Performance Payments for Environmental Services: Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion

Institute for Environmental Decisions (IED) Working Paper 7, ETH Zurich

22 Pages Posted: 9 Aug 2009

See all articles by Astrid Zabel

Astrid Zabel

Bern University of Applied Sciences (BFH)

Brian E. Roe

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics

Date Written: June 1, 2009

Abstract

Payments for environmental services (PES) schemes have become an increasingly accepted and popular mode for governmental and non-governmental agencies to use in addressing local and regional declines in ecosystem services. A defining characteristic of performance payments, a sub-category of PES schemes, is the linking of individual payments to environmental outputs themselves rather than to the inputs that affect the production of environmental services. Such a focus raises several practical issues during implementation. We review and translate key aspects of the economic theory of incentives into the context of performance payments schemes with special attention paid to two practical issues. The first is that of structuring individual incentives to account for risks outside the individual’s control such as weather that can affect the level of environmental services generated. The second deals with the possibility of distortion in the measurements of environmental services used to determine individual payments under PES schemes. Each challenge is accompanied by a discussion of advice based upon economic theory and a discussion of examples from different countries where such implementation issues arise.

Keywords: optimal incentive contracts, payments for environmental services, performance incentives, distortion

JEL Classification: Q2

Suggested Citation

Zabel, Astrid and Roe, Brian E., Performance Payments for Environmental Services: Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion (June 1, 2009). Institute for Environmental Decisions (IED) Working Paper 7, ETH Zurich. Available at SSRN: https://ssrn.com/abstract=1430419 or http://dx.doi.org/10.2139/ssrn.1430419

Astrid Zabel (Contact Author)

Bern University of Applied Sciences (BFH) ( email )

Laenggasse 85
Zollikofen, BE 3052
Switzerland

Brian E. Roe

Ohio State University (OSU) - Department of Agricultural, Environmental & Development Economics ( email )

2120 Fyffe Rd
Columbus, OH 43210-1067
United States
614-688-5777 (Phone)

HOME PAGE: http://https://aede.osu.edu/our-people/brian-e-roe

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