Tuesday, February 8, 2011

Show Me the Money

Please comment before 8 am (5am pst)Thursday morning - Article for thursday

37 comments:

Ann McCampbell said...

The Article "Show Me the Money" discusses a new plan to directly internalize externalities with a payment for environmental services (PES)system.This new plan is primarily aimed toward developing countries because they traditionally are rich with natural resources such as tropical forest and have the greatest need for funds. In theory PES provides as cost-effective approach to provide incentives to conserve the ecosystem between at least one buyer and one seller. Payments are only given if incentives are met and the environmental actions should be closely monitored.
However, the system breaks down due to imperfect information and hidden actions. It is hard to monitor the effectiveness of the program when individuals act outside of set guidlines. Additionally, private PES projects have had more success than government implemented plans. PES seems like an expensive way to internalize economic incentives and presents challenged for monitoring economic change. Costa Rica has been the most successful with PES because it analyzes regional enviorments rather than indivial farms. While PES potentially can increase conservation funding the plan appears to be difficult to monitor and may create a mentality where pro-social preferences are crowded out and individuals expect to be compensated for any conservation activity.

Katie Garratt said...

The payment for environmental services (PES) program pays landowners to provide public goods. In theory the payments are tangible incentives for landowners to conserve the ecosystem. As Ann pointed out, hidden information and hidden action can lessen PES's effectiveness. Missing markets, or instances where there are no market prices to signal opportunity costs, can also decrease the impact of PES programs.
REDD (reduced emissions from deforestation and degradation) is connected to PES with regard to climate change. REDD programs are international programs that reward countries, communities, or landowners for decreasing greenhouse gas emissions resulting from deforestation. REDD is often "seen as an international PES" because a government's receipt of payment is conditional upon the amount of forest-based emissions that are reduced. REDD is promising in its scale because it can target national-level rates of deforestation.

Ben Fass said...

The authors of this articles approached the topic of payments for environmental services (PES) in a very interesting way. This system is clearly based somewhat in a market approach. It is an alternative to the market solutions cap and trade and taxation can provide, which we have discussed in prior literature. These authors do not conduct any studies themselves, but rather synthesize previous case studies of the PES system. I think that this point is very interesting as they go on to conclude that the research that has been done lags significantly behind the theory itself.

Something that really stuck out to me about PES is the diversity of funding that it can potentially utilize. PES projects can be financed by governments, donors, taxes, and environmental service buyers. They do point out that in many cases governments financing conservation payments to landowners is not as efficient. Governments often have political agendas, such as poverty alleviation, that may not make for an entirely efficient PES market. This point is important because most of the work done so far has been in developing countries. This is of course because many ecosystems in need of conservation are in the developing world.

The authors mention many difficulties with PES programs. They use different terms, but this market is extremely susceptible to adverse selection and especially moral hazard. Once a contract has been put in to place the landowner has an incentive to still harm the land for his benefit. There is also the problem of missing markets where it is even more difficult than usual to price ecological services. An interesting concern the authors bring up is that landowners may alter baseline ecosystem conditions. They may actually further degrade their land so that they can earn larger payments for protecting it in the future. This could be a very difficult problem to regulate.

Jennie said...

The authors of Show Me the Money stated that one of the causes of the degradation of ecosystems is that “society has failed to create institutions that internalize the public values of ecosystems”. I believe that the likelihood of a country internalizing these externalities properly is related to their culture. Gert Hofstede determined five cultural factors and two of these should relate to a true attempt to conserve the environment. The first is individualism, which in high levels means the people within a society are only looking out for themselves. If this is high, as it is in the US, people may have trouble committing to internalizing externalities because it could cause a potential decrease in profits for themselves and they are not concerned with the social benefit. The second cultural dimension is long-term orientation, for which the US has a very low score. The structure of financial statements in the US are evidence of this; every firm presents quarterly statements and tries to show maximized profits for each one. This short-term orientation can hurt the firm in the long run, as it will hurt the environment in the long-run if people are unwilling to take short-term losses for the total benefit of society.

curriee13 said...

Even though it is hard to gauge how successful the program actually is (due to poor information and lack of data), the most successful payments for environmental services (PES) program was in Costa Rica, and most likely contributing to this success was the recent legislation passed about illegal deforestation. Although some of the programs in other countries saw some success, it was still not comparable to that of Costa Rica. Maybe deforestation legislation and a broader focus for the program (regional instead of localized tracks of land) are the catalysts that will make the difference in encouraging people to get involved in the program and change the ways they interact with these valuable biomes.
In an ideal world, it seems as though this policy would work, but unfortunately, not everyone has the global interest in mind. As many others have pointed out, it is inevitable that some of the landowners will try to cheat the system by violating the contract and using the land, or as Ben suggested, will purposely degrade the land before entering the contract in order to receive larger payments for protection.

Kelsey Sizer said...

