Localizing Demand and Supply of Environmental Services: Interactions With Property Rights, Collective Action and the Welfare of the Poor

Payments for environmental services (PES) are increasingly discussed as appropriate mechanisms for matching the demand for environmental services with the incentives of land users whose actions modify the supply of those environmental services. While there has been considerable discussion of the institutional mechanisms for PES, relatively little attention has been given to the inter-relationships between PES institutions and other rural institutions. This paper presents and builds upon the proposition that both the function and welfare effects of PES institutions depend crucially on the co-institutions of collective action (CA) and property rights (PR). Experience from around the developing world has shown that smallholder land users can be efficient producers of environmental services of value to larger communities and societies. However, experience also shows that the international and national institutions that govern PES are often designed in ways that entail transaction costs that cannot be feasibly met by individual smallholders. Collective action can provide a mechanism for farmers to coordinate actions over large areas to provide environmental services such as biodiversity and watershed protection. Collective action also offers the potential to reduce the costs of monitoring and certification usually required to obtain payments for the services. However, the nature of the environmental services will influence the scale and type of collective action needed, the bargaining power of smallholders, and the investment or reinvestment requirements. The relationships between property rights and environmental services are more complex. The creation of PES institutions itself actually represents the creation of new forms of property and responsibility, with all of the tensions and tradeoffs that are entailed. How are balances struck, for example, between people’s responsibilities not to pollute and the need to compensate people for foregoing polluting activities? What about balances between constitutional rights to safe environment and the right to earn a livelihood? In carbon sequestration arrangements, secure property rights are often seen as a necessary pre-condition for binding contracts, even though collective forms of property may generate high quality environmental services. On the other hand, environmental services can influence property rights, notably where land or water tenure are given as rewards for certain types of services, land use, or stewardship. The type of environmental service, and the possibility of exclusion it provides, is also likely to influence the type of property rights. This paper presents a conceptual framework that clarifies the inter-linkages between property rights, collective action, payment for environmental services, and the welfare of smallholder land users. The framework is centered on concerns of function and welfare effects of PES. The functional perspective clarifies the effects of collective action and property rights institutions on the supply of environmental services. The welfare perspective considers smallholders as one of several potential sources of supply, sometimes directly competing against large landowners and public sector providers. Using this conceptual framework can help to identify conditions under which smallholders are likely to be able to participate in payment for environmental services schemes. Greater consideration of the linkages between PES and other rural institutions can lead to more equitable outcomes, particularly by 1) suggesting how collective action can be used to overcome transaction costs and barriers to participation by smallholders, and 2) identifying mechanisms through which managers of small private parcels or areas of common property can be rewarded for environmental stewardship through PES.