Market for Environmental services (ES) and poverty

David Zilberman, Leslie Lipper & Nancy McCarthy

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)

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

Command and controlCommand and control Cap and tradeCap and trade 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 Commons problems-the atmosphereCommons problems-the atmosphere Correcting mismanagement of a stockCorrecting mismanagement of a stock

Alternative exchange Alternative exchange mechanismsmechanisms

Formal Markets Formal Markets Exchanges Exchanges Clearing house Clearing house

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

ES & Land Use ES & Land Use 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 Generally not land- but resource stock related

to land useto land 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 are Some ES are provided simultaneously others are

not not Restoring wetland conflicts with native plantsRestoring wetland conflicts with native plants Soil erosion and wind erosion control are Soil erosion and wind erosion control are

complementarycomplementary 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 Wetland The Dimensions of Wetland ServicesServices

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 pays” pays” 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 benefits.Private agencies should pay for private benefits.BUTBUT

Private Private willingness to paywillingness to pay for ES is understated because for ES is understated because it generates public goods it generates 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. bilateral tradebilateral trade

MarketsLow transaction costStandard productLarge number of buyersMinimal contact of buyerand seller

Bilateral TradeTailor 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

Monitoring and enforcement critical to sustained Monitoring and enforcement critical to sustained ES; depends on affordable measurementES; depends on affordable measurement

Bundles of ESBundles of ES

A field/water body may generate various types A field/water body may generate various types of ESof 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 (“unbundling the bundles”)(“unbundling the bundles”)

HeterogeneityHeterogeneity

Lands/water bodies vary in their Lands/water bodies vary in their productivity and ES generationproductivity and ES generation

Sometimes 90% of ES is provided by 10% Sometimes 90% of ES is provided by 10% landland

Heterogeneous interest of buyers and Heterogeneous interest of buyers and sellers leads to unbundling. sellers leads to unbundling.

Targeting strategiesTargeting strategies

A buyer with given budget may chooseA buyer with given budget may choose Acreage maximizationAcreage maximization given the budget given the budgetThis 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 Purchase the highest quality lands within budget -best for buyers quality lands within budget -best for buyers if there is lower variability of productivity if there is lower variability of productivity than ES among landsthan ES among lands

Benefit /cost targeting Benefit /cost targeting Purchase lands with Purchase lands with the highest benefits/dollar given the the highest benefits/dollar given the budget-always works for buyersbudget-always works for buyers

Leakage & Secondary Leakage & Secondary ImpactImpact

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 in Taking lands out of production may result in increase ag pricesincrease ag prices May backfire leading to farming of previously idle May backfire leading to farming of previously idle

lands - thus may need to pay for prevention lands - thus may need to pay for prevention Reduced farm activities may reduce tax baseReduced farm activities may reduce tax base Environmental outcome may be less than Environmental outcome may be less than

expected.expected.

Landowners may gain but workers and Landowners may gain but workers and taxpayers and others lose taxpayers and others lose

Role of governmentRole of government Create demand for creditsCreate demand for 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 pricingpricing

Pay for public good aspects of ESPay for public good aspects of ES ES Smooth the transition from local to globalES Smooth the transition from local to global

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

Employment effects of various kindsEmployment effects of various kinds Some ES program supply pro poor goods Some ES program supply pro poor 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 V price of ESV price of ES B = Quantity of ES provided per hectareB = Quantity of ES provided per hectare R = Ag. production rentR = Ag. production rent W=Value of labor release at saleW=Value of labor release at sale 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 both Poorer farmers may have less land, lower rent or 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 land Gain = VB - R + W Per unit land converted converted

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

Cases of significant gainCases of significant gain A positive correlation between wealth and A positive correlation between wealth and

rent – if poorer farmers have small and less rent – if poorer farmers have small and less productive farmsproductive farms

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

Gains are higher with higher v and WGains are higher with higher 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 If no correlation between size and R- rich is largerlarger

No correlation between B and R.No correlation between B and R. Poor may not gain much if they own Poor may not gain much if they own

small and highly productive plots small and highly productive plots

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

Revenue loss PY ( use traditional technology) Revenue loss PY ( 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 conserve varieties used by Payment aim to conserve varieties used by

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

for less erosive soil managementfor less erosive soil management

Impacts on LandlessImpacts on Landless 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 as Diverting resources and denying access as

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

THE ENDTHE END

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. Can = Costs per acre( value of land in alternative Can = Costs per acre( value of land in alternative

useuse)) Targeting criteriaTargeting criteria

Acreage maximizationAcreage maximization Buy the lands with the Buy the lands with the lowest Can (regardless of benefits) given the lowest Can (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

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

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)