Performance Payments for Environmental Services : Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion
AbstractPayments 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 InfoPaper provided by IED Institute for Environmental Decisions, ETH Zurich in its series IED Working paper with number 09-07.
Length: 22 pages
Date of creation: Jun 2009
Date of revision:
Optimal Incentive Contracts; Payments for Environmental Services; Performance Incentives; Distortion;
Find related papers by JEL classification:
- Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
This paper has been announced in the following NEP Reports:
- NEP-AGR-2009-07-28 (Agricultural Economics)
- NEP-ALL-2009-07-28 (All new papers)
- NEP-ENV-2009-07-28 (Environmental Economics)
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