Usefulness of the article:The quality of our ecosystems is deteriorating due to our polluting activities. This article seeks to understand how payments for ecosystem services can help combat biodiversity loss and what the associated challenges are, particularly the idea of adding an agglomeration bonus to payments.
Summary:
- Ecosystem services, which correspond to the benefits derived from ecosystems, are deteriorating due to human activity.
- Payments for ecosystem services (PES) are an increasingly common tool, particularly in agriculture. Their aim is to halt this degradation and achieve optimal provision of ecosystem services.
- When the spatial configuration of a habitat is important, adding an agglomeration bonus—an additional payment for connected habitats—can improve the environmental effectiveness of PES.
Ecosystem services are the benefits we obtain from nature, including provisioning services, which are tangible products such as wood; regulating services such as pollination or flood mitigation by wetlands; supporting services such as water and carbon cycles; and socio-cultural services such as aesthetic, recreational, or spiritual aspects (Millennium Ecosystem Assessment, 2005).
In 2019, the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) published a summary of its global assessment report on biodiversity and ecosystem services. The main conclusion of this report is that there is a worldwide degradation of ecosystem services, particularly due to overexploitation of land (IPBES, 2019).
Apart from provisioning services, ecosystem services are positive externalities that are not taken into account by markets. Therefore, policies need to be put in place to achieve more efficient provisioning. At this stage, voluntary incentives are one of the most common mechanisms for encouraging conservation on private land (Lewis et al. 2011). This article will present the mechanism of payments for ecosystem services (PES), as it allows the values of nature to be incorporated into landowners’ decision-making. Although widely used, this mechanism remains relatively unknown. In particular, we will consider this type of mechanism while incorporating an extension better known as the « agglomeration bonus. »
1) What are Payments for Ecosystem Services?
1.1 Environmental policies
In the field of environmental economics, there are market instruments known to address negative externalities, such as the Pigouvian tax[2] on pollution or quota markets such as the European quota market for regulatingCO2 emissions. These policies follow the polluter pays principle and Coase’s theorem (1960): if transaction costs are low, both the Pigouvian tax and the quota market achieve optimal allocation.
On the other hand, there are also positive externalities associated with land management. For example, if farmers plant grass strips near a river, this helps absorb excess fertilizer and thus improves water quality. But for the farmer, this can lead to additional costs and opportunity costs in terms of production. To address this situation, payments for ecosystem services (PES) have emerged as an instrument that follows the beneficiary-payer principle and consists of « paying » landowners for actions that increase ecosystem services. The most widely cited definition of PES is that of Wunder (2005), who defines PES as a voluntary action between at least one buyer and at least one seller where payment is conditional on the provision of ecosystem services.
1.2 PES in practice
PES are most commonly implemented in agriculture, as the intensification of agricultural land use is one of the main reasons for the loss of biodiversity and other ecosystem services. In Europe, provisions for PES have been in place since 1992 as part of the Common Agricultural Policy (CAP). Since 2015, in France, they have been referred to as agri-environmental and climate measures (AECM)[i]. Recently, however, PES for maintaining organic farming have been the subject of debate in the CAP reform[ii].
At the global level, the REDD+ program aims to compensate foresters for forest management that combats deforestation and forest degradation. Formalized in 2013, the idea behind this program is that developed countries can establish a contract with developing countries whereby developed countries pay the opportunity costs associated with reducingCO2 emissions from forests in developing countries in order to meet the emission mitigation obligations of developed countries (Chiroleu-Assouline et al. 2018).
