Making Markets Pay for Stewardship

Executive Summary

Some of the most promising ways to bring about rural poverty alleviation and conservation around the world involve innovative ways to increase the control that the rural poor can exercise over their natural resource base and to pay them for their sustainable stewardship of environmental functions and services. These approaches can make use of market instruments through innovative ways of valuing environmental goods and services, establishing exchange arrangements, and expanding the use of traditional common property practices like common-pool assets regimes that are particularly appropriate for the sustainable management of natural resources, and delivery of environmental services. Exciting new experiences have resulted from creative actions by committed communities, governments, civil society and NGOs, and businesses. What is needed now is to expand their use, and improve the enabling frameworks needed for their success. To this end, this paper presents recent experiences and and a conceptual framework on which to base a set of actions at national and international level that NGOs and aid agencies may want to pursue, among them:

At international level

• Expanding efforts in rich countries to create a demand for global environmental services both inside and outside of conventional markets. These efforts should concentrate on goods and services that are particularly important to global environmental sustainability and can contribute to improve rural poor livelihood in developing countries. Creating such interest and demand is essential to overcoming the problems caused by the public goods aspects of the environment, making people understand the real value of these services, and convincing them to pay for them. Action on this initiative should include a combination of educational and marketing programs. While it should be concentrated in rich countries which have the wealth to purchase or support environmental stewardship, major elements should also be directed toward developing countries to increase their understanding and to promote local stewardship schemes, which may benefit from international experience.
  
  
• Creating a stewardship compensation fund or funds to pay poor people and communities for stewardship services. Both the public good nature of many critical environmental services and the vast income differential between developed and developing countries argue for establishing mechanisms to compensate the poor for appropriate stewardship. Given the variety of programs that could be supported and the difficulties of creating another large international fund like the GEF, it seems better to encourage different aid agencies and international NGOs to create or expand separate funds aimed at promoting and compensating specific aspects of global environmental stewardship. They should be flexible and have a minimum of administrative overhead. They should be used both to start up new initiatives and to provide long-term funding in cases where the global public good aspect of the program is substantial. In some cases, there may be reason to institutionalize the transfers where a long-term partner can be found.
  
  
• Extending the application of EIAs and compensation of affected local people to all international investment flows that involve resource extraction (broadly defined) or other significant impacts on the environment. Much of the most severe damage to the environment is the result of exploitation and extraction of natural resources. A large part of these extracted resources enter into international trade. Governments and companies involved usually reap large profits and consumers benefit from the use of the resource converted into a commodity. All too often, the local people in areas where the resources are extracted are deprived of their livelihoods or worse, and the local environment destroyed. In view of the profits made and benefits derived, action should focus on assuring adequate compensation of those most seriously affected. Even though many of these costs normally do not enter the market, or are explicitly excluded by government decision, they are real costs on the people and environments involved. While there may need to be adjustments in EIA processes to extend their range, a major priority of those who want to preserve the environment and promote poverty reduction should be to assure that all relevant international investments respect environmental sustainability and promote poverty reduction in their direct as well as indirect impacts, rather than impoverishing local populations. This will require a multifaceted campaign of NGOs and aid agencies, supported by popular pressure in the developed countries.

At national levels

• Establishing appropriate enabling legislation to permit common property systems and enforceable environmental stewardship agreements among communities. There are many aspects of current legal frameworks in developing countries (and developed countries) that need reform to encourage more environmental stewardship. A high priority is reforming property regimes to allow and encourage common property arrangements. It is important that civil society groups mobilize and express popular support for such reforms and increase the participation of local people in such schemes. International groups can provide some assistance, and aid programs can support such reforms actively. The enabling environment must encompass both the regulatory reforms and increased encouragement for cooperation among communities who supply and consume environmental services.
  
  
• Creating active support for appropriate stewardship agreements. Because of the public good nature of many of the environmental services, public intervention is usually necessary to put in place compensation agreements. Actions should involve regulatory changes as discussed in this paper. While the state is likely to be a key player in many of these arrangements, the initiative can and often does come from other sectors of society. NGOs have initiated many of the successful programs reviewed in this paper. Developing better community level governance will be important, both to secure the provision of environmental services and to assure equitable distribution of the payments received for those services.
  
  
• Establish a market framework for stewardship agreements and other forms of compensation for environmental services: Most stewardship arrangements will benefit from functioning within a market framework. It is an efficient means to obtain the results, once the overall objectives and values are established. A market framework can minimize the need for direct government involvement and maximize local involvement and responsibility. Yet creating appropriate market structures may need considerable external assistance. In addition to the rights and institutional factors discussed in this paper, aid is needed to establish a basis for pricing environmental services, for evaluating the costs imposed on local communities due to environmental degradation from extraction activities, and for monitoring the results so that medium and longer term agreements can be consummated. Mechanisms then need to be designed and enforced by governments to assure that the appropriate payments are made for the services provided or for the loss of benefits. Sometimes this can be done with relatively simple processes. Other times, it may require substantial interventions to assure that environmental services are valued and priced appropriately. Both NGOs and governments may need to invest in producing the information required to set standards, monitor outcomes on a regular basis, and enforce contracts. Governments should be encouraged to improve environmental regulations that are conducive to market solutions, including setting caps, establishing quality guidelines, and publicizing environmental information relevant to market agreements.

