Transcript Document
EEP 101/econ 125:Market for Environmental services (ES) and poverty DAVID ZILBERMAN
What are we talking about?
Categories of Environmental Services (ES)
Conservation&Preservation
Storage and stabilization ( e.g water,carbon )
Risk reduction ( flood control, protection form fire)
Natural resources quality enhancement ( soil,water)
Example 1: water cleanup
The New York water utility considered investing $2 billions in water filtering The water was contaminated by waste of 20000 cows that grazed in the water catchments of the city’s reservoir The benefit per cow annually is $1000 It will cost $500 million to invest in in water quality if the cows will not graze.
After negotiation with the local farmer each land owner will receive $1500 per cow/annually not to graze The lawyers received $50million and stuff paid another $10 to reach a deal
Example 1: water cleanup II
If the rate of discount is 5% Net benefits of PEM Ne 2,000,000,000 saved Minus 20000*1000/.05 400,000,000 cow feed Minus 500,000,000 invest Minus 60,000,000 transac. Cost Value of ES 1040,000,000,000 Benefits were shared dairy gain receive 600 mil Issues Monitoring and enforcement of no grazing agreement
Example 2: Flood control by wetlands
Probability damage Without wetland .05
10,000,000,000 Small Wetland Big wetland .02
.01
5,000,000,000 1,000,000,000 Wetland cost small 50,000,000 big 120,000,000 Value of wetland 10,000,000,000 *.05=500,000,000 Minus damage small 100.000,000 big 10,000,000 Minus cost small 50,000,000 big 120,000,000 Total gain small 350,000,000
big 370,000,000
Example 3:Forest preservation
Forest communities cut forest to gain income from lumber sale and range activities That leads to erosion, loss of biodiversity, carbon release, existence value loss Forest vary by quality and likelihood of deforestation The government wants to slow deforestation It established a purchasing fund to pay forest communities for preservation One program has the government ask communities to provide proposal of conservation activities that will lead to preservation of forest in the next 15 years
Forest purchasing fund
There is a large number of forest communities entitled to participate Candidate to the program has to provide a bid How much area they want to preserve How much they want in annual pay Features of the forest to be preserved Trees Location Wildlife Soil erosion protection and water purification
Management activities :Forest ES fund
Ranking proposals Likelihood of deforestation Value of contribution of forest Are the tree rare Soil erosion and water purification contributions Wild life and biodiversity contribution Poverty of the community ( ES is used to reduce poverty) The benefits are then compared to costs to rank bids Selecting the highest ranked given the budget Payments are annual ( budgets are annual) Behavior of forest communities are monitored and penalty established for violations
value of tree unit 1 value of erosion 1 area 500 300 400 250 300 500 250 450 350 250 500 400 350 tree quality erosion 2 6 9 8 3 5 6 6 3 2 3 6 8 9 4 5 6 9 7 4 6 7 8 6 7 8 bid/land value 7 7 9 9 8 9 6 6 4 5 7 6 9 14 12 12 10 11 10 14 12 10 10 9 13 16 value/$ 1.56
1.50
1.33
1.67
1.57
1.43
1.56
2.00
2.50
2.00
1.29
2.17
1.78
total Budget 4500 2400 3600 1500 2100 3500 2250 2700 1400 1250 3500 2400 3150 24000 4500 2400 0 1500 2100 0 2250 2700 1400 1250 0 2400 3150 34250 23650
value of tree unit 1 value of erosion 0.5
area 500 300 400 250 300 500 250 450 350 250 500 400 350 tree quality erosion 2 6 9 8 3 5 6 6 3 2 3 6 8 9 4 5 6 9 7 4 6 7 8 6 7 8 bid/land value 7 7 9 9 8 9 6 6 4 5 7 6 9 11 7.5
8.5
8 6.5
8 11.5
9 6.5
6 6 9.5
12 value/$ 1.22
0.94
0.94
1.33
0.93
1.14
1.28
1.50
1.63
1.20
0.86
1.58
1.33
total Budget 4500 2400 3600 1500 2100 3500 2250 2700 1400 1250 3500 2400 3150 24000 4500 0 0 1500 0 3500 2250 2700 1400 1250 0 2400 3150 34250 22650
Issues of Forest ES program
Monitoring- through remote sensing and random physical inspection Enforcement= how do you punish violations by poor forest communities Are leaders personally responsible?
What about control of crime that endanger forests?
Distribution- who receives the money? The community leadership or the forest dwellers that may lose earning opportunities?
