Environmental Services

David Zilberman

University of California Berkeley

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.

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

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

The Dimensions of Wetland ServicesLocal National International

Wildlife habitat PublicPrivate

Public Public

Flood control Public Private Public Private Public Private

Water purification PrivatePublic

Public Private

Aesthetic value Public Private Public Public

Recreation Private Private Private

Existence Public Public Public

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 manyNo 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 cooperationMatching fund Tax credit

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 Permitting:conditional approval of development activities

Institutional Setup to Create ES Private parties may invest in excludable amenity

creating ES (habitat to birds or fish,recreation area) NGO’s 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 NGO’s

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 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 criteriaAcreage maximization Buy the lands with the lowest Cn

(regardless of benefits) given the budgetBenefits 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

Alternative Forms of Targeting

Benefit per acre

Cost per acre

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 )

Scale Effects

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

Unit type number of units Size Benefits/unit total cost

1 6 2 2 22 3 4 6 43 1 12 24 12

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

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-especially given that ES require large areas at remote locations

The ability to trade in ES improves with scientific knowledge- need to quantify&measure: benefits of wetlands, bio-diversity gains,reduced risks etc.

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 netAverage 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.

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 objectiveMinimize public & private costs of wetland targetsAgencies may aim to maximize wetland provisions given the given the

agency budget-agency budget-ignoring regulation costs leads to inefficiencyignoring regulation costs leads to inefficiency

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 management&design of restoration and conservation of wetlands

` * Reduce transaction cost of regulation* Address issues of spillover of benefit and costs

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.

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

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

Alternative Approaches to Wetland Protection

Land retirement Working lands

Carrot CRP, WRP EQIP

Stick Swampbuster

Conservation Reserve Program:Background

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.

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.

CRP Rents

CRP Rental Rate (Dollar/Acre)

12 - 4040 - 5050 - 6060 - 7070 - 113No CRP

CRP Historical Background 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 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.

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.

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.

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).

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.

*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.

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.

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.

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

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

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.

TNC’s 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 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,

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.