Evaluating the role of market based policy instruments in managing trade-offs between ecosystem services supply and human welfare: case of Uluguru water catchment, Tanzania By Gody Jonathan Sanga Submitted in partial fulfilment of the requirements for the degree of Doctor of Philosophy (PhD): Environmental Economics In the Department of Agriculture Economics, Extension and Rural Development Faculty of Natural and Agricultural Sciences University of Pretoria Supervision of Prof. Eric D. Mungatana May, 2017 © University of Pretoria Dedication To my sons, Nelson and Nixon, daughter, Grace, and wife, Tumaini. ii © University of Pretoria Declaration I declare that this thesis submitted for the degree of Doctor of Philosophy in Environmental Economics at the University of Pretoria is my own work and has not been submitted anywhere else for the award of a degree or otherwise. Parts of the thesis have been published in ecological economic journal. Any errors in thinking and omissions are entirely my own responsibility. Signed…………………………… Date……………………… Name: Gody Jonathan Sanga Month…………… iii © University of Pretoria Acknowledgements I would like to express my gratitude to numerous institutions and individuals that have helped me in the course of writing this thesis. My first inspiration in the field of environmental economics came from Professor Joseph Hella, who was from the Agriculture Economics and Agribusiness Department, Postgraduate coordinator and my Master’s Degree supervisor at Sokoine University of Agriculture in Tanzania. He linked me with the Centre for Environmental Economics and Policy for Africa (CEEPA) for the first time in 2005. For this, I would like to say Akhsante Sana Prof. Hella. I joined PhD programme in 2008, thanks to Professor Hella and Dr Kilima, who wrote excellent recommendation letters that helped me make my way to the University of Pretoria. Since then, I have been receiving continuous support and encouragement from Dr Eric D. Mungatana, Professor Rashid Hassan, Dr Wellington Jogo, Professor Christern, Professor Greg Hetzelar and other staff members of the Department of Agriculture Economics, Extension and Rural Development of the University of Pretoria and visiting Professors. These not only were my colleagues, but also they introduced me to the field of resource and environmental economics. My supervisor, Dr Eric Dada Mungatana, deserves special thanks for his untiring support throughout my PhD programme. I acknowledge his high intellectual guidance and patience throughout the course of this work. His valuable comments and suggestions have shaped me to who I am today and this work to what it is. I received unfailing contributions and support, guidance and moral boosts from him since I started this journey at the University of Pretoria. I cannot thank you enough, Dr Mungatana, but I am looking forward to working with you in the future. I also received numerous comments, suggestions and moral support from Dr Hawasi, Dr Albino Tenge, Dr Adam Mwakalobo, Professor Abiud Kaswamila and Professor Joseph Hella especially on the paper submitted for publication from this work. To all of you, I say thank you very much. The environmental economics unit of the University of Pretoria is a wonderful family that I am proud to have belonged to. I thank all of my friends in the PhD room who have been and will continue to be part of this great force in natural resource and iv © University of Pretoria environmental economics in Africa and the world at large. I benefited a lot from individual and group discussions in the PhD room, coffee/tea breaks, lunch meetings and seminars. My fellow friends with whom I enjoyed the first year of course work are: Mr Abbas Taloddi Magbul, Dr Mulatu, Dr Sikweni Dyadibha, Dr Mariam Mapila, and Mr Jingulula. Other members in the unit that I feel connected to and received support from over the last 3 years include Ms Chilot Hewort, and Dr Jethro Zwarime. I thank you all for your moral support throughout this work. My fieldwork would not have been possible without enormous support from WWF and CARE International Morogoro office. The group consisted of charming, hard-working people who made the difficult task of travelling hundreds of kilometres in the Uluguru water catchment area and mobilising hundreds of people so much easier. Special thanks go to Mr Deustatus Lopa, the EPWS project manager, and his team mates Mr Masoro, Ms Aqulina Wamba and the driver, Mr Bakari. I am also grateful to Uluguru water catchment village leaders, agricultural officers and farmers who responded well to my questions. Special thanks go to Mr Banzi and his colleague for providing us with the logistical support throughout the fieldwork. I would like to thank Mr Mwaluko Mpangwa, Mr Rajabu Msangi, Mr Arbogats Moshi, and Ms Gladness Thomas for assisting me during fieldwork. I thank Dr Hepelwa for reviewing the thesis. In a special way, I also thank Ms Zakia Bakari for the kind of support and comfort she offered my family throughout this work. My two little boys and daughter, who are very naughty