Cost-effective payments for forest biodiversity restoration: When to pay for actions vs outcomes

There is growing political interest in payment for ecosystem services (PES) schemes as a policy tool to incentivize the provision of forest services on European private land. In the hopes of strengthening the link between public expenditure and ecosystem service delivery, new EU regulations now explicitly allow payments to landowners to be conditional on the delivery of ecological outcomes like increases in species richness (result-based payments), as opposed to the implementation of prescribed management actions with uncertain consequences (action-based payments). However, it is still unclear whether result-based payment schemes are indeed more cost-effective than their action-based counterparts. Using stated preference data from 1,547 Danish forest owners, we conduct policy simulations of hypothetical biodiversity restoration schemes to estimate the conditions under which either approach is more cost-effective. Unlike other studies using an income forgone-based approach to predict landowner participation, our stated preference-based analysis accounts for higher risks and transaction costs that landowners face in result-based schemes. Evidence from our case studies confirms that action-based schemes yield comparatively greater land enrollment for given scheme budgets. A result-based approach is thus only more costeffective when biodiversity responds only weakly to the measures prescribed under action-based schemes, and when landowners are able to deliver outcomes independently. However, the response levels at which both approaches are equally cost-effective can differ significantly across schemes, as landowners have varying preferences for different objectives and designs. We also demonstrate that the way in which payments are tied to outcome thresholds has a substantial effect on the schemes' cost-effectiveness.