US ag conservation programs
T
he Conservation Reserve Program (CRP) pays rents and cost-share assistance for long-term, land conversion from farming conservation EQIP pays for adoption of conservation practices in livestock or agriculture.
The Wetlands Reserve Program is offering landowners the opportunity to protect, restore, and enhance wetlands on their property.
Conservation security program private working lands. CSP provides financial and technical assistance to promote the conservation and improvement of soil, water, air, energy, plant and animal life, and other conservation purposes on Tribal and
US conservation program
CRP-Originated in soil conservation program Initially targeted cheapest lands Now use an index based on mixture of attributes Spending 2005 CRP 1.9 Bill EQIP 1.0 Bill CSP .2 Bill WRP .3 Bill Other .2 Bill Payments are targeted to regions where there is political pressure not environmental need IS it a subsidy or a genuine program?
Alternative Approaches to Wetland Protection
Land retirement Working lands CRP, WRP Carrot Stick EQIP Swampbuster
Conservation Reserve Program:
Background
The CRP is a land retirement program. It aims to reduce farm acreage so to increase supply and to increase farm income.
The biggest program of U,S. Agriculture is excess supply. Another problem has been soil erosion. Conservation programs traditionally paid farmers to take erosive land out of production Conservation programs are “Green” policies, and are looked favorably by international trade agreements aimed to reduce farm support. They are likely to increase in importance.
CRP-Basic Features
CRP provides owners or operators with an annual per-acre rental payment and 1/2 the cost of establishing a permanent land cover for retiring cropland from production for 10- to 15-years.
Producers can offer land for competitive bidding based on an Environmental Benefits Index (EBI) during periodic signups.
Producers can automatically enroll more limited acreages in practices such as riparian buffers, field windbreaks, and grass strips on a continuous basis Enrollees in selected practices program receive enhanced rental rates, 50-percent cost-sharing and a per-acre maintenance payment.
CRP Rents
CRP Rental Rate (Dollar/Acre) 12 - 40 40 - 50 50 - 60 60 - 70 70 - 113 No CRP
CRP Historical Background
CRP Established in its current form in 1985 to be administered by USDA’s Farm Services Agency (FSA) ad funded through Commodity credit corporation.
In 1996, CRP was reauthorized, limiting enrollment to 36.4 million acres at any time.
In 2000, enhanced incentives for continuous signup: A signing incentive payment of $100 to $150 per acre A practice incentive payment equal to 40 percent of cost sharing for all continuous signup practices As of October 2001, about 1.5 million acres had been enrolled in the continuous signup, The 2002 Farm Act increased the enrollment limit to 39 million acres.
The Wetland Reserve Program
WRP was authorized under the 1985 Farm Act. Under the 2002 Farm Act, the acreage cap is increased from 1.075 million acres to 2.275 million acres. Objective is to enroll 250,000 acres per year Options: a permanent or30-year conservation easement or a 10-year cost-share restoration agreement USDA pays 100 percent of restoration costs for permanent easements, and 75 percent for 30-year easements and restoration cost-share agreements. Conservation vs restoration . was around $1,300 per acre. The study also concludes that the WRP achieves restoration at around $600 per acre.
Retirement Program and Wetlands
The 2002 Act expands land retirement by 4 million acres, WRP enrollment cap more than doubles, from 1.075 million acres to 2.275 million,. In the CRP, 500,000 acres could be used to enroll farmed wetlands and associated buffer acreage. CRP serves to support farmers income-not environmental needs. Has limits as wetlands policy framework.
Working Land
Working land conservation programs can benefit wetlands mostly indirectly by reducing agricultural pollution.
$5.7 billion is available from 2002-2007 and $12 billion from 2002-11 for the Environmental Quality Incentives Program (EQIP), Wildlife Habitat Incentives Program (WHIP), and Conservation Security Program (CSP).
The Environmental Quality Incentives Program EQIP
*EQIP-Provides technical assistance, cost sharing (up to 75 percent), and incentive payments to assist livestock and crop producers with environmental improvements.
*60%of EQIP's funding earmarked for livestock producers, No size limits on livestock operations, Payments are limited to a total of $450,000 per operation over the 6-year life of the Act.
Conservation Security Fund & The Wildlife Habitat Incentives Program
The Conservation Security Program will focus on land-based practices and specifically excludes livestock waste-handling facilities. Producers can participate at one of three tiers; higher tiers require greater conservation effort and offer higher payments. The lowest cost practices that meet conservation standards must be used.
The Wildlife Habitat Incentives Program provides cost sharing to landowners and producers to develop and improve wildlife habitat .
Swampbuster
Established 1985
.