At first glance, payments for environmental services seem to be a win-win situation. The internalization of externalities is an ideal economic goal. By creating a market for these previously nonmarket goods, they are able to supply incentives, in the form of payments, for landowners to conserve and properly care for the environment. Moreoever, the authors suggest the PES system could potentially help alleviate poverty, as often times the environmental resources needing conservation are located in rural areas of developing countries.
In the end though, the authors' concerns about the system seemed particularly valid to me, especially with the lack of supporting data to suggest that the program has had any significant effect at all in areas where it is currently implemented. Hidden information, hidden action, missing markets, and lack of effect regulation of the system are all problems that make successful PES difficult. The program appears to be ideal, but only if these concerns could be properly remedied.

Guilherme fernandes said...

Several things worry me when I try to conceive the idea of having a PES program implemented in a huge territory like the Amazon. First, the main reasons driving deforestation in the “Arc of Deforestation” are soy and cattle. The problem is that both are part of about 45% of the country’s exports revenue. The amount of money which would have to be paid to most farmers in the arc of deforestation would have to be gigantic in order to make them stop converting land to grow soybeans or cattle graze. And I doubt there would be poverty alleviation, since they are one of the richest and most influential groups in Brazil.
In Amazonas, where I come from, estimates are that about 97% of the state is covered by its original forest. People who live deep in the state’s forests are often extremely poor, but they would not be eligible for such a program, once the forest has been mostly intact anyway.
Another thing that worries me is that if “applications exceeded the available funding by a factor of 3 in Mexico’s PES program”, as any other good subject to supply and demand forces, isn’t it going to drive prices of ecological goods/services downwards?
The final thing is about monitoring costs and enforcement. In 2008 or 2009, a plane was actually able to take a picture of an isolated tribe somewhere deep in the forests between Peru and Brazil. This illustrates how incredibly vast the Amazonian territory is, being nearly impossible to be effectively monitored (required costs would be just unimaginable). And the worst is, even if it could be monitored, most people in Brazil do not fear law: they’d rather bribe an official so everyone is always “better off”.
Because of the way the incentives have been designed up to this point, along with Brazilian particularities, I’d say this would not be an efficient call at all.

Amy said...

"Show Me the Money" explores the concept of paying land owner's to conserve forests, ecosystem, and other important natural resources. A farmer in Ecuador, concerned about feeding his family, obviously has incentive to clear the rainforest in order to farm a greater area; however, his actions have high marginal social costs. In order to incentivize a change in behavior,the farmer can be subsidized, or paid, to conserve the rainforest on his property.

The PES system brings to mind the other article posted about Ecuador. President Correa is calling for the international community to pay Ecuador not to drill for oil in the Yasuni rainforest. In return for half of the predicted oil revenue, Correa will promise that those oil fields will be permanently left undrilled.

The issue of ownership and sustainability comes into question here. PES seems to address household level payments, but Yasuni is a national park. There are tribes, some uncontacted, living within Yasuni, however, who would claim rights to the land. If Correa receives the payments to keep the Yasuni rainforest untouched, what happens when the next administration takes power? There has to be some way to ensure that future regimes continue to honor the agreement. This is a major issue of sustainability in terms of PES programs. Once pahments are received or end, how do you continue to incentivize conservation.

Mackenzie Doss said...

In theory, payments for environmental services sound perfectly reasonable: a mechanism to improve the provision of indirect environmental services in which those who provide environmental services get paid for doing so and those who benefit from these services pay for the provision. They are certainly attractive in that they bring new financing that was not previously available for conservation and they conserve what is actually worth conserving. They have the potential for sustainability because they are not based on the whims of NGO's but on the self-interest of service users/providers. However, for this to actually work- getting the science right is critical (if water is our service, do we understand the basics of hydrology, irrigation, etc). Services need to be actually delivered (because if services aren’t delivered, then people won’t pay) and mechanisms must be tailored to specific local conditions. In calculating supply and demand it is also important to consider: what specific services will be provided, who benefits from these services/how much benefit will they enjoy, and how/who generates these services. This will be easiest when beneficiaries are easy to identify, are already organized, and are preferably few in number. Monitoring a PES program once it has been implemented is critical in both ensuring confidence in the system and in order to make adjustments as may be necessary. For example, service users should only be paying the value of the benefit received and not for extra costs brought on by local conditions (for example- water treatment costs, etc). Monitoring should take place on both the level of implementation and on the impact of services- whether or not these changes in land use are generating the desired service AND whether or not they are improving the actual welfare of those involved. It seems that a PES program would be most advantageous/ideal in a small local condition in order to achieve the above however there is a potential concern of much higher transaction costs.

Ben Bartlett said...

In their article entitled, “Show me the Money: Do payments Supply Environmental Services in Developing Countries?,” Pattanayak et al. present a cohesive discussion of PES as a means of mitigating the global loss of native ecosystems. While I appreciate the importance and potential of such a system, I am weary that monitoring issues may prove to be difficult to surmount.

