Pay for Performance and Deforestation: Evidence from Brazil ∗
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Pay For Performance and Deforestation: Evidence from Brazil ∗ Liana O. Andersony Torfinn Hardingz Karlygash Kuralbayeva§ Ana M. Pessoa{ Po Yin Wongk May 2021 Abstract We study Brazil’s Bolsa Verde program, which pays extremely poor households for forest conservation. Using a triple difference approach, we find that the program keeps deforestation low in treated areas. In terms of reductions in carbon dioxide emissions, the program benefits are valued at approximately USD 335 million between 2011 and 2015, about 3 times the program costs. The treatment effects increase in the number of beneficiaries and are driven by action on non-private prop- erties. We show suggestive evidence that the BV program provides poor households with incentives to monitor and report on deforesta- tion. (JEL I38, O13, Q23, Q28, Q56) ∗The project is funded by the Research Council of Norway (project number 230860). The views expressed in this paper are those of the authors and do not necessarily reflect those of the Hong Kong Monetary Authority. We thank Andre de Lima for his expert assistance with maps and spatial data. We also thank participants at various conferences and seminars for very helpful comments and discussions. We are particularly thankful to Kelsey Jack, our discussant at the NBER SI Environment and Energy Economics 2019, for very detailed comments and suggestions. Remaining potential errors are our own. yNational Center for Monitoring and Early Warning of Natural Disasters (CEMADEN) zDepartment of Economics and Finance, University of Stavanger Business School §Department of Political Economy, King’s College London {National Institute for Space Research (INPE) kResearch Department, The Hong Kong Monetary Authority 1 1 Introduction The threat of climate change and the emergence of global climate polices have increased the world community’s attention to conservation.1 A crit- ical (and classical) question is how to best achieve conservation in devel- oping countries with weak enforcement mechanisms and limited financial resources. This paper addresses this question within the context of one of the most im- portant ecosystems in the world, the Amazon rainforest. We study the ef- fectiveness of Brazil’s Bolsa Verde (BV) program, a conditional cash transfer program for rural populations living in extreme poverty. BV has a unique incentive structure. Each recipient household signs a contract committing to implementing conservation activities and using natural resources sus- tainably, but the conditionality is based on the aggregate outcome of forest cover at the regional level. All beneficiaries in the area exit the program if the total forest cover violates the Forest Code, which requires at least 80 percent of lands to be permanently maintained as legal reserves (for- est). As such, any conservation or deforestation activity within the area has consequences for all BV participants. Our analysis is based on all areas eligible for the BV program in the Brazil- ian Legal Amazon (BLA). Our period of analysis is from 2011 to 2015. The forests in the BLA is rich in carbon and the region has a high prevalence of poverty. Municipalities in the BLA have approximately 43.1% of the coun- try’s poor populations and 6.2% of the extremely poor in 2016. We estimate double and triple difference models, taking advantage of the roll-out of the program and comparison between receiving areas and non-receiving areas 1As policy agenda, Dagupta [2021] sets out the ways in which economics and decision making should account for nature. A growing number of central banks and financial regulators are adopting research initiatives to fulfil their mandates in the context of bio- diversity loss and nature conservation [NGFS and INSPIRE, 2021]. The UK government pledged £3 billion to protect nature and biodiversity over the next 5 years, with £150 million channeled through the newly launched Mobilising Finance for Forests Programme, which is further expected to attract £850 million from private sector [Government, 2021]. 2 with similar characteristics. Using multiple novel datasets, we find that the BV program keeps defor- estation low in BV-receiving areas. The program effects are slightly larger in areas with more beneficiaries per area, alleviating concerns about free- riding. Program impacts are also larger in extremely poor areas, indicating the importance of the payment as a financial incentive for program com- pliance, as poor regions are more likely to have beneficiaries for whom the cash transfer is a more sizeable addition to the household budget. These results are robust to various specifications. We present a conceptual framework that highlights two channels through which BV can reduce deforestation: (i) recipients reducing their own de- forestation activity and (ii) recipients monitoring and reporting illegal de- forestation activities by others happening in their areas. To distinguish between (i) and (ii) in the data, we utilize information from Brazil’s rural property registry (CAR) for private properties in combina- tion with high resolution