The above proposals are consistent with the prevailing reliance on market mechanisms, while compensating for well-known market imperfections. These flaws in the market system must be overcome to better address society's fundamental goal of improving human well-being and environmental management in a sustainable manner.

I. INTRODUCTION

Two of the 21st Century's most important challenges are the eventual elimination of absolute poverty and the sustainable management of the environment. These goals have been recognized in the Millennium Development Goals of the OECD for 2015. However, in the policy and practices of many stakeholders these goals usually are not linked. The failure to address poverty alleviation and environmental sustainability in an holistic manner is a reflection of flawed conventional wisdom, be it that environmental sustainability is a luxury that can only be addressed once higher levels of income are attained; or that environmental resources and services are not important for the poor and for poverty alleviation.

Both traditional approaches and recent innovations have demonstrated the contrary. There are many ways that an improved environment can help the poor and that poverty alleviation can go hand in hand with a better environment. In this paper, we will review some recent experiences with innovative ways to a) increase the control of the rural poor over natural resources and enhance their capacity to manage those resources sustainably; and b) engage the poor productively in environmental stewardship and compensate them for doing so.

In the following section, we summarize the extent of rural poverty, its linkages to environmental sustainability, and how uncontrolled exploitation of natural resources contributes to poverty. The third section briefly discuss the economic value of sustaining environmental services. These sections cover well-charted ground and are included to outline the justification for pursuing new methods of compensation.

The fourth section reviews property rights and particularly common pool approaches as tools that could be used to increase the rural poor control over natural resources, and the opportunities to manage those resources sustainably. In the fifth section we discuss market failures in the handling of public goods that lead to the abuse of natural resources and to the augmentation of poverty in many rural areas. The sisth section briefly discusses markets and equity considerations. Finally, in section seven we suggest ways of using market instruments to compensate environmental stewards and identifying common structures that must be promoted to do so.

II. THE RURAL POOR AND THEIR ACCESS TO NATURAL RESOURCES

In all developing countries for which data is available, save two, the incidence of rural poverty exceeds urban poverty, often by a factor of two or three. At least 3 billion people survive on less than $2 per day, over one billion live below $1 per day (the World Bank's definition of absolute poverty). Nearly a billion suffer from malnutrition. More than half of these poor live in rural areas and depend on sustainable access to natural resources and assets for their subsistence. In addition to income measures, other measures of well-being, such as health care, basic education, access electricity and communications are lower than in urban areas. These areas also tend to have much less influence in government decisions, which can be attributed to a combination of lower education levels and more limited access and voice in national matters. While urban poor are not a primary focus in this paper, they often suffer from water pollution, flooding, and other negative environmental impacts that have their origins in the poor management of rural lands.

People living in rural areas can be marginalized, both by reduced access to natural resources and public services. Close to half of the rural population, approximately 1.5 billion people, live on marginal land. These lands are classified as marginal due to terrain that is mountainous, forested, arid, or composed of poor soils. In many cases, rural people have been forced onto these marginal land by population pressures, displacement from their traditional living areas, political forces, or by their inability to find other means of supporting themselves. Although the overwhelming majority of all rural people depend on natural resources for their livelihoods, legal land and use rights for communities are rare, and while accurate data is not available, most poor people in developing countries' rural areas do not have clear title to their lands.

Most rural poor are engaged in some type of pastoral activity, with subsistence agriculture as their primary source of income. Those not engaged in subsistence agriculture are engaged in extractive industries such as logging, mining, etc. Yet, few rural dwellers have legal rights to natural resources extracted from the land where they live. These rights are usually claimed by the state and often granted to large firms which take little or no responsibility for the welfare of people living in exploited areas. The Grasberg Mine in Iryan Jaya, Indonesia, (See Box 1) is one of the most striking examples of the abuse of both the environment and of the local people. In this example, the Amungme people had neither legal rights to the resources being mined nor legal recourse to hold PT-Freeport Indonesia responsible for the social and environmental consequences of its actions.

Box 1: Indonesia: The Grasberg mine
The Grasberg mine, located in the eastern Indonesia, is the world's largest open-cut gold and copper mine. The mine is owned and operated by PT-Freeport Indonesia, with approximately 80% of the shares owned by Freeport McMoRan and 10% by the Indonesian government. Mineral rights were granted by the government to the mine with no recognition of the rights or livelihoods of the local people who had lived in the area for centuries and depended on its agricultural and animal resources for their livelihoods. The extensive mining practices destroyed many of their sources of livelihood and forced many, often entire villages, to relocate with little or no compensation. Neither locals nor environmental experts were consulted on how to run the mine to minimize social and environmental impacts. PT Freeport has been involved in grievous human rights violations, the death of local people, the destruction of local water quality and a sacred mountain, and serious long term environmental threats posed by mining activities. The local inhabitants, represented by LEMASA, the Amungme Tribal Council, have been vocal and insistent in protesting their treatment by PT-Freeport. After decades of protesting the company within Indonesia, the Amungme have brought their case for redress against the abuses of PT Freeport to New Orleans, Louisiana, the home of the parent company. In response to the change of power in Indonesia in combination with pressure from communities and activists, PT-Freeport has made some changes in policy, although Amungme tribal leaders accuse Freeport of merely making policy without implementing it.
Source: Kennedy, D, 1998

In too many cases, opportunities to maintain the livelihood of the rural poor have been destroyed by non-sustainable activities promoted by outside investors interested in mining the area's natural resources. When the area's extractive resources are exhausted and the outside investors move on, local inhabitants are usually left with neither a job nor any longer a resource base on which they can support themselves. These conditions occur in developing as well as developed countries, as illustrated by the history of West Virginia, USA (See Box 2).

