Stefanie Engel

The Devil in the Detail: A Practical Guide on Designing Payments for Environmental Services

Payments for environmental services (PES) have become a popular approach to address environmental degradation. However, evidence on its effectiveness is scarce and rather mixed. PES is not a panacea, but there are many cases where PES can be a promising tool. Yet, poor PES design translates into poor performance of the instrument. PES design is a complex task; the devil is in the detail of a number of PES design features. The purpose of this paper is to provide guidance in dealing with this complexity through a comprehensive review of PES design that is accessible to both academics and practitioners. Practitioner guidelines on deciding whether PES is the best approach and for selecting among alternative design features are presented. PES design has to start from a careful understanding of the specific ecological and socio-economic context. We now know a lot about which design features are best suited to which context. It is time to put these insights into practice.

Conservation Payments under Uncertainty

The paper analyses the implications of landowners’ option values in land allocation and derives policy recommendations for payments for Reducing Emissions from Deforestation and Forest Degradation (REDD). Given that REDD will not represent a permanent change in the cumulative flux of carbon dioxide to the atmosphere, payment scheme design is motivated by the need to secure forest carbon sinks over time (the ‘permanence criterion’) while remaining relatively cost-effective. Alternative payment schemes, combining fixed and variable components, are considered in a framework with two competing land uses, forest and agriculture. Cost-effectiveness depends on the dependency structure between the returns from the indexed component of the payment and the returns from the alternative land use, the relative volatility level of the underlying returns, and the relative combination of fixed and variable payments. After developing the general model, it is is applied to REDD policy scenarios in Parana State, Brazil.The decision of whether to retain forest or convert to another land use is affected by uncertainty over future land use returns. This paper examines the design of conservation payments to landowners under uncertainty. Payments are either indexed to the returns from deforestation (agriculture), or to a market value associated with forest nonuse benefits. Payment size depends on the degree of correlation between payments and agricultural returns, and their relative volatility. Market-based payments for reducing emissions from deforestation and degradation (REDD) are simulated for Brazilian soybean growers. Payments indexed to carbon prices are larger than those indexed to international soybean prices.

Exploiting Common Resources with Capital-Intensive Technologies : The Role of External Forces

This paper focuses on the interactions between local communities having at least some degree of informal claims over natural resources and firms interested in commercially exploiting such resources, explicitly allowing for interventions by third parties interested in community welfare and environmental outcomes. Integrating conflict and bargaining theories, we develop a bargaining model with endogenous inside and outside options, in which the feasibility and outcomes of a potential bargaining game depend on the unraveling of a conflict stage and vice versa. The model implies that, contrary to the conventional bargaining model, distribution and efficiency cease to be separable. We show that certain third-party interventions in the bargaining process may have unexpected and counterproductive effects.

'Painting the Forest REDD?' Prospects for Mitigating Climate Change Through Reducing Emissions from Deforestation and Degradation

This paper aims to introduce the role of forests in mitigating climate change and summarise some of the key issues and research covered in Palmer and Engel (2009). Section 2 presents the climate change problem, the role of forests and the policy debate so far. Section 3 focuses on research to assess the cost-effectiveness of avoided deforestation as a strategy to mitigate climate change, while section 4 examines the barriers to the adoption of such a strategy, primarily those related to policy and institutions. Section 5 looks at policy design, with a focus on overcoming additionality and leakage constraints and maximising the efficiency and effectiveness of potential avoided deforestation schemes. The main findings are analysed alongside some further issues for discussion in section 6. It should be noted upfront, however, that providing a full review of related literature is beyond the scope of this paper4. Excellent studies are constantly adding to the existing body of knowledge relevant for REDD policy design. Section 7 concludes by addressing some of the key, remaining open questions along with suggestions for future research.

The Complexities of Decentralization in a Globalizing World

In many developing countries, decentralization programmes for natural resource management aim to induce incentives for sustainable resource management at the local level. The effectiveness of such programmes has, however, suffered from weak property rights to the resource and by the presence of externalities. Growing economic integration among countries has exacerbated these problems by increasing the exposure of local user groups to commercial actors interested in resource extraction. In this paper, the interplay of decentralization and globalization in affecting environmental outcomes and community welfare is analysed through a game-theoretic model of community-firm interactions. The results highlight the complexities of policy design. First, by raising the extractive value of the resource, globalization may lead to communities negotiating resource extraction agreements with firms. Second, with a lack of effective state enforcement of community resource rights, communities may be unable to assume de facto ownership over the resource, while commercial actors succeed in exploiting resources without community consent. No single policy option provides a panacea to counteracting these negative effects. Instead, a mix of policies, combining incentive payments along with the provision of more secure property rights and poverty alleviation is shown to have the potential to improve both environmental outcomes and community welfare.