and inquisitive, were always taken care of by this young lady who dedicated her time to assist my wife to raise him. For her I say, Akhsante Sana Zakia. My study at the University of Pretoria offered me an opportunity to meet my fellow countrymen: Mr Mbawala, Dr Kitundu, Mr Mayson Rwangisa, and Dr Chacha. Our life together was full of joy, encouragement and support; I enjoyed their company. To all of them, I say Akhsanteni Sana. In the course of writing this thesis, I lost three very important persons who bestowed their love for education upon me and resulted in my reaching this level. My grandmother, Matha M. Vilumba, uncle Jackson M. Mwikombe and brother Romanus v © University of Pretoria Mwikombe, who passed away when I was in the middle of this journey. May the Almighty God place their souls in eternal peace. I would like to thank my brothers and sisters: Mbodile W. Mwikombe, Frinday W. Mwikombe, Albert W. Sanga, Godrey J. Mwikombe, Neema J. Mwikombe and other members of my extended family for their tireless support and love. I would like express my special thanks to my parents, Mr Jonathan Mwikombe and Mrs Paulina M. Mwikombe, who initiated this journey when I was 11 years old. Last but not least, I would like to express my heartfelt thanks and love to my best friend and wife, Tumaini Jongo Sanga, for her great patience, love and support. She played the dual role of father and mother to our sons, Nelson and Nixon Mwikombe Sanga, who were born while I was still on the journey. As for Nelson and Nixon, I can only hope that one day they will understand why I was always on the move, coming home late at night and having time for the computer and not them when I was at home. Finally, I cannot forget to express my gratitude to the people and institutions that made this study possible. First and foremost, I want to thank my first employer, the University of Dodoma (UDOM), for granting me three years’ study leave that facilitated the early stages of this study and financial support for fieldwork and data analysis. I would like to thank CEEPA for funding my study at the University of Pretoria. I wish to thank Professor Rashid Hassan, the director of CEEPA, and Dalene Duplensis, the coordinator of CEEPA, for making my life so smooth all the time in South Africa and outside. As with every other achievement in my life, I owe this to the Almighty God, without whom this work would never have been realised. Despite all the help I have received throughout the years, any mistakes or errors that remain in this work are entirely mine. vi © University of Pretoria Abstract This study uses the Uluguru water catchments in Tanzania to assess whether market- based policy instruments can secure internalisation of externalities in such complex socio-economic-ecological systems which are not only characterised by uncertain long- term responses to perturbations, but also intense competition between upstream and downstream beneficiaries for their limited ecosystem services. Although several studies have shown that market-based policy instruments perform better than their command and control counterparts in a variety of socio-economic- ecological configurations, their relevance to the management of water catchments raises some concerns. First, although there is general consensus that such instruments exploit the potential of upstream landholders and downstream ecosystem services beneficiaries to achieve catchment-wide conservation goals without compromising the welfare of the former, the robustness of this conclusion is questionable. Second, the literature also acknowledges the unpredictable long-term benefit flows from managing water catchments, their inequitable distribution, and the divergence between private and social objectives facing upstream decision makers as a major challenge to the long-term sustainability of using market-based policy instruments to manage water catchments. This research was thus designed to answer the following questions on the relevance of market-based policy instruments in securing management of water catchments: (1) is it necessarily true that market-based policy instruments can secure catchment-wide conservation without compromising the welfare of upstream decision makers? (2) Can market-based policy instruments address the incentive incompatibility faced by individual upstream decision makers? (3) Can market-based policy instruments simultaneously provide sufficient ecological, hydrological, and private economic and benefits to make them acceptable to private land users and other decision makers? (4) Which policy and economic scenarios are important in ensuring that they provide equitable long-term benefit flows? A system dynamics framework was used to develop an integrated ecological economic model to evaluate the long-term response of the Uluguru catchment to five management regimes hypothesised to internalise upstream land use externalities: (1) taxing crop vii © University of Pretoria output and inputs, (2) tax cuts on inputs used in fruit production, (3) tax cuts on basic domestic goods (i.e.