metadata: authors: 0: author: Dissanayake,Sahan T. M.
1: author: Beyene,Abebe Damte
2: author: Bluffstone,Randall Ames
3: author: Gebreegziabher, Zenebe
4: author: Martinsson,Peter
5: author: Mekonnen,Alemu
6: author: Toman,Michael A.
7: author: Vieider,Ferdinand M.
count: Ethiopia
docna: 0: docna: Preferences for REDD+ contract attributes in
            low-income countries : a choice experiment in Ethiopia
docty: Policy Research Working Paper
subtopic: Climate Change Mitigation and Green House Gases,Forests and Forestry,Environmental Disasters & Degradation,Forestry,Coastal and Marine Resources,Energy and Natural Resources,Global Environment
teratopic: Environment,Health, Nutrition and Population,Science and Technology Development
abstracts: cdata!: This paper informs the national and
            international policy discussions related to the adoption of
            the United Nations Reducing Emissions from Deforestation and
            Forest Degradation Programme. Effective program instruments
            must carefully consider incentives, opportunity costs, and
            community interactions. A choice experiment survey was
            applied to rural Ethiopian communities to understand
            respondents’ preferences toward the institutional structure
            of the program contracts. The results show that respondents
            have particular preferences about how Reducing Emissions
            from Deforestation and Forest Degradation programs are
            structured with regard to the manner in which the payments
            are divided between the households and the communities, the
            restrictions on using grazing land, and the level of
            payments received for the program. Surprisingly,
            restrictions on firewood collection do not significantly
            impact contract choice. The paper further analyzes the
            structure of the preferences by using attribute interaction
            terms and socio-demographic interaction terms. The analysis
            finds significant regional variation in preferences,
            indicating that Reducing Emissions from Deforestation and
            Forest Degradation should be tailored to specific regions.
            Finally, the marginal willingness to pay for attributes is
            calculated using the traditional preference space approach,
            as well as the more recent willingness-to-pay approach.
geo_reg_key: 517191
repnme: repnme: Preferences for REDD+ contract attributes
            in low-income countries : a choice experiment in Ethiopia
display_title: Preferences for REDD+ contract
            attributes in low-income countries : a choice experiment in Ethiopia
listing_relative_url: /research/2015/06/24602989/preferences-redd-contract-attributes-low-income-countries-choice-experiment-ethiopia
topicv3: BioCarbon m1325994 1851,Climate Change Mitigation m1327079 579,Reduced Emissions from Deforestation and
            Degradation m1327378 1757,Environment, Natural Resources and Blue
            Economy m1327391 566,Deforestation m1503714 3386
publishtoextweb_dt: 2015-06-09T00:00:00Z
historic_topic: Environment,Health, Nutrition and Population,Science and Technology Development
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 33
author_keys: 0: author_key: 633741
1: author_key: 166060
model_extractions: WPS7296 Policy Research Working Paper 7296 Preferences for REDD+ Contract Attributes in Low-Income Countries A Choice Experiment in Ethiopia _Sahan T. M. Dissanayake Abebe Damte Beyene Randall Bluffstone Zenebe Gebreegziabher Peter Martinsson Alemu Mekonnen Michael Toman Ferdinand M. Vieider_ Development Research Group Environment and Energy Team June 2015
Policy Research Working Paper 7296

# **Abstract**

This paper informs the national and international policy discussions related to the adoption of the United Nations Reducing Emissions from Deforestation and Forest Degradation Programme. Effective program instruments must carefully consider incentives, opportunity costs, and community interactions. A choice experiment survey was applied to rural Ethiopian communities to understand respondents’ preferences toward the institutional structure of the program contracts. The results show that respondents have particular preferences about how Reducing Emissions from Deforestation and Forest Degradation programs are structured with regard to the manner in which the payments are divided between the households and the communities, the restrictions on using grazing land, and the level of payments received for the program. Surprisingly, restrictions on firewood collection do not significantly impact contract choice. The paper further analyzes the structure of the preferences by using attribute interaction terms and socio-demographic interaction terms. The analysis finds significant regional variation in preferences, indicating that Reducing Emissions from Deforestation and Forest Degradation should be tailored to specific regions. Finally, the marginal willingness to pay for attributes is calculated using the traditional preference space approach, as well as the more recent willingness-to-pay approach.

This paper is a product of the Environment and Energy Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The lead author may be contacted at sdissan2@gmail.com _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Preferences for REDD+ Contract Attributes in Low-Income Countries: A Choice Experiment in Ethiopia**

Sahan T. M. Dissanayake*, Abebe Damte Beyene, Randall Bluffstone, Zenebe Gebreegziabher, Peter Martinsson, Alemu Mekonnen, Michael Toman, Ferdinand M. Vieider

**Keywords:** REDD+, Community Forestry, Ethiopia, choice experiment, WTP Space

**JEL Codes:** Q23, Q51, 013

*Corresponding author: Sahan T. M. Dissanayake, Department of Economics, Colby College, Diamond, 3rd floor 5230 Mayflower Hill Waterville, ME 04901-8852. sdissan2@gmail.com
# **Preferences for REDD+ Contract Attributes in Low-Income Countries: A Choice Experiment in Ethiopia**<sup>**1**</sup>

## **1. Introduction**

According to Millennium Ecosystem Assessment (2005), approximately 30% of the global forest has been cut down in the last two centuries and 25 countries lost their forests completely, another 29 countries lost over 90% of their forests. Moreover, the total size of tropical forest is decreasing at a rate of over 10 million hectares per year. This rate of deforestation and the associated harm has not only created concerns for the local people who largely depend on the forests and forestry products for their livelihood, but also the world at large for the ecosystem services they provide. Worldwide, some 1 to 2 billion people depend primarily on forests for their livelihoods and deforestation and forest degradation accounts for 11%–20% of annual greenhouse gas emissions (Saatchi et al. 2011; van der Werfet al. 2009; Chao, 2012; UNEP 2012). Therefore preventing deforestation and forest degradation is necessary from both a climate stabilization and sustainable development point of view. It is difficult to envision reaching a climate stabilization goal without the inclusion of forests in an international carbon mitigation framework (Angelsen and Brockhaus, 2009).

> 1 