Overcompliance, labeling, and lobbying: The case of credence goods

This paper presents a model of quality choice in the case of credence goods, i.e., when consumers cannot observe quality even after purchase. It shows that firms may voluntarily overcomply, i.e., produce high quality, even when doing so implies giving up short-run profits. This generalizes results on reputation effects derived in the IO literature for the case of experience goods. The crucial assumptions of the model are that there is a positive degree of monitoring of firms’ claims and a positive probability that the firm is of an “honest type,” i.e., always prefers to produce high quality. The result also helps explain why we see phenomena such as firms voluntarily overcomplying with environmental standards, food safety laws, etc. It is shown that overcompliance is more likely when consumers learn about all (positive and negative) monitoring results than when consumers only find out about firms that have been found cheating, as is often the case in practice. I further show that even firms that pretend to be producing high quality while really producing low quality may have an incentive to lobby for stricter monitoring. This helps explain, for example, why firms in Europe and the United States lobby for the implementation of voluntary environmental audits, third-party labeling agencies or other disclosure strategies.

On the Endogeneity of Resource Comanagement: Theory and Evidence from Indonesia

We examine theoretically the emergence of participatory comanagement agreements that share between state and user the management of resources and the benefits from use. Going beyond useruser interactions, our state-user model addresses a critical question—when will comanagement arise?—in order to consider the right baseline for evaluating comanagement’s forest and welfare impacts. We then compare our model’s hypotheses concerning de facto rights, negotiated agreements, and transfers (all endogenous) with community-level data including observed agreements in a protected Indonesian forest. These unique data could refute the model, despite being limited, but instead offer support. (JEL Q28, Q57)

Ensuring REDD plays its part in any post-2012 agreement: which issues remain to be resolved?

This article reviews the recent policy literature and political debate on Reduced Emissions from Deforestation and Degradation (REDD). The strengths of REDD, including its cost–effectiveness, are highlighted. The main focus of the article is the identification of policy issues that need to be resolved before a broad international consensus on REDD+ (which includes the addition of conservation, sustainable management of forests and enhancement of forest carbon stocks to the concept of REDD) can be reached. Such a consensus is particularly important if REDD+ is to be included in a post-2012 climate agreement and is to be used as a policy mechanism that can effectively mobilize land-based mitigation. Defining methodologies in order to set reference scenarios, tackling leakage, and assigning liability for carbon credits generated in REDD+ schemes are among the policy issues discussed.

On the Incentives of Violence

This paper revisits the rationalist conceptions of warlordism in civil wars, which has amounted to the greed hypothesis as opposed to grievance. This argument states that rebels are not motivated to generate public goods—the betterment of society—but seek private gain. While initial studies focused on explaining why civil war breaks out in the first instance, there is now increasing interest in modelling violence and warlordism in an ongoing civil war. In this paper, a contextual model is suggested to explain the dynamics of violence in the Sri Lankan ethnic conflict. We conceptualize a game theoretical model, which distinguishes extrinsic (‘greed’) and intrinsic motivations (‘pride’). We utilize narratives from the civil war of Sri Lanka and model a game that involves two layers of actors: combatants (rebels and army) and civilians (farmers of different ethnicities). In order to understand the causal linkages between greed, pride and grievance, we analyze local conflicts over resources situated in the civil war zones and ask how these localized conflicts are intertwined with the broader political struggles orchestrated in the civil war. Broadly speaking, our study suggests that while in the early stages of warfare, pride may have been more dominant, it is subsequently crowded out in favour of greed.

Participatory Protection in Theory and Application: Paper Tigers, Fences & Fines, or Negotiated Co-Management?

Forest protection can imply binding constraints on communities (‘fences & fines’) yet some attempts to protect forest by blocking local land use are fruitless (‘paper tigers’). Participatory protection, i.e. involving a local community in forest ‘co-management’, is a relatively recent forest policy innovation that falls between these two endpoints. We model the emergence of negotiated agreements that can share management of and benefits from forest between actors with different objectives, a state and forest users. Going beyond models of user-user interactions involving common-property resources, our state-user model addresses the question of when rights are devolved to such users. Next we compare our derived hypotheses about de facto rights, negotiated agreement, and within-agreement transfers – all endogenous – with unique community-level data describing a large protected area in Indonesia. The results broadly support this model.