Revealing Willingness to Pay and Willingness to Work to Avoid Deforestation and Forest Degradation Using the Contingent Valuation Method: Evidences from Indonesia by Akhmad Solikin Supervised by Prof. Dr. Wilhelm Löwenstein A dissertation submitted in partial fulfillment of the requirements for the degree of PhD in International Development Studies Institute of Development Research and Development Policy Ruhr University Bochum, Germany 2015 Acknowledgements There are many people contributing in different ways for the completion of this dissertation. First and foremost, I would like to express my great appreciation to my first supervisor, Prof. Dr. Wilhelm Löwenstein, who providing scientific supports and advices during my academic journey. I also would like to offer my special thanks to my second supervisor, Prof. Dr. Helmut Karl for his guidance and valuable comments. I am also thankful to Prof. Dr. Markus Kaltenborn as the chairperson in my oral examination. I also thank many people in IEE for their supports. I thank Dr. Anja Zorob and Dr. Katja Bender as current and former PhD Coordinator who help me navigating though administrative process during my study in Bochum. I am also thankful to administrative supports provided by IEE secretariat. For Welcome Center of RUB for providing supports in dealing with legal and cultural matters as well as for Research School of RUB which provide additional workshops, I would like to thanks. I am also grateful for fruitful discussions and talks with colleagues of PhD students especially Mr. Naveed Iqbal Shaikh, Mr. Elias Fanta, Mr. Elkhan Sadik-Zada, Mr. Abate Mekuriaw Bizuneh, Mr. Beneberu Assefa Wondimagegnhu, Mr. Charlton C. Tsodzo, Ms. Jasmin Gerau, Ms. Tamara Nierstenhöfer, Mr. Michael Tsegay Assefa, and Ms. Farah Asna Ashari. For their valuable supports during my last stay in Bochum, I also thank to Ms. Farah Asna Ashari, Mr. Mohamed Dawude Temory, Mr. Casper Agaton, and Ms. Lesley Hope. I would like to thanks to Dr. Yosep Ruslim of Mulawarman University for helping me recruiting interviewers and providing important advices on logistical and cultural matters for conducting field surveys. Assistance provided by Mr. Atma Wahyu, Mr. Safarwadi, Mr. Sanjaya, Mr. Tangkas P. Simamora, and Mr. Zulkifli Syam as interviewers are greatly appreciated. I am also deeply indebted to local people who participated in my field surveys. My empirical part in this dissertation is only possible with their patience to answer my questionnaires. Financial support from Government Financial Revenue Administration Project (GFMRAP) allows me to study in Germany. Great support from GFMRAP team, especially Mr. Almizan Ulfa is highly appreciated. The funding is possible due to extensive supports from my office, Fiscal Policy Agency. Specifically, I would like to thank to former Head of Fiscal Policy Agency of Ministry of Finance Indonesia, Dr. Anggito Abimanyu, for his motivation and supports. I also thank to Dr. Irfa Ampri (Secretary of Fiscal Policy Office), i Mrs. Endang Larasati, and Mr. Wahyu Kusuma Romadhoni for their administrative supports in the last part of my study. I thank Dr. Ian Copestake of Slovos, Dr. Charlton S. Tsodzo of the Mandeleo Group, and Mr. Fiifi Hope for proofreading services, which some advices are beyond the grammars. I am also indebted to Indonesian colleagues for their supports while I was in Bochum. My thanks go to Ms. Silviana Norman, Ms. Nyiayu Hesty Susanti, Mr. Said Ihsan, Mr. Iman Santoso, and Mr. Agesa Permadi, and the late Mr. Sabaruddin Asis. You were really my family when I was away from home. I thank very much to my wife T. Widiasih Asmaningtyas and my children (Nabila Putri Sholiha, Ghozam Muliawan Sholihin, and Fawwaz Wasis Sholihin) who continuously shower understandings and loves during my long academic journey. Terima kasih tak terhingga atas kesabaran, doa, dan segala dukungannya. For my parents, the late Bapak Imam Subari and the late Ibu Sumiatun, I pray to Alloh for you in heaven. I thank all of you from the bottom of my heart. Bochum, 2015 Akhmad Solikin ii Abstract Roles of tropical forests in climate change mitigation and adaptation are lively academic topics. Many previous studies inquire the costs and the suitable designs for implementing a program for reducing carbon emissions from deforestation and forests degradations in tropical forests. These studies, however, see the tropical forests from perspectives of developed country actors as potential buyers of carbon credits resulted from forest climate programs. This dissertation is among the rare studies that offer views of local people concerning costs of the program as well as program designs that suit the local people interests. The inclusion of local people is crucial since under forest