In the last 50 years, rapid population growth has greatly increased pressure on rural resources for subsistence, led to unsustainable farming practices, and pushed more people into marginal areas. When such pressures cannot be restrained, land regimes often degenerate into 'open access' situations, where there are no limitations on the use of an asset or property. The resource will be overexploited as any number of agents may try to extract as much value as possible. As a result, the total value provided by the resource is reduced and its productive capacity may be unsustainably depleted. Additionally, many new nation states have claimed rights to the natural resources traditionally managed by local communities and granted exploitation rights to government or private agencies from outside the areas, further impoverishing local communities.

Box 2: West Virginia, USA: Resource Extraction and External Investment

In the mid nineteenth century, West Virginia comprised a near unbroken forest, covering more than 15.5 million acres. However, between 1880 and 1920, the state was almost completely deforested by absentee landowners abetted by corrupt state government. The influence of large absentee landowners continues today. From the turn of the century, external capital investment was employed to exploit natural resources. Almost no capital existed in the sparsely populated mountains, so the majority of capital was invested by 'foreign' or 'absentee' owners and firms, which acquired a disproportionate influence over West Virginia, both economically and politically. Once the forests were cleared, local West Virginians were left with a state ravaged by severe water pollution, flooding, fires, and landslides. Much of the employment was temporary and transient, and opportunities were few after the timber was extracted. The expansion of coal mining offered additional employment opportunities, at further cost to the environment and local health.

Extractive industries, such as mining and timber, still provide employment opportunities within the state, but the advance of technology has eliminated many jobs previously performed by human hands. A major mountain-top removal coal mine employs only 70-90 workers in all, many from out of state. As of 1998, West Virginia ranked 50th in the nation in terms of median household income and 3rd in terms of the percent of population below the poverty line, with a rate of 17.8% as compared to the national average of 12.7%.
Source: US Census Bureau. http://www.census.gov/statab/www/states/wv.txt and Lewis, 1998.

III. THE ECONOMIC VALUE OF A SUSTAINABLE ENVIRONMENT

While rural environments are being eroded by the needs of the poor and the lack of concern of the rich, numerous studies have shown that the current rate of use of most natural resources already exceeds sustainable use levels, even when it only manages to provides one sixth of the world's population with an affluent life-style and about one third with an acceptable one. The needs of the poorest half of the world's population still must be provided for.

Already, the foot-print of environmental consumption of the wealthy nations greatly exceeds the environmental area of those countries. They are drawing on the environmental resource base of the rest of the world and on reserves of environmental wealth that are being exhausted. These studies also suggest that if the whole world's population were to live at the level of a median OECD country, the environmental foot-print would be the equivalent of at least three Earths, given today's consumption patterns, institutions, and technology.

Admittedly, there have been important technical and consumption changes that have reduced the resource input per unit of GDP, and have resulted in an increase in food production, that, if distributed evenly throughout the world's population, would be enough to feed everyone. These improvements, however, have not been sufficient to reduce the total number of people living in poverty. Nor have these changes occurred fast enough to reduce overall resources' consumption. World output growth exceeds efficiency and productivity gains, so total consumption of resources continues to grow. The implications of these patterns are obvious: either a change in consumption patterns, institutions, and technology drastically to reduce demands on resources, or an improvement in the management of those resources to increase their sustainability or a mix of the above is needed to stop the further deterioration of the world's environment.

From a market economic perspective this over-consumption of natural resources can be attributed to the fact that throughout history, most environmental services, and many environmental goods have been treated as free to be used as needed. In earlier times, the environment was vast in relation to human use, and extractive activities had little impact. Environmental goods could be had for the taking on a first come first serve basis. This perception of the environment as an inexhaustible free good has persisted long after the reality has changed.

While it is useful to bring this economic perspective to the analysis of the over-exploitation of environmental goods and services, it is important to keep certain characteristics of the environment in mind. Most market goods and services are produced and maintained as discrete objects separable from other goods and services. Environmental goods and services, in contrast, are part of an ecosystem which functions as a complex, integrated system in delivering its services, rather than as a collection of separable elements. Services such as water purification, climate moderation, flow management, and siltation control, do not stem from a particular component of an ecosystem (such as a group of trees or pile of minerals), but from the integral functioning of the whole system. Removing or significantly changing one part can disrupt the whole systemic function.

For example, assuring environmental sustainability is not something that can be confined to protecting a specific area or a discrete set of resources, though such protection may be necessary in certain circumstances. We need to address the system in a holistic manner to make sure that the system will continue to provide the desirable services over time. The extent of such ecosystems is generally larger than could be owned by an individual or even a corporation and may include both public and private lands. Indeed, ecosystems may be interconnected in such an elaborate manner that it is not possible to define precise boundaries. A broader community viewpoint is required to balance different needs and uses, taking proper account of the benefits and costs of competing uses and placing values on the systemic effects as well as on the various individual components.

