wildlife habitat on their lands.

TNC’s Glacial Ridge Project, one of 12 habitats TNC’s Glacial Ridge Project, one of 12 habitats targeted in the “Saving the Last Great Places” targeted in the “Saving the Last Great Places” campaign, received $1.6 million from NRCS as part campaign, received $1.6 million from NRCS as part of the USDA’s WRP program for a partial easement of the USDA’s WRP program for a partial easement payment to restore nearly 2,800 acres of previously payment to restore nearly 2,800 acres of previously drained wetland and 1,500 acres of tall grass drained wetland and 1,500 acres of tall grass prairie in Minnesota. Saving the Last Great Places, prairie in Minnesota. Saving the Last Great Places,

International programsInternational programs

Debt for nature swapDebt for nature swap Problem- government get money, rural Problem- government get money, rural

people do not see thatpeople do not see that

Private vs. Public Private vs. Public ApproachesApproaches

Public sector is not forced to pay attention to factor Public sector is not forced to pay attention to factor prices. Private groups have better incentives to target prices. Private groups have better incentives to target the land with the highest level of environmental the land with the highest level of environmental amenities per dollar spent. amenities per dollar spent.

Private investment in wetland conservation, includes Private investment in wetland conservation, includes land purchase expenditures and investment in land purchase expenditures and investment in improvement on wetland quality. improvement on wetland quality.

From the Corps perspective, the land has no From the Corps perspective, the land has no opportunity cost, from a societal perspective the land opportunity cost, from a societal perspective the land is valuable in providing other services. This, there may is valuable in providing other services. This, there may be a tendency to over-regulate and acquire more land be a tendency to over-regulate and acquire more land than is socially optimal.than is socially optimal.

ES new item in Env. Policy ES new item in Env. Policy makers toolbox makers toolbox

Old tools Old tools Command and controlCommand and control Cap and tradeCap and trade

New policy New policy

Paying for ES -Paying for ES - “ “When you can not beat them-bribe them”When you can not beat them-bribe them” Base line and creditBase line and credit

Rationale for ES Rationale for ES programsprograms

Payment for positive externalitiesPayment for positive externalities When polluters has rights to pollute ES When polluters has rights to pollute ES

programs will buy pollution reductionprograms will buy pollution reduction Payments for public goodsPayments for public goods

Existence value, knowledgeExistence value, knowledge Common problems-the atmosphereCommon problems-the atmosphere Correcting mismanagement of a stockCorrecting mismanagement of a stock

Alternative mechanisms sell Alternative mechanisms sell ES ES

All mechanisms have problems and need All mechanisms have problems and need improvementimprovement

MarketsMarkets Clearing house ?Clearing house ? Formal Markets Formal Markets ExchangesExchanges

OffsetsOffsets Bilateral dealsBilateral deals AuctionsAuctions Subsidies & government paymentsSubsidies & government payments

Environmental Services & Environmental Services & Land Use Land Use

Distinguish between resource rental programs Distinguish between resource rental programs and working land programsand working land programs

Working land programs-promoting green Working land programs-promoting green practicespractices

Conversion of lands to “greener” useConversion of lands to “greener” use From farming to forestFrom farming to forest

Prevention of land use conversionsPrevention of land use conversions Controlling developmentControlling development

What is the Asset unit?What is the Asset unit? Generally not land- but resource stock related to Generally not land- but resource stock related to

land useland use Stored carbonStored carbon Water quality in lakeWater quality in lake

The Multidimensionality of The Multidimensionality of ESES

The same land may provide a multitude of ES The same land may provide a multitude of ES Some ES are provided simultaneously others Some ES are provided simultaneously others

are not are not Growing Wetland conflicts with native plantsGrowing Wetland conflicts with native plants Soil erosion and wind erosion are complementarySoil erosion and wind erosion are complementary

ES may provide regional, national & global ES may provide regional, national & global benefitsbenefits

Benefits of ES vary across individuals &groupsBenefits of ES vary across individuals &groups Bird watchers & hunters benefit from better bird Bird watchers & hunters benefit from better bird

habitathabitat All gain from flood control- gains vary by locationAll gain from flood control- gains vary by location

The Dimensions of The Dimensions of Wetland ServicesWetland Services

Local National International

Wildlife habitat PublicPrivate

Public Public

Flood control Public Private Public Private Public Private

Water purification PrivatePublic

Public Private

Aesthetic value Public Private Public Public

Recreation Private Private Private

Existence Public Public Public

Implication of “Beneficiary Implication of “Beneficiary pay” pay” Government pays for public good aspectsGovernment pays for public good aspects- -

utilized by manyutilized by many No exclusionNo exclusion - e.g Existence value - e.g Existence value

Private agencies should pay for private Private agencies should pay for private benefits.benefits.

