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
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Date
2017-05
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Sokoine University of Agriculture.
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 output and inputs, (2) tax cuts on inputs used in fruit production, (3) tax cuts on basic
domestic goods (i.e. sugar, salt, soap, kerosene, maize and wheat flour), (4) enhancing
economic growth, and (5) compensating upstream land decision makers who adopt fruit
tree production on land left to fallow through payment for ecosystem services (PES)
arrangement. The framework was also used to assess the distribution of benefits
between upstream decision makers and downstream ecosystem services beneficiaries.
Data were collected from Uluguru water catchment upstream land users, the Bank of
Tanzania, Dar-es-Salaam Water and Sewage Company (DAWASCO), Ruvu Basin
Water Office, and CARE International between January and December 2011.
An integrated ecological economic model was selected based on its ability to link
different components that build the system into a single model that simplifies system
response to exogenous factor analysis. Systems are made of elements which are tightly
interwoven into one system with direct interactions and feedbacks between them. To
quantify the effect of interactions and feedbacks, both biophysical and economic data
are used and the model built in STELA software links all the elements through
equations generated from biophysical and economic data. The linked series of equations
quantify the behavioural response of complex systems upon interaction with other
systems over time, a feature which gives the model the ability to predict the future state
(or response) of the systems under a given management or treatment option.
Simulation results indicate that although taxing crop output will reduce the area
converted to crop cultivation and increase the area planted with fruit trees on land left to
fallow, the policy will skew the distribution of benefits in favour of downstream
ecosystem services beneficiaries in the long run. It will reduce income accrued to
upstream land holders by 26.35%; 68.48% and 11.26%; 70.64%, and the cost of
producing portable water for domestic use by 18% and 0.66% when the tax is applied to
banana and paddy outputs, respectively. But the policy will have different effects on the
total social welfare; it will increase per capita income to both by 4.41 % and lower it by
0.57 % when the tax is applied to banana and paddy outputs, respectively
A tax cut on inputs to fruit tree production will have double dividends in the long run: it
will improve the quality of water flowing downstream by reducing the sediment load by
13.21 % and by increasing social welfare measured as income per capita by 3.22 %.
This is because such reduced sediment load will reduce the cost of producing portable
water downstream by 4.33%. This is because tax cut on inputs will encourage
investment in fruit production; hence expansion of area under fruit production and
increased fruit production will increase income. The increased income from fruit
production plus the reduced cost of producing portable water downstream will give a
positive social welfare accrued to both upstream and downstream communities.
Negative social welfare is obtained when taxes are applied to crop input and out prices
despite the reduced sediment load and costs of producing portable water downstream.
Results indicate that social welfare measured as income per capita will decrease by
2.46% and 3.44% when banana and paddy inputs, and 0.11% and 1.81% when banana
and paddy outputs are taxed respectively. This is because the income accrued from
increased production of fruits and reduced costs of producing portable downstream will
not be enough to cover the loss from the reduced production of the two crops. This
indicates how important are the two crops to upstream land holders and the effect of the
policy on the total social welfare.
Tax cut on domestic goods not only decreases sediment load and cost of producing
portable water for domestic use by 49.09 % and 12.67% respectively, but also increases
the social welfare measured as income per capita by 4.88 %. This indicates that the
policy will induce equitable distribution of benefits to both upstream land holders and
downstream ecosystem services beneficiaries. This could be attributed to the fact that
nearly 70 % of rural household income is spent on food and other domestic goods, and
cutting down the tax to them will reduce the need for income to spend on domestic
good, hence cutting down catchment detrimental economic activities such as crop
production and expansion of environmentally friendly land use practices such as fruit
production. Such shift in land use results in reduction of sediment load, hence reducing
the cost of producing portable water for domestic use.
Improving economic growth by 7 % decreases sediment load by 4.56 %, cost of
producing portable water by 2.95% and increases social welfare measured as income
per capita by 1.62 % in the long run, meaning that it favours both upstream and
downstream beneficiaries.
Subsidising inputs to fruit tree production through downstream upstream markets (PES)
achieves the goal of reducing sediment load in water flowing downstream without
compromising the well-being of upstream landholders and that of downstream
ecosystem services users in the long run. In the long run, the policy will induce a
decrease in the total area converted to crop production by 2.02 % per annum, and an
increase in the total area left to fallow planted fruit trees and natural vegetation by
26.62 % and 0.8 % per annum, respectively. Such a trade-off in land use will decrease
sediment load by 5.24 % and cost of producing portable water for domestic use by
3.33% per annum. Such induced shift in land use will improve the total social welfare
measured as income per capita by 1.49 % per annum, respectively.
Change in climatic conditions also will induce land use shift in the long run; a 10%
decrease in rainfall will induces a decrease in the total area converted to crop production
by 36.42 % and area planted with fruit trees by 48.36 % per annum respectively. It will
induce an increase in the total area left for natural vegetation to occupy by 57.62 % per
annum. The overall impact of these trade-offs is to decrease the sediment load by
15.16 % and cost of producing portable water for domestic use downstream by 5.31%
per annum. However, this shift in land use will not improve the social welfare to both
upstream land holder and downstream ecosystem beneficiaries because the volume of
water flowing downstream will decrease reducing the social welfare measured as
income per capita by 1.2 % per annum.
These results demonstrate the potential for securing catchment conservation goals (i.e.
reducing sediment load in the streams and rivers draining the water catchment) using
taxes on crop inputs and outputs, tax cuts on inputs to fruit production, tax cuts on basic
domestic goods to catchment dwellers, and downstream-upstream compensation
schemes. The results also show the differential impacts of these policies on benefits
distribution. Tax cuts, subsidies and economic growth achieve internalisation of land
use externalities without skewing the distribution of benefits, suggesting they are likely
to be sustainable in the long run. Taxing crop inputs and outputs achieves conservation
goals at the expense of upstream landholders, making them amenable to rejection by
upstream decision makers. The two approaches lower the social welfare in the long run
something which engender rejection by policy markers.
Description
PhD - Thesis