EEP101_lecture18PES

EEP101_lecture18PES - EEP 101/econ 125:Market for E n v ir...

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Unformatted text preview: EEP 101/econ 125:Market for E n v ir o n m e n ta l se r v ice s ( E S ) a n d p o v e r ty D A V ID Z ILB ER M A N What are we talking about? Categories of Environmental Services (ES) C o n s e r v a t io n & P r e s e r v a t io n S t o r a g e a n d s t a b iliz a t io n ( e . g w a t e r ,c a r b o n ) R is k r e d u c t io n ( fl o o d c o n t r o l, p r o t e c t io n fo r m fi r e ) N a t u r a l r e s o u r c e s q u a lit y e n h a n c e m e n t ( s o il, w a t e r ) A m e n it y c r e a t io n - R e s t o r a t io n , E n h a n c e m e n t E x a m p le 1 : w a te r c le a n u p 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 E x a m p le 1 : w a te r c le a n u p I I If t h e r a t e o f d isc o u n t is 5 % Ne N et b en efi ts of P E M 2 ,0 0 0 ,0 0 0 ,0 0 0 s a v e d 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 B e n e fi t s w e r e sh a r e d d a iry g a in r e c e iv e 6 0 0 m il Issu e s Monitoring and enforcement of no grazing agreement E x a m p le 2 : F lo o d c o n tr o l b y w e tla n d s Probability Without wetland .05 Small Wetland Big wetland .02 .01 damage 10,000,000,000 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 F o r e st p u r ch a sin g f u n d T h e r e is a la r g e n u m b e r o f fo re st c o m m u n it ie s e n t it le d t o p a r t ic ip a t e C a n d id a t e t o t h e p r o g ra m h a s t o p r o v id e a b id 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 Management Ranking proposals Likelihood of deforestation Value of contribution of forest A re th e tree ra re S o il e r o sio n a n d w a te r p u r ifi c a tio n c o n tr ib u tio n s W ild life a n d b io d iv e r s ity c o n tr ib u tio n 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 area 500 300 400 250 300 500 250 450 350 250 500 400 350 total value of 1 erosion 1 Budget 24000 4500 2400 0 1500 2100 0 2250 2700 1400 1250 0 2400 3150 tree quality erosion bid/land value value/$ 8 6 9 14 1.56 3 9 8 12 1.50 5 7 9 12 1.33 6 4 6 10 1.67 2 9 7 11 1.57 6 4 7 10 1.43 9 5 9 14 1.56 6 6 6 12 2.00 3 7 4 10 2.50 2 8 5 10 2.00 3 6 7 9 1.29 6 7 6 13 2.17 8 8 9 16 1.78 4500 2400 3600 1500 2100 3500 2250 2700 1400 1250 3500 2400 3150 34250 23650 value of tree unit area 500 300 400 250 300 500 250 450 350 250 500 400 350 total value of 1 erosion 0.5 Budget 24000 4500 0 0 1500 0 3500 2250 2700 1400 1250 0 2400 3150 tree quality erosion bid/land value value/$ 8 6 9 11 1.22 3 9 8 7.5 0.94 5 7 9 8.5 0.94 6 4 6 8 1.33 2 9 7 6.5 0.93 6 4 7 8 1.14 9 5 9 11.5 1.28 6 6 6 9 1.50 3 7 4 6.5 1.63 2 8 5 6 1.20 3 6 7 6 0.86 6 7 6 9.5 1.58 8 8 9 12 1.33 4500 2400 3600 1500 2100 3500 2250 2700 1400 1250 3500 2400 3150 34250 22650 I ssu e s o f F o r e st E S p r o g ra m M o n it o r in g - t h r o u g h r e m o t e se n sin g a n d r a n d o m p h y sic a l in sp e c t io n E n fo r c e m e n t = h o w d o y o u p u n ish v io la t io n s b y p o o r fo r e st c o m m u n it ie s Are leaders personally responsible? What about control of crime that endanger forests? D ist r ib u t io n - w h o r e c e iv e s th e m o n e y ? The community leadership or the forest dwellers that may lose earning opportunities? U S a g c o n se r v a tio n p r o g r a m s 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. U S c o n se r v a tio n p r o g r a m CRP-Originated in soil conservation program Initially targeted cheapest lands Now use an index based on mixture of attributes CRP 1.9 Bill EQIP 1.0 Bill CSP .2 Bill WRP .3 Bill Other .2 Bill Spending 2005 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 Alternative Protection Land retirement Working lands Carrot CRP, WRP EQIP Stick Swampbuster C o n se r v a tio n R e se r v e P r o g r a m : B a ck g ro u n d 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. C R P -B a sic F e a tu r e s 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. C R P R e n ts CRP Rental Rate (Dollar/Acre) 12 - 40 40 - 50 50 - 60 60 - 70 70 - 113 No CRP C R P H isto r ica l B a ck g r o u n d 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 costsharing 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. T h e W e tla n d R e se r v e Pro g ram WRP was authorized under the 1985 Farm Act. 