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Performance Payments for Environmental Services : Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion

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Abstract

Payments for environmental services (PES) schemes have become an increasingly accepted and popular mode for governmental and non-governmental agencies to use in addressing local and regional declines in ecosystem services. A defining characteristic of performance payments, a sub-category of PES schemes, is the linking of individual payments to environmental outputs themselves rather than to the inputs that affect the production of environmental services. Such a focus raises several practical issues during implementation. We review and translate key aspects of the economic theory of incentives into the context of performance payments schemes with special attention paid to two practical issues. The first is that of structuring individual incentives to account for risks outside the individual’s control such as weather that can affect the level of environmental services generated. The second deals with the possibility of distortion in the measurements of environmental services used to determine individual payments under PES schemes. Each challenge is accompanied by a discussion of advice based upon economic theory and a discussion of examples from different countries where such implementation issues arise.

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Bibliographic Info

Paper provided by IED Institute for Environmental Decisions, ETH Zurich in its series IED Working paper with number 09-07.

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Length: 22 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:ied:wpsied:09-07

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Keywords: Optimal Incentive Contracts; Payments for Environmental Services; Performance Incentives; Distortion;

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  1. Pagiola, Stefano & Ramirez, Elias & Gobbi, Jose & de Haan, Cees & Ibrahim, Muhammad & Murgueitio, Enrique & Ruiz, Juan Pablo, 2007. "Paying for the environmental services of silvopastoral practices in Nicaragua," Ecological Economics, Elsevier, vol. 64(2), pages 374-385, December.
  2. Frank Wätzold & Martin Drechsler, 2005. "Spatially Uniform versus Spatially Heterogeneous Compensation Payments for Biodiversity-Enhancing Land-Use Measures," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 31(1), pages 73-93, 05.
  3. Zabel, Astrid & Holm-Muller, Karin, 2007. "Performance payments for carnivore conservation in Sweden," Discussion Papers 57031, University of Bonn, Institute for Food and Resource Economics.
  4. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
  5. Wunder, Sven & Engel, Stefanie & Pagiola, Stefano, 2008. "Taking stock: A comparative analysis of payments for environmental services programs in developed and developing countries," Ecological Economics, Elsevier, vol. 65(4), pages 834-852, May.
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Cited by:
  1. Ines Kapphan & Pierluigi Calanca & Annelie Holzkaemper, 2011. "Climate Change, Weather Insurance Design and Hedging Effectiveness," IED Working paper 11-17, IED Institute for Environmental Decisions, ETH Zurich.
  2. Moritz Rohling & Markus Ohndorf, 2010. "Prices vs. Quantities with Fiscal Cushioning," IED Working paper 10-11, IED Institute for Environmental Decisions, ETH Zurich.
  3. Justin Caron & Markus Ohndorf, 2010. "Irreversibility and Optimal Timing of Climate Policy," IED Working paper 10-14, IED Institute for Environmental Decisions, ETH Zurich.
  4. Salvatore Di Falco & Marcella Veronesi, 2011. "On Adaptation to Climate Change and Risk Exposure in the Nile Basin of Ethiopia," IED Working paper 11-15, IED Institute for Environmental Decisions, ETH Zurich.
  5. Thomas Bernauer & Lena Maria Schaffer, 2010. "Climate Change Governance," IED Working paper 10-12, IED Institute for Environmental Decisions, ETH Zurich.
  6. Markus Ohndorf, 2010. "Optimal Monitoring for project-based Emissions Trading Systems under incomplete Enforcement," IED Working paper 10-13, IED Institute for Environmental Decisions, ETH Zurich.
  7. Thomas Epper & Helga Fehr-Duda & Renate Schubert, 2011. "Energy-Using Durables: The Role of Time Discounting in Investment Decisions," IED Working paper 11-16, IED Institute for Environmental Decisions, ETH Zurich.
  8. Blasch, Julia & Farsi, Mehdi, 2012. "Retail demand for voluntary carbon offsets – a choice experiment among Swiss consumers," MPRA Paper 41259, University Library of Munich, Germany.
  9. Michele Baggio, 2012. "The Optimal Management of a Natural Resource with Switching Dynamics," IED Working paper 12-19, IED Institute for Environmental Decisions, ETH Zurich.

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