All the above explain the difficulty faced by markets, and society at large, when trying to put a value to environmental services. Yet, in the last few decades a host of studies have show that in situ environmental services may be much more valuable than the commodities that are extracted from them. A recent study estimated that the value of environmental services provided by ecosystems functioning in place (water purification, flood control, etc.) totals about $33 trillion a year (1996), or slightly more than the world's GDP of $29 trillion in that year. These values were estimated as the cost of providing equivalent services by installing plants that provide similar results, such as water purification plants, or as the costs imposed on users by the lack of services, such as the health costs of breathing polluted air. Obviously, many other services cannot be quantified in market terms, but are valued by many societies. Viewed as a provider of services, nature is a gigantic enterprise and deserves careful management to avoid significant losses in the value of the services it provides.

Many local studies have also found that the values of the services rendered in situ greatly exceed the values of extracting and commoditizing specific goods, such as timber or minerals. Box 3 summarizes a detailed calculation made for a forest in Indonesia to this effect. Such studies indicate where services are the most valuable and in need of protection. Specific studies such as this example in Indonesia demonstrate in concrete terms the value of environmental services in local areas. Proper valuation of local resources will be an important foundation of the stewardship agreements discussed below.

Box 3: Indonesia: Forest Valuation

Indonesia has established an extensive system of national parks to protect its environmental resources. To justify the maintenance of these parks, efforts have been undertaken to estimate the value of the services provided by the parks. In 1999, Conservation International sponsored a study of the Mt. Gede-Pangrango National Park located in central Java. This park is among the oldest in Indonesia and encompasses more than 15,000 ha. of forest reserve. It is surrounded by several hundred thousand ha. of buffer (production forests), transition (agriculture) and watershed zones that benefit from the services of the park.

Careful monetary estimates were made of the benefits provided by sound park management due to tourism, water supply for agriculture, water for household use, and sediment control. Benefits were also recognized but not measured for non-timber forest products, biodiversity, air quality, carbon sequestration, risk management, research and education, and existence or option values. The quantified benefits were compared to the costs of park management and the opportunity costs of foregone timber extraction in the park. The identified benefits were nearly one and a half times the costs of management and foregone timbering. The total would have been even larger if the other benefits could have been quantified

This exercise demonstrates that environmental services of an ecosystem can be very valuable in terms of improved production (water for rice, sediment control) and improved quality of life (water for households, tourism). However, in many cases, these services are not treated as market goods and sold, as for example timber would have been. Although the Mt. Gede-Pangrango National Park is not in danger of being exploited, the calculations demonstrate that for many unprotected areas, the benefits from timbering, which accrue to very few, are probably outweighed by the costs imposed on local people through loss of water, sedimentation, etc.; creating negative results and increasing local poverty.
Source: Valuation of Mt. Gede-Pangrango National Park, Conservation International (Indonesia), Natural Resource Management Program, 1999.

In addition to the difficulty of valuing environmental services, assessing environmental issues requires a longer time frame than markets, or political decision-makers, are usually comfortable dealing with. Some natural cycles are relatively short, such as seasonal crops or rainfall. Other cycles can last for decades, such as tree regeneration or fish stock recovery. Still others, such as the reformation of topsoil or climate change, extend well beyond human life spans. Some effects are irreversible, such as the deforestation of the high Alps (due to soil loss), species extinction (over-fishing), or toxic pollution around many mined areas. Thus, innovative stewardship solutions to environmental problems require working from a conceptual framework that is both broad enough to include the ecosystem-based nature of environmental goods and long-term enough to account for nature's longer cycles.

IV. PROPERTY RIGHTS AND COMMON POOL RESOURCES

PRIVATE PROPERTY REGIMES

Market economies are based on private property ownership of goods. The concept is relatively simple when applied to produced economic goods, most of which have a life span shorter that the owner and which do not have broad impacts beyond their own physical mass. The issue of property rights for land and natural assets is more complex, and inherent flaws in the concept and application of property rights to natural resources create serious threats to both sustainability and rural poverty alleviation.

At a national level, different states have allocated land use rights in different manners. In some countries, all land is held by the state and then allocated to specific uses. In others, some land may be held in reserve by the state for conservation or other purposes, some may remain in public ownership, but be licensed for specific uses, and some may be transferred to private ownership - all with varying degrees of enforcement under a variety of specific systems. Once lands are privately owned, they are treated as a private good, subject to some limitations. The result is a variety of mixed regimes, and there is no strong evidence that any one is better for assuring environmental sustainability, poverty alleviation, or growth.

The economic success of private property regimes depends on an extensive legal and governmental infrastructure, whether the protagonists have enough surplus income to use the costly legal system, and whether there are mechanisms to recognize public goods and enforce community interests. Unfortunately for many developing countries, and particularly for the rural poor, these conditions are not realized in practice. Registration of land for individuals, especially for the poor, can be exceedingly burdensome, if even possible in practice. Numerous environmental problems can result from misguided registration rules, such as requiring the conversion of land to commercial uses (e.g. pasture) to obtain a title, regardless of the best use of the land. Another problem in areas with weak institutions is that even if property rights can be assigned to local individuals, often the rights are not enforced and individuals are still left without legal recourse.