"Swampbuster" - farmers or ranchers lose eligibility for farm program benefits if they produce an agricultural commodity on a wetland converted after December 23, 1985, or if they convert a wetland after November 28, 1990,.
Swampbuster recognizes four categories of wetlands:.
Wetlands, or areas that contain hydric soils which support mostly hydrophates Converted wetlands, defined as areas drained or altered after December 23, 1985 Farmed wetlands, or areas partially drained or altered to produce a crop prior to Swampbuster, but which still retain some wetland characteristics Prior converted wetlands, or areas that were used for farming prior to Swampbuster and which no longer exhibit any wetland characteristics.
Permitting vs. Voluntary
Programs
more accurate assessment of the inventory of wetlands. With incentive programs, more work is necessary to measure wetland gains and losses In a permitting system, applicants must bear significant fixed application costs. With voluntary program, the government pays for targeting Voluntary program may be captured.
Targeting criteria matters acreage maximization benefits farmers.Should target lands with highest benefit cost ratio.
Slippage-high commodity prices lead to reuse of marginal lands or wetlands-should be considered in design
Activities of Private Groups
Easements, Duck Unlimited DU rarely buys wetlands outright, but negotiates conservation easements. These agreements are for 10-years.
The nature conservancy has a diversified approach Ownership Type Conservation Easement Acres 1,400,453 Management Agreements Leases Owned by TNC
TOTAL
1,389,099 2,146,745 2,098,950
7,035,246
Conservation Partnerships
One such collaboration between DU and the federal government is the River CARE project in which DU and the NRCS have cooperated in implementing the WRP in the Mississippi Alluvial Valley (MAV). By 1998, more than 1,500 private landowners in the MAV were active partners with DU and WRP to provide and restore wildlife habitat on their lands. TNC’s Glacial Ridge Project, one of 12 habitats targeted in the “Saving the Last Great Places” campaign, received $1.6 million from NRCS as part of the USDA’s WRP program for a partial easement payment to restore nearly 2,800 acres of previously drained wetland and 1,500 acres of tall grass prairie in Minnesota. Saving the Last Great Places,
International programs
Debt for nature swap Problem- government get money, rural people do not see that
Private vs. Public Approaches
Public sector is not forced to pay attention to factor prices. Private groups have better incentives to target the land with the highest level of environmental amenities per dollar spent. Private investment in wetland conservation, includes land purchase expenditures and investment in improvement on wetland quality. From the Corps perspective, the land has no opportunity cost, from a societal perspective the land is valuable in providing other services. This, there may be a tendency to over-regulate and acquire more land than is socially optimal.
ES new item in Env. Policy makers toolbox
Old tools Command and control Cap and trade New policy Paying for ES “When you can not beat them-bribe them” Base line and credit
Rationale for ES programs
Payment for positive externalities When polluters has rights to pollute ES programs will buy pollution reduction Payments for public goods Existence value, knowledge Common problems-the atmosphere Correcting mismanagement of a stock
Alternative mechanisms sell ES
All mechanisms have problems and need improvement Markets Clearing house ?
Formal Markets Exchanges Offsets Bilateral deals Auctions Subsidies & government payments
Environmental Services & Land
Use
Distinguish between resource rental programs and working land programs Working land programs-promoting green practices Conversion of lands to “greener” use From farming to forest Prevention of land use conversions Controlling development What is the Asset unit?
Generally not land- but resource stock related to land use Stored carbon Water quality in lake
The Multidimensionality of ES
The same land may provide a multitude of ES Some ES are provided simultaneously others are not Growing Wetland conflicts with native plants Soil erosion and wind erosion are complementary ES may provide regional, national & global benefits Benefits of ES vary across individuals &groups Bird watchers & hunters benefit from better bird habitat All gain from flood control- gains vary by location
The Dimensions of Wetland Services
Local National International Wildlife habitat Public Private Public Public Flood control Public Private Public Private Public Private Water purification Aesthetic value Recreation Existence Private Public Public Private Private Public Public Private Public Private Public Public Private Public
Implication of “Beneficiary pay”
Government pays for public good aspects
utilized by many
No exclusion
- e.g Existence value Private agencies should pay for private benefits.
BUT Private
willingness to pay
emits public goods for ES is understated because it There is a role for public-private cooperation Matching fund Tax credit
Selling ES in markets vs. special trades
Market
Low transaction cost Standard product Large number of buyers Minimal contact of buyer and seller
Special deal
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 Unbundling Heterogeneity Correlation Targeting Role of government Third party
Measurement
Buyers and sellers need to know What is delivered - when - for what price Deliverables can be outcomes or actions Must be easily measurable Simplicity and common sense are essential ES is controlled by the worker in the field Not the scientist is the lab.
