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A Dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management

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  • James Roumasset

    (UHERO, University of Hawaii at Manoa)

  • Christopher Wada

    (UHERO, University of Hawaii at Manoa)

Abstract

A theory of payment for ecosystem services (PES) pricing consistent with dynamic efficiency and sustainable income requires optimized shadow prices. Since ecosystem services are generally interdependent, this requires joint optimization across multiple resource stocks. We develop such a theory in the context of watershed conservation and groundwater extraction. The optimal program can be implemented with a decentralized system of ecosystem payments to private watershed landowners, financed by efficiency prices of groundwater set by a public utility. The theory is extended to cases where land is publicly owned, conservation instruments exhibit non-convexities on private land, or the size of a conservation project is exogenous. In these cases, conservation investment can be financed from benefit taxation of groundwater consumers. While volumetric conservation surcharges induce inefficient water use, a dynamic lump-sum tax finances investment without distorting incentives. Since the optimal level of conservation is generated as long as payments are correct at the margin, any surplus can be returned to consumers through appropriate block pricing. The present value gain in consumer surplus generated by the conservation-induced reduction in groundwater scarcity serves as a lower bound to the benefits of conservation without explicit measurement of other benefits such as recreation, biodiversity, and cultural values.

Suggested Citation

  • James Roumasset & Christopher Wada, 2012. "A Dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management," Working Papers 2012-7, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
  • Handle: RePEc:hae:wpaper:2012-7
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    Cited by:

    1. James Roumasset & Christopher Wada, 2014. "Groundwater Economics without Equations," Working Papers 2014-8, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    2. James Roumasset & Christopher Wada, 2013. "Integrating Demand-Management with Development of Supply-Side Substitutes," Working Papers 2013-13, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    3. Nelson Ndakolute Ndahangwapo & Djiby Racine Thiam & Ariel Dinar, 2024. "Land Subsidence Impacts and Optimal Groundwater Management in South Africa," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(5), pages 1097-1126, May.
    4. James Roumasset & Christopher Wada, 2014. "Integrated Groundwater Resource Management," Working Papers 201414, University of Hawaii at Manoa, Department of Economics.
    5. Wada, Christopher A. & Pongkijvorasin, Sittidaj & Burnett, Kimberly M., 2020. "Mountain-to-sea ecological-resource management: Forested watersheds, coastal aquifers, and groundwater dependent ecosystems," Resource and Energy Economics, Elsevier, vol. 59(C).
    6. Kimberly Burnett & James Roumasset & Christopher Wada, 2014. "The Good, Bad, and Ugly of Watershed Management," Working Papers 2014-7, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    7. Hao Wang & Sander Meijerink & Erwin van der Krabben, 2020. "Institutional Design and Performance of Markets for Watershed Ecosystem Services: A Systematic Literature Review," Sustainability, MDPI, vol. 12(16), pages 1-26, August.
    8. Andrea B. Coulson & Michael O. Rivett & Robert M. Kalin & Sergio M. P. Fernández & Jonathan P. Truslove & Muthi Nhlema & Joseph Maygoya, 2021. "The Cost of a Sustainable Water Supply at Network Kiosks in Peri-Urban Blantyre, Malawi," Sustainability, MDPI, vol. 13(9), pages 1-18, April.
    9. Encarna Esteban & Elena Calvo & Jose Albiac, 2021. "Ecosystem Shifts: Implications for Groundwater Management," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(3), pages 483-510, July.
    10. Wang, Xialin & Nuppenau, Ernst-August, 2021. "Modelling payments for ecosystem services for solving future water conflicts at spatial scales: The Okavango River Basin example," Ecological Economics, Elsevier, vol. 184(C).

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    More about this item

    Keywords

    Renewable resources; dynamic optimization; groundwater management; watershed conservation; payments for ecosystem services; benefit taxation; conservation surcharge;
    All these keywords.

    JEL classification:

    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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