Description

Abstract: Decentralization reforms in Indonesia have led to local communities engaging in logging agreements with timber companies for relatively low financial payoffs and at high environmental costs. This paper analyzes the potential of payments for environmental services (PES) to provide an alternative to logging for these communities and to induce forest conservation. We apply a game-theoretical model of community-firm interactions that explicitly considers two stylized conditions present in the Indonesian context: (i) the fact that community rights to the forest remain weak even after decentralization, and (ii) the presence of logging companies interested in the commercial exploitation of the forest.

Conventional PES design suggests that there should be a focus on those communities with the lowest expected payoffs from logging. However, it is shown that those communities with low expected payoffs may not be able to enforce a PES agreement, i.e., they may not be able to prevent logging activities by timber companies. Moreover, some communities would conserve the forest anyhow; in these cases PES would not induce additionality. Most importantly, the Introduction of PES may impact on expected payoffs from a logging agreement by raising the communities reservation utility in negotiations. A failure to consider this endogeneity in expected payoffs would lead to communities opting for logging agreements despite PES, simply allowing communities to negotiate better logging deals. We use a graphical analysis to derive the conditions for effective and efficient PES design. The results indicate that in our context PES design is a complex task, and that the costs of an effective PES system could potentially be much higher than expected from considering currently observed logging fees.

Using data collected in Indonesia on actual logging fees received by communities, we illustrate how the theoretical results could be used in empirical analysis to guide PES design. Our results are likely to be useful in other cases where local people make resource use decisions but have weak property rights over these resources, and where external commercial forces are present.