Cost-effectiveness of conservation auctions for outcome-based and action-based PES: Implementation of tree-planting field trial in Kenya
April 12, 2012 by presa
Apr 12, 2012 By Lucie Andeltová edited by Judith Nzyoka
The direct approach of PES has the potential to promote conservation and sustainable use of ecosystem services and biodiversity and at the same time offers spectacular cost-savings relative to less direct approaches – thus making a more efficient use of available conservation finance (OECD, 2010; Ferraro & Simpson, 2000). A significant proportion of the PES schemes implemented worldwide, however, fail to realise their potential cost-effectiveness gains (Ferraro 2008; OECD 2010), which crucially depend on programme design and implementation.
Information asymmetries where landholders know more on their opportunity costs of supplying the contracted environmental services than the conservation agent, and inefficient way of managing related to moral hazard problem of action-based conservation contract types are argued to be among the main barriers to potential high cost-effectiveness gains of the PES programmes (Ferraro, 2008, Schilizzi et al. 2011, Matzdorf & Lorenz, 2010).
The information asymmetry can be to much extent mitigated by the use of conservation auctions, which in contrast to fixed payments induce landholders to reveal their opportunity costs and as result reduce overbidding (OECD, 2010; Ferraro, 2008). The moral hazard problem related to payments for compliance with set of conservation prescriptions can be then addressed by the use of outcome-based payments – that offer more flexibility to enhance innovations (Matzdorf & Lorenz, 2010) as well as “do harness the self-interest” of landholders to comply with the conservation goals “by optimizing their stewardship effort” (Schilizzi et al., 2011).
However, there is uncertainty problem, which limits the use of outcome-based PES schemes in practice (Schilizzi et al., 2011). Apart from production risks, there is also uncertainty about the possible distortion in the performance indicators (Zabel & Roe, 2009). These additional layers of uncertainty may result in low participation and/or in demand of high risk premiums in return for bearing the risk (Schilizzi et al., 2011), which would unintentionally decrease the cost-effectiveness of the conservation scheme.
A study was conducted with landholders along the Kapingazi River at the Eastern slope of Mount Kenya with the aim of exploring the combined effects of the auction mechanism and the contract types in order to identify which of those effects – higher ecological performance, or higher contracting cost – prevails and whether the outcome-based PES scheme is more cost-effective as compared to the action-based scheme. In addition, social and gender aspects of the pilot PES scheme will be scrutinized.
The study area was selected due to: a). the severe soil erosion and river sedimentation problems resulting from agricultural activities at the riparian area, and b). Tree planting is an adequate measure in targeting the environmental services of erosion abatement and increased water quality.
Field trials implementation
The study started in October 2011 with a baseline survey of all residing households having land along the Kapingazi River in the central and lower part of the river catchment. In total 411 households were surveyed in Muthatari, Mutunduri, and Kairuri administrative areas – locally called as Focal Development Areas (FDAs). The surveyed household members were simultaneously given a personal invitation for an informational workshop, where the tree-planting project including the conservation contract types the auction procedure was explained.
Both contract types required planting of 30 indigenous trees at the riparian area and the contract period was six months, i.e. until June 2012. However, the monitoring and pay-off conditions were different for each of the two contract types.
Action-based contracts required farmers to keep the soil around the trees moist, and the payment was conditional on monitoring results of this tree-watering requirement. Outcome-based contracts, on the other hand, did not subscribe any actions to farmers, and the payment was conditional exclusively on the tree survival rates after the six months contract period.
Conservation auction conduct and contract allocation
The auction was conducted in December 2011, whereas 234 farmers out of the 411 surveyed households participated. Both auction treatments were conducted at the same time, and landholders were assigned to either the auction for action-based or outcome-based conservation contracts using stratified random sampling method based on income levels and gender – in order to capture these characteristics equally.
Following, landholders were required to submit bids indicating the payment they are willing to accept for the specified conservation contract, and the lowest bids were accepted – subject to our target constrains.
Out of 117 participants in each of the two auctions, 60 participants were selected in the action-based auction, and 59 participants in the outcome-based auction. Consequently, 45 and 54 action-based and outcome-based contracts, respectively, were signed and the contracted farmers received trees for planting.
Monitoring and pay-offs of farmers
The monitoring was conducted in collaboration with the Kenya Forest Service and each farmer had to endorse the monitoring results. Whereas the farmers with action-based contracts were monitored twice during the dry season on the compliance with the tree-watering requirement, the landholders with outcome-based contracts were monitored only once – in June 2012 – on the tree survival rates.
The conservation payments were then adjusted for each farmer according to his/her monitoring results. Finally, the pay-offs were conducted for all contracted farmers after the end of the contract period in July/August 2012, simultaneously with a project evaluation survey.
The on-going cost-effectiveness analyses of the two different contract types include bid levels, tree survival rates, action-compliance, socio-economic characteristics and attitudes with particular focus on gender as well as the evaluation data on innovations and intrinsic motivation.About the author: Lucie Andeltová Supervisors: Karin Holm-Müller, Joachim von Braun, Tobias Wünscher Field supervisors: Delia Catacutan*, Sara Namirembe*, Oluyede C. Ajayi* Department of Economic and Technological Change, Centre for Development Research (ZEF), University of Bonn Resource and Environmental Economics Institute for Food and Resource Economics, University of Bonn *World Agroforestry Centre (ICRAF)
FERRARO, P. J. Asymmetric information and contract design for payments for environmental services. Ecological Economics. 2008, no. 65, p. 810-821.
FERRARO, P.J., SIMPSON, R.D. (2000). The Cost-Effectiveness of Conservation Payments. Discussion Paper 00-31. Resources for the Future. Washington, D.C.
MATZDORF, B., LORENZ, J. (2010). How cost-effective are result-oriented agri-environmental measures?—An empirical analysis in Germany. Land Use Policy 27: 535–544.
OECD (2010). Paying for biodiversity. Enhancing the cost-effectiveness of payments for ecosystem services.
SCHILIZZI, S., BREUSTEDT, G. and LATACZ-LOHMANN, U. (2011). Does tendering conservation contracts with performance payments generate additional benefits? Working Paper 1102, School of Agricultural and Resource Economics, University of Western Australia, Crawley, Australia.