Abstract. Payment for ecosystem services (PES) program contracts include penalties for non-performance to ensure that these programs receive the environmental benefits they have been paying for. The standard penalty structure in PES programs requires participants to pay back all program payments received if the contract is terminated before the end of the contract lifetime. We derive the optimal non-completion penalty structure, which decouples the penalty from payments received. In contrast to the backward-looking standard penalty, the optimal penalty is forward-looking and equals the principal’s net future environmental benefits lost due to contract non-completion. The optimal penalty thus falls over the life of the contract, in contrast to the standard penalty, which rises over the life of the contract. A numerical policy simulation with heterogeneous agents based on features in federal agricultural conservation programs in the United States suggests that the optimal penalty structure can increase realized net environmental benefits significantly. Our results suggest that performance of most kinds of PES programs can be enhanced by decoupling non-completion penalties from payments and by adjusting how penalties vary over contract lifetimes.
Abstract. Public investment in natural infrastructure through payments for ecosystem services (PES) delivers environmental benefits. This paper shows PES also mitigate economic losses from extreme weather. The U.S. Conservation Reserve Enhancement Program pays landowners to establish conservation cover on cropland to improve water quality and wildlife habitat. Exploiting the program’s staggered rollout, I find it reduces the extent and severity of flood damage on cropland, recovering nearly 30 percent of its cost through avoided crop insurance payouts. Retiring flood-prone cropland alone cannot explain the reduction, pointing to the cover’s flood-control services. PES thus finance self-insurance against climate risk through nature-based solutions.
Abstract. The global community has committed to a substantial increase in the scale of investment in nature via Target 19 of the Kunming-Montreal agreement. An important but understudied mechanism for attracting private investment into biodiversity outcomes is conservation compensation funds–funds that aggregate payments to compensate for negative impacts on biodiversity to contribute to strategic objectives. We described the principles of effective compensation funds based on economic and ecological theory, and assembled by far the largest database of operational compensation funds to date (32 funds across 17 countries) through a mixed methods review. We explored the variety of practice in real-world implementation, and how empirical practice compares to theory, highlighting key gaps. In doing so, we provided a guide to the design of ecologically effective compensation funds, a hitherto understudied but potentially substantial source of investment for biodiversity outcomes.
Abstract. Emissions trading programs have been promoted as efficient means to reduce nonpoint source water pollution and sequester carbon from agricultural land. While trading programs are often evaluated in isolation, they compete with longstanding agricultural conservation subsidy programs. Both programs target agroforestry practices that provide environmental benefits using different payment structures: Trading pays for performance while agricultural conservation programs pay for effort. We evaluate the performance of both programs in isolation and competition using an integrated assessment model that combines a stated preference survey of agricultural landowners for establishing forests with biophysical models of water quality and carbon sequestration benefits of forests. Our numerical policy simulation suggests that the water quality trading program in isolation can provide sufficient financial incentives for landowners to engage in afforestation activities on agricultural land. However, federal agricultural conservation subsidies largely crowd out the trading program when in competition. Stacking payments for carbon offsets with water quality trading payments does not enhance trading participation. Overall, the attractiveness and effectiveness of emissions trading programs for afforestation activities on agricultural land are heavily influenced by the presence and level of federal agricultural conservation subsidies.