1. PES Design Issues II Paul J
PES Design Issues II Paul J. Ferraro Department of Economics Andrew Young School of Policy Studies Georgia 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. Source: Leimona, Jack and Ferraro, 2007
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