Can Commercialization Really Solve Externalities in the Forested Area? Lessons Learned from Payment for Environmental Services Schemes in Indonesia

Abstract

"Market failure and policy failures in common property resources have led to negative externalities, imposing social costs to society. An unclear property right in the forested area, for example, has led to negative externalities in the form of environmental degradation and disruption of environmental services such as clean water to downstream communities. Commercialization of the ecological goods and services, which are common in nature, to internalize environmental externalities has been widely adopted as a Coasian prescription of such problems. Nowadays, this portfolio of commercialization is expanded to include environmental services known as payment for environmental services (PES). PES scheme provides incentives or rewards to those who provide useful environmental services by means of market transaction. Nevertheless, in the context of developing countries, market based alone is not guarantee to work due to the fact that complex institutional dimension in the form of rules and regulation, including social norms which have been built within society play a critical role in solving common property resources. This hinders the efficiency gains which should have been occurred from market forces. Incentives based in the context of resource and environmental services, to some extent, have created moral hazard and 'hostage effect' due to complexity of the nature of ecosystems and institutional dimensions. This paper discusses Indonesian experiences with such market based incentives derived from various PES schemes practiced in the country. It shows how this instrument transforms non-market incentives which had been practiced in the society and how it changes the structure of norms and built-in institution in the communities. The paper also examines some critical thoughts on whether the market based instruments are appropriate compared with other communities built-in instruments when dealing with externalities."