Environmental Services

1
Environmental Services

• David Zilberman
• University of California Berkeley

2
Categories of Environmental Services (ES)

• Pollution Prevention. Farmers may be paid to
  modify environmental damaging activities and
  engage in sustainable practices(farmers may have
  implicit historical rights to pollute that have
  to be bought).
• Conservation. of natural resources, life styles,
  ecosystems etc. Including forest resources and
  wetland, agricultural communities ( slow urban
  sprawl), traditional varieties and species, etc.
• Amenity creation-restoration and built up of
  natural resources Include clean up activities,
  planting of forests, restoration of wetlands etc.

3
Environmental Services Land Use

• Most ES are embodied in land use and management
• In situ conservation of crop bio-diversity
• Soil carbon sequestration through no tillage
• Provision of habitat in wetlands
• ES can be attained by
• Working land programs-promoting green practices
• Transition to IPM
• Conversion of lands to greener use
• From farming to forest
• prevention of land use conversions
• Controlling development

4
The Multidimensionality of ES

• The same land may provide a multitude of ES
• No tillage sequesters carbon and reduced soil
  erosion
• A wetland may purify water and support wild life
• ES may be complementary or substitutes
• Growing Wetland acreage may areas with native
  plants
• Reduction in runoff may be accompanied in less
  wind erosion
• ES may provide regional, national global
  benefits
• Benefits of ES vary across individuals groups
• Bird watchers hunters benefit from better bird
  habitat
• All citizens gain from flood control-but the risk
  reduction vary by location

5
The Dimensions of Wetland Services
Local National International
Wildlife habitat Public Private Public Public
Flood control Public Private Public Private Public Private
Water purification Private Public Public Private
Aesthetic value Public Private Public Public
Recreation Private Private Private
Existence Public Public Public
6
Public Private Sectors Wetland Management

• Responsibility and finance of wetland should
  correspond to nature of their benefits
• Government should concentrate on providing
  public good aspects- utilized by many
• No exclusion - e.g Existence value
• Private agencies have important role in
  financing wetland aspects that benefit their
  members-wildlife habitat.
• Private action is indication of willingness to
  pay for wetland services- it may be understated
  because of public good aspects
• There is a role for public-private cooperation
• Matching fund
• Tax credit

7
Mechanism to Obtain ES

• Aggregate targets of ES with Tradable permits
• No reduction target led to wetlands banking in
  U.S.
• Kyoto targets may be attained by CO2
  Sequestration
• Purchasing Funds-target buy assets or pay for
  ES
• Nature conservancy buys lands development right
• USCRP pays for farmland use modification for a
  period
• Utilities pay for carbon sequestration in Costa
  Rica Iowa
• Incentives-payments for ES, penalties for damages
• Direct controls
• Zoning restricting land use to certain
  activities
• Permittingconditional approval of development
  activities

8
Institutional Setup to Create ES

• Private parties may invest in excludable amenity
  creating ES (habitat to birds or fish,recreation
  area)
• NGOs may finance and control specialized ES
• National Local governments may
• Pay directly for or subsidize private provision
  of amenity creating ES
• Establish legal framework to require generation
  of resource conserving or pollution preventing
  ES
• Global ES may be generated controlled by
• International agreements (Kyoto, Debt for nature)
• Voluntary agreements initiated by NGOs

9
Management of Purchasing Fund

• Heterogeneity -ES benefit cost per acre vary
• Consider first the case with the No Scale
  effects-
• Suppose there are N locations, identified by
  n1,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

10
Alternative Forms of Targeting
benefit targeting
Benefit per acre
Cost targeting
benefit cost targeting
Cost per acre
11
Implication of Targeting Schemes

• Benefit cost targeting are optima,Maximizing ES
  for budget
• Cost targeting maximize acreage preferred by
  land owners.
• Benefit maximizing result in lowest acreage
  reduction
• The importance of correlation when low cost
  lands has high ES (negative correlation of Bn and
  Cn) the welfare loss of cost targeting is small.
  It is big in case of positive correlation.
• The Importance of variability Benefit targeting
  is optimal when benefits are positively
  correlated to costs variability of benefit is
  much larger than of costs

Cn 1 2 3 4 5 6 7 8 9 10 11
Budget 21 Bn1 1 3 5 7 9 12 15 18 20 24
28 Optimal policy-Buy Highest Q Bn2 1 2 2
3 3 3 3 3 3 4 4 Optimum
-Maximize Acreage (in particular n 6 )
12
Scale Effects

• When ES/acre increases with size targeting may
  radically change with budget

When Budget is 8 Buy 2 units type 2
Benefits 12 When Budget is 10 Buy 2
units type 2 1type1 Benefits 14 When Budget is
12 Buy 1 unit type 3 Benefits
24 When budget is 15 buy 1 unit type 3 1
type 1 Benefits 26
13
Difficulties of Trading in ES

