of Payment for Environmental Service (PES) Program Wenting Chen - PowerPoint PPT Presentation

1 Does Off-farm Labour Market Accessibility Matter for the Efficiency of Payment for Environmental Service (PES) Program Wenting Chen Department of Economics Norwegian University of Technology and Science 19 June 2009

2 General overview of PES • Current scheme overview ( Mayrand and Paquin (2004),UIC; Engel, et. al (2008), EE) Upstream Providers: – Rationale: e.g. Farmers Users pay – Purpose: Service Environment generate a market; – Internalize environmental externality • Four types of environmental service (ES): – Water service – Biodiversity conservation – Carbon sequestration Downstream: – Landscape beauty e.g. Urban citizens, industries. • Comparative study: Wunder, et.al. (2008),EE - Developing countries: Ecuador, Costa Rica, China (SLCP) - Developed countries: France and Australia

3 PES literature for impact of off-farm labour market Empirical • Correlation between PES program and off-farm labour supply e.g. Uchina (2007); Bennett, et.al Off-farm labour market: (2008a) • participation PES • Accessibility e.g. • Bennett, et.al (2008b): households with less exposure to off-farm labour market fare better in managing their planted trees • Mullan (2008): When constrained by labour market accessibility, those with high land-labour ratio are more willing to participate in PES vprogrammes that release labour; opposite holds when PES requires additional labour input.

4 Contribution • To provide an analytical framework for how labour market accessibility affects the impact of PES program on – production efficiency – ES provision by taking account the relative labour intensity in ES production and other agricultural activities, as well as the consumption elasticity between the e-good and agricultural goods. when upstream landowners are both consumer and producer of ES. • Two types of ES (Zilberman et al. 2008) 1. Produced by changing existing agricultural activities (working land program): improvement in biodiversity , high water quality 2. A by-product of a new private good such as reforestation: water quality improvement, stable climate, reduction of sedimentation in rivers; Preventing soil erosion and restoring erosion and desertification • Questions to be answered  How does off-farm labour market accessibility affect the optimal ES provision after introducing PES program?  How does off-farm labour market accessibility affect the marginal impact of PES payment on ES provision?  Will the impact be different for the two ways of environmental good production?

General description of the model 5 Assumptions:  Upstream landowners are both consumers and producers of ES e  Consumption – Representative upstream landowner consumes both crop ( c c ) and environmental service ( c e )      – Utility function ( , ) ln (1 )ln U c c c c C e C e  Production – Produce both crop ( q c ) and environmental service ( q e ); price for crop: p c – Two inputs: land ( A i ) and labor ( T i ), ( i= c,e ) – Cobb-Douglas production function:           1 1 Crop: f A T ( , ) A T Environmental service: g A T ( , ) A T C C C C e e e e  Total land endowment A and labor endowment T A T / : Low for small landowner ; high for large landowner  Off-farm labor activity: . T O T   T  0( 0) : 0: labour market not accessible Sell (purchase )labor O O  Wage rate for Off-farm labor market: w Real wage rate is between the labor productivity of small landowner and large landowner.  Number of the downstream buyer: N

Table 0: Type 1 ES 6 Ex-ante PES Ex-post PES      Max U c ( , q ) ln c (1 )ln q C e C e Without off-   s t . . p c p q B (3.1) C C C C farm           1 q f A T ( , ) A T (3.2) p c p q p q Np q B labor market C C C C C C C e e C C e e       1 q g A T ( , ) A T (3.3) e e e e e   A A A (3.4) C e   T T T (3.5) C e With off-farm T  0    Labor market T T T T O C e O    T T T T C e O      p c p q p q Np q wT B C C e e C C e e O    p c p q wT B C C C C O

Table 2: Impact of accessibility of off-farm labor market 7 Efficiency Opt. land and labor for ES condition Ex-ante Ex-post Ex-ante PES Ex-post PES PES PES   1           (1 ) (1 ) p          * T T T T *   q T T T T T C     C e C e       e O   e e C With off-farm  w  depends on , , , , and w     A A   A A  C e p A A C e   1            e e C  Labor market (1 ) (1 ) p    *   C A A ( T T )   1    e O   Different requirement for parameters from  w    case above 1 ( B               * 1 * * 1 A A ) [ T (1 )] [ (1 )( A A ) A ]    e e e * q p       C T T T T e Without off- 0 as long as T 1   C e C e *  A e     A A  p A A e farm C e C e    e (1 ) labor market    (1 )    * * T T /[ ( / A A 1) 1]    e e (1 ) Result 3: For ES being produced by changing existing agricultural activities, • Off-farm labour market accessibility will not distort production efficiency of both ES and crop production. That is, with and without labour market, the marginal substitution rate between labour and land are constant across crop and ES production after PES program is introduced. • Off-farm labour market accessibility does affect the marginal impact of PES payment on ES provision . Different requirement has to be fulfilled to increase ES provision with increase in PES payment.

8 Type 1 ES : With off-farm labor market Ex-post PES     Table 1 shows the marginal impact of PES payment on ES provision when 1 (i) (ii) (iii)        1         1 & low w P /  1 & high w P / 1  C  1 C 1 and and and    T T      C e   or A     1 3 1 3 A   1 3 C e * /   + - -/+ A P e e * /   + - -/+ T P e e -/+ * / -   + q P e e * /   is difficult to see from analytical result T P O e   (i) * /    q P   e e It is more efficient to apply PES program to the region with high off-farm wage. 0  w   * /    It is more efficient to apply PES program to poorer region given budget q P   e e 0 constraint..  w

9 Type 2 ES: a by product of a private good • The private good: e.g. reforestation • ES provided: – Better water quality – Staler climate – Reduced sedimentation, soil erosion and desertification   k is the link between the private good production q kq e f and the ES provision. • Impact of off-farm labour market accessiblity on ES production efficiency and marginal impact of PES payment on ES provision is similar to that in Type 1 ES, except ES always increases after PES program.

10 Conclusion • Accessibility of labour market does not affect the production efficiency of ES. • It does play a role in the marginal impact of PES program on ES provision for both types of ES. Factors such as output elasticity of different input factors, relative labour intensity between ES and crop production, consumption elasticity as well as off-farm wage will all affect marginal impact of PES program. Different criteria is required to ensure a positive impact depending on whether the off-farm labour market is accessible or not. • It may be important for policy makers to distinguish the off-farm labour market accessibility and estimate relevant parameters before designing payment stream.

11 Thank you!

12 Type 1 ES : With off-farm labor market Ex-post PES     Table 2 shows the marginal impact of PES payment on ES provision when 1 (i) (ii) high w P / low w P / C C & & T T  T T e C  e C A A A A e C e C * /   A P + (-) e e * /   + (-) T P e e * /   q P + (-) e e