Clever use of new IT can improve measurement accounting and monitoring
The reasons for ES product standards
( Being commodities not unique products)
Buyers want to know what they buy To sell it when they want ( liquidity) Certification by trusted agency All associated with having ES meeting standards. Also Low transaction cost High volume of trading
Monitoring and Enforcement
ES are frequently generated on large parcels of land over long period of time Farmers can easily cut corners Inspection backed by action will lead to improved ES quality justify higher prices Can be part of certification program Monitoring allows establishing buyers insurance plans ( Guaranteeing delivery and compensation)
ES markets allow selling bundles of ES
A field may generate various types of ES 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 A well functioning ES market results in a pricing of individual ES that will increase the flexibility of the buyers and sellers
Heterogeneity
Lands vary in their productivity and ES generation Sometimes 90% of certain ES is provided by 10% land Both buyers and sellers benefit when buyer who appreciate certain ES are able to get them-part of efficient buying and selling strategies Buying the lands with the best ES is not always the best strategy- best to buy ES who provide highest value Per dollar
Targeting strategies
A buyer with given budget may choose 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 Benefit /cost Targeting Purchase lands with the highest highest per dollars given the budget-always works for buyers
Targeting strategies
Suppose there are N locations, identified by n=1,N .
An= Land of location n, Bn = Benefits per acre of location n.
Cn = Costs per acre( value of land in alternative use
) Budget S Acreage Maximization-buy all land with Cn
targeting
B Benefit max Cost Minimi zation Benefit/cost ratio C
C 10 8 15 6 8 9 14 8
Importance of heterogeneity ranking vary withtargeting
5 7 3 4 6 B 5 6 3 B/C .5
.375
.4
,83 .875
.333
.29
.75
Rank C max Bmax B/C max 6 4.5 4 3 7.5 6 8 2,5 5 1 4.5 2 3 1 1 5 7.5 7 7 6 8 3 2.5 3
Third parties
Designers of ES programs need to be aware that taking lands out of production may result in increase ag prices May backfire leading to farming of previously idle lands (slippage)- thus may need to pay for prevention Reduced farm activities may reduce tax base Landowners may gain but operators and other lose
Role of government in ES
Create demand for environmental credits Establish rules of games definition Liability Invest in R&D to allow measurement and better pricing of ES Pay for public good aspects of ES Play role of assembler of Domestic ES in global program (Kyoto)
ES 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 Es program may affect Urban poor Poor asset owners Landless rural poor
Impacts on urban poor
Possibly negative food prices effect ( supply reduction) Employment effects of various kinds Some ES program y supply pro poor goods Flood control, fire protection Improved water quality Existence value of wild life is presumably a luxury good
Impacts on poor assets owners when they are sold to ES
Notation B = ES per acre R rent per acre W=Value of labor release at sale V price of ES Farms have L hectares Farm income before program L*R Poorer farmers may have less land, lower rent or both Land will be sold for ES if VB+W>R Gain = VB - R + W Per unit if land
Do the poor gain from selling
land for ES?
Case of significant gain A positive correlation between wealth and rent Poorer farmers has small and less productive farms A negative correlation between B and R- less productive land provides more ES Gain is higher the higher are v and W Gain to poor from ES is relatively smaller If no correlation between size and R- rich is larger No correlation between B and R.
Poor may not gain much if they own small and highly productive plots
The case of working lands
Payment per acre VB Costs include D R= P D Y+ D C Revenue loss P D Y ( use traditional technology) Cost increase D C ( Reduce input use) Participate in ES program if VB> P D Y+ D C Poor benefit if ( P D Y+ D C)/ VB is negatively correlated to income. E.g, Payment aim to preserve varieties used by poor. They have high B and low D Y Poor are located in erosive area and payment for less erosive toil managment
Impacts on land less
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 . 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)
Dynamic considerations
Poor may be late adopters and ES payment excludes consideration of improved options.
The benefits of ES program may vary in their dynamic profile. Some ES effort aim to induce a sustainable change Other aim to provide quick relief Income may vary over time 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
Management of Purchasing Fund
Heterogeneity -
ES benefit &cost per acre vary Consider first the case with the No Scale effects Suppose there are N locations, identified by n=1,N .
An= Land of location n, Bn = Benefits per acre of location n.
Cn = Costs per acre( value of land in alternative use
) Targeting criteria 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 Benefit /cost Targeting Purchase lands with the highest Bn/Cn (highest benefit cost ratio) given the budget