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Payments for environmental services as an alternative to logging under weak property rights: The case of Indonesia

  • Engel, Stefanie
  • Palmer, Charles

Decentralization reforms in Indonesia have led to local communities negotiating logging agreements with timber companies for relatively low financial payoffs and at high environmental cost. This paper analyzes the potential of payments for environmental services (PES) to provide an alternative to logging for these communities and to induce forest conservation. We apply a game-theoretical model of community-firm interactions that explicitly considers two stylized conditions present in the Indonesian context: (i) community rights to the forest remain weak even after decentralization, and (ii) the presence of logging companies interested in the commercial exploitation of the forest. Intuition may suggest that PES design should focus on those communities with the lowest expected payments from logging deals. However, we show that these communities may not be able to enforce a PES agreement, i.e., they may not be able to prevent logging activities by timber companies. Moreover, some communities would conserve the forest anyway; in these cases PES would not lead to additional environmental gains. Most important, the introduction of PES may increase a community's expected payoff from a logging agreement. A failure to consider this endogeneity in expected payoffs could lead to communities opting for logging agreements despite PES, simply allowing communities to negotiate better logging deals. Our results indicate that PES design is a complex task, and that the costs of an effective PES system could potentially be much higher than expected from observing current logging fees. Using data collected in Indonesia on actual logging fees received by communities, we illustrate how the theoretical results could be used in empirical analysis to guide PES design. Our results are likely to be useful in other cases where local people make resource use decisions but have weak property rights over these resources, and where external commercial forces are present. The results highlight the importance of understanding the details of the local context in order to design PES programs appropriately.

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Article provided by Elsevier in its journal Ecological Economics.

Volume (Year): 65 (2008)
Issue (Month): 4 (May)
Pages: 799-809

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Handle: RePEc:eee:ecolec:v:65:y:2008:i:4:p:799-809
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolecon

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  1. Arild Angelsen, 2001. "Playing Games in the Forest: State-Local Conflicts of Land Appropriation," Land Economics, University of Wisconsin Press, vol. 77(2), pages 285-299.
  2. Engel, Stefanie & López, Ramón, 2008. "Exploiting common resources with capital-intensive technologies: the role of external forces," Environment and Development Economics, Cambridge University Press, vol. 13(05), pages 565-589, October.
  3. Peter Burton, 2004. "Hugging Trees: Claiming de Facto Property Rights by Blockading Resource Use," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 27(2), pages 135-163, February.
  4. Engel, Stefanie & Palmer, Charles, 2006. "Who owns the right? The determinants of community benefits from logging in Indonesia," Forest Policy and Economics, Elsevier, vol. 8(4), pages 434-446, June.
  5. Alston, Lee J. & Libecap, Gary D. & Mueller, Bernardo, 1999. "A model of rural conflict: violence and land reform policy in Brazil," Environment and Development Economics, Cambridge University Press, vol. 4(02), pages 135-160, May.
  6. Siikamäki, Juha & Layton, David F., 2006. "Potential Cost-Effectiveness of Incentive Payment Programs for Biological Conservation," Discussion Papers dp-06-27, Resources For the Future.
  7. Bose, Pinaki, 1998. "Formal-informal sector interaction in rural credit markets," Journal of Development Economics, Elsevier, vol. 56(2), pages 265-280, August.
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