1.3 The challenges of PES
First, when a buyer of ecosystem services rewards a seller of these services for the costs of actions taken to increase ecosystem services, there is an information asymmetry between the seller and the buyer, which can lead to « overpaying » for these services (adverse selection problem) relative to the benefits derived. A study by Chabé-Ferret and Subervie (2013) analyzes the effectiveness of seven MAECs in France, and their results show that MAECs that impose strict requirements have almost no windfall effect. To solve this problem of information asymmetry and adverse selection, academic literature proposes the use of reverse auctions, where sellers bid for contracts and the buyer accepts the cheapest ones. Auctions have the advantage that each seller will offer their own price, which will be close to their true costs (compared to a situation where the buyer offers contracts all at the same price and sellers with lower costs receive the price of sellers with higher costs). Although reverse auctions can address information asymmetry, there is always the risk that the cheapest bids will provide fewer ecosystem services or lower quality services. To address this concern, the buyer can implement eligibility criteria for participating in the auction (Latacz-Lohmann and Van der Hamsvoort, 1997).
However, it can be difficult to measure ecosystem services, and monitoring costs can be quite significant. As a result, most PES programs reward landowners for actions rather than for the quantity of ecosystem services provided. On the other hand, although less common, there are also results-based payments, particularly in northwestern Europe (Herzon et al. 2018). For these results-based payments, there must be a well-defined objective that can be measured by one or more indicators. For example, a program in Germany aimed at grassland conservation bases payments on the presence of four plant species (Herzon et al. 2018).
Finally, there is the question of the permanence of PES. PES contracts typically last from five to fifteen years, depending on the program. Sometimes a contract is renewable, otherwise the land covered by a non-renewable contract may revert to its « previous use, » where the benefits derived will gradually diminish or even disappear. This issue is also linked to the idea that extrinsic motivation such as PES can undermine intrinsic motivation to do good for the environment.
2) The agglomeration bonus
Habitat fragmentation—the process of dividing contiguous habitat areas into smaller, more isolated pieces—can be one of the causes of the loss of certain species and thus biodiversity (Albers et al. 2017). The probability of a species’ survival may depend not only on mortality and fertility rates, but also on its ability to migrate and colonize a new habitat following a natural disaster or predator threat. When habitat patches become scarcer and more widely spaced, the probability of a species’ survival is reduced.
Habitat fragmentation is therefore one of the main reasons why a bonus should be added to PES for contiguous land that is conserved in order to prevent habitat fragmentation. This mechanism was first proposed in the literature by Parkhurst et al. (2002). The idea is as follows: if a landowner has several parcels of land and takes measures to conserve or create habitat on one parcel of his land, he receives the standard PES and a bonus for each adjacent parcel that is also conserved, either by the same owner or by a neighboring owner. So, if the owner conserves a parcel on the border of their land, they have an incentive to negotiate with their neighbor to conserve an adjacent parcel if it is not yet profitable for the neighbor.
Figure 1: Illustration of the agglomeration bonus concept
Source: Parkhurst et al. (2002)
The main disadvantage of the agglomeration bonus is the possibility of having several Nash equilibria[5], and therefore of encountering a classic problem of information asymmetry that requires coordination (Parkhurst et al, 2002). Among these different equilibria, there is only one optimal equilibrium for society, called the Pareto dominant Nash equilibrium, which depends on the targeted land configuration (Parkhurst and Shogren, 2007). Some examples of configurations include corridors that allow migration or a configuration that minimizes the size ratio between the edges and the interior; the target configuration will depend on the species to be protected. The challenge is then to get landowners to coordinate to conserve land in order to achieve this type of equilibrium. Several studies have found multiple Nash equilibria in different scenarios in their models, and the failure of coordination has been documented in some experimental articles, demonstrating the importance of understanding how and why coordination is possible (Albers et al., 2008; Parkhurst and Shogren, 2007). For example, Parkhurst and Shogren (2007) chose four specific configurations—each of which could correspond to the habitat needs of different species—and studied whether these configurations were achieved with an agglomeration bonus. They found that the right configuration is achieved when landowners have more experience with the payment structure and when the configuration requires less coordination among landowners. In other words, the first configuration (a) in the illustration will be more difficult to achieve, as it requires coordination among all four landowners, compared to the last configuration (d), where there is no coordination among landowners.
Figure 2: Illustration of the configurations studied in Parkhurst and Shogren (2007). The bold lines indicate the boundaries between landowners.