Furthermore many modern states use land titling as a way to ignore or abrogate traditional land rights and management techniques, thereby depriving large numbers of rural poor of their traditional natural resources and access to sustainable livelihoods. Lack of clear individual or community property rights in many rural areas is a major factor explaining poverty as well as abuse. Individuals who do not have secure access to their resources have little incentive to manage their land for future benefits. They may not be eligible for credit, nor have access to extension services, nor the ability to access markets to sell their products.

As for the management of environmental services through private property rights, most modern property rights regimes do not specify responsibilities for the impacts of use of environmental resources on those outside of the property line, such as pollution, water diversion, siltation, etc. Spillover of negative environmental impacts can also arise from the segregation and allocation of different components of an integrated environmental system, e.g. mineral or timber or other rights can be sold or licensed separately from the rest of the ecosystem. Market forces can then lead to the exploitation of that specific good with no concern for the impact of that exploitation on the remaining components of the ecosystem or related societies. When these impacts are significant, the whole community has a right and responsibility to act, usually through the action of the government. Naturally, this may lead to conflict, between individual property rights and society at large as exemplified by the case in Box 4

Box 4: United States: Conflicts over Property Rights and the Environment

Within the United States, conflicts persist between private and community interests . The rights of owner include the right of possession, the right to control how the land is used, the right to enjoy the benefits (income and intangible benefits) of the land, and the right to give, sell, encumber, or bequeath rights to others. The state retains the right to tax the land, the right of eminent domain, the right to control use to ensure protection of public interest, and the right to claim the land if there are no legal heirs. In addition, the state lays claim to wildlife that inhabits private lands. Where the state wants to exercise a public interest, such as protecting endangered species (biodiversity) or water quality, it has to contend with the sanctity of those property rights. For example, the Endangered Species Act of 1973 made it a crime to "take" an endangered or threatened plant or animal species. This conflicts with a "taking" under the Fifth Amendment of the US Constitution , which requires that the government pay "just compensation" when a property owner's rights are lost due to government action, like the construction of a road through private property. These disputes resulted in a significant impact on local populations and long drawn out court battles, such as the well publicized spotted owl debate in Oregon.
Source: McEvoy, 1998

COMMON-POOL PROPERTY REGIMES

Typically conventional state and private property systems do not directly take the systemic aspects of natural resources into account. They ignore the impacts that the single purpose use (or abuse) of a resource can have on others outside that area. Proper ecosystem management requires taking into consideration a larger area than a private agent or licensee could normally be expected to manage and a wider range of impacts on ecosystem beneficiaries. In some cases, state management can fulfill these functions, but not always. One type of property regime that provides a means to do so is common-pool property.

The analysis of common-pool property regimes by Elinor Ostrom and her colleagues has greatly enriched our understanding of the value of community approaches to natural resource management issues. Common-pool property is characterized by several attributes. First, it is larger than one single local owner can afford. Second, there are multiple beneficiaries of the property's output. Third, producing that output is a result of integral functions of the property as a whole. As a result, management of the property as a common unit produces greater output more efficiently than division into many discrete units managed independently, and there are inherent incentives for equitable allocation of the benefits.

Both global and local ecosystems have many characteristics of common pool property and would benefit from common property management techniques in order to assure sustainability. The challenge is finding ways to meld common pool approaches with conventional private property systems. At the simplest level, this involves encouraging communities to manage their own resources sustainably and to assure their livelihoods. Often, changes in management can occur voluntarily. For example, rice and sugarcane producers in Colombia organized to create 12 water user associations that voluntarily agreed to increase user fees to finance improvement of stream flow and reduction of sedimentation in their irrigation canals (Perrot-Maitre and Davis, 2001). In the Dominican Republic, when farmers linked deforestation in the Nizao catchment to the reduction of seasonal stream flows, they voluntarily adopted limits on tree cutting that were more stringent than government requirements (Tognetti, 2001). But more frequently, some external encouragement is required, as in the case of the forest management project in India cited at the beginning of this paper.

Common or community property land management systems have evolved throughout the world in a variety of circumstances. Within a community, use rights can be assigned in a variety of ways. For example, the use of particular plots of land may be assigned to families over long periods of time. The amount can be adjusted based on family size and need, and each family often has plots in different areas to offset risks of climatic variation during the year. These systems seek to address efficient production needs, as well as equity considerations and risk management. Success depends on strong community institutions, enforceable rights to their resources, and the capacity to limit access to members of the community. They perform well, if the broader national institutions permit and encourage such arrangements, such as the formation of community managed forests in Nepal (See Box 6). These systems are particularly adapted to managing resources such as community forests, irrigation systems, and other assets that have to be managed on a scale too large for individual ownership, but which require cooperation from the whole community to enjoy the benefits.

The scope for expanding these community property regimes in developing countries is quite large and requires the adaptation of legal systems in many countries. Government bureaucracies also have to accept delegation of authority to these communities - subsidiarity. In many cases, community building would also be required to create and expand the necessary social capital to exercise effective management of the common pool assets. Conditions for developing common pool resources within a community are shown in Box 5. Not only are such changes likely to lead to more sustainable management of the natural resources, but they will provide improved and more sustainable livelihoods for the communities involved.