BUTBUT Private Private willingness to paywillingness to pay for ES is understated for ES is understated

because it emits public goods because it emits public goods There is a role for public-private cooperationThere is a role for public-private cooperation

Matching fund Matching fund Tax creditTax credit

Selling ES in markets vs. Selling ES in markets vs. special tradesspecial trades

MarketLow transaction costStandard productLarge number of buyersMinimal contact of buyerand seller

Special dealTailor product to buyers’ needsLocal small number of potential partnerNeeds a way to link buyer to seller green E-bay

Elements of Elements of implementationimplementation

MeasurementMeasurement

ES output meeting well defined standardsES output meeting well defined standards

Monitoring and enforcementMonitoring and enforcement

UnbundlingUnbundling

HeterogeneityHeterogeneity

CorrelationCorrelation

TargetingTargeting

Role of governmentRole of government

Third partyThird party

MeasurementMeasurement Buyers and sellers need to knowBuyers and sellers need to know

What is delivered - when - for what priceWhat is delivered - when - for what price Deliverables can be outcomes or actionsDeliverables can be outcomes or actions Must be easily measurableMust be easily measurable Simplicity and common sense are essential Simplicity and common sense are essential

ES is controlled by the worker in the fieldES is controlled by the worker in the field Not the scientist is the lab.Not the scientist is the lab.

Clever use of new IT can improve measurement Clever use of new IT can improve measurement accounting and monitoring accounting and monitoring

The reasons for ES product The reasons for ES product standardsstandards

( ( Being commodities not unique Being commodities not unique products)products) Buyers wantBuyers want

to know what they buyto know what they buy To sell it when they want ( liquidity)To sell it when they want ( liquidity) Certification by trusted agencyCertification by trusted agency

All associated with having ES meeting standards. All associated with having ES meeting standards. AlsoAlso

Low transaction costLow transaction cost High volume of tradingHigh volume of trading

Monitoring and Monitoring and EnforcementEnforcement ES are frequently generated on large ES are frequently generated on large

parcels of land over long period of timeparcels of land over long period of time Farmers can easily cut cornersFarmers can easily cut corners Inspection backed by action will lead to Inspection backed by action will lead to

improved ES qualityimproved ES quality justify higher pricesjustify higher prices Can be part of certification programCan be part of certification program Monitoring allows establishing Monitoring allows establishing buyers buyers

insurance plansinsurance plans ( Guaranteeing delivery ( Guaranteeing delivery and compensation)and compensation)

ES markets allow selling ES markets allow selling bundles of ESbundles of ES

A field may generate various types of ESA field may generate various types of ES Potential buyer may be interested in only part Potential buyer may be interested in only part

of the packageof the package The Land owner’s gain will increase If they The Land owner’s gain will increase If they

can sell different types of ES to to different can sell different types of ES to to different buyersbuyers

A well functioning ES market results in a A well functioning ES market results in a pricing of individual ES that will increase the pricing of individual ES that will increase the flexibility of the buyers and sellers flexibility of the buyers and sellers

HeterogeneityHeterogeneity

Lands vary in their productivity and ES Lands vary in their productivity and ES generationgeneration

Sometimes 90% of certain ES is Sometimes 90% of certain ES is provided by 10% landprovided by 10% land

Both buyers and sellers benefit when Both buyers and sellers benefit when buyer who appreciate certain ES are buyer who appreciate certain ES are able to get them-part of efficient buying able to get them-part of efficient buying and selling strategiesand selling strategies

Buying the lands with the best ES is not Buying the lands with the best ES is not always the best strategy- best to buy ES always the best strategy- best to buy ES who provide highest value Per dollarwho provide highest value Per dollar

Targeting strategiesTargeting strategies

A buyer with given budget may chooseA buyer with given budget may choose Acreage maximizationAcreage maximization given the budget given the budget

This strategy is preferred by sellersThis strategy is preferred by sellers

It is optimal only when cheapest lands provide most It is optimal only when cheapest lands provide most ES.ES.