The authors describe a number of scenarios in which effectively monitoring the landowners, or suppliers, may be cost prohibitive or, altogether, impossible. For instance, once a contract has been struck it will likely be very difficult and expensive to ensure that the landowner does not breach the contract and degrade the forest, despite his obligation. Likewise, the authors discuss how it is nearly impossible to determine which landowners need payments to prevent land conversion. It may very well be the case that landowners will collect payments to conserve lands they had no intention of changing. While these are only two cases of such potential monitoring issues that could arise, they give one the sense that wide scale implementation of a program like the PES would be an administrative nightmare and likely very inefficient overall. I am skeptical that the program will be able to consistently yield benefits that outweigh the negative impacts resulting from these and other systemic shortcomings.

Parker Pritchett said...

In theory PES sounds like a possibly effective method for internalizing environmental externalities. It makes sense that those who provide environmental services be compensated for that provision by those that are benefiting from the services. The idea of employing PSAs in poorer countries that often contain large tropical forests adds to the attractiveness of the potential adoption of the programs. However, the complicated minutia of implementing this strategy create many difficulties in tracking and quantifying the successfulness of the program. It seems that in Costa Rica there were positive results of reduced deforestation. Unfortunately it is difficult to deduce the effect of the PSA itself considering that Costa Rica was already working towards reduced levels of deforestation. Furthermore, the cases in China, Mexico and Columbia show less positive or indicatory results. From the programs in this country it is difficult to tell if the programs had any effect. Overall it seems that PES is a valid idea- the practical implementation of the programs are where the problems lie. Hopefully, over time, the programs and evaluation processes will become more refined and easier to implement and maintain.

Parker Pritchett said...

In theory PES sounds like a possibly effective method for internalizing environmental externalities. It makes sense that those who provide environmental services be compensated for that provision by those that are benefiting from the services. The idea of employing PSAs in poorer countries that often contain large tropical forests adds to the attractiveness of the potential adoption of the programs. However, the complicated minutia of implementing this strategy create many difficulties in tracking and quantifying the successfulness of the program. It seems that in Costa Rica there were positive results of reduced deforestation. Unfortunately it is difficult to deduce the effect of the PSA itself considering that Costa Rica was already working towards reduced levels of deforestation. Furthermore, the cases in China, Mexico and Columbia show less positive or indicatory results. From the programs in this country it is difficult to tell if the programs had any effect. Overall it seems that PES is a valid idea- the practical implementation of the programs are where the problems lie. Hopefully, over time, the programs and evaluation processes will become more refined and easier to implement and maintain.

Cailin said...

I think that this article was an interesting and comprehensive introduction to the concept of payments for environmental services and the existing PES literature. However, although I admit this is my first exposure to the PES literature, I am not sure that I agree with some of the concerns/arguments of the authors. For example, they highlight the issue of an information asymmetry in the form of “hidden information” of the landowner. So the landowner exaggerates the value of the good they are agreeing to accept payment to preserve, but if the goal of PES in developing countries is in fact two fold – poverty alleviation and environmental conservation – then I think that the authors overstate the issue of “hidden information.”

Another thought I had on the information asymmetry problem was just an idea to prevent the moral hazard problem. Instead of paying the landowner a lump sum to preserve their land, and then have to check up on their actions to make sure that they don’t breach their contract, smaller payments could be made over time. It also could mean more accurate payments because it is easier to estimate opportunity costs for a shorter time horizon. This would work better for some environmental goods more than others.

I wish that the authors went into the methodology of the empirical studies they reviewed a bit more. In the case of the study in Colombia they mention that the authors attempt to include a control group of landowners but found ex post that the control group differed from the contract holders in many important respects. I find this to be fairly obvious. If in fact it is the case that the demand for PES contracts exceeds supply I would think that landowners with specific desirable qualities would be selected, and moreover the landowners that actively choose not to participate are going to be systematically different than those who do.

Lastly, in the Costa Rica case study they mention that several studies report that lack of alternative use has the greatest influence on the decision to participate in PSA. This seems to indicate that the opportunity cost for other landowners, who actually have possibilities for alternative use of their land, exceeds the payment they are being offered. If PSA is actually just protecting land that wouldn’t have been used anyway it seems that the funds are not being used correctly, and more time needs to be spent calculating the opportunity costs of the landowners.

Shane R said...

PES programs face a lot of substantial obstacles if they are to be effective. Leakage, monitoring, additonality, permanence, missing markets, and lack of information were all discussed as major problems of effective implementation of PES. It seems like it is very difficult to decide who to pay for the the preservation of which piece of land. Land owners have there own private conservation agendas and would love to get payed for leaving a tract of land forested that they were planning on doing so anyway. This is where the problem of additionality comes in. PES programs have to figure out ways to spend there compensation money in the most efficient manor. This could be done by deciding a specific type of habitat or ecosystem service that the program seeks to conserve. Examples of this are programs that specifically concern themselves with water quality and support the maintenance of riparian buffers. Programs that focus on erosion and preserve hillsides were also mentioned.REDD is also an example that has a broad scale goal of increasing carbon sequestration. Having a specific goal can make it easier to decide what pieces of land to protect and to monitor the success of the initiative. Even then there are still externalizes to deal with. if you are paying for and valuing the land according to one specific ecosystem service then you are not taking into account other environmental services offered by the land. Is the value you come up with for the ecosystem services greater than the opportunity cost of the land owner? These are very difficult questions to answer in many cases. The authors point out how little evidence there is of the valuation and paying for ecosystem services actually resulting in more services equal to the price payed.

