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

PhD - Thesis

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.