Context Matters: Exploring the Cost-effectiveness of Fixed Payments and Procurement Auctions for PES

Abstract

Successfully implemented payment for ecosystem services (PES) programs can provide both conservation of nature and financial support to rural communities. In this paper, we explore how PES programs can be designed so as to maximize the amount of additional ecosystem services provided for a given budget. We also provide a brief summary of the use of auction mechanisms in real world PES programs. To explore the potential additionality of different PES program designs we use a conceptual agent based simulation model where payments are either fixed, or set through a uniform or discriminatory auction. The program can also be designed to target payments to land-owners based on their provision of ecosystem services. Theoretically, auctions should be the most effective design, especially if payments are differentiated and targeted by ecosystem service provision. However, what we find is that the context in which the PES program is implemented—baseline compliance with program standards among the participants, correlation between opportunity costs and ecosystem services in the landscape, heterogeneity in costs and budget size—has a determining impact on the relative effectiveness of the different payment designs, with fixed payments schemes being much more effective than auctions in certain settings. Our findings suggest that context should be taken into serious consideration when a PES program design is chosen.