Benefits targetingBenefits targeting Purchase the highest quality Purchase the highest quality lands within budget -best for buyers if there is lands within budget -best for buyers if there is lower variability of productivity than ES among lower variability of productivity than ES among landslands

Benefit /cost Targeting Benefit /cost Targeting Purchase lands with the Purchase lands with the highest highest per dollars given the budget-highest highest per dollars given the budget-always works for buyersalways works for buyers

Targeting strategiesTargeting strategies Suppose there are N locations, identified by n=1,NSuppose there are N locations, identified by n=1,N . .

An= Land of location n, An= Land of location n, Bn = Benefits per acre of location n.Bn = Benefits per acre of location n. Cn = Costs per acre( value of land in alternative useCn = Costs per acre( value of land in alternative use)) Budget SBudget S

Acreage Maximization-buy all land with Acreage Maximization-buy all land with Cn<CCn<C

benefits maximization-buy all land with benefits maximization-buy all land with Bn>BBn>B

Benefit cost maximization: buy all land with Benefit cost maximization: buy all land with Bn/Cn>B/C Bn/Cn>B/C

targetingtargeting

C

CostMinimization

Benefit max

Benefit/cost ratio

Importance of Importance of heterogeneityheterogeneityranking vary ranking vary withtargetingwithtargeting

CC BB B/CB/C Rank C max Bmax B/C maxRank C max Bmax B/C max

1010 55 .5.5 6 4.5 46 4.5 4

88 3 3 .375.375 3 7.5 63 7.5 6

1515 66 .4.4 8 2,5 58 2,5 5

66 55 ,83,83 1 4.5 21 4.5 2

88 77 .875.875 3 1 13 1 1

99 33 .333.333 5 7.5 75 7.5 7

1414 44 .29.29 7 6 87 6 8

88 66 .75.75 3 2.5 33 2.5 3

Third partiesThird parties

Designers of ES programs need to be aware Designers of ES programs need to be aware that that

taking lands out of production may result taking lands out of production may result in increase ag pricesin increase ag prices May backfire leading to farming of previously May backfire leading to farming of previously

idle lands (slippage)- thus may need to pay for idle lands (slippage)- thus may need to pay for prevention prevention

Reduced farm activities may reduce tax baseReduced farm activities may reduce tax base Landowners may gain but operators and Landowners may gain but operators and

other lose other lose

Role of government in ESRole of government in ES Create demand for environmental creditsCreate demand for environmental credits Establish rules of games- Establish rules of games-

definition definition LiabilityLiability

Invest in R&D to allow measurement and better Invest in R&D to allow measurement and better pricing of ESpricing of ES

Pay for public good aspects of ESPay for public good aspects of ES Play role of assembler of Domestic ES in global Play role of assembler of Domestic ES in global

program (Kyoto)program (Kyoto)

ES and poverty ES and poverty alleviationalleviation

Theory:One tool (ES) may be ineffective in Theory:One tool (ES) may be ineffective in the pursuit of two objectives( the pursuit of two objectives( Environmental Environmental

quality and poverty alleviationquality and poverty alleviation) ) it all depends on synergies and it all depends on synergies and

correlationscorrelations

Es program may affectEs program may affect Urban poor Urban poor Poor asset ownersPoor asset owners Landless rural poorLandless rural poor

Impacts on urban poorImpacts on urban poor

Possibly negative food prices effect Possibly negative food prices effect ( supply reduction)( supply reduction)

Employment effects of various kindsEmployment effects of various kinds Some ES program y supply pro poor Some ES program y supply pro poor

goods goods Flood control, fire protection Flood control, fire protection Improved water qualityImproved water quality

Existence value of wild life is presumably Existence value of wild life is presumably a luxury gooda luxury good

Impacts on poor assets Impacts on poor assets ownersowners

when they are sold to ESwhen they are sold to ES NotationNotation B = ES per acreB = ES per acre R rent per acreR rent per acre W=Value of labor release at saleW=Value of labor release at sale V price of ESV price of ES Farms have L hectaresFarms have L hectares Farm income before program L*RFarm income before program L*R Poorer farmers may have less land, lower rent or Poorer farmers may have less land, lower rent or

both both Land will be sold for ES ifLand will be sold for ES if

VB+W>RVB+W>R

Gain = VB - R + W Per unit if landGain = VB - R + W Per unit if land

Do the poor gain from Do the poor gain from selling land for ES?selling land for ES?