BOX 5: ATTRIBUTES FOR COMMON-POOL RESOURCES:

Attributes for the Resource:

• Feasible Improvement: The resources conditions are not at a point of deterioration such that it is useless to organize or so underutilized that little advantage results from organizing.
• Indicators: Reliable and valid indicators of the conditions of the resource system are frequently available at reasonable cost.
• Predictability: The flow of resource units is relatively predictable.
• Spatial extent: The resource system is sufficiently small, given the transport and communication technology in use, that appropriators can develop accurate knowledge of the external boundaries and internal microenvironments.

Attributes of the Users:

• Salience: Users are dependant on the resource for a major portion of their livelihood or other variable of importance to them.
• Common Understanding: Users have a shared image of the resource (as defined above) and how their actions affect each other and the resource system.
• Discount Rate: Users have a sufficiently low discount rate in relation to the future benefits to be achieved from the resource.
  
• Distribution of Interests: Users with higher economic and political assets are similarly affected by a current pattern of use.
  
• Trust: Users trust each other to keep promises and relate to one another with reciprocity.
  
• Autonomy: Users are able to determine access and harvesting rules without external authorities countermanding them.
  
• Prior Organizational Experience: users have learned to least minimal skills in organization through participation in other local associations or learning about the ways then neighboring groups have organized.

Source: Ostrom, 1999,

SOME EXAMPLES OF SUCCESFULL COMMON POOL PROGRAMS

Since 1978, Nepal has been creating community-managed forests by transferring limited property rights from government to community control (See Box 6). Nationwide, the legal rights to manage over 250,000 hectares of national forest have been transferred to user groups, creating economic incentives for locals to sustainably manage their resource base for both profit and their own needs. Similar programs have been successful in India (See Box 7) and Thailand.

Box 6: Nepal: Community Forest User Groups in the Makalu Barun Conservation Area

In 1978, the Government of Nepal embarked on a program to transfer limited property rights from previously nationally managed forestlands to community forest user groups. Within the Makalu Barun Conservation Area, the Mountain Institute aided the government to transfer 6,250 hectares of forestland from government control to 71 community user groups. Although the government still retains title to the land, the transfer of control gave locals a legal means to increase their revenue from natural resources. The cost of the transfer of limited property rights is borne by the national population in terms of lost sales revenues.

In order to receive management authority, user groups were required to show that the forest resources would be sustainably managed. Before the change in ownership, local people paid a high price to the central government to use the forests. In addition, villagers had high incentives to illegally extract forest resources both due to lack of personal consequence and the nonactive stewardship role of the government. Consequentially, significant resource degradation as well as negative social repercussions occurred. Now the groups have the authority to decide on user fees, to collect fees, and to impose penalties for community members who violate management practices. As of 1996, more than 2000 households had been given stewardship rights and have received the revenue generated from these resources. The majority of user groups have generated funds that are being invested back into the community. Source: The Mountain Institute, 1997.

Box 7: India Community Forest Project in Madhya Pradesh

In the province of Madhya Pradesh, India, local communities (with financial support from the and the World Bank) undertook a Joint Forest Management project that included a transfer of timber harvest rights from the state to joint community management. Nearly half a million families now participate and now receive 100 percent of the value of non-timber forest products (and revenues from sustainable harvest of the timber), estimated in total to be worth $125 million per year, or about $280 per household per year. Migration has declined, local investment has increased, and numerous environmental benefits have resulted. 5.5 million hectares of forests are being protected from grazing and unmanaged forest use. Villagers have reported an increase in the water table, as well as in wildlife populations and biodiversity. In this example, both the environment and local inhabitants have benefited
Source: Arnold, J.E.M. 1998,

V. MARKETS AND ENVIRONMENTAL SERVICES

Belief in markets has become conventional wisdom throughout much of the world today. Indeed, markets have contributed a great deal to increasing incomes, improving standards of living, and delivering more efficient production. However, there is no single model of a market-based economy. Different cultures and societies place different relative weights on values outside the markets and create regulatory structures to balance those values with the functioning of the market.

Well-functioning market systems are not self-creating and have not yet proven to be the 'natural' economic system that will arise in the absence of any regulation. In fact, well-functioning market economies require a great deal of institutional infrastructure and regulation to operate. A large part of this infrastructure and regulatory system is designed to offset market imperfections and assure that non-market values are respected. These structures determine many of the characteristics of any particular market and how it deals with other goals, such as the environment and poverty alleviation. Thus it important to understand the basic imperfections in markets in order to be able to design beneficial interventions to overcome them.

The Role of Public Goods and Public Bads: Market theory is based on the production and trade of discrete private goods. These goods have the characteristics of rivalry and exclusion. Rivalry means that the owner's use or consumption of a good reduces the amount available for anyone else to consume. Exclusion means that whoever owns the good can exclude others from its use. Pure public goods, on the other hand, are characterized by the opposite: non-excludability and non-rivalry. No one can be prevented from using a public good, and use by anyone does not reduce its availability for use by others. A lighthouse is a classic example of a pure public good - once in place, no-one can be prevented from benefiting from it, and anyone's benefiting from it does not prevent another from benefiting. Scenic views have similar characteristics.

