Market for Environmental services (ES) and poverty David Zilberman, Leslie Lipper & Nancy McCarthy

Conservation&Preservation Conservation&Preservation Storage and stabilization ( e.g water,carbon ) Storage and stabilization ( e.g water,carbon ) Risk reduction ( flood control, protection form fire) Risk reduction ( flood control, protection form fire) Natural resources quality enhancement ( soil,water) Natural resources quality enhancement ( soil,water) Amenity creation-Restoration, Enhancement Amenity creation-Restoration, Enhancement What are we talking about? Categories of Environmental Services (ES)

ES new item in Env. Policy makers toolbox Command and control Command and control Cap and trade Cap 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 credit Base line and credit

Rationale for ES programs Payment for positive externalities Payment for positive externalities When polluters has rights to pollute ES programs will buy pollution reduction When polluters has rights to pollute ES programs will buy pollution reduction Payments for public goods Payments for public goods Existence value, knowledge Existence value, knowledge Commons problems-the atmosphere Commons problems-the atmosphere Correcting mismanagement of a stock Correcting mismanagement of a stock

Alternative exchange mechanisms Formal Markets Formal Markets Exchanges Exchanges Clearing house Clearing house Offsets Offsets Bilateral deals Bilateral deals Auctions Auctions Subsidies & government payments Subsidies & government payments

ES & Land Use Working land programs-promoting green practices Working land programs-promoting green practices Conversion of lands to “greener” use Conversion of lands to “greener” use From farming to forest From farming to forest Prevention of land use conversions Prevention of land use conversions Controlling development Controlling development What is the asset unit? Generally not land- but resource stock related to land use Generally not land- but resource stock related to land use Stored carbon Stored carbon Water quality in lake Water quality in lake

The Multidimensionality of ES 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 not Some ES are provided simultaneously others are not Restoring wetland conflicts with native plants Restoring wetland conflicts with native plants Soil erosion and wind erosion control are complementary Soil erosion and wind erosion control are complementary ES may provide regional, national & global benefits ES may provide regional, national & global benefits Benefits of ES vary across individuals &groups Benefits of ES vary across individuals &groups Bird watchers & hunters benefit from better bird habitat Bird watchers & hunters benefit from better bird habitat All gain from flood control- gains vary by location All gain from flood control- gains vary by location

The Dimensions of Wetland Services LocalNationalInternational Wildlife habitatPublic Private Public Flood controlPublic Private Water purificationPrivate Public Public Private Aesthetic valuePublic PrivatePublic RecreationPrivate ExistencePublic

Implication of “Beneficiary pays” Government pays for public good aspects - Government pays for public good aspects - Utilized by many Utilized by many No exclusion - e.g Existence value No exclusion - e.g Existence value Private agencies should pay for private benefits. Private agencies should pay for private benefits.BUT Private willingness to pay for ES is understated because it generates public goods Private willingness to pay for ES is understated because it generates public goods There is a role for public-private cooperation There is a role for public-private cooperation Matching fund Matching fund Tax credit Tax credit

Selling ES in markets vs. bilateral trade Markets Low transaction cost Standard product Large number of buyers Minimal contact of buyer and seller Bilateral Trade Tailor product to buyers’ needs Local small number of potential partner Needs a way to link buyer to seller green E-bay

Elements of implementation Measurement ES output meeting well defined standards Monitoring and enforcement UnbundlingHeterogeneityCorrelationTargeting Role of government Third party

Measurement Buyers and sellers need to know Buyers and sellers need to know What is delivered - when - for what price What is delivered - when - for what price Deliverables can be outcomes or actions Deliverables can be outcomes or actions Must be easily measurable Must be easily measurable Simplicity and common sense are essential Simplicity and common sense are essential ES is controlled by the worker in the field ES 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 accounting and monitoring Monitoring and enforcement critical to sustained ES; depends on affordable measurement Monitoring and enforcement critical to sustained ES; depends on affordable measurement

