Paying landowners to change land use

Economists recognise that people respond to incentives. If you increase the cost of doing something, on average people will do less of it. On the other hand, if you increase the benefits of doing something, people will do more of it. So, economists are less surprised than 'normal people' about things like this, as reported in the New York Times at the end of last year:

In environments as different as North America and Africa, new programs are preserving land through short- and-long-term deals that pay people to protect nature on their own land. The innovation makes it possible to transform a binary approach to land use — either devoting it to private development or turning it into a nature reserve — into something in between.

Consider how Airbnb works. Think of Minneapolis during the coming Super Bowl, when hotel rooms are scarce and residents will be enticed to rent their homes to football fans. Something like that happens in the environmental realm, too: There is a surge in demand for protected land when migratory birds are passing through an area or a threatened species is breeding.

In the United States, the nonprofit Nature Conservancy has been a pioneer in bringing the “sharing economy” business model to conservation. It has been temporarily expanding wetlands for migratory birds in California’s Sacramento Valley since 2014. In early fall, when birds head south for the winter, and again in early spring on their return journey, birds need larger protected areas than the current mix of parks and nature preserves allows, as the website Howstuffworks reported in August.

The big insight was realizing “we could use a rent rather than buy model,” said Mark Reynolds, an ecologist with the Nature Conservancy, which pays rice farmers to flood their fields for the few crucial weeks each fall and spring. Rice growers routinely flood their fields for irrigation and to decompose crop residue after harvest; through the conservation program, named BirdReturns, they do so during periods when the fields would have been dry.

So often, activists and environmental campaigners settle on a 'command and control' model as their preferred policy to ensure positive environmental outcomes ('command and control' policies are policies that say you 'must do' some things, or 'must not do' other things). As the New York Times article makes clear, a market-based approach can be just as effective, if not more effective, in some circumstances. A market-based approach doesn't rely on compelling people to obey, it relies on changing the incentives.

In this case, if you offer landowners a payment for changing their land use for part of the year (e.g. flooding their fields to make wetlands), then landowners can choose whether they want to do so. Landowners who face a low cost of changing their land use (maybe because their land is not highly productive so they won't be giving up much production) will be more likely to do so (because the payment will exceed the costs of land use change). Economists refer to the value of the foregone production for these landowners as an opportunity cost - it is the cost (to those landowners) of choosing to change land use. In contrast, landowners who face a higher cost of changing their land use (maybe their land is more productive, so they would be giving up more production) will be less likely to do so. For these landowners, there is an opportunity cost of not changing their land use - they are giving up the payment they would have received from the environmental group.

How do you work out how much to pay the farmers to get the right number of them to change land use? The article explains:

A team of ecologists and economists figured out how much to compensate the farmers for this change. They ran “reverse auctions” in which landowners specified the lowest payment that would entice them to flood their fields for a given four- to eight-week period.

This auction system adjusts payments to farmers’ costs. For example, flooding during the end of the spring migration season is trickier to fit into an annual rice-growing schedule, so bids — and payments — are higher then. The auction model is also flexible when the weather fluctuates. The early years of the program occurred during California’s prolonged drought, but abundant rainfall in 2017 meant that BirdReturns could dial back the amount of pop-up wetland it procured this year.

Note that the reverse auction is a good way for the environmental group to ensure that they can achieve their desired change in land use at the lowest cost, provided the landowners are genuine in specifying their opportunity cost for changing land use as the lowest payment they would accept. The italicised bit in the last sentence is important. You don't want landowners to simply hold out for higher payments. One way to avoid that problem is to ensure that you invite more landowners (with more land) than would be necessary to achieve your desired amount of land use change.

Finally, it is worth noting that this type of market-based system can't make farmers worse off. Since farmers are not compelled to participate, they will only do so if the benefits to them outweigh the costs. Markets aren't a perfect solution for every problem, but sometimes they can solve problems in a surprisingly simple way.