Source: Parkhurst and Shogren (2007)
An alternative form of agglomeration bonus would consist of an agglomeration payment where there is a minimum threshold of contiguous land retained before the standard PSE is paid. In this case, payment is only received if there is a sufficient area of land retained, and there is no bonus.
As for the effectiveness of agglomeration bonuses, several theoretical and experimental studies analyze one of the following measures of effectiveness: cost-effectiveness, environmental effectiveness, and economic effectiveness.
For cost-effectiveness, the idea that a goal is achieved through the reverse auction system (with the lowest cost), there are mixed results in the literature.
With regard to environmental efficiency, it is often very costly to measure the ecosystem services concerned directly, and therefore a proxy is used, such as the amount of land enrolled in the PES program or a measure of the connectivity of conserved lands. Most studies find that agglomeration bonuses have a positive effect on the environmental effectiveness of PES, but others find mixed effects. For example, Delacote et al. (2016) simulated PES and agglomeration bonus policies targeted at reducing deforestation, using avoided deforestation and relocations as measures of environmental effectiveness, and found that an agglomeration policy reduces relocations but at the expense of reducing avoided deforestation.
To assess the economic effectiveness of the agglomeration bonus, estimates of the monetary values of ecosystem services are needed. These can be obtained through surveys of willingness to pay for services, choice experiments, or hedonic regressions. In addition, the provision of one ecosystem service can influence the provision of another, with positive or even negative effects, which complicates the calculation of the optimal provision of an ecosystem service. As a result, the literature on the economic efficiency of agglomeration bonuses is not yet very developed.
The idea of agglomeration bonuses is still largely theoretical, but there are at least two programs where it has already been implemented: the Conservation Reserve Enhancement Program (CREP) in the United States and the Swiss Network Bonus (SNB) in Switzerland.
The CREP, which began in the state of Oregon, focuses on riparian lands and provides a one-time bonus equal to four times the annual rental rate for each unit of land enrolled, provided that a threshold of 2.5 miles (approximately 4 km) per 5-mile (approximately 8 km) riparian segment is maintained (Parkhurst et al. 2002). The goal is to improve water quality and, consequently, fish and other wildlife populations. According to a 2009 report[iii] that studied the presence of aquatic macroinvertebrates as a measure of environmental effectiveness, stream quality was improved, but the effect was subtle. New results are expected following recent studies conducted in 2019.
In Switzerland, financial support for « ecological compensation areas » has been in place since 1993 (Krämer and Wätzold, 2018). Following criticism that these areas were not sufficient to conserve biodiversity, two other payment methods were introduced: a quality bonus and an agglomeration bonus to create connected ecological compensation areas. The study by Krämer and Wätzold (2018) found preliminary results showing an improvement in the size and quantity of ecological compensation areas.
Conclusion
With the well-documented loss of biodiversity and other ecosystem services, the preponderance of nature’s services over human activity is becoming apparent. Ecosystem services are often difficult to measure, as is their integration by markets, and this situation leads to significant market failures.
However, several policies could be implemented to address these failures. While the payments for ecosystem services presented in this article may not necessarily offer the ultimate solution, this tool can nevertheless limit the loss of ecosystem services, and the idea of an agglomeration bonus would seem to improve the effectiveness of PES policies in certain cases.
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[1] This generally involves conserving habitats to protect animal and plant populations. Conservation measures vary and can range from simple measures, such as planting certain plants to create a habitat, to more complex measures, such as modifying mowing regimes to take into account the breeding habits of a species of butterfly.
[2] A Pigouvian tax is a tax that aims to integrate the negative externalities of economic activity, particularly pollution, into the market.
[3] A transaction cost is a cost associated with an economic exchange, more specifically a market transaction. This cost is not taken into account in the context of pure and perfect competition.
[4] A windfall effect occurs when activities that could have taken place without payment are subsidized; in the context of PES, this would mean paying for ecosystem services that could be obtained free of charge.
[5] In game theory, a Nash equilibrium is a situation in which each player in a game maximizes their gain, given the correct prediction of the other players’ choices.
