SETTING THE SCENE – Incentives, context and policy · Proceedings of the National Conservation Incentives Forum: Setting the Scene Author: Stuart Whitten Created Date: 8/31/2005

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SETTING THE SCENE –Incentives, context and policy

StructureStuart Whitten

CSIRO Sustainable Ecosystems

Structure

• Why incentives?

• Role of incentives

• Where and why we might want to use incentives over other methods

• Some issues in incentive design and implementation

• Conclusions

Why incentives?

• Our landscapes produce a wide range of valued outputs

Fertile soil

Breathable air

Liveable climates

Biodiversity

Clean water Pest control

Flood protection

Aesthetics

• These valued outcomes are not actively supplied by land managers – why not?

• They are different to other goods:– Difficult to exclude potential consumers (non-excludable)

– Possible for more than one consumer to consume (non-rival)

– Economists call these public goods

• Other reasons:– Poor understanding of production relationships, benefits,

threats, replaceability

– Policies/programs not focussed on service delivery

Why Incentives?

Why Incentives?

• The focus during the forum will be on incentives – on the supply of these ecosystem services.

• We should not forget the demand side: – Who wants these ecosystem services?

– How many services are desired?

– How much of our scarce resources should be allocated to ecosystem protection protection and production?

– Ecosystem services at what cost / what trade-off for other outcomes?

– There are a range of tools available to help in this area including planning, valuation and other tools.

Why Incentives?

• These services can be produced by either the public or the private sector:

– Pragmatically in a market economy like Australia with the majority of land in private ownership or management the primary vehicle will be via private ownership.

– The question then becomes one of how best to encourage ecosystem services provision on private land – and this is where incentives come into play.

Role of incentives

• Signals are provided for wheat, wool, beef, timber and other products …

• But not all signals are provided via markets

– Moral suasion can be very effective as can regulation.

• So the question is what signals are most appropriate and how are they best provided to land managers?

• We need to consider the full range of potential signals when thinking about conservation outcomes even if the focus is primarily on incentives.

Role of incentives

• One way of thinking about the range of measures available is Dan Bromley’s division between facilitative, incentive, and coercive measures.

Role of incentives – levels of intervention

• Facilitative measures inform the decision frame

– improve the flow of information and signals without providing direct payments (eg extension, Carbon rights legislation).

• Incentive measures directly alter pay-offs

– usually intended to substitute for missing monetary signals that are generated within markets for other goods and services (eg stewardship payments, tax/subsidy) .

• Coercive measures enforce change via regulation

– non-voluntary and are designed to compel management change using thecoercive powers of government (eg native vegetation clearing laws).

Role of incentives

• In fact most effective policies comprise a mix of 1 or more measures

• this is particularly the case with MBIs

– Most are underpinned by strong facilitative measures via extension and information campaigns (advertising, expression of interest, site visits).

– They offer direct incentives to change management (especially auctions)

– Many are built on a strong coercive regulatory frameworks (e.g. cap and trade and offsets)

Incentives – where and why?

Where and why might we prefer incentives over other measures?

• Facilitative

– Moral suasion is often slow to take effect

– Other facilitative measures often only offer small, indirect rewards to individuals - may be insufficient to change management

– But facilitative changes to, for example, property rights, may be all that are needed (Carbon rights = carbon market).

Incentives – where and why?

• Why might we prefer incentives over coercive measures?

– Negative incentive

– Imposes hidden and often forgotten costs on landholders

– Doesn’t really solve the problem.

– We want an ecosystem services oriented outcome but are getting agricultural production oriented outcomes. To paraphrase Edwardde Bono – by far the easiest way of providing an ecosystem services outcome is to make this the easiest and most attractivepath. Instead coercion tries to make it as difficult as possible to get alternative outcomes.

– But regulation will be needed if everyone must change behaviour to achieve the desired outcome!

Incentives – where and why?

• Best guess about outcomes in short term (3-5 years):

– Facilitative ~ 20%

– Incentive ~ 50%

– Coercive ~ 80%

– Depends on issue, nature of constraints, etc.

Incentives - advantages

• They provide resources to resource mangers, attracting their attention and enabling desired actions

• They are generally voluntary, assisting compliance (by those accepting the incentive) and community acceptance

• They often maintain existing rights and autonomy (and so are often considered to maintain investment security)

• They are well suited to encouraging action beyond mandatory or minium standards (if targeted appropriately)

• They can be used to leverage private funds and effort, improving cost

effectiveness

(source: Steve Hatfield Dodds)

Incentives - disadvantages

• They usually require government funds, and coverage is usually only partial (failing to engage the attention of some resource mangers in the target group)

• Their voluntary nature means that incentives generally ignore cost shifting (to other places and into the future), and so may focus on symptoms without addressing underlying causes

• Autonomy will not provide genuine security if fundamental issues are ignored (as discussed below)

• Providing incentives may discourage responsibility, and so may not always be appropriate

• Leverage requires some private benefit, and so a leverage focus may divert funds from pure public benefit activities

(source: Steve Hatfield Dodds)

Issues in incentive design and delivery

• So you’ve decided that an incentive approach is appropriate – but what incentive to use?

• Incentives need to target the constraints to ecosystem service production

– Focus on making the path to production of ecosystem services easier!

– Includes knowledge, skills, resources and other factors of the landholders targeted.

Issues in incentive design and delivery

• Policy constraints also occur at the governance level

– This is both administrative level and higher

– May include resources, skills, legislative impact etc.

– These serve to limit the range of incentives that can be offered (e.g. don’t know how to run an Auction)

– They may also limit the impact of incentives on the target (e.g. local government and upstream water quality)

Example - the ‘zone of opportunity’ for local & regional organisations

Political Scale

Bio

ph

ysic

al s

cale Line of

Opportunity

NationalRegionalLocal International

Best bets

Issues in incentive design and delivery

• Different styles of incentive approaches targeting the same constraints may have differing levels of cost-effectiveness.

Heterogeneity and appropriate mechanisms

Owner variability (in terms of costs)

Homogeneous Heterogeneous

Homogeneous Standard fixed price contracts and payments for specified outputs

Auctions (variable payments

for homogeneous products)

Protection variability

Heterogeneous

Site-specific management agreements

Site-specific management

agreements and payments

Issues in incentive design and delivery

• Another issue is whether to use a single program to target multiple ecosystem services issues or to use multiple programs?

One incentive or many?

4. Separate single outcome programs – relatively greater freedom in sites and management actions.

3. Programs with management actions specified, but greater freedom in location

No

2. Programs with biophysical sites specified, but greater flexibility in management actions

1. Multiple outcome programs – site and management actions reasonably specific

YesBiophysical

Hotspots Overlapping (biophysical

outcome occurring at

the same spatial scale)

NoYes

Management Actions Overlapping (multiple outcomes from single action)

Issues in incentive design and delivery

• How best to mix incentives

– Most incentives also involve facilitative measures (information and extension) or are underpinned by coercive measures (duty of carebaselines).

• Existing frameworks

– Are they effective

– Do they constrain options?

• It is most important to consider the costs of additional refinement against the additional benefits obtained.

Conclusions

• Important to identify clearly what the incentive is being offered for.

• Select an appropriate measure to address the constraints – consider all options!

• Design the incentive subject to resources, skills, needs of both landholders and those operating it.

For more information….

Stuart Whitten

CSIRO Sustainable Ecosystems

[email protected]

Presentation will be on our website soon:

www.ecosystemservicesproject.org.au