Bundles of ES A field/water body may generate various types of ES A field/water body may generate various types of ES Potential buyer may be interested in only part of the package Potential buyer may be interested in only part of the package The land owner’s gain will increase If they can sell different types of ES to to different buyers The land owner’s gain will increase If they can sell different types of ES to to different buyers A well functioning ES market results in a pricing of individual ES that will increase the flexibility of the buyers and sellers (“unbundling the bundles”) A well functioning ES market results in a pricing of individual ES that will increase the flexibility of the buyers and sellers (“unbundling the bundles”)

Heterogeneity Lands/water bodies vary in their productivity and ES generation Lands/water bodies vary in their productivity and ES generation Sometimes 90% of ES is provided by 10% land Sometimes 90% of ES is provided by 10% land Heterogeneous interest of buyers and sellers leads to unbundling. Heterogeneous interest of buyers and sellers leads to unbundling.

Targeting strategies A buyer with given budget may choose Acreage maximization given the budget Acreage maximization given the budget This strategy is preferred by sellers It is optimal only when cheapest lands provide most ES. Benefits targeting Purchase the highest quality lands within budget -best for buyers if there is lower variability of productivity than ES among lands Benefits targeting Purchase the highest quality lands within budget -best for buyers if there is lower variability of productivity than ES among lands Benefit /cost targeting Purchase lands with the highest benefits/dollar given the budget-always works for buyers Benefit /cost targeting Purchase lands with the highest benefits/dollar given the budget-always works for buyers

Leakage & Secondary Impact Designers of ES programs need to be aware that Taking lands out of production may result in increase ag prices Taking lands out of production may result in increase ag prices May backfire leading to farming of previously idle lands - thus may need to pay for prevention May backfire leading to farming of previously idle lands - thus may need to pay for prevention Reduced farm activities may reduce tax base Reduced farm activities may reduce tax base Environmental outcome may be less than expected. Environmental outcome may be less than expected. Landowners may gain but workers and taxpayers and others lose Landowners may gain but workers and taxpayers and others lose

Role of government Create demand for credits Create demand for credits Establish rules of games- Establish rules of games- Definition Definition Liability Liability Invest in R&D to allow measurement and better pricing Invest in R&D to allow measurement and better pricing Pay for public good aspects of ES Pay for public good aspects of ES ES Smooth the transition from local to global ES Smooth the transition from local to global

ES and poverty alleviation Theory:One tool (ES) may be ineffective in the pursuit of two objectives ( Environmental quality and poverty alleviation ) Theory:One tool (ES) may be ineffective in the pursuit of two objectives ( Environmental quality and poverty alleviation ) It all depends on synergies and correlations It all depends on synergies and correlations ES program may affect ES program may affect Urban poor Urban poor Poor asset owners Poor asset owners Landless rural poor Landless rural poor

Impacts on urban poor Possibly negative food price effect ( supply reduction) Possibly negative food price effect ( supply reduction) Employment effects of various kinds Employment 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 quality Improved water quality Existence value of wild life is presumably a luxury good Existence value of wild life is presumably a luxury good

Impacts on poor assets owners when they are sold to ES Notation Notation V price of ES V price of ES B = Quantity of ES provided per hectare B = Quantity of ES provided per hectare R = Ag. production rent R = Ag. production rent W=Value of labor release at sale W=Value of labor release at sale Farms have L hectares Farms have L hectares Farm income before program L*R Farm 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 if Land will be sold for ES ifVB+W>R Gain = VB - R + W Per unit land converted

Do the poor gain from selling land for ES? Cases of significant gain Cases of significant gain A positive correlation between wealth and rent – if poorer farmers have small and less productive farms A positive correlation between wealth and rent – if poorer farmers have small and less productive farms A negative correlation between B and R- less productive land provide more ES A negative correlation between B and R- less productive land provide more ES Gains are higher with higher v and W Gains 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 larger If 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 highly productive plots Poor may not gain much if they own small and highly productive plots

