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 “Developing land for intensive agriculture is in all
practicality an irreversible decision. To convert, say, a palm
oil plantation in Indonesia back to being a national forest,
would be so costly that it is functionally irreversible,” says
Amy Ando.
In a recent study, Ando’s then student Payal Shah, models two
such potentially irreversible decisions. In one scenario, a
landowner gets a permanent lump-sum payment to never develop the
land. In the other, the landowner receives a temporary lump-sum
payment and agrees not to develop it for a while. At the end of
that time, the landowner can choose to develop or re-contract.
Shah, who is now a research scientist at Okinawa Institute of
Science and Technology Graduate University, and Ando look at how
large a payment is necessary under those two conditions to
induce a landowner to accept a contract.
“We find that the permanent lump-sum needs to be much higher for
the land owner to agree. It’s more than just about the money.
It’s what we call the ‘loss of option value.’ Having that
flexibility to make the best choice tomorrow has real value,”
Ando says.
Interestingly, the option value is higher the more uncertainty
there is about the future. So, the more that returns fluctuate
up and down, the more people want to wait and see before
deciding what to do with their land.
“We model a world in which you get carbon payments if your land
is not developed or you can get profit from farming if you
develop it,” Ando explains. “Both of those choices are uncertain
in the future. You don’t know what the market for carbon
payments will be like. If you don’t develop it, you don’t know
what profits would be like for the palm oil plantation. The more
uncertainty there is, the more increasingly reluctant a
landowner is to make any permanent decision about what to do
with the land. They just want to wait and see.”
Ando says if the carbon payments for not developing land are
linked to something, like the profits a landowner gets after
developing the land, this creates a positive correlation between
those two and reduces the overall uncertainty. “This makes
people less hesitant to make a permanent decision.”
The case study in Indonesia is simulated, but based on real data
on the profits on palm oil plantations and real data on carbon
payments. The outcome from the study is formulas to help those
who design conservation policies to estimate how much money is
needed to pay landowners to be willing to accept a conservation
contract, to not convert their land.
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“It can be very complicated to estimate what payments need to
be,” Ando says. “If there are multiple uncertainties and they’re
not perfectly positively correlated with each other, simpler
models can yield totally incorrect estimates of the payments you
would need to give landowners in order to get them to agree to a
conservation contract. Sometimes it’s an overestimate. Sometimes
it’s an underestimate. You can’t even predict that. It depends
on the particular circumstances. This is a more complicated
model with dual uncertainties.”
Ando says anything you can do to reduce volatility in the returns to
the land that you get when it’s not converted reduces the amount of
money needed to pay land owners to be willing to conserve. For
example, carbon prices. “Anything you can do to stabilize the prices
makes it easier for landowners to agree to be a part of a
conservation contract.
“If there are uncertainties in both what you get from developing
your land and from permanently protecting it, anything you can do to
put them in lockstep with each other lowers the price it takes for
landowners to accept a conservation contract,” she says.
Ando adds that landowners who enter into conservation agreements can
sometimes get two payments. A signed conservation easement
agreement, currently 10 to 15 years in length, prevents landowners
from doing some things but not everything.
“Landowners may use their conservation-dedicated land for other
revenue streams,” she says. “The landowner might get payments for
not cutting down trees on the land, but may allow people to tap
maple syrup from their trees or allow hunting and fishing on their
property. The landowner still owns the land. They’ve just sold part
of the rights to the land – the right to cut down trees for
example.”
The study, “Permanent and temporary policy incentives for
conservation under stochastic returns from competing land uses,” is
co-authored by Payal Shah from the Okinawa Institute of Science and
Technology Graduate University and Amy Ando from the University of
Illinois. It is published in the American Journal of Agricultural
Economics. The work was supported in part by USDA NIFA Hatch project
#ILLU-470-316.
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