Environmental changes in biodiversity hotspot ecosystems of
South Ecuador: RESPonse and feedback effECTs (FOR2730)

Abstract:

Environmental studies regularly use the net present value (NPV) to value benefits and costs of projects. However, the NPV disregards whether the stream of net benefits is steady or volatile and ignores the distribution of net benefits among different groups of people. Here we test alternatives to NPV, building on two example cases: 1) We use discounted utility (DU) to evaluate land-use projects and calculate opportunity costs for avoided deforesta-tion. 2) We simulate decision-making on tropical deforestation, whereby we use multiple decision criteria to consider the distribution of net benefits between two groups: farmers and conservationists. Results show considerable differences in the ranking of projects between DU and NPV, when projects are not marginal. Compared to DU, NPV regularly overestimates the value of forest plantations. Moreover, NPV tends to overstate the opportunity costs of avoiding deforestation in terms of saved carbon emissions. Not accounting for the distribution of net benefits in optimizing land-use allocation leads to suboptimal simulated deforestation scenarios. We therefore suggest that future studies should either also use DU to value economic consequences of projects or that they use the NPV as only one among several socio-economic and ecological decision criteria.

Abstract:

We usually have only limited knowledge about the economic consequences of land-use decisions, thus they are uncertain. We analyze the implications of this uncertainty on conservation payments (CP) to preserve wildlife-friendly shade coffee production in southwest Ecuador, when conversion to maize is the most profitable alternative. Our objective is twofold: First, we analyze the consequences of applying Stochastic Dominance (SD) to derive CP, an approach making only minimal assumptions about the preferences of farmers. Second, we investigate the effects of land-use diversification to reduce CP by allowing for shade coffee on part of a landholding, and maize production on what remains. CP derived by SD turned out to be at least twice the amount calculated by an alternative method which maximizes a concave utility function?US$ 166 to US$ 294 ha-1 year-1 instead of US$ 86 ha-1 year-1. Given this result, we doubt that the assumptions underlying SD are reasonable for farmers, who are known to be riskaverse. Allowing for land-use diversification has a significant impact on CP. The optimal portfolio share of shade coffee is 27 % and for maize 73 % for moderately risk-averse farmers?without any CP. A larger share of shade coffee is preferable for strongly risk-averse farmers?51 and 49 % maize. The amount of CP necessary to encourage the expansion of shade coffee to 75 %is US$ 40 ha-1 year-1 (for moderately risk-averse) and US$ 19 ha-1 year-1 (for strongly risk-averse farmers). Stimulating diversification may thus help to significantly reduce CP necessary to preserve less profitable agroforestry options.

Abstract:

Analyses were carried out on financial compensation to avoid loss of tropical forests and related carbon (C) emissions when marginal financial yield declined for land-use options with extended areas, and when a riskaverting perspective (modeled according to financial theory around the capital asset pricing model) is assumed. The approach in this study was to consider natural forest, forest plantation, pasture, and cropland simultaneously to investigate how an optimized land-use distribution may reduce the amount of compensation necessary to avoid C emissions from forest loss. The financial compensations derived were as high as US$ 176 per hectare per year when comparing natural forests only with the most profitable alternative (croplands). However, compensation decreased to US$ 124 for risk-neutral decision-makers, who would strive for optimized land-use allocation, and to only US$ 47 per hectare per year for risk-avoiders, who would look to maximize the reward-to-variability ratio. Sensitivity analyses indicated that the compensation under risk-aversion increased much less than under risk-ignoring when increased productivity of agricultural land-use or growing demand for agricultural products was simulated. It was concluded that considering appropriate diversification strategies and the well documented human behavior to avoid risks is an important step in developing cost-effective compensation policies.