PES Design Issues II Paul J. Ferraro Department of Economics Andrew Young School of Policy Studies Georgia State University October 4, 2007

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

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? 3 P. Ferraro

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

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

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 6 P. Ferraro

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

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

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) 9 P. Ferraro

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

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

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 12 P. Ferraro

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

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

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

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) 16 P. Ferraro

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

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

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 19 P. Ferraro

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 20 P. Ferraro

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. 21 P. Ferraro

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%. 22 P. Ferraro

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 23 P. Ferraro

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 24 P. Ferraro

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

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. 26 P. Ferraro

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

Source: Leimona, Jack and Ferraro, P. Ferraro

Source: Leimona, Jack and Ferraro, P. Ferraro Demand

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. 30 P. Ferraro

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 31 P. Ferraro

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

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 33 P. Ferraro

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 34 P. Ferraro