Designing cost effective conservation payment programs

Background/Question/Methods

Incentive payment programs to private landowners provide a center-piece of conservation strategies in many parts of the world. For example, the EU and US spend billions of dollars each year on payments intended to encourage farmers to undertake environmentally friendly production techniques. However, past assessments of the ecological and economic effectiveness of such payment programs have been equivocal.

We examine how payment programs can be designed to provide cost effective improvements in biodiversity. We first estimate the "true" supply price to farmers of producing a given level of improvement in different biodiversity indicators. We then derive the optimal (i.e. most cost effective) program design for each biodiversity indicator. This provides a benchmark against which to compare the cost effectiveness of simpler, but more readily implemented, payment programs.

We focus on 44 extensive livestock farms in the Peak District in northern England and use bird species as an indicator of biodiversity. We conducted detailed surveys of the economics of farm businesses and combined these with property-scale surveys of species responses to farm management. We parameterized nonlinear programming models of farm businesses that allow the production of biodiversity improvements on farms alongside the production of more conventional agricultural commodities (like livestock).

Results/Conclusions

The models suggest existing payment schemes are highly cost ineffective. Rather than compensating farmers for income forgone as a consequence of changing management practices, current schemes primarily subsidize farm profits.

The optimal policy exploits variation in costs of producing biodiversity enhancements within and among farms. However such a policy would be prohibitively complex to administer.

By comparing alternative simpler policies to the optimal policy, we show that common simplifications in payment scheme design can result in 49-100% of promised biodiversity gains being given up. Moreover, we are able to identify which policy simplifications are most problematic. Spatially differentiating pricing for biodiversity improvements is critical to the success of such programs, a finding that is robust to idiosyncratic responses of different biodiversity targets to management actions.