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. R e tir e m e n t P r o g r a m a n d W e tla n d s T h e 2 0 0 2 A c t e x p a n d s la n d r e t ir e m e n t b y 4 m illio n a c r e s, W R P e n r o llm e n t c a p m o r e t h a n d o u b le s , f r o m 1 .0 7 5 m il lio n a c r e s t o 2 .2 7 5 m illio n ,. In t h e C R P , 5 0 0 ,0 0 0 a c r e s c o u ld b e u se d t o e n r o ll fa r m e d w e tla n d s a n d a sso c ia t e d b u ffe r a cre a g e . C R P se r v e s t o su p p o r t fa r m e r s in co m e -n o t e n v ir o n m e n t a l n e e d s. H a s lim it s a s w e t la n d s p o licy fr a m e w o r k . W o r k in g L a n d W o r k in g la n d c o n se r v a t io n p r o g r a m s c a n b e n e fi t w e t la n d s m o st ly in d ire c t ly b y re d u c in g a g r ic u lt u r a l p o llu t io n . $ 5 .7 b illio n is a v a ila b le f r o m 2 0 0 2 - 2 0 0 7 a n d $ 1 2 b illio n fr o m 2 0 0 2 -1 1 fo r t h e E n v ir o n m e n t a l Q u a lit y In c e n t iv e s P ro g r a m (E Q IP ), W ild life H a b it a t In ce n t iv e s P ro g r a m (W H IP ), a n d C o n se r v a t io n S e c u r it y P r o g r a m (C S P ). T h e E n v ir o n m e n ta l Q u a lity I n ce n tiv e s P r o g r a m E Q I P *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. C o n se r v a tio n S e cu r ity F u n d & T h e W ild lif e H a b ita t I n ce n tiv e s P r o g ra m 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 Established . "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:. Swampbuster Wetlands, or areas that contain hydric soils which support Wetlands, mostly hydrophates mostly 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 produce some wetland characteristics Prior converted wetlands, or areas that were used for farming prior to Swampbuster and which no longer exhibit farming any wetland characteristics. 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 A ct iv it ie s o f P r iv a t e G rou p s 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 Acres Conservation Easement 1,400,453 Management Agreements 1,389,099 Leases 2,146,745 Owned by TNC 2,098,950 TOTAL 7,035,246 C o n se r v a tio n P a r tn e r sh ip s 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 Gl 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, I n te r n a tio n a l p r o g r a m s D e b t fo r n a tu re sw a p Problem- government get money, rural people do not see that P r iv a te v s . P u b lic A p p r o a ch e s 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. E S n e w i te m i n E n v . P o licy m a k e r s to o lb o x O ld t o o ls Command and control Cap and trade N e w p o licy P a y in g fo r E S “When you can not beat them-bribe them” Base line and credit R a tio n a le f o r E S p r o g r a m s P a y m e n t fo r p o sit iv e e x te r n a lit ie s When polluters has rights to pollute ES programs will buy pollution reduction Existence value, knowledge P a y m e n t s fo r p u b lic g o o d s C o m m o n p r o b le m s-t h e a t m o sp h e r e C o r r e ct in g m ism a n a g e m e n t o f a st o c k A lte r n a tiv e m e ch a n ism s s e ll E S All mechanisms have problems and need improvement Markets Clearing house ? Formal Markets Exchanges Offsets Bilateral deals Auctions Subsidies & government payments E n v ir o n m e n ta l S e r v ice s & L a n d U se 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 Controlling development Prevention of land use conversions 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 T h e D im e n sio n s o f W e tla n d S e r v ice s Local National International Wildlife habitat Public Private Public Private Public Public Flood control Public Private Public Private Water purification Aesthetic value Private Public Public Private Public Private Public Public Recreation Existence Private Public Private Public Private Public I m p lica tio n o f “ B e n e fi cia r y p a y ” 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 Private willingness emits public goods There is a role for public-private cooperation Matching fund Tax credit S e llin g E S i n m a r k e ts v s. s p e cia l tr a d e s 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 E le m e n ts o f i m p le m e n ta tio n Measurement ES output meeting well defined standards Monitoring and enforcement Unbundling Heterogeneity Correlation Targeting Role of government Third party M e a su r e m e n t 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 T h e r e a so n s f o r E S p ro d u ct sta n d a r d s ( Being commodities not unique Buyers want products) 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 E S a r e fr e q u e n t ly g e n e r a t e d o n la r g e p a r c e ls o f la n d o v e r lo n g p e r io d o f tim e F a r m e r s c a n e a sily c u t c o rn e r s In sp e c t io n b a c k e d b y a c t io n w ill le a d t o im p r o v e d E S q u a lit y justify higher prices C a n b e p a r t o f c e r t ifi c a t io n p r o g r a m M o n it o r in g a llo w s e st a b lish in g b u y e r s in su r a n c e p la n s ( G u a r a n t e e in g d e liv e r y a n d co m p e n sa t io n ) M o n ito r in g a n d E n f o r ce m e n t E S m a r k e ts a llo w s e llin g b u n d le s o f E S 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 H e te r o g e n e ity L a n d s v a r y in t h e ir p r o d u c t iv it y a n d E S g e n e