AnalysisThe incentives of private companies to invest in protected area certificates: How coalitions can improve ecosystem sustainability
Introduction
The development of a representative network of protected areas is nowadays a well-established instrument for the conservation of ecosystems that provide a multitude of provisioning, regulating, cultural and supporting services (Duraiappah & Naeem, 2005). However, there is limited involvement of private companies in preserving areas with global importance (Emerton et al., 2006). To enhance private funding for protected areas, international certification markets are developed. Still in their infancy, these markets are being led through initiatives such as REDD+ and GDI (Carius, 2010).1 There are two drivers of corporate environmental responsibility that are emphasized in literature: the image effect of environmental commitment; and the mitigation of corporate ecological risks (e.g. natural disasters, depletion of resources) (CDP, 2012a, CDP, 2012b, Dummett, 2006, Koellner et al., 2010). Regarding the second driver, it should be considered that many ecosystem services are public goods characterized by non-rivalry and non-excludability (Pascual & Muradian, 2010). This leads to the problem that companies that invest in the preservation of ecosystems not only have to share the resulting benefits (positive externalities) but also suffer from the exhaustion of ecological resources caused by other market participants (negative externalities) (Tietenberg & Lewis, 2012).
The application of game theory shows that externalities are crucial for determining the behavior of strategic players as they constitute the basis for the free rider problem; a situation in which the individual self-interest of players leads to a social outcome that is not Pareto optimal (Barrett, 2007). Environmental agreements (EAs) aim to overcome such social dilemmas and are typically described by cooperative approaches that are based on the concept of the core (Chander & Tulkens, 1997) or by non-cooperative approaches that follow internal and external stability conditions (Barrett, 1994, Carraro and Siniscalco, 1993). The objective of cooperative game theory is to distribute coalition payoffs in a manner that enables forming the socially optimal grand coalition. The core defines the set of payoff vectors that cannot be improved by any subgroup of players (Esteban & Dinar, 2013). In contrast, non-cooperative games develop individual payoff functions for each player under a given transfer scheme to predict sustainable coalition structures. A detailed overview of the different methods is given in Chander and Tulkens (2008) and Finus (2003).
So far, scientific EA studies that applied coalition game approaches either focused on the design of international EAs between countries that face global public good allocation problems (Barrett and Stavins, 2003, Finus et al., 2009) or on the cooperation between locally affected agents (e.g. companies, residents, neighboring countries) that sustainably manage common-pool resources (Abbink et al., 2005, Ambec and Ehlers, 2008). In order to extend the applicability of coalition games and analyze the incentives of private companies to invest in the sustainability of ecosystems, this article introduces a novel non-cooperative coalition game model. Basically, we assume that an international market for so called protected area certificates (PACs) exists. The land based certificates cover a defined geographical area and certify that the ecological values of this area are maintained in accordance with specific standards. By purchasing PACs, companies not only have the possibility to provide financial support for the conservation of nature but also to offset their impact on ecosystems and label their products accordingly. We further suppose that companies can choose in which projects they invest, and thus which ecosystem benefits are generated. The certificates do not grant any property rights so that companies do not obtain an improved access to preserved resources. In fact, the protected areas are either managed by government agencies, environmental charities or the local community (Dudley, 2008). Given this scenario, a coalition is defined as a corporate EA that enables signatories to collectively cope with and manage ecological challenges through a mutual obligation to buy PACs. Corporate EAs determine the number and type (e.g. origin, provided ecosystem services) of PACs that signatories are required to buy in a certain period, and can be part of a public or company driven environmental initiative. To appeal to both large companies as well as small and medium sized enterprises (SMEs), a transfer scheme is installed.
The model comprises two differences to previous EA models. First, non-cooperative coalition formation models are typically described as two-stage games in which players first decide on their participation, and second on their economic strategy (complete plan of action) and side payment schemes (Finus et al., 2009, Pintassilgo and Lindroos, 2008). In contrast, the presented model is based on a three-stage game approach adding another decision level at the beginning of the coalition formation process. The extension of the game is due to the image effect of environmental commitment. Depending on the behavior of their strategic opponents, companies might even be interested in buying PACs without the existence of a corporate EA. The image effect is also the reason for the second difference in model design. Here, price premiums reduce free rider incentives of private companies. If the extra revenue is sufficiently high, no free riding incentives might exist at all.
The objective of the study is to evaluate the feasibility of an international market for PACs. Chapter 2 starts with a cost–benefit analysis in order to describe corporate incentives to invest in the sustainability of ecosystems. In chapter 3, the design of the three-stage coalition game model is specified. PAC threshold price developments are displayed for individual as well as for common behavior of market participants and a regulatory framework is suggested to create coalition stability. After the theoretical construction, chapter 4 illustrates the derived propositions in a numerical example applied for the German tourism sector in Zanzibar by using a sensitivity analysis approach. Finally, chapter 5 draws a critical conclusion and presents an outlook for future work.
Section snippets
Incentives of Private Companies to Invest in PACs
The process of modeling the PAC investment decision of private companies starts with a cost–benefit analysis. As already mentioned, there are two main drivers for voluntarily protecting ecosystems. First, the image effect of environmental commitment. Through the certification of environmental performance, companies have the opportunity to communicate their ecological objectives and increase their reputation in society (McWilliams & Siegel, 2011). If final products are labeled with ecological
The Game Model
The model in this paper pursues the approach of non-cooperative coalition theory (Carraro and Siniscalco, 1993, Finus et al., 2009, Pintassilgo and Lindroos, 2008) and consists of a three-stage game with one sector and n companies as strategic players that are exposed to similar kind of ecological risks. During all stages companies opt simultaneously for their strategic action. Rationality and common knowledge of rationality are assumed. The subgame perfect Nash equilibria are determined via
Numerical Analysis Using the Example of German Tourism in Zanzibar
A numerical example is used to illustrate the propositions of the game model and carry out a sensitivity analysis on PAC threshold prices. The set-up of the analysis is as follows. In stage 1 of the game, German tourist operators that sell journeys to Zanzibar individually decide on PAC investment. In stage 2, they have the opportunity to sign an EA and form a coalition that jointly protects ecosystems in Zanzibar. In the last stage, the signatories can either act under the terms of or deviate
Conclusion
The paper gives initial policy advice for upcoming international initiatives (e.g. GDI, REDD+) that focus on the protection of ecosystems. When companies individually decide on their environmental strategy, they only value the benefit of ecological risk mitigation for their own business and the number of PACs falls below the socially optimal amount. This constitutes a typical problem in the allocation of public goods in which incentives to free ride increase with the environmental activities of
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