Talk by Riccardo Scarpa at VNN peatland workshop, Leeds 18th January 2012

1. Incentive design to promote
participation and uptake by
landowners
Riccardo Scarpa
WP3
Workshop: Assessing and valuing
peatland ecosystem services for
sustainable management
18-19 January 2012, University of Leeds

2. Purchasing the optimal amount of
conservation of anything

3. Hierarchy of solutions
• First best: as in full information
• Second best: something less than that but not
as inefficient as
• Third best: a flat conservation contribution to
all involved. Everyone gets the same and is
asked the same regardless of opportunity cost
of unit of CO2e
• Money for activities or for outcomes (e.g.
tCO2e)?

4. Asymmetric Information
• Landowners know the cost of conservation practices in
their land
• Funding bodies do not
• Assessing this cost by surveying is time consuming and
expensive
• Need an incentive compatible mechanism through which
the available money to buy conservation practices is best
spent
• Buy as much conservation as possible as cheaply as
possible
• This means purchasing the most beneficial (cost-effective)
conservation practices (or tCO2e) first and the least
beneficial last up to level it is convenient (benefit exceed
opportunity costs)

5. Consequences of AI
• Adverse selection (paying more than the
marginal cost of provision of the tCO2e)
• e.g. Net sinkers have incentive to disguise as
net emitters so as to show higher benefits
from entering the program
• Moral hazard (some farmers do not fully
comply with the program, i.e. do not act on
the program land management prescriptions)
• e.g. Agency gets reduced tCO2e sink and need
to pay for enforcing contract compliance

6. Risk aversion
• the length of time required by the program to
produce net benefits may be long
• Landowners are risk averse and loss averse
• while they might find it convenient at given
time to enter the program they might dread a
binding commitment lasting a long time as
this can compromise future opportunities
• Lower amounts of affordable tCO2e are
trapped or more are emitted

7. Contract menus and Auctions as
revelation Mechanisms
• Contract menu: designed to give the incentive to the
right landowner to get into their most adequate
conservation program, while discouraging mis-
representation. They then self-select in the right
program as other are less beneficial.
• Auction: get landowners to put a bid (tendering)
competitively amongst themselves for a limited
combination of contracts practices. Competition from
others should induce revelation.
• Both are challenging, but there are a series of positive
experience round the world (USA conservation reserve
program, Australia BushTender, some German Landers)