In practice, there are few pure public goods, but there are many goods that have significant public goods elements. Education is an example of a partial public good. The individual obtains private benefit, for which (s)he may pay. But society at large also benefits from having educated individuals, and the provider of the education does not capture this benefit. The public benefits from basic education are greater, so it is more frequently provided by the public, while higher education has more individual benefit, and is more likely to be paid for by the individual.

Conversely, markets can also produce negative goods (things that cause harm) or 'bads,' In the case of private bads, the producer would pay the recipient for the harm produced (for example liability in a car crash). However, there are also many public or partial public negative goods. Pollution and congestion are well known examples. If a farmer applied a pesticide to his field that damaged his neighbors farm due to runoff, that would be a negative externality the first farmer would usually not have to pay for.

Private markets will produce a sub-optimal amount (under-produce) partial public goods because private producers cannot capture all the benefits that these goods deliver. By the same token, markets will tend to over-produce partial public bads, because their producers are not charged for the damage they inflict upon others. These positive or negative impacts of public goods that are not captured by (or charged to) the producer are often called 'externalities,' or costs and benefits that are external to the normal market transaction. Unless these externalities can be incorporated into the transaction, or 'internalized,' markets generate sub-optimal outcomes.

Environmental goods and services have many properties of public goods in that they typically have significant non-rivalry and non-excludability characteristics and produce significant externality benefits for a large number of people, both directly and indirectly. And conversely with 'bads.' As a consequence, markets by themselves will not devote adequate resources to stewardship of ecosystems that produce environmental goods (watershed protection, biodiversity, soil management) and will not constrain production of environmental bads (air and water pollution, erosion).

External intervention is often needed to rectify market-based misallocations. These interventions can range from command and control legislation, such as the Clean Air Act in the United States which mandates changes to increase air quality, to creative application of market instruments to align market incentives with environmental goals.

Here we are particularly interested in exploring market opportunities to pay the rural poor for the provision of environmental services and functions, or what is often called their role of 'environmental stewardship' to reflect the traditional concept of humans having stewardship responsibility for the world around us. Numerous examples exist in both rich and poor countries of arrangements that use beneficial aspects of market systems to remunerate the stewardship for environmental services, and we believe that there is an enormous potential to expand the use of these arrangements.

Two general steps must be taken to adapt environmental public goods (or bads) to market instruments. First, some external intervention is needed that will increase the rivalry or excludability of the environmental public good in question and grant some proprietary rights to stewards of that good so that they can market they environmental service and be compensated for it. Second, the profits generated by the creation of these markets need to be equitably distributed to the stewards that provide the good and to the community at large

For example, a 'virtual' market can be created for certain environmental services by placing a limit or cap on the production of that good, or bad; thereby creating a marketplace for trading in that capped good. In the case of mitigating air pollution, an acceptable level of emissions may be established for a given airshed, and permits are issued to participants to emit up to a certain level. These permits can then be traded to obtain the most cost-efficient reduction in emissions. This approach has been effective in reducing sulfur emissions in the US, and is being proposed for CO2 emissions. In effect, the process converts the public good value of clean air to a marketable good (emission permits), which are scarce and can attain a market value. The degree of scarcity (number of permits), is set by non-market forces based on health sciences and public opinion on how clean the air should be. Within such a framework, markets work.

Variation on this model has been applied in some developing countries. In Chiapas, Mexico, the Scolel-Te ("growing trees") Pilot Project for Community Forestry and Carbon Sequestration is financed by revenues from a greenhouse gas mitigation agreement with the International Automobile Federation, which is committed to offsetting the carbon emissions resulting from sponsored car races. Farmers receive 60-80 percent of the resource rent, and the remaining funds are used for administration costs. (Scherr et al, 2001)] In Bolivia, the largest forest-based carbon project in the world has created a potential net carbon benefit of 6-8 million metric tons of carbon over 30 years. Carbon offsets generated from this project are shared among the Government of Bolivia and the three energy company investors. The government offset proceeds are allocated to specified biodiversity priorities in Bolivia. (See Box 4).

Box 8: BOLIVIA: THE NOEL KEMPFF CLIMATE ACTION PROJECT

The Noel Kempff Mercado National Park, Bolivia, covers over 1.5 million hectares in one of the most biologically diverse areas in the world. Since 1997, almost half of this area is managed through the Noel Kempff Mercado Climate Action Project, the largest forest-based carbon project in the world. Project participants include the Government of Bolivia, Fundación Amigos de la Naturaleza (FAN), the Nature Conservancy, and three U.S.-based energy companies. The project has been given $9.6 million (U.S.) for the first 10 of 30 years, including a permanent endowment of $1.5 million.

Project activities have contributed to biodiversity protection through park expansion, and improved soil, water, and air quality through the cessation of logging on two million acres of land. The most recent mid-term estimates indicated a potential net carbon benefit of 6-8 million metric tons of carbon over 30 years. Carbon offsets generated from this project are shared among the Government of Bolivia and the three energy company investors. In the case of the government offsets, proceeds would be allocated to various specified biodiversity priorities in Bolivia.

