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A Dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management

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  • James Roumasset

    ()
    (UHERO, University of Hawaii at Manoa)

  • Christopher Wada

    ()
    (UHERO, University of Hawaii at Manoa)

Abstract

A theory of payment for ecosystem services (PES) pricing consistent with dynamic efficiency and sustainable income requires optimized shadow prices. Since ecosystem services are generally interdependent, this requires joint optimization across multiple resource stocks. We develop such a theory in the context of watershed conservation and groundwater extraction. The optimal program can be implemented with a decentralized system of ecosystem payments to private watershed landowners, financed by efficiency prices of groundwater set by a public utility. The theory is extended to cases where land is publicly owned, conservation instruments exhibit non-convexities on private land, or the size of a conservation project is exogenous. In these cases, conservation investment can be financed from benefit taxation of groundwater consumers. While volumetric conservation surcharges induce inefficient water use, a dynamic lump-sum tax finances investment without distorting incentives. Since the optimal level of conservation is generated as long as payments are correct at the margin, any surplus can be returned to consumers through appropriate block pricing. The present value gain in consumer surplus generated by the conservation-induced reduction in groundwater scarcity serves as a lower bound to the benefits of conservation without explicit measurement of other benefits such as recreation, biodiversity, and cultural values.

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Bibliographic Info

Paper provided by University of Hawaii Economic Research Organization, University of Hawaii at Manoa in its series Working Papers with number 2012-7.

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Length: 44 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:hae:wpaper:2012-7

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Keywords: Renewable resources; dynamic optimization; groundwater management; watershed conservation; payments for ecosystem services; benefit taxation; conservation surcharge;

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References

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  1. Koundouri, Phoebe, 2004. "Current issues in the economics of groundwater resource management," MPRA Paper 38425, University Library of Munich, Germany.
  2. Muñoz-Piña, Carlos & Guevara, Alejandro & Torres, Juan Manuel & Braña, Josefina, 2008. "Paying for the hydrological services of Mexico's forests: Analysis, negotiations and results," Ecological Economics, Elsevier, vol. 65(4), pages 725-736, May.
  3. Pitafi, Basharat A.K. & Roumasset, James A., 2003. "Efficient Groundwater Pricing And Watershed Conservation Finance: The Honolulu Case," 2003 Annual meeting, July 27-30, Montreal, Canada 21958, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Engel, Stefanie & Pagiola, Stefano & Wunder, Sven, 2008. "Designing payments for environmental services in theory and practice: An overview of the issues," Ecological Economics, Elsevier, vol. 65(4), pages 663-674, May.
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  6. Partha Dasgupta, 2009. "The Welfare Economic Theory of Green National Accounts," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 42(1), pages 3-38, January.
  7. Simpson, R. David & Ferraro, Paul, 2000. "The Cost-Effectiveness of Conservation Payments," Discussion Papers dp-00-31, Resources For the Future.
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  9. Pagiola, Stefano, 2006. "Payments for Environmental Services in Costa Rica," MPRA Paper 2010, University Library of Munich, Germany.
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  12. Farber, Stephen C. & Costanza, Robert & Wilson, Matthew A., 2002. "Economic and ecological concepts for valuing ecosystem services," Ecological Economics, Elsevier, vol. 41(3), pages 375-392, June.
  13. Darrell Krulce & James A. Roumasset & Tom Wilson, 1997. "Optimal Management of a Renewable and Replaceable Resource: The Case of Coastal Groundwater," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1218-1228.
  14. Kaiser, Brooks & Roumasset, James, 2002. "Valuing indirect ecosystem services: the case of tropical watersheds," Environment and Development Economics, Cambridge University Press, vol. 7(04), pages 701-714, October.
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  16. Basharat A. Pitafi & James A. Roumasset, 2009. "Pareto-Improving Water Management over Space and Time: The Honolulu Case," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(1), pages 138-153.
  17. Weitzman, Martin L, 1997. " Sustainability and Technical Progress," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(1), pages 1-13, March.
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  19. Hines Jr., James R., 2000. "What is benefit taxation?," Journal of Public Economics, Elsevier, vol. 75(3), pages 483-492, March.
  20. Batabyal, Amitrajeet A. & Kahn, James R. & O'Neill, Robert V., 2003. "On the scarcity value of ecosystem services," Journal of Environmental Economics and Management, Elsevier, vol. 46(2), pages 334-352, September.
  21. Dasgupta, Partha, 2001. "Human Well-Being and the Natural Environment," OUP Catalogue, Oxford University Press, number 9780199247882.
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Cited by:
  1. James Roumasset & Christopher Wada, 2013. "Integrating Demand-Management with Development of Supply-Side Substitutes," Working Papers 2013-13, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.

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