Case of significant gainCase of significant gain A positive correlation between wealth and rent -A positive correlation between wealth and rent -

Poorer farmers has small and less productive Poorer farmers has small and less productive farmsfarms

A negative correlation between B and R- less A negative correlation between B and R- less productive land provides more ESproductive land provides more ES

Gain is higher the higher are v and WGain is higher the higher are v and W Gain to poor from ES is relatively smaller Gain to poor from ES is relatively smaller

If no correlation between size and R- rich is largerIf no correlation between size and R- rich is larger No correlation between B and R.No correlation between B and R.

Poor may not gain much if they own small and Poor may not gain much if they own small and highly productive plots highly productive plots

The case of working landsThe case of working lands Payment per acre VBPayment per acre VB Costs include Costs include R= PR= PY+ Y+ CC

Revenue loss PRevenue loss PY ( use traditional technology) Y ( use traditional technology) Cost increase Cost increase C ( Reduce input use)C ( Reduce input use)

Participate in ES program if VB> PParticipate in ES program if VB> PY+ Y+ CC Poor benefit if (Poor benefit if (PPY+ Y+ C)/ VB C)/ VB isis negatively negatively

correlated to income. E.g,correlated to income. E.g, Payment aim to preserve varieties used by Payment aim to preserve varieties used by

poor. They have high B and low poor. They have high B and low YY Poor are located in erosive area and payment Poor are located in erosive area and payment

for less erosive toil managmentfor less erosive toil managment

Impacts on land lessImpacts on land less If landless are employed in activities If landless are employed in activities

reduced by ES program- the programs mayreduced by ES program- the programs may benefitbenefit the poor the poor land ownersland owners but may but may harmharm the the landlesslandless

ES program design affects employment & ES program design affects employment & livelihood opportunities of the landless . livelihood opportunities of the landless . Less jobs if ES results in closed reserves Less jobs if ES results in closed reserves

than when it leads to Eco tourismthan when it leads to Eco tourism Diverting resources and denying access Diverting resources and denying access

as part of ES management may be costly as part of ES management may be costly to the landless (to the landless (they utilize these resources they utilize these resources informally) informally)

Dynamic considerationsDynamic considerations Poor may be late adopters and ES payment Poor may be late adopters and ES payment

excludes consideration of improved options.excludes consideration of improved options. The benefits of ES program may vary in their The benefits of ES program may vary in their

dynamic profile. dynamic profile. Some ES effort aim to induce a sustainable Some ES effort aim to induce a sustainable

changechange Other aim to provide quick reliefOther aim to provide quick relief Income may vary over time Income may vary over time

Contract should reflect the dynamic nature of Contract should reflect the dynamic nature of benefits and income available to ES programbenefits and income available to ES program

ES design should consider impact of present ES design should consider impact of present performance on future earningperformance on future earning

Management of Purchasing FundManagement of Purchasing Fund Heterogeneity -Heterogeneity -ESES benefit &cost per acre varybenefit &cost per acre vary Consider first the case with the No Scale effects-Consider first the case with the No Scale effects- Suppose there are N locations, identified by n=1,NSuppose there are N locations, identified by n=1,N . .

An= Land of location n, An= Land of location n, Bn = Benefits per acre of location n.Bn = Benefits per acre of location n. Cn = Costs per acre( value of land in alternative useCn = Costs per acre( value of land in alternative use))

Targeting criteriaTargeting criteria Acreage maximizationAcreage maximization Buy the lands with the Buy the lands with the

lowest Cn (regardless of benefits) given the lowest Cn (regardless of benefits) given the budgetbudget

Benefits targetingBenefits targeting Purchase the highest quality Purchase the highest quality lands (lands with highest Bn) within budget lands (lands with highest Bn) within budget

Benefit /cost Targeting Benefit /cost Targeting Purchase lands with the Purchase lands with the highest Bn/Cn (highest benefit cost ratio) given highest Bn/Cn (highest benefit cost ratio) given the budgetthe budget