r a t io n S o m e t im e s 9 0 % o f c e r t a in E S is p r o v id e d b y 1 0 % la n d B o t h b u y e r s a n d se lle rs b e n e fi t w h e n b u y e r w h o a p p r e c ia t e c e r t a in E S a r e a b le t o g e t t h e m p a r t o f e ffi c ie n t b u y in g a n d se llin g st r a t e g ie s B u y in g t h e la n d s w it h t h e b e st E S is n o t a lw a y s t h e b e st st r a t e g y - b e st t o b u y E S w h o p r o v id e h ig h e st v a lu e P e r d o lla r T a r g e tin g s tr a te g ie s 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 Benefit highest per dollars given the budget-always works for buyers T a r g e tin g s tr a te g ie s 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 b e n e fi t s m a x im iz a t io n -b u y a ll la n d w it h B n > B B e n e fi t c o st m a x im iz a t io n : b u y a ll la n d w it h Bn/ C n > B/ C ta r g e tin g Β Cost Minimi zation Benefit max Benefit/cost ratio C I m p o r ta n ce o f h e te r o g e n e ity r a n k in g v a r y w ith ta r g e tin g C 10 8 15 6 8 9 14 8 B 5 3 6 5 7 3 4 6 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 T h ir d p a r tie s 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 R o le o f g o v e r n m e n t i n E S Create demand for environmental credits Establish rules of games d e fi n itio n L ia b ility 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) E S a n d p o v e r ty a lle v ia tio n T h e o r y :O n e t o o l ( E S ) m a y b e in e f f e c t iv e in t h e pursuit of two objectives( Environmental quality and poverty alleviation) it a ll d e p e n d s o n sy n e r g ie s a n d c o r re la t io n s E s p ro g ra m m a y a ffe ct Urban poor Poor asset owners Landless rural poor I m p a cts o n u r b a n p o o r P o ssib ly n e g a t iv e fo o d p r ic e s e ffe c t ( su p p ly r e d u ct io n ) E m p lo y m e n t e ffe c t s o f v a r io u s k in d s S o m e E S p r o g r a m y su p p ly p r o p o o r g o o d s Flood control, fire protection Improved water quality E x ist e n c e v a lu e o f w ild life is p r e su m a b ly a lu x u r y g o o d I m p a cts o n p o o r a sse ts o w n e r s w h e n t h e y a re s o ld t o E S Notation B = ES per acre R rent per acre W=Value of labor release at sale V price of ES Farms have L hectares Farms 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 D o t h e p o o r g a in f r o m s e llin g l a n d fo r E S? C a se o f sig n ifi c a n t g a in 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 G a in t o p o o r fr o m E S is r e la t iv e ly sm a lle r If no correlation between size and R- rich is larger No correlation between B and R. P o o r m a y n o t g a in m u c h if t h e y o w n sm a ll a n d h ig h ly p r o d u c t iv e p lo t s T h e c a se o f w o r k in g l a n d s P ay m en t p er acre V B C o st s in clu d e D R = P D Y + D C Revenue loss PD Y ( use traditional technology) Cost increase D C ( Reduce input use) P a r t i c i p a t e i n E S p r o g r a m i f V B > PD Y + D C P o o r b e n e fi t if ( P D Y + D C )/ V B is n e g a t iv e ly c o r r e la t e d t o in c o m e . 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 I m p a cts o n l a n d l e ss If la n d le ss a r e e m p lo y e d in a c t iv it ie s r e d u c e d b y E S p rog ram - th e p ro g ram s m ay b en efi t th e p o o r l a n d o w n e r s b u t m a y h a r m t h e l a n d le ss E S p r o g r a m d e sig n a ffe c t s e m p lo y m e n t & liv e lih o o d o p p o r tu n it ie s o f t h e la n d le ss . Less jobs if ES results in closed reserves than w h e n it le a d s t o E c o t o u r ism D iv e r t in g r e so u r c e s a n d d e n y in g a c c e ss a s p a r t o f E S m a n a g e m e n t m a y b e c o st ly t o t h e landless (they utilize these resources informally) D y n a m ic c o n sid e r a tio n s P o o r m a y b e la te a d o p t e r s a n d E S p a y m e n t e x c lu d e s c o n sid e r a t io n o f im p r o v e d o p t io n s. T h e b e n e fi t s o f E S p r o g ra m m a y v a r y in t h e ir d y n a m ic p r o fi le . Some ES effort aim to induce a sustainable change Other aim to provide quick relief Income may vary over time C o n t r a c t sh o u ld re fl e c t t h e d y n a m ic n a t u r e o f b e n e fi t s a n d in c o m e a v a ila b le t o E S p r o g r a m E S d e sig n sh o u ld c o n sid e r im p a c t o f p r e se n t p e r fo r m a n c e o n fu t u re e a r n in g Management of Purchasing Fund Management Heterogeneity -ES benefit &cost per acre vary Consider first the case with the No Scale effectsSuppose 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 ...
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This note was uploaded on 03/18/2010 for the course ECON C125 taught by Professor Zelberman during the Spring '09 term at Berkeley.

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