The case of working lands Payment per acre VB Payment per acre VB Costs include R= Y+ C Costs include R=  Y+  C Revenue loss PY ( use traditional technology) Revenue loss PY ( use traditional technology) Cost increase C ( Reduce input use) Cost increase  C ( Reduce input use) Participate in ES program if VB> PY+ C Participate in ES program if VB> P  Y+  C Poor benefit if (PY+ C)/ VB is negatively correlated to income. e.g. Poor benefit if (P  Y+  C)/ VB is negatively correlated to income. e.g. Payment aim to conserve varieties used by poor. They have high B and low Y Payment aim to conserve varieties used by poor. They have high B and low  Y Poor are located in erosive area and payment for less erosive soil management Poor are located in erosive area and payment for less erosive soil management

Impacts on Landless If landless are employed in activities reduced by ES program- the programs may benefit the poor land owners but may harm the landless If landless are employed in activities reduced by ES program- the programs may benefit the poor land owners but may harm the landless ES program design affects employment & livelihood opportunities of the landless. ES program design affects employment & livelihood opportunities of the landless. Less jobs if ES results in closed reserves than when it leads to Eco tourism Less jobs if ES results in closed reserves than when it leads to Eco tourism Diverting resources and denying access as part of ES management may be costly to the landless ( they utilize these resources informally) Diverting resources and denying access as part of ES management may be costly to the landless ( they utilize these resources informally)

Dynamic considerations Poor may be late adopters and ES payment excludes consideration of improved options. Poor may be late adopters and ES payment excludes consideration of improved options. The benefits of ES program may vary in their dynamic profile. The benefits of ES program may vary in their dynamic profile. Some ES effort aim to induce a sustainable change Some ES effort aim to induce a sustainable change Other aim to provide quick relief Other aim to provide quick relief Income may vary over time Income may vary over time Contract should reflect the dynamic nature of benefits and income available to ES program Contract should reflect the dynamic nature of benefits and income available to ES program ES design should consider impact of present performance on future earning ES design should consider impact of present performance on future earning

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Management of Purchasing Fund Heterogeneity -ES benefit &cost per acre vary Heterogeneity -ES benefit &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,N. Suppose 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 use) Can = Costs per acre( value of land in alternative use) Targeting criteria Targeting criteria Acreage maximization Buy the lands with the lowest Can (regardless of benefits) given the budget Acreage maximization Buy the lands with the lowest Can (regardless of benefits) given the budget Benefits targeting Purchase the highest quality lands (lands with highest Bn) within 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 Benefit /cost Targeting Purchase lands with the highest Bn/Cn (highest benefit cost ratio) given the budget

Management of Purchasing Fund Heterogeneity -ES benefit &cost per acre vary Heterogeneity -ES benefit &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,N. Suppose 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 use) Cn = Costs per acre( value of land in alternative use) Targeting criteria Targeting criteria Acreage maximization Buy the lands with the lowest Cn (regardless of benefits) given the budget 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 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 Benefit /cost Targeting Purchase lands with the highest Bn/Cn (highest benefit cost ratio) given the budget

The reasons for ES product standards ( Being commodities not unique products) Buyers want Buyers want to know what they buy to know what they buy To sell it when they want ( liquidity) To sell it when they want ( liquidity) Certification by trusted agency Certification by trusted agency All associated with having ES meeting standards. Also Low transaction cost Low transaction cost High volume of trading High volume of trading

Monitoring and Enforcement ES are frequently generated on large parcels of land over long period of time ES are frequently generated on large parcels of land over long period of time Farmers can easily cut corners Farmers can easily cut corners Inspection backed by action will lead to improved ES quality Inspection backed by action will lead to improved ES quality Justify higher prices Justify higher prices Can be part of certification program Can be part of certification program Monitoring allows establishing buyers insurance plans ( Guaranteeing delivery and compensation) Monitoring allows establishing buyers insurance plans ( Guaranteeing delivery and compensation)