A Revealed Preference Approach to Estimating Supply Curves for Ecosystem Services: Use of Auctions to Set Payments for Soil Erosion Control in Indonesia

Abstract

To supply ecosystem services, private landholders incur costs. Knowledge of these costs is critical for the design of conservation-payment programs. Estimating these costs accurately is difficult because the minimum acceptable payment to a potential supplier is private information. We describe how an auction of payment contracts can be designed to elicit this information during the design phase of a conservation-payment program. With an estimate of the ecosystem-service supply curve from a pilot auction, conservation planners can explore the financial, ecological, and socioeconomic consequences of alternative scaled-up programs. We demonstrate the potential of our approach in Indonesia, where soil erosion on coffee farms generates downstream ecological and economic costs. Bid data from a small-scale, uniform-price auction for soil-conservation contracts allowed estimates of the costs of a scaled-up program, the gain from integrating biophysical and economic data to target contracts, and the trade-offs between poverty alleviation and supply of ecosystem services. Our study illustrates an auction-based approach to revealing private information about the costs of supplying ecosystem services. Such information can improve the design of programs devised to protect and enhance ecosystem services.

Integrating a Spatially Explicit Tradeoff Analysis for Sustainable Land Use Optimal Allocation

“…In previous studies, this can provide a summary proportion of farmers adopting the payment policy but cannot provide the spatial variability of farmers' adoption [14][15][16][17][18]. It is unclear where practice b changes from practice a, a situation that will hamper decision making.…”

“…In this study, we developed the ALUOA-TOA system to support sustainable land use planning, applied it in the newly reclaimed region of Yili, and validated its usefulness. Supplementing the TOA-MD [14][15][16][17][18], our tool established spatial distribution of land use allocation for the tradeoff curve at each corresponding payment price, which provides more detailed information for decision making.…”

“…The tradeoff analysis in the ALUOA-TOA system was based on the TOA-MD model, with its basic assumptions [14][15][16][17][18] but some different settings. It assumes that farmers make land use and management decisions to maximize their perceived economic wellbeing.…”

“…Moreover, this is a challenge in developing countries. The development and application of a quick and low-cost method for ex ante evaluation of land planning are needed [14][15][16][17][18]. A tradeoff analysis-minimum data (TOA-MD) approach is proposed to provide timely and accurate information to support policy decision making [14][15][16][17][18].…”

From Polluter Pays to Provider Gets: Distribution of Rights and Costs under Payments for Ecosystem Services

“…This is of overall importance, especially if, and this is often the case, opportunity costs are larger than the PES to be paid (Karsenty 2007, Kosoy et al 2007. One example of a method used to clarify opportunity costs can be found in Indonesia (Jack et al 2009), where a PES program on mitigation of soil erosion from coffee plantations used an auction-based approach to reveal private information on the price of the PES; however, whether this approach is really adequate requires further research. For example, compared with the maximum result provided by an auction, some contingent valuation analyses undertaken in Ecuador and Guatemala on potential PES have found that the minimum compensation demanded by rural households was far from uniform (Southgate et al 2010).…”