The Leakage and Livelihood Impacts of Payments for Environmental Services

Payments for environmental services, and payments for carbon offsets in particular, are a growing source of public sector expenditures in developing countries. For example, the Common Market for Eastern and Southern Africa (COMESA) recently launched a carbon fund expected to raise 500 million USD for investment in carbon emissions mitigation and sequestration in its member countries, including Malawi and Zambia. While numerous interventions that target smallholder farmers claim both environmental and poverty alleviation impacts from environmental payment programs, little rigorous evidence on the true impacts is available [1].

The research follows up on a field experiment carried out in Malawi to subsidize tree planting on private land for carbon sequestration and other environmental services. Random assignment of carbon sequestration contracts among a subsample of eligible landholders facilitates direct comparisons to analyze the impacts on livelihoods and the environment three years later. Specifically, the analysis focuses on two key issues for payments for environmental services:

  1. What share of carbon sequestration benefits associated with tree planting subsidies is lost due to leakage? What share of sequestration is lost due to within-farm leakage?
  1. What are the livelihood impacts of payments for environmental services for contracted households? Are there measurable spillover effects for households without contracts through labour market opportunities or other price effects?

The afforestation contracts were allocated in 2008 and offered annual payments conditional on tree survival. Landholders were required to plant trees on half an acre of land, which is one-tenth of the average landholding among the study population. Each year, the contract paid up to one-tenth of average household income, based on tree survival. The evaluation of program impacts on the environment and livelihoods is based on a survey implemented at the end of the three year contract. Of the 537 households surveyed in the baseline, over 90 percent were reached for the follow up survey. A detailed biophysical analysis was carried out on a sub-sample of plots to further detect evidence of leakage.

Data analysis is still underway. Though the study size is modest and may therefore lack statistical power to detect some subtler effects, the results have direct policy implications. Specifically, payments for environmental services programs can be better designed to mitigate on-farm leakage though better incentive design. In addition, complementary programs could be bundled with payments for environmental services to ensure that contracted households directly benefit from the program.

[1] Pagiola et al. (2004) “Can payments for environmental services help reduce poverty? An exploration of the issues and evidence to date from Latin America” World Development. Zilberman et al. (2008) “When could payments for environmental services benefit the poor?” Environment and Development Economics.