deforestation data. We find nil effects of the program in tiny and small properties, which are more likely to be owned by BV-recipients who typically are small-scale farmers. We find that the program effects are significant on medium or large properties, as well as in those parts of receiving areas that are not registered in the CAR. These results indicate that the program effect does not arise from reductions in deforestation at the recipients’ own properties, but instead among non- recipients like large-scale farmers or logging companies. We interpret this as evidence in support of (ii) the monitoring and reporting channel. We present further evidence in support of the monitoring and reporting channel by taking advantage of geo-located data on fines and satellite based deforestation alarms used by the enforcement authorities. We find that the number of deforestation related fines increases significantly in BV- treated areas, conditionally on deforestation taking place. The effect on fines is, if anything, larger in areas that are far away from where an alarm 3 went off. This indicates that the authorities learn about the offences not through satellite-based alarms, but through some other channel, such as reporting from the BV households. This paper contributes to two strands of the literature. First, we expand the literature on “payments for ecosystem services” (PES) programs by bring- ing in BV’s unique features. Existing studies have evaluated PES programs that are designed at an individual level (e.g., household) or at a group level (e.g., neighboring landholders or communities), with payments made con- ditionally on the performance of the specified individual or group [Kaczan et al., 2017, Sims and Alix-Garcia, 2017]. The key novelty of the BV pro- gram is its combination of incentives at the individual level and the policy goal defined at the communal level. In effect, BV incentivizes deforestation monitoring by program beneficiaries on land managed by non-program re- cipients. The payment and incentive structure of the BV program thus helps with overcoming the problem of moral hazard in teams identified by Holmström [1979].2 As the effect of the program goes beyond the defor- estation caused by the recipients themselves, the program facilitates reduc- tions in deforestation at a larger scale and allows for scalability. The facts that the program was implemented at scale and provides us with quasi experimental evidence from observational data, also distinguish our paper from the experimental papers in the literature. Second, our work relates to the literature on improving governance and public goods delivery in developing countries through decentralisation. The key theoretical idea underpinning this strand of research is that agents and middle managers are better informed than principals [Aghion and Ti- role, 1997]. There is a rich literature which investigates this idea within different contexts. For instance, some studies have investigated the effec- 2Moral hazard in communal ownership and management of natural resources has been considered as one of the main challenges for sustainable management of natural resources [Shyamsundar et al., 2005]. Co-management regimes of resources seem the most likely to counter collective action problems in the presence of well-defined property rights and incentives for monitoring at the local level [Berkes et al., 2006]. 4 tiveness of social targeting programs when the task of choosing program beneficiaries was delegated to local organizations or communities [Alder- man, 2002, Galasso and Ravallion, 2005]. Studies have also documented in- formational advantages of joint liability lending to the poor compared with traditional forms of lending [Ghatak, 1999, Ghatak and Guinnane, 1999]. The general mechanism in these studies is that groups are usually formed by self selection, e.g., borrowers find partners themselves, and members of a community know more about one another compared to an outside institution such as a bank. We contribute to this literature by providing suggestive evidence that incentives can mobilize valuable information held by the program beneficiaries regarding deforestation on “the ground” and allowing for monitoring to be effectively delegated to the program benefi- ciaries. Our findings have direct implications for policy. As the fight against de- forestation gather force, the world’s leaders will be confronted with a chal- lenge of addressing deforestation in remote areas. Furthermore, about one- third of forest areas in developing countries is under some form of com- munity ownership [Gilmour, 2016], and this proportion is likely to increase given ongoing efforts to delegate forest management to local communities in many countries [Agrawal et al., 2008]. Our results of the BV-program demonstrate that deforestation in remote locations as well as free riding within communal resource ownership can be reduced cost effectively by transferring income to poor households. In terms of implementation, this paper points to the importance of the ex- isting regulatory framework. The costs of introducing an environmental policy can be high, especially in developing countries.