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When thinking about policies for fighting against climate change, what naturally comes to our mind first has always been policies such as carbon tax or setting emission limits. These policies set hard rules for us to follow and their outcomes have been significant in many areas. However, if we switch gears slightly and consider replacing sticks with carrots, is it possible to achieve win-win situations?
What is Payment for Ecosystem Services?
Payment for Ecosystem Services (PES) is an innovative mechanism. The basic idea of PES, as explained by the United Nation Development Programme is that “whoever preserves or maintains an ecosystem service should be paid for doing so”. Those who have used their land to provide services that reduce negative externalities, or have had positive impacts on the environment, are rewarded.
Theoretical Hypothesis: Why developing countries?
Conversations regarding who should be responsible for climate change and who is taking the burden has been going on for a few decades, and it has become a consensus that poorer countries are taking the greatest hit, due to reasons such as geographical location, fragile political institutions, and health support. Having recognized the unequal distribution of causes and impact, the world has been urging rich countries to pay for mitigation policies. However, the two issues— who pays for mitigation and where it takes place— do not need to coincide. As we live on one planet, climate mitigation requires global action; thus, we should put the money into the most cost-efficient use cases - and these opportunities lie in developing economies. Why so? Speaking from an economic perspective, cost calculations should include opportunity costs. As people are poorer, the costs of behavioural changes that lead to reductions in emission are effectively lower. For example, if using public transportation instead of private cars will take people on average 30 minutes longer to get to work, for people in richer countries, this might mean losing $10 of daily income. On the other hand, for people in poorer countries living on $1 daily income, this might only translate to a financial opportunity cost of only $0.1.
Furthermore, the impact of implementing PES programmes in developing countries could be more effective than implementing them in developed countries, given that financial incentives should have a greater marginal impact on utility for people with lower initial income. These policies not only ensure that the income level of local communities are protected, but also that they bring along local benefits. For example, the installation of solar panels that aims to lower carbon emissions could also help to reduce particulate matter emissions, which is a significant problem in countries such as India.
Implementing PES in developing countries: Western Uganda Case Study
After looking at the numerous theoretical benefits of investing in climate mitigation policies in poor countries, we still need to answer the crucial question of whether PES projects in poor countries are actually effective. A study done by Seema Jayachandran, an economist and professor at Northwestern University specialising in the field of development economics, used statistical methods to investigate the effects and outcomes of a PES project to reduce deforestation in Western Uganda.
Western Uganda is one of the regions with the highest rates of deforestation in the world, with approximately 2 and a half to 3 percent per year deforestation rate. Deforestation contributes to a large proportion of our carbon emission, according to the World Resources Institute, averaged over 2015~2017, as the global loss of tropical forests contributed to about 8-10% of annual human emissions of carbon dioxide. The carbon dioxide that is absorbed by trees is stored in the tree trunks. Once we cut them down, the stored carbon dioxide eventually becomes emitted into the surrounding atmosphere. The project researchers found that most lands in Western Uganda are privately owned and that the main reasons why people cut down trees on their piece of land include:
Clearing land for cultivation
Selling lumber
Selling charcoal
If we take a closer look at these reasons, they all have relatively low financial returns compared to the long term environmental costs we have to pay for deforestation, which opens up the opportunity of implementing a PES scheme to financially reward people who do not cut down trees that grow on their privately owned land.
For the research team to statistically evaluate the effectiveness of this programme, the reward scheme was implemented on 60 randomly selected villages (selected by lottery) and the villagers were told that they could sign up to participate in the programme on a voluntary basis. What was the outcome? After two years of implementation, tree cover was measured by satellite images and analysed using artificial intelligence, identifying changes in coverage percentages.
The comparison is drawn between the pre and post-implementation images of the treatment groups - the selected villages and the control group. In the villages where the program was not implemented, it turns out that over the two-year period, the area of tree cover declined by 9.1% in control areas and only 4.2% in treatment areas. In statistical jargon, the difference in the difference estimator was a staggering 4.9%. The main takeaway from the cost and benefit analysis is that this 4.9% decline translates to approximately 5.5 hectares per village. According to the Global Forest Watch, each hectare stores 153.5 metric tons of carbon, which means 3000 metric tons of delayed carbon dioxide emission per village over the two years. The accumulated impact was huge, even with local scale implementation involving only 60 villages.
A more exciting finding was that the treatment villages were deforested at a slower rate than the control villages even one year after the reward scheme was closed, so there is evidence for its persistent impact. Nevertheless, many local factors need to be considered when designing the scheme, for instance, if land is not privately owned, the problem of moral hazard and the division of the shared reward could be controversial. To better engage local communities, contextuality is the key.
Empirical Evidence: Why did PES work well?
First of all, as discussed in the hypothesis section, when these financial incentives are given to people in developing countries they would experience a greater marginal increase in the level of utility due to lower initial income levels. The opportunity cost of giving up a few pennies from the sale of lumber or charcoal, compared to the financial reward from the PES scheme, is minimal.
Another reason was the common interests of various stakeholders to protect the local environment. The government was willing to support the project for various local benefits, for example, the preservation of chimpanzee habitats in Western Uganda. International organizations were also eager to push for PES implementation and were willing to bridge communications. They could provide sufficient support to coordinate the transfer of funding from developed economies to developing economies; an efficient transfer of funds is critical in ensuring long term engagement and trust between parties.
Concluding Remarks
Standing on the tipping point of climate change, engaging each and every community around the globe to implement cost-effective climate mitigation policies is crucial. PES schemes have shown commendable outcomes to programmes promoting different Sustainable Development Goals, such as alleviating poverty, fighting climate change, protecting biodiversity, and building economic growth in a sustainable manner. Rich countries should not be restricted by national borders when considering investment into climate mitigation programs, but rather carry out subjective cost-benefit analyses, investing into projects that are most cost-effective. If projects such as the PES schemes in Western Uganda could be carried out in perpetuity, we could then accelerate our progress in achieving SDGs by 2030 and foster long-term sustainable development.
Bibliography
Gibbs, David, et al. “By the Numbers: The Value of Tropical Forests in the Climate Change Equation.” World Resources Institute, 4 Oct. 2018, www.wri.org/insights/numbers-value-tropical-forests-climate-change-equation.
Jayachandran, Seema, et al. “Cash for Carbon: A Randomized Controlled Trial of Payments for Ecosystem Services to Reduce Deforestation.” 2016, doi:10.3386/w22378.
“Payments for Ecosystem Services.” Home, www.sdfinance.undp.org/content/sdfinance/en/home/solutions/payments-for-ecosystem-services.html.