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

2. 2 P. Ferraro 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? 3 P. Ferraro

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

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

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 6 P. Ferraro

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

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

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) 9 P. Ferraro

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

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? 11 P. Ferraro

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 12 P. Ferraro

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

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

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

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) 16 P. Ferraro

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

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

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 19 P. Ferraro

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 20 P. Ferraro

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. 21 P. Ferraro

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%. 22 P. Ferraro

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 23 P. Ferraro

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 24 P. Ferraro

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

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. 26 P. Ferraro

27. 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

28. Source: Leimona, Jack and Ferraro, 2007 28 P. Ferraro

29. Source: Leimona, Jack and Ferraro, 2007 29 P. Ferraro Demand 1.6 3.1

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. 30 P. Ferraro

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 31 P. Ferraro

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

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 33 P. Ferraro

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 34 P. Ferraro