The Role of Risk in Targeting Payments for Environmental Services

Abstract

This paper discusses the gain in efficiency from including deforestation risk as a targeting criterion in payments for environmental services (PES) programs. We contrast two payment schemes that we simulate using data from Mexican common property forests: a flat payment scheme with a cap on allowable hectares, similar to the program implemented in several countries, and a payment that takes deforestation risk into account. We simulate the latter strategy both with and without a budget constraint. Using observed past deforestation, we find that while risk-targeted payments are far more efficient, flat payments are more egalitarian. We also consider the characteristics of communities receiving payments from both programs. We find that the risk-weighted scheme results in more, though smaller, payments to poor communities, and these payments are more efficient than those to non-poor ejidos. In the flat scheme, payments to poor and non-poor are equal, though they receive less of the budget than in the more efficient program.