Payments for environmental services in Costa Rica: Increasing efficiency through spatial differentiation

Payments for Environmental Services (PES) have become a widely acknowledged and increasingly popular market based instrument to conserve forests and their environmental services. Costa Rica was the first developing country to have implemented a nationwide PES program. Besides legal and formal requirements which have to be met by any program applicant, the forest sites are selected from a pool of applications on the basis of predefined program areas. Sites inside these program areas qualify for participation, those outside do not, although exceptions are made. Assuming that more complex spatial differences do exist the efficiency of the PES program might be increased by considering a site's actual service delivery potential, deforestation risk and by making not fixed, but flexible payments according to the site's opportunity cost of forest conservation. Based on this data a selection mechanism is developed that maximizes additionality per dollar spent. Given a fixed budget results show that the selection mechanism increases the amount of contracted environmental services. Especially the use of flexible payment levels according to individual opportunity costs has a significantly positive impact on service delivery. Yet, as deforestation activities in Costa Rica are rare the use of deforestation probability estimates leads to little efficiency gain. It is also observed that the average area of the selected sites decreases which might indicate that the proposed selection mechanism encourages participation of the poor. For the implementation of flexible payments a PES program would need to estimate individual opportunity costs in a cost effective way. Three estimation approaches are tested and compared to the land owners´ expressed willingness to accept a PES contract. Results show that none of the approaches explain sufficiently the land owners´ decision behavior. If it is true that opportunity costs do not sufficiently explain decision behavior, then not opportunity cost estimation approaches are required for the implementation of flexible payments, but alternative approaches which determine payment levels taking all decision influencing factors into account. Inverse auction systems present such an alternative and should be given more attention.