ChampionJ said...

In this article, Pattanayak et al. clearly describe Payments for Environmental Services as a potential method to directly internalize externalities. Basically, a government or non-government organization compensates land-owners for maintaining or bettering the quality of their land by altering their means of using the land.

In theory, this is a great idea, however, as is discussed in the article, there are many pitfalls of the PES programs. One of the pitfalls that particularly interested me was the continued payment to land-owners who maintained their land without making any improvement. In other words, they received the same benefits for stabilizing the quality of their land as other land-owners who actually did improve the quality of their land. In a way, this seems like free-riding because those land-owners that improve the quality of their land influence organizations to continue funding land-owners in the area while some of the people that receive benefits actually don’t do anything in terms of improvement. In this case, I support setting goals and conditions by which people can continue to receive benefits. I believe this would ultimately improve the quality of many of these areas while eliminating the financial burden of those who ultimately free-ride.

When all other factors brought up by Pattanayak et al. are taken into account, the use of PES yields few benefits when compared with the negative impacts and costs of implementing these systems. In the future, organizations should form more efficient monitoring practices as well as goals and guidelines for continued funding in addition to multiple other improvements that should be made in order to effectively utilize PES.

Jeffrey Stirling said...

In theory, the PES system should provide an incentive to conserve the ecosystem, as well as being simpler, more cost-effective, more effective in economic growth, and providing new sources of finance in regard to conservation. The PES system will not work with hidden information and action, areas where market prices cannot be derived (missing markets), and scenarios where it does not deliver supplementary protection along with the original. In theory, the PES system is great as it solves the earlier mentioned issues, but then again theory only goes so far. In practice, private PES projects have seemed to be more effective than ones issued by the government, with Costa Rica taking the cake. For PES to supply environmental services it depends primarily on four different issues, enrollment, coniditionality, additionality, and land use. Another interesting part of this article is REDD, which is made up of many different international programs and projects, to reward landowners, communities, and countries that are part of the tropical regions. It rewards them for decreasing greenhouse gas emissions that result from deforestation. REDD targets national-level deforestation rates, where governments are forced to be accountable for leakage and factors that promote deforestation, unlike the PES system.

Colin Elliott said...

Clearly there comes expensive monitoring issues with implementing PES as well as the likelihood that there will be leakage and farmers who would originally preserve land would begin to farm it to receive payment. Other problems include the lack of empirical evidence of the success of PES programs because of the relative briefness of the movement. Furthermore, such as in the Amazon and Ecuador, many of the poorest inhabitants of the forest will not receive payment because of their nomadic/tribal/un-european tendencies and lifestyles. All of this being said, the alternative to requiring those who benefit from the environment from paying is what most of the world is experiencing currently, a rapid deterioration of forest, habit, and uninhibited carbon polluting. While it may be necessary for there to be more conclusive experimental evidence that PES will have greater environmental benefits than the cost to organizations or governments for policy to be enacted, the global trend of environmental degradation and deforestation should be enough of a sign that change needs to be made. The authors even suggest that PES policy has a positive effect on poverty or at least no effect at all. In conclusion, I understand that there may be landowners who unfairly benefit from PES policy or difficulty in monitoring, however, the overall evidence suggests that PES policy will be beneficial for the environment and who better to bare the burden of the cost than those who are responsible for the degradation.

Wendelbo said...

This is quite the challenge. How do you adjust for the fact that almost any observation you make could be wrong in either direction because we can’t capture the payment effects? The Costa Rican example, which the authors clearly prefer, is kind of unsettled on these things as well. I am wondering why, then, the authors suggest that Coase gave us a framework for “taking care of” environmental externalities. If we, in economics, can’t measure the effects, then how can we possibly expect an urbanite in San José to know how much to substitute the farmer on the Osa peninsula?
At the same time, given this uncertainty, I am surprised to see that the author’s do not discuss in any meaningful depth the gap between theory and evidence. The general consensus, I believe, is at the moment that there are significant, large positive externalities from reforestation – or not cutting primary growth forest. The evidence is, though, that the given models of reimbursement are not really working – or their effects are modest. The authors rely on Coase’s idea that if transaction costs are sufficiently low, then a market could be efficient – but if direct reimbursement does not work, then what kinds of transaction costs to we encounter in developing new, better methods?
I am curious to know how the authors (of the studies summarized, not the authors of this article) controlled for the other forces that may drive forestation in either direction. In Costa Rica, the past decade has made a very significant push for restoring natural areas as eco-tourism has grown. The little effect they do capture, is this apart from an effect such as this?

