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\hypersetup{pdftitle={Practical Approaches to Estimate Opportunity Costs of Ecosystem Service Provision},pdfauthor={Tobias Wünscher, Stefanie Engel, Sven Wunder},pdfsubject={Tropentag 2010: Abstract},pdfkeywords={Auctions, Costa Rica, environmental services, opportunity costs, payments for ecosystem services},pdfpagemode=None,colorlinks=true}
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\parbox[b]{13.4cm}{\centering \large{\textbf{Tropentag, September 14-16, 2010, Zurich}}\\[1ex] \Large{``World Food System  ---\\A Contribution from Europe''\\[2ex]}}
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\Large{\textbf{Practical Approaches to Estimate Opportunity Costs of Ecosystem Service Provision\footnote{\textbf{Contact Address:} Tobias Wünscher, University of Bonn, Center for Development Research (ZEF), Walter-Flex-Straße 3, 53113~Bonn, Germany, \mbox{e-mail}: \email{tobias.wuenscher@uni-bonn.de}}\\[0.8ex]}}
\normalsize{\textsc{Tobias Wünscher$^{1}$, Stefanie Engel$^{2}$, Sven Wunder$^{3}$}}
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\begin{itemize*}
\item[]{\small{\textit{$^{1}$University of Bonn, Center for Development Research (ZEF), Germany}}}
\item[]{\small{\textit{$^{2}$ETH Zurich, Institue for Environmental Decisions (IED), Switzerland}}}
\item[]{\small{\textit{$^{3}$Centre for International Forestry Research (CIFOR), Brazil}}}
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\index[author]{Wünscher, Tobias}
\index[author]{Engel, Stefanie}
\index[author]{Wunder, Sven}
\begin{center}
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\textbf{Abstract}
\begin{abstract}
\normalsize{
Payments for ecosystem services (PES) are an increasingly popular market"=based instrument to translate positive externalities of land use into management incentives for land stewards. With the prevalent constraint of limited conservation budgets, increasing the efficiency of PES schemes can be seen as an important complement to a strategy of raising additional funds. Numerous studies have stressed the efficiency potential that lies in cost targeting and the notion of aligning payments to real costs of service provision. But cost"=effective and precise estimation of micro"=level costs is a major challenge and most studies run short of suggesting methods to practically estimate opportunity costs. We test two approaches in a case study with 178 farming properties on the Nicoya Peninsula, Costa Rica: i. annual land rents as a proxy for opportunity costs (Rent approach), and ii. regressing easy"=to-obtain and difficult"=to-manipulate variables such as land characteristics on net per hectare returns (Model approach). Pasture retirement and subsequent natural forest regrowth was the assumed conservation action. The opportunity cost is therefore equal to net returns from pasture utilisation. Transaction and protection costs as additional components of actual payments are neglected here for reasons of simplicity. The results show that none of the two approaches (Rent and Model) appeared to predict opportunity costs sufficiently well. The mean values of the Rent approach (55.23\$US) were significantly different from the computed opportunity costs (109.26\$US) and did not correlate (Pearson 0.56 and Spearman 0.53), even after exclusion of extreme values. Different versions of the Model approach returned a maximum adjusted R$^{2}$ of 0.15, too low for practical application in PES programs. The results demonstrate the challenges of reliable opportunity cost estimation at the farm level and call for more robust techniques. Inverse auction systems are a promising alternative to the presented approaches. Sufficient competition provided, they have the potential to push bids close to actual opportunity costs and have the additional advantage to harness private land holder information in the bids.}

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\noindent \textbf{Keywords:} Auctions, Costa Rica, environmental services, opportunity costs, payments for ecosystem services
\index[key]{Auctions}
\index[key]{Costa Rica}
\index[key]{Environmental!services}
\index[key]{Opportunity costs}
\index[key]{Payments for ecosystem services}
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