Tuesday, October 14, 2014

Incentives, Costa Rica and PES

One of the things we learn in natural resource economics is to look at problems in terms of their costs and benefits.  By asking questions about who gains and who loses (and when, and how) we can gain an important perspective on the causes of natural resource problems. 

While it is certainly true that people behave in ways that we can’t always predict, when given access to private benefits from natural resources, people tend to take actions that promote their own well-being. This access comes in the form of our daily contact with open access and common property resources as well as extraction and habitat conversion on private lands. Individually it does not feel like we’re doing much, but in the aggregate our actions often have significant adverse effects on the environment. 

Yes, some people act in ways that benefit the environment some of the time, but we all pollute in numerous ways to promote our own benefits (comfort, convenience, standard of living), because it’s cheap and easy to do so. As individuals, the costs we pay for access to the world’s resources are low because they are shared by everyone. 

How do we change the calculus?  Let’s try everything and see what works. Education, an appeal to “do the right thing”, and legal mandates on acceptable use, all serve an important role.  Monetary incentives that affect household-level costs and benefits also can be an effective tool in some situations. These incentives come in many forms, most of which we discuss in this course.
One incentive-based method that seems to be gaining favor in developing nations is PES. PES stands for Payments for Environmental Services. The basic idea of PES is to create incentives for conservation of natural resources by transferring dollars from those that benefit from conservation to those who bear the (opportunity) costs of conservation.  

In some PES arrangements government and/or NGOs pay landowners to engage in activities to conserve or restore biodiversity. This can be as simple as letting a cow pasture revert back to its natural state or setting aside lands that would otherwise be used for another purpose. 

Costa Rica is a leader in PES and a great example of the power of this approach. From the 1940s through the 1980s, Costa Rica had one of the highest rates of deforestation in the world.  As recently as 1995, forest cover in Costa Rica was as low as 25 percent of national territory, down from over 85 percent in the early 1900s. The principle causes of deforestation were incentives for the conversion of land to agricultural uses, such as preferable tax treatment for lands used to cultivate crops and support cattle, and heavier tax burdens for “unproductive” lands (i.e. lands not used to produce market benefits). People responded to the incentives they faced. Given the costs and benefits of land use it made sense to convert lands to other uses. 

In 1996, leaders in Costa Rica decided to try to reverse this path of biodiversity loss. The main idea was simple: reward landowners for conservation rather than rewarding them for land conversion. A series of forest laws were enacted, which gave favorable tax treatment to conservation and reforestation, banned the export of primary forest products, mandated that banks provide low-interest loans for reforestation, created a system of national parks and forest reserves and, in 1997, enacted a PES system.  

Costa Rica’s PES system involves direct payments to landowners in exchange for the adoption of land uses and management techniques that provide one or more of four services:  Greenhouse gas mitigation, provision of water or other hydrological services, conservation of biodiversity or provision of scenic beauty for recreation and tourism. Payments are provided by government. Revenues from a fuel tax (ala Pigou) are a primary source of funding. Other sources of funds include sale of carbon credits to other nations and international loans. Between 1997 and 2005, a half-million hectares of forest lands were enrolled in the program. Forest cover is now over 60 percent and rising.

While this progress is exemplary, the Costa Rican Minister of the Environment recently stated that it is getting increasingly difficult to conserve. Without a system of international carbon markets, such as that which might take place through large scale adoption of REDD and REDD+ schemes, he suggested that the Costa Rican path of conservation will soon be unsustainable.

Read more about Costa Rica’s PES experience here at PaxNatura.

Read more about PES here at UNEP and at Ecology and Society.


Nicholas Alphin said...

After reading this piece and briefly discussing about this topic in class, it is clear that Costa Rica is showing initiative and concern for environmental treatment. People respond to incentives, and Costa Rica is supply plenty of them. Tax breaks and subsidies are given to those that take actions toward environmental preservation and proper treatment. Some of Costa Rica's actions mirror the Soil Bank Program that was enacted in the United States during the late 1950's that provided financial compensation for farmers that left farmland stagnant for 10 years. Although tax breaks and subsides are an effective method for encouraging healthy environmental actions, I can see how that would be a difficult system to upkeep due to finances. I love Costa Rica's actions and how they are setting a precedent to other nations on effective environmental policy and practices. This article makes me very excited to see the potential for a further detailed carbon trading system.

Bridget Callahan said...

PES was a successful incentive based program in Costa Rica. In order for this type of system to work in other countries there needs to be a strong administrative backing for the program. The administrative part of the PES system would need to make sure property owners are preserving their land and the allocation of money is not corrupted. I was interested to see if any other countries had successful PES programs. Both Mexico and Ecuador have similar successful programs. As more countries start PES programs or similar preservation programs the sooner a carbon trading system can be established.

Reaghan Smith said...

A couple of weeks ago, we discussed Costa Rica and the success of the PES program. After learning about many scenarios regarding subsidies and tax breaks, they seem like the most efficient way to truly grasp the people's attention since it involves money. However, it is getting increasingly difficult to conserve. If more countries decided to embark on similar projects, maybe an international carbon market could be produced and conservation in Costa Rica could be sustained. What incentives do other countries have to begin such programs? Don't the leaders of the country need to make a step forward first to begin the process like the leaders in Costa Rica?

Ashley Elias said...

After reading this blog it really helped me understand incentives when dealing with PES. It helped me write my extra credit assignment for this course. I think PES is a wonderful incentive based program and should be implemented more. Everyone has their own opinion when it comes to solutions but i believe PES is a great subsidy for people who are trying to be (or sometimes forced to be when needing money) environmentally friendly which will hopefully promote more people to do the same thing.