• Trading requires quantifiable observable
  commodities- it is not always feasible with ES
• Quantification of output is difficult when ES are
  aesthetic values or bio-diversity.It is easier
  for soil carbon.
• .When benefits are random (flood control) or
  unobservable directly (sequestration) agreements
  for estimation of benefits are needed. A critical
  element is establishing a bench mark- benefits
  are improvements
• Monitoring enforcement are problematic-especiall
  y given that ES require large areas at remote
  locations
• The ability to trade in ES improves with
  scientific knowledge- need to quantifymeasure
  benefits of wetlands, bio-diversity gains,reduced
  risks etc.

14
Distribution of ES Earnings

• Cost of ES may be born by endogenous or local
  population- who may be constrained sometimes
  removed to attain conservation etc.
• But they may not receive the earnings that may
  go to governments, NGOs, or legal owners
• Even when they receive earnings they may not gain
  - they rarely participate in negotiations and
  their overall cost may exceed benefits
• ES gains are not a panacea-soil carbon may result
  in gross gain of 150 per acre- with much lower
  net
• Average Bio prospecting benefits/acre are likely
  to be very small- Bio knowledge is crucial to
  identify a priory location with high potential
  and target them.

15
Private Sector Regulations and ES

• Permitting is major tool to regulate ES
  (especially wetland) use by private sector.
• Criteria for optimal regulation of wetlands
• Maximization of net public and private benefits
• Private cost of regulations should be considered
  in policy design
• A less ambitious objective
• Minimize public private costs of wetland
  targets
• Agencies may aim to maximize wetland provisions
  given the agency budget-
• ignoring regulation costs leads to inefficiency

16
Institutional Setup for Various ES

• A wetland with purely local benefit should be
  regulated by the local government.
• Differences policy approaches between regions
  allow for choice given heterogeneity of
  preferences.
• Decentralized solutions may be costly in terms
  of transaction and regulation costs
• Regional cooperation can
• Reduce fixed cost of research and
  managementdesign of restoration and conservation
  of wetlands
• Reduce transaction cost of regulation
• Address issues of spillover of benefit and
  costs

17
Division of Responsibilities in a Federalist
System

• ES may provide a variety of benefits across
  constituencies-All benefits may be considered and
  compensated for in ES design and management
• Funds for managing credits for provision of
  benefits to National and Global ES may be
  created. That will require international
  agreement or national policies, but will provide
  the right incentives
• Activities that compromise ES(wetland
  modification) activities may be constrained to
  protect national and global amenities-or be
  taxed to pay the fund.

18
Regions with Vulnerable Isolated Wetlands(Duck
Unlimited study)

• Vulnerability is the result of weak law high
  concentration of isolated wetlands
• Great Basin(excluding California,Oregon
  Washington)-Wetlands occur on agricultural land
  in Nevada and Idaho
• Prairie Pothole region( excluding Minnesota and
  Iowa)-Prairie Pothole Region is located on ag
  land, especially in Dakotas.
• Southern Great Plains- The majority of playa
  lakes in Texas occur in intensively farmed region
  of the Panhandle
• Gulf Coastal Prairie-,many wetlands occur on
  farmlands east of Houston,,
• Mississippi Alluvial Valley(excluding Tennessee)
• Great Lakes(excluding Michigan, Minnesota
  Wisconsin) Not much wetland on agricultural land

19
Wetlands in Agricultural Lands

• In 5 of the regions isolated wet lands are
  agricultural lands entitled to CRP-There are 6
  millions of wetlands acres in agriculture
• 46 millions of the U.S. 300- million acres of the
  U.S. farm lands are converted wetlands.
• A large acreage of wetland occurs in rangelands
  (the Sandhill region of Nebraska) who are not
  part of commodity programs

20
Alternative Approaches to Wetland Protection
Land retirement Working lands
Carrot CRP, WRP EQIP
Stick Swampbuster
21
Conservation Reserve ProgramBackground

• 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.

22
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.

23
CRP Rents
24
CRP Historical Background

• CRP Established in its current form in 1985 to be
  administered by USDAs 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.

25
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 . was around 1,300 per acre. The
  study also concludes that the WRP achieves
  restoration at around 600 per acre.

26
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.

27
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).

28
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.
• 60of 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.

29
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.

30
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.

31
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

32
Activities of Private Groups

• Easements, Duck Unlimited DU rarely buys wetlands
  outright, but negotiates conservation easements.
  These agreements are for 10-years.
• The nature conservancy has a diversified approach
• Ownership Type 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

33
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.
• TNCs 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 USDAs 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,

34
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.