governance structure in Indonesia, local people are de facto forests users in which any forest related program would firstly affect their wellbeing and eventually be unsuccessful except integrating their views. This study incorporates the concept of non-market values, total economic values, and open- access in order to understand local people behaviors regarding forest resource extractions. This study argues that forests are very important for local people since the forests provide wide ranges of benefits including, at least some part, non-use values. Accordingly, the theoretical framework is based on household welfare change induced by quantity restriction of public good or known as Equivalent Surplus of Hicksian measure. In order to empirically capture all possible benefits of tropical forests, a stated-preference approach called the contingent valuation method (CVM) was applied. The surveys were conducted in ten villages in or near tropical forests in Berau District, East Kalimantan Province, Indonesia. The results show that local people highly support a program to avoid deforestation and forest degradation. The local people are willing to pay (WTP) about 2.5% of their monthly household income to finance the program. The percentage is higher than other studies in developing countries. However, the aggregate welfare change in terms of monetary contribution is very small compared to other potential land uses which support potential buyers’ perspective that forest related mitigation and adaptation programs are at the least costs. The conclusion is different when the local people are given alternative to pay in terms of working time. In terms of willingness to work (WTW), the local people are willing to work 20.25 days per year without payment to support the program. This WTW is also higher than other studies in developing countries. These results support the use of working time as a numeraire for future CVM studies, especially when it applied in poor and limited cash communities. In addition, the results also show that determinants of WTP and WTW are iii significant and having theoretically consistent signs that support the validity of the CVM applied in this study. Interestingly, the very traditional local people, i.e. Dayak tribe, elicit smaller WTP but higher WTW, which is consistent to previous results of using WTW as unit of account to cash strapped community. In addition to standard socioeconomic variables, variable of trust to other people, i.e. beliefs that other fellow village dwellers will pay the program costs, positively determines probability and amount of WTP. This result is important since previous studies usually use trust variable in terms of trust to program provider. Concerning the program designs, local people prefer compensations in terms of long term benefits, such as education and health facilities as well as alternative employments. The compensations in terms of cash and forested land are not popular. These results indicate that compensation for the program should be designed according to Integrated Conservation and Development Program (ICDP) rather than Payment for Environmental Services (PES). This result is also consistent with the argument that forest mitigation and adaption program should compensate local people based on multiple or co-benefits rather than merely on carbon emissions benefits. Lastly, in terms of compensation channels, local people prefer wide participation of stakeholders to distribute the program benefits. This result may indicate the need of check and balance in order to avoid elite capture of the benefits. Keywords: Carbon Emissions, Contingent Valuation Method, Deforestation, Forest Degradation, Equivalent Surplus, Hicksian Measure, Integrated Conservation and Development Program, Land Use Change, Opportunity Costs, Payment for Environmental Services, Stated Preference, Welfare Change, Willingness to Pay, Willingness to Work, Indonesia JEL Codes: D110, D120, D610, F590, Q230, Q240, Q510 iv Table of Contents Acknowledgements i Abstract iii Table of Contents v List of Tables and Figures ix List of Abbreviations and Acronyms xi I Introduction 1 1.1 Statement of the Problem 5 1.2 Research Objectives and Importance 6 1.3 Organization of the Study 8 II Forests: Deforestation, Degradation, and Emissions Reduction 10 Introduction 10 2.1 Forests in Indonesia 10 2.1.1 Forest Classification 11 2.1.2 Governance Structure 12 2.2 Extent of Deforestation, Forest Degradation and Carbon Emissions 15 2.2.1 Drivers of Deforestation 19 2.2.2 Drivers of Forest Degradation 21 2.2.3 Strategies to Reduce Emissions from Deforestation and Forest 25 Degradation 2.3 REDD Mechanisms and Designs 27 2.3.1 REDD Mechanism 29 2.3.2 REDD Designs and Local People 30 2.3.2.1 Criteria to Assess REDD Project