Designing Payments for Environmental Services with Weak Property Rights and External Interests

Payments for environmental services (PES) are often promoted as a mechanism for alleviating poverty and providing environmental benefits. This chapter analyzes PES design in a context where actors such as forest-dependent communities have only weak property rights over the forest, and where firms interested in commercial resource exploitation are present. A game-theoretical model of community-firm interactions is applied to the Indonesian setting where communities have been observed to negotiate logging deals with firms. As an alternative, PES design could focus on those communities with the lowest expected payments from logging deals. But these communities may not be able to enforce a PES agreement, while others would conserve the forest anyhow. Most importantly, the introduction of PES may increase a community’s expected payoff from a logging deal. A failure to consider this endogeneity in expected payoffs would lead to communities opting for logging deals despite PES, simply allowing communities to negotiate better logging deals. Potential trade-offs are shown to exist between maximizing environmental benefits and poverty alleviation, which implies the need for two policy tools, and not just one.