Paige Gance said...

In theory, Payments for Environmental Services should help slow or even reverse the process of land degradation in developing counties where most of the world’s rainforests exist. But in practice, these programs are still in the infant stage. The biggest problem that seems to affect PES on several levels is a lack of information and understanding. Asymmetrical information causes market inefficiencies, and PES is no exception. Landowners know more about their property than buyers of ecological services and can exploit that to their advantage. Even if a landowner is not planning on exploiting their land, as long as others think that they are they will still receive payments. No additionality has been created because the use or non-use of the land has not changed because payments have been made. Landowners can also change the amount of payments they receive through baseline alteration, whereby the payments will then be too high. Lack of information also affects land-use service linkages. This is the connection between actions aimed at conservation of land and actual results. This usually depends on the quality of the efforts and location of the land. The more understood the ecological services to be provided are, the more likely the efforts will be successful. For instance, carbon sequestration is a well-known ecological service, but watershed protection is more complex and less studied. Once the information gap has been solved, PES should become more efficient.

sturgesa12 said...

The article "Show me the money" the authors look at a fairly new system that will directly account for environmental externalities by paying for environmental services. The strategy works by offering incentives, generally in the form of payments, if the firm meets certain environmental standards. This approach provides a cost effective solution that provides incentives for both the buyer and the seller. The plan generally is used in developing countries, such as Costa Rica and Mexico that are rich in natural resources. In these countries the majority of the populations are poor and this solution can bring more wealth to the areas.
The theory behind this system is great but it does not always work perfectly. Many times there are hidden actions and imperfect information. Many times it is costly to monitor the effectiveness of the program, making it possible for a firm to still produce the externalities and also receive the payments. This makes the program just a waste of money. The approach is expensive and difficult to monitor, but if it works correctly it can greatly impact the area. It has seemed that private PES projects have been more successful than the government plans. In Costa Rica PES have been successful and shown the PES is a viable option in the future.

Graham Sheridan said...

My worry comes in the negotiations of the contract. When people try to explain to the landowners that they want to pay them for preserving the forest as-is, it must make the landowner suspicious. They must think that the environmentalist knows something they don't about the land. Especially if part of the deal concerns scientific research on the land. They might think that the environmentalist is trying to pull a fast one on the locals.
Also, are payments what the people need? First, some of them are in such remote areas that an in-kind, rather than a cash payment could be better. They may have less to spend money on we do. Additionally, some of the people may want money so that they can move to the city. So, they sit, collect a few payments, then leave. Then, the environmentalist must renegotiate a new PES contract with the new landowner, who may do the same thing again. Providing in-kind improvements to villages may be a sort-of sneaky way to provide increases in quality of life and keep the people with whom the contracts were made in place.

Elise Parker said...

There are clearly several issues that PES fails to address – and the primary one the authors mention is that most PES studies just aren’t designed from the outset with a purpose of evaluating their effectiveness. That makes it all the more difficult to argue a convincing case for PES without supporting data. For example, effects of PES ranged from -10% change in deforestation in Mexico to positive ecosystem services in Colombia, to transitioning labor from the farm to off-farm by 15-20% in China. These findings are interesting, but the lack of controlled studies is an impediment.

Also, as others have already mentioned, PES seems to underestimate the costs required to run this program on a large-scale. PES programs provide services depending on four issues – enrollment, conditionality, additionality, and land use-service linkages. Though enrollment was not a problem, they noted gaps in areas of high-value water services in Mexico. They theorized this was because the opportunity cost of accepting the payment was too high. As Gui stated, this is not something unique to Mexico and would be a big problem if tried in Brazil. Also, costs for monitoring would be high in remote areas or in industries where land use-service links are not well understood.

Given the constraints and limited data on the effectiveness of PES – I agree with the authors that it has the potential to offset negative aspects of other conservation efforts.

Siwan said...

PES sounds promising as such programs are voluntary and mutually beneficial contracts for both consumers and suppliers of ecosystem services. However, referring to what Gui pointed out, in some cases, such as the Amazon, it might be very difficult to pay a price that is greater than the cost (primarily opportunity cost here, i.e. gains of deforestation) of providing ecosystem services. PES is also attractive because there are correlations between PES and poverty alleviation. Even though they appear to be meagre until now, there is potential for poverty alleviation associated with PES in the long-run, effects that cannot yet be measured.

Despite the rather weak evidence, data and evaluation models offered in the paper, I found it interesting that user-financed programs seem more successful than government-coordinated programs. Even though this result should not be easily generalized, it might however indicate the higher probabilities of failure in administration and coordination in developing countries when implemented by the governments (which are typically weak or not necessarily concerned about social welfare and cannot be held accountable unlike parties in private PES contracts).
It is also interesting that China seems to be more and more considering policies favoring economic incentives than command-and-control approaches, speaking further for the higher effectiveness of the former.

