A dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management

James Roumasset and Christopher Wada

Ecological Economics, 2013, vol. 87, issue C, 24-33

Abstract: A theory of payment for ecosystem services (PES) pricing consistent with dynamic efficiency and sustainable income requires optimized shadow prices. Since ecosystem services are generally interdependent, this requires joint optimization across multiple resource stocks. We develop such a theory in the context of watershed conservation and groundwater extraction. The optimal program can be implemented with a decentralized system of ecosystem payments to private watershed landowners, financed by efficiency prices of groundwater set by a public utility. The theory is extended to cases where land is publicly owned, conservation instruments exhibit non-convexities on private land, or the size of a conservation project is exogenous. In these cases, conservation investment can be financed from benefit taxation of groundwater consumers. While volumetric conservation surcharges induce inefficient water use, a dynamic lump-sum tax finances investment without distorting incentives. Since the optimal level of conservation is generated as long as payments are correct at the margin, any surplus can be returned to consumers through appropriate block pricing. The present value gain in consumer surplus generated by the conservation-induced reduction in groundwater scarcity serves as a lower bound to the benefits of conservation without explicit measurement of other benefits such as recreation, biodiversity, and cultural values.

Keywords: Renewable resources; Dynamic optimization; Groundwater management; Watershed conservation; Payments for ecosystem services; Benefit taxation; Conservation surcharge (search for similar items in EconPapers)
JEL-codes: H2 Q25 Q28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: A Dynamic approach to PES pricing and finance for interlinked ecosystem services: Watershed conservation and groundwater management (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:87:y:2013:i:c:p:24-33

DOI: 10.1016/j.ecolecon.2012.11.023

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