Payments and Penalties in Ecosystem Services Programs

62 Pages Posted: 21 Jun 2023 Last revised: 10 Jun 2024

See all articles by Youngho Kim

Youngho Kim

University of Maryland - Department of Agricultural and Resource Economics

Erik Lichtenberg

University of Maryland - College of Agriculture & Natural Resources

David A. Newburn

University of Maryland - Department of Agricultural & Resource Economics

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.

Keywords: payments for ecosystem services, agri-environmental programs, conservation programs, contract design, non-compliance penalties

JEL Classification: Q15, Q28, Q57, Q58

Suggested Citation

Kim, Youngho and Lichtenberg, Erik and Newburn, David Allen, Payments and Penalties in Ecosystem Services Programs. Available at SSRN: https://ssrn.com/abstract=4487106 or http://dx.doi.org/10.2139/ssrn.4487106

Youngho Kim

University of Maryland - Department of Agricultural and Resource Economics

Symons Hall
#3124
College Park, MD 20742
United States

Erik Lichtenberg

University of Maryland - College of Agriculture & Natural Resources ( email )

0108 Symons Hall
University of Maryland
College Park, MD 20742-5551
United States

David Allen Newburn (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

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