Local participation is emphasized in this project. FAN has hired approximately half of the park guards from the local communities and established revolving funds for microenterprises such as heart-of-palm plantings, to help take pressure off of the forest lands. In addition, the project is assisting the local communities in their efforts to attain legal status as indigenous peoples and to secure land tenure.

Carbon benefits from the project are expected to last in perpetuity, considering both that the site lies within the National Park and a permanent endowment has been established to fund protection activities beyond the 30-year life of the Project. Project developers have shown that logging concessionaires would have continued harvesting timber on the property and much of the land in the project site would have been cleared without the guidelines of the project. Source: The Nature Conservancy, 2000

A more modest and better known approach is to charge uses of what was before a free environmental service, like access to a national park or other protected areas. For instance in the Annapurna Conservation area in Nepal, visitors pay an entrance fee of $12, which is channeled back to local people through the Kind Mahendra Trust for Nature Conservation, a local NGO. As of 1997, over $400,000 had been collected, enough to cover operation costs for the park as well as regional development programs. In Kigali, Rwanda, a user fee of $200 per day is charged by the National Park office for tourists who want to view the mountain gorilla in its natural habitat. Funds are used to cover park expenses and salaries for the staff. In these cases, excludability has been created by closing a park and limiting entry.

Of utmost importance when considering user or entrance fees to fund compensation for environmental stewardship is the assurance that the funds are channeled directly back to participating local communities. The local reinvestment of these funds has the potential to create strong incentives for increased local stewardship activities. In both the case of air pollution and national parks, public intervention sets a certain parameter (supply or price) and individual agents then responded in a quasi market situation.

Enhancing local community management rights to their own resources addresses many of the stewardship and poverty alleviation objectives, but by no means all issues of resource management. The challenges of sustainable resource management often extend beyond individual communities. Better environmental management then requires stewardship actions by those in an area where the benefits originate (let us say 'upstream'), while the beneficiaries are located in a different area (let us say 'downstream'). In these cases, the common pool resources span two or more communities, and they have to find ways to work together to increase their mutual benefits. The situation becomes more complicated when the benefits of improved stewardship are not shared by the community that does the stewardship, but by those downstream. In these cases, there are two relatively distinct communities that share a common pool resource and a transaction external to each community is required to achieve the enhanced common benefit. The beneficiaries have to compensate the providers.

The partnership between New York City and the Catskills farmers (See Box 9) is a good example of a downstream community compensating an upstream community. In France, Perrier-Vittel, the world's largest bottler of natural mineral water, has succeeded in reducing non-point pollution through payments to upstream farmers who agree to switch to less intensive dairy farming technology. Payments are based on the reduced profitability associated with the change in technology (Perrot-Maitre and Davis, 2001). In Quito, the capital city of Ecuador, funds raised through a small increase in water fees were allocated to the maintenance of protected areas within the watershed providing water for the city (Tognetti, 2001). These are examples of how pairs of communities have worked out a way for those downstream to pay for the public good of clean water by financing the protection of crucial upstream areas. In Costa Rica, two contrasting case studies illustrate the potential of these negotiations between upstream and downstream residents (See Box 10).

Box 9: New York City, USA: Watershed Agricultural Program

In the early 1990s, New York City and the Environmental Protection Agency (EPA) were concerned about the potential decrease in water quality due to runoff from barnyards and faulty sewage treatment systems upstream. New York was facing the possibility of having to build a $6 billion water filtration system. A recent partnership between New York city and the upstate farmers of the Catskill mountains, who inhabit the watershed feeding the city's reservoirs protects 1,900 square miles of watershed from further degradation while at the same time allowing for the growth of upstate communities. What started out as a potentially expensive and exhaustive battle has turned into a model project. In January 1997, the historic NYC Watershed Memorandum of Agreement (MOA) was signed, bringing together the rural and urban inhabitants of New York with the hope of benefiting the mountain inhabitants, city dwellers, and the environment.

New York city agreed to fund $35.2 million for farmers in the Catskills to purchase or build pollution abatement devices. Participating farmers must convince at least 85 percent of the 400 farmers in the watershed to join them. On average, a farm will receive $75,000 for improvements such as cement manure pipes, fencing to improve cattle feeding, and riverside tree planting. The Watershed Agricultural Council, consisting of 21 members, meets to disburse the city funds to participating farmers. The program is voluntary and completely run by the farmers themselves.

Numerous benefits are already materializing through this partnership. The primary social benefit is renewed trust between upstate farmers and city residents. Income for farmers is not only increased due to city funding, but their productivity is expected to improve in nine out of ten cases due to expected improvements made on their properties. Downstream water consumers benefit by avoiding the cost of a water filtration system, and the incentives for conservation have been created by direct payments to participating farmers. The price of water was increased slightly, but by far less than would have been the case if the treatment plant had been built. The incremental revenue was reinvested in protecting the watershed. This case study illustrates the benefits possible across the board when downstream users must pay for the maintenance of the watersheds as well as the cost of the water.
Source: The Mountain Institute. 1997.

While the source of all environmental goods and services are rooted in their locality, impacts and benefits can be

VI. Markets and Equity

VII. CONCLUSIONS: TOOLS TO LINK POVERTY REDUCTION AND SUSTAINABILITY