How does incentive-based management of ecosystem services address

To protect ecosystems’ long-term integrity, efficient and equitable institutions are required to manage the interconnections between societies, ecosystems, and environmental service delivery (Vatn 2010b, Vira 1997, Vatn 2010a). Given the complexity and dynamics of social and ecological systems, finding appropriate institutions to manage the environment is “one of the greatest challenges in the realm of environmental protection” (Ostrom 1990, Clements 2012, Ostrom 2007b). Institutions -- defined as, “the rules of the game” (North 1990) – are social practices, which determine participation in decision-making. They also define which activities are allowed and constrained, and what structures are used for social interaction (Mehring et al. 2011, Ostrom 1990). Groups of individuals within an institution’s framework operate in material organisations. These are based on rules that can be formal, such as policy, property rights, and legal systems, or informal, such as social norms, local customs, or traditions which shape interactions (Corbera 2005b, North 1990). The local social, economic, political, and external environmental context will significantly influence these social practices, either formal or informal.

Vatn (2010a) describes three types of institutional structures that enable governance: Hierarchical (‘systems of command’), Markets (‘voluntary exchange’), and Community structures (‘based on cooperation’). These types of structures influence a society’s economic growth and human welfare (North 1990, Clements 2012). Human action and social change also can affect and reshape institutions. They influence

which individuals can make decisions, how these decisions are controlled (Corbera 2005b).

Regimes that manage environmental resources are types of institutions (Erkstom and Young 2009, Young, King, and Schroeder 2008). At various scales, institutions enable practices that address and govern ecosystem-based management. Institutions can have a strong influence over environmental resources. Institutions’ function and structure also can affect societal behaviours towards the environment, which can consequently impact demand for ecosystem services (Swallow and Meinzen-Dick 2009, Dietz, Ostrom, and Stern 2003). Importantly, the most significant institutions that address environmental governance may not be specifically designed for that purpose (Erkstom and Young 2009, Young, King, and Schroeder 2008).

Institutions do not function alone. They interact with and within other institutions, and social, political, economic, and biophysical dimensions. This creates significant uncertainty in determining institutional outcomes. Governance often affects the outcome of other institutional arrangements, and can have both positive and negative results (Young, King, and Schroeder 2008). The dynamics, functionality, and multi- level nature of social-ecological systems make the ‘fit’ of institutions to the temporal and spatial scales difficult to achieve (Young, King, and Schroeder 2008, Erkstom and Young 2009). Effective institutional governance must take into account the local context that both influences, and is influenced by, societies in which they are placed.

Incentive-based institutions for ecosystem services seek to enable change in institutional structures to modify environmental behaviours. They also serve as a mechanism to redistribute benefits from ecosystems (Corbera 2005a). Incentive-based institutions try to integrate both biodiversity protection and sustainable development. The aim is to link the institutions with wider political goals such as environmental neoliberalism, conservation, poverty reduction, and ecosystem services frameworks (Clements 2012, Naidoo et al. 2008). In many locations, such command and control environmental institutions are limited in their scope, efficiency and overall effectiveness in protecting ecosystem services (Swallow and Meinzen-Dick 2009). Traditional market processes rarely capture public goods and the value of ecosystem services (i.e.: water provision, carbon storage, and nutrient cycling) (Costanza et al. 1997, Travers 2009). Uncompensated benefits become positive ‘externalities.’ Processes such as deforestation drive natural ecosystem service degradation and loss (Landell-Mills and Porras 2002). The inclusion of environmental costs for lost services would, more often than not, reduce the economic efficiency of ecosystem degradation (Balmford et al. 2002). The use of compensatory incentives to offset lost opportunity cost can help resolve conflicts between natural resources and resource- users, and therefore make them more efficient in managing ecosystem services (Wunder, Engel, and Pagiola 2008).

Based on an ecosystem services approach, the use of such incentives (often economic, including Payments for Ecosystem Services (PES)) has generated strong interest. The criteria for incentive schemes are based upon Wunder (2005b) early studies. Funded either by direct or indirect services users, incentive-based institutions have the potential to mobilise financial resources to integrate the short-term immediacy of conservation goals with the long-term economic and social change of development objectives (McShane et al. 2010, Tacconi 2007, Ferraro 2001). Influencing individuals’ natural resource-use decisions via incentives also can serve as a redistributive mechanism between different social groups and ecosystem users (Adams and Hulme 2001, Barrett and Arcese 1995, Kumar and Muradian 2008).

Where incentives are involved, the type of ecosystem service is important in an institutional design and governance context (Swallow and Meinzen-Dick 2009). The case studies in this research focused on watershed service provision through incentive-based institutions. These aimed to protect watershed integrity to enable adequate flow, withstand flash floods (a frequent event in Lombok upper catchments), while also increasing social equity of access to the resource. These mechanisms were often managed through the installation of water infrastructure and forest replantation. Institutions to manage watersheds are complex. Multiple actors, various organisation levels, and a high degree of interaction with other institutions were evident. As a common pool resource, ground water is seen as a public good, with a high cost of excluding free riders. The benefits of water resources are subtractive in nature and have a communal use, this denotes that, “when water is scarce, conflict is likely” (Wade 1987).

When dealing with natural resource management, the influence of incentive-based institutions on individuals’ and organisations’ behaviour and decision-making is convoluted, particularly when institutional ‘interplay’ is high. It is therefore difficult to align theoretical assumptions with the ‘messy’ reality of outcomes from incentive- based institution implementation For example, the culture and social norms that structure the society is highly significant (Rojas 2006). The impact of existing power relations and well-defined and enforced property rights also are essential to understand for the creation of functioning markets for incentives.

Local governance institutions play a key role in determining variation in forest conditions (Agrawal and Ostrom 2001). The role of local institutions in natural resource governance is highly dynamic. They have a multi-directional influence on socioeconomic, political, and environmental outcomes. Anderson and Agrawal (2011) argue that the structure and strength of these local institutions can affect socioeconomic contexts. They contend that governance institutions can mediate the positive or negative effects of these contexts, which arise from market forces, demographic pressures, and political regimes.