Some results in table 3 were curious. If I am not mistaken, the ratio between recurrent transaction costs and payment show large variations. For instance, transaction costs for Los Negors are $1/ha vs. payments of $1.5-3/ha, whereas transaction costs for PROFAFOR are $3/ha, but payments are $100-200/ha? Does this merely suggest that the value of ecosystems differ widely from place to place? This refers to the issue in the Costa Rica that many landowners who had no other use of the land would participate. If land that would remain unused even without PES (probably due to its low value?) then resources should be reallocated.

As the authors point out, there is still a lack of trustworthy quantitative analysis of PES program effects. Accordingly, some questions remain unclear when looking at the tables in the appendix. For instance in table 2, it would be important to know what the respective thresholds were for considering conditionality and additionality as “high” or “low”, since the results come from different studies (do they?). If the standards set for evaluation categories in different programs vary, comparability might not hold.

Becca Bolton said...

In the article “Show Me the Money,” the authors discuss how PES programs have tried to internalize the externalities of environmental services. As the authors point out, the PES program seems simple in theory, but it has been difficult to apply to real situations. While PES could potentially save valuable ecosystems and ecosystem services, there are too many additional factors, and there is a lack of information on how well existing programs are working. Asymmetric information, spillovers or leakage, and hidden action are just some of the factors that reduce the effectiveness of PES. The analysis of the case studies definitely convinced me that these programs do not seem to be working. While most of these programs haven’t been in effect for a long amount of time, I think that many people want to see greater results. There is definitely not enough data to prove that more land would have been saved with or without the PES, but I do not think that this means PES programs should be abandoned completely. In my mind, doing something is better than nothing at all, but the programs definitely need to become more efficient. The authors seem to think that the REDD programs are very promising, so hopefully these programs will begin to show signs of success.

Alli Shearin said...

At a first glance, payments for environmental services seem like a great idea. It makes sense that people who are providing an economic service should be compensated, and who better to pay for this compensation than the people who benefit from the environmental service? It is also good to give payments for environmental services, because this provides a huge incentive for people to participate in environmental conservation. This way, more people can participate in environmental conservation, because now not only do people participate because they are genuinely concerned about the environment, but also people who just want to make some money. I’m not praising the people who only want to make money and aren’t concerned to begin with, but I think it is important to get as many people involved as possible, which is what PES helps to do. However, I think it is too early to tell if PES will actually work, because it seems like a lot more research needs to be done. I also think that PES is a lot more difficult in developing countries. I think it would be much more difficult and much more costly to regulate and enforce PES in developing countries. Also, the authors claim that PES can help reduce poverty. However, in many developing countries, the poor people don’t actually own the land, and/or have a lifestyle where they roam and live of the land (again that they don’t necessarily own). These poor people cannot receive payments, because they do not actually own the land, so I wonder how it could help reduce poverty in areas like this.

Levi said...

Like others have said, the jury still seems to be out on whether PES are actually effective in improving environmental quality (not to mention whether they are cost effective). However, I feel that participation is a much greater concern than has been given credit. Like the authors have pointed out, land-owners do have options at their disposal when concerning the use of their land, though some have fewer than others. So, If I'm a land owner and all of the land owners around me are participating in the program, meaning that they are forgoing the use of their forests for some alternate use (like fuel wood), I might have an incentive to quit the program (assuming I already have participated) and provide my neighbors with fuel wood if the price is right. In which case, rather than reducing deforestation, the program in this circumstance has merely changed the location of the deforestation to a more concentrated area (which, as we mentioned in class on Tuesday, can mean a longer regrowth period if at all).

Furthermore, I find the fact that the fixed sum in the PES systems to be a rather unwise decision. Although creating a standard payment would help to reduce the transaction costs, it provides less of an incentive for highly valued areas of land (such as key water ways) to participate. Like the authors have mentioned, we can reach a sub-optimal level by over-paying land owners who had no intention on degrading that portion of their land anyways. Likewise, we could also argue that some plots of land are more important or more beneficial (ecologically) than others. And, by creating a fixed level of payment, we might lose out on these more important plots of land. Therefore, I would like to see the effects of a stratified payment system based on ecological importance.

Sarah Monte said...

While the PES policy seems effective in theory, the lack of supporting evidence makes me wary of its actual benefits. PES seems too small scale to accomplish the goals necessary regarding deforestation. If Costa Rica has already had great success using national policies, it seems that would be the ideal to strive for in all countries with tropical forests. Also, the idea the PES program has to be divided equally based on need throughout the country, regardless of the amount of forested land, would seem to make the program ineffective right from the start. Another problem I see with PES is that research is not done into what landowners intend to do with their land. PES should be used as a persuasive tool, not a hand out to anyone who owns land. I think this policy could be very effective if more research is undertaken and the policy is reformed accordingly.

Van Nguyen said...

I am rather disappointed in this paper one-page discussion on REDD and how PES can be a proxy evaluation for REDD and its impacts on a larger scale. The analysis on REDD is rather superficial since there is much debate on the potential negative impacts of REDD in tropical countries. It has been shown that commercially planted plantations are qualified for REDD credits even though the plantations were built upon the cleared away forest lands. The analysis of REDD also does not address the long-term impacts of both REDD and PES since the problem of compliance and the continuity of the projects depend upon continuous funding. Since the length of the project is still dependent upon how the incentive structure

I don't particularly agree on the conditionality requirement that PES requires in order to determine eligibility of their project's recipients since the structure might create the wrong incentives for people to manipulate the baseline by increasing deforestation. An analogy can be made in the case of conditional aids by IGOs on developing countries in which the aids exaggerated the economic establishment on those recipients.

Lastly, I am curious to see a comparison experiment on PSEs with user-financed structure with ecological preservation as its sole purpose and user-financed structure with other side impacts on poverty reduction and equity to see the difference in cost-benefit analysis. Intuitively, I would say that the sole ecological preservation structure would result in higher additional benefits since the economic incentive structure is aligned in a simpler manner.

Spence Daw said...

"Show Me the Money" concerns a payment for environmental services (PES) system that attempts to conserve ecosystems through subsidization and monitoring. If an important ecosystem provides an environmental service on a clearly defined property, Wunder feels that a voluntary transaction between at least one buyer and seller should take place. Developing countries provide the most hope for successful PES systems because they possess both rich ecosystems and the need for monetary opportunities.

The system is somewhat inefficient because there is no way to successfully monitor every property taking advantage of a PES system. A conservation agent has no way of knowing whether or not a landowner had the intention of destroying or protecting the ecosystem of interest in the first place. Landowners often benefit more from a contract because they have a better knowledge of their property and the opportunity costs associated with protecting an ecosystem. If monitoring is too expensive and the contract is not enforced strongly, the majority of low income landowners will breach the written agreement. Although I feel that PES systems have the potential to conserve many important ecosystems, the benefits of actual implementation would be outweighed by the overall waste of time and money.

David Dennis said...

The PES program seems to have so many factors that affect how efficiently it operates that the ultimate goal of conservation is not even guaranteed. By internalizing the externalities, the residents would become dependent on the subsidies and not actually strive for improved environmental conditions. It seems more important to provide educational programs (and incentives for residents to attend) so that the people know that it is in their best interest to protect their surrounding environment. The PES program would be effective as long as certain criteria are met but even when they are, it can prove difficult to evaluate. The residents would need certain regulations he or she had to meet every month or so to receive the financial aid. But government corruption and inefficiencies seem inevitable.

Joe Moravec said...

While reading "Show me the Money," I could not think of PES as anything but the conditional cash transfers we studied in Development economics, except in this cas the goal of the investment is environmental sustainability, instead of education and health care. However, as I see it, the PES system has a huge advantage over other cash transfer programs. Conditional cash transfer programs demand that the recipient does an action, like pay for a childs education or attending doctor visits. Contrastly, the PES system demands that the recipient does NOTHING. The program is paying a farmer his opportunity cost to protect the farmer's land and provide the public good of environmental protection. In CCT programs, the opportunity cost includes time. In the evaluation of opportunity costs under PES, the opportunity cost is relatively much lower, as the farmer does not harvest the trees, and can spend the leftover time on other pursuits, such as working harder/longer/in another place. This lower opportunity cost will lead to further acceptance of the PES program, while increasing the social benefits (environmental cleanup) derived from the farmers choice.

Matt Benson said...

"Show Me the Money" presented a very thorough examination of PES systems. I agree in principle that environmental services need to be compensated, but I do not believe there is a feasible method to implement such a policy in any undeveloped locations. Unfortunately the undeveloped world houses many of the environmental services that would be protected by such a law. My problem with PES implementation as it was presented in this article stems from the situation of telling impoverished people not use land so that land owners can collect a potentially larger paycheck from a PES payment. In most places where there are rural peoples they typically do not own the land they work on and derive an income from. I do not believe a PES system would stop them from using the land and they would surely use it illegally. I found the quote, "the poor will be able
to participate in PES schemes if they are: (a) eligible (e.g., ecologically in the “right place”);
(b) disposed (e.g. payments exceed provision costs); and (c) able (e.g., have secure property
rights)," because I cannot concieve of any poor individuals who could possibly fulfill these requirements, and I would imagine in places like the Florida Everglades, Mexico, or Brazil that the people who would be capable of fulfilling these requirements and possibly willing to do so would be landowners who owned a great deal of land. Also, monitoring such a system fully seems absurd. In the best case scenario these PES lands would be monitored to a similar levels as a national forest, but even this would prove less effective in more remote areas. In all i think internalizing the externalities of environmental services is a good idea, but I think implementation of such ideas is difficult and needs more empirical research as mentioned in the article.

George Brooke said...

"Show Me the Money" presents a new way to internalize externalities through Payment for Environmental Services (PES). PES is a method aimed at reaching the optimal supply of environmental services through incentives to conserve the ecosystem. PES is focused on poor and developing countries that have a particularly abundant supply of natural resources. PES plans to provide incentive for environmental conservation, but in theory it will also help reduce poverty. This article cites Coase as he argues that "suboptimal situations can be resolved provided that transaction costs are low and property rights are clearly defined and enforced". This statement shows the biggest problems with PES. If the plan targets poor and developing countries, all of Coase's requirements will be extremely hard to meet. Most poor and developing countries tend to have weak government and lack any legitimate organization that has the ability/funds to start PES. Without any type of strong governing body to oversee the entire process, it is very difficult to clearly define and enforce property rights. Also, the poor population tends to be uneducated and PES and its goals might not be fully understood or appreciated. While PES sounds good in theory, the lack of evidence of its impact and the challenges presented by poor countries make the practice of PES sounds very difficult.

gioioson12 said...

The most interesting part of this PES debate is its effects on the theories of non-market valuation, especially on those consumers outside of the domestic market in which the environmental services are produced. This PES system allows concerned world citizens to put their money where their lungs are and make direct payments in the hope of saving parts of the forests in developing nations and at the same time reducing poverty in those countries. “Show me the Money” presents a strong argument for informed “users” taking charge and bypassing the governments of individual countries to identify and conserve environmental services.

However, there are problems with this PES system on the supply-side. Although we can rely on a Coase-ian framework for the theoretical model of generating the optimal supply of a good through voluntary transactions, the cost of enforcing these contracts is high, and buyers have to rely on trust and good will for their actual production. The “supplier” of the environmental resource has the upper hand in this situation, in which there are informational asymmetries that benefit them, such as the problem of non-additional protection.

The introduction to REDD provides an interesting presentation of the idea that an overarching national environmental quality improvement plan could promote accountability for governments to take charge and enforce laws against deforestation. If the countries don’t cut their emissions to a certain level or prevent deforestation, then they don’t get paid. This way there is a large incentive for countries to monitor and add to the quality of their environmental services.

Peter O'Donnell said...

The authors address the concerns of Wunder, Engel, and Pagiola (2008) that government sponsored PES programs are cost-inefffective because of side objectives. They then use example of how a Mexican government sponsored PES was distributing funds 'fairly' throughout the country. I believe if governments are to sponsor PES programs then they need to focus on the area of greatest concern; however having a side objective, so long as it is beneficial, does not take away from the effectiveness of a program but may in actuality contribute to its worth. While many economists freak out over whether or not the protected land will render environmental services worthy of its compensations, once the ecosystem rebounds from stress the rewards of the program, regardless of side objectives, will include increases in private benefits, social benefits, and social welfare.

Also, if those who implement the PES programs fear that farmers will purposely degrade the quality of their land while in the program in order to either receive more funds for the land or to exploit the natural resources of the land, then the method in which land owners are rewarded needs to change. A policy providing positive incentives, e.g. as the quality of the land improves the compensation should improve too, would certainly act as a deterrent to degradative practices.

michelle said...

With the implementation of PES for environment protection, the fact that user implemented payments if more cost effective than government initiated payments is an important issue to consider. The user implemented payment system help alleviate some of the issues associated with PES through better information, whether it is better cost estimation or the better access to the landowners regardless of formal ownership, and more effective allocation. The ambiguity involved with the actual cost and benefit of environmental conservation makes it difficult for price setting, since there exists the issue whether the PES actually induce excess preservation and whether this preservation increase ecological services. It is costly and difficult to measure those impacts, thus the socially optimal level of PES cannot be determined. Again, the lack of perfect information weakens the system that works well in theory. Especially with the interconnection of all the ecological systems, the direct association of cause and effect is impossible to measure, thus the PES may or may not be the optimal choice, but it does have the potential to an effective policy especially with the aid of REDD, which provides a more direct measurement.

Kelly Cossey said...

PES do sound like a good idea for developing countries, where concern about environmental degradation may not be as high. Who is really going to care about if their farming technique is bad for the land when their main goal is just to make a little money and get food on the table for their family? PES are thought to reduce poverty and ecosystem degradation, though, so it would seem to be a win-win for developing countries. If they really could be effectively implemented in developing countries, improving cash flow and economic growth for suppliers, I think it could definitely improve the quality of life.
I agree, however, that PES could fail to protect as much of an ecosystem that we would hope. By putting a landowner under contract to protect a certain area of land, he could just move over to another area not under contract and essentially just do what he wants, with no regard to the environmental services. Another point the authors bring up is that landowners may accept payments to protect areas that they were not even planning on using in the first place. Should landowners be paid just for protecting the land, even if they had no intention to use it for anything else? In some cases, it is also difficult to equate environmental services directly to land use practices because some systems are so complex, making it hard to put value on the PES. Overall, PES are a good idea. There is just some uncertainty as to what impact they really have when actually implemented.