EEP 101/econ 125:Market for Environmental services (ES) and poverty DAVID ZILBERMAN

1. EEP 101/econ 125:Market for Environmental services (ES) and poverty DAVID ZILBERMAN

2. 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) • Amenity creation-Restoration, Enhancement

3. 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

4. Example 1: water cleanup II • If the rate of discount is 5% Ne Net benefits of PEM 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

5. Example 2: Flood control by wetlands 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 350,000,000big 370,000,000

6. 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

7. 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

8. 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

11. 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?

12. US ag conservation programs • The 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 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 private working lands.

13. 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?

14. Alternative Approaches to Wetland Protection

15. 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.

16. 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.

17. CRP Rents

18. 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.

19. 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.

20. 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.

21. 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).

22. 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.

23. 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.

24. 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.

25. Permitting vs. Voluntary Programs • Permitting cuts down on uncertainty. It can lead to a 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

26. 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 TypeAcres • Conservation Easement 1,400,453 • Management Agreements 1,389,099 • Leases 2,146,745 • Owned by TNC2,098,950 • TOTAL 7,035,246

27. 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,

28. International programs • Debt for nature swap • Problem- government get money, rural people do not see that

29. 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.

30. 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

31. 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

32. Alternative mechanisms sell ES • All mechanisms have problems and need improvement • Markets • Clearing house ? • Formal Markets • Exchanges • Offsets • Bilateral deals • Auctions • Subsidies & government payments

33. 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

34. 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

35. The Dimensions of Wetland Services

36. 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 for ES is understated because it emits public goods • There is a role for public-private cooperation • Matching fund • Tax credit

37. Selling ES in markets vs. special trades

38. Elements of implementation Measurement ES output meeting well defined standards Monitoring and enforcement Unbundling Heterogeneity Correlation Targeting Role of government Third party

39. 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

40. 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

41. 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)

42. 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

43. 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

44. 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

45. 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<C • benefits maximization-buy all land with Bn>B • Benefit cost maximization: buy all land with Bn/Cn>B/C

46. targeting Benefit max B Benefit/cost ratio Cost Minimi zation C

47. Importance of heterogeneityranking vary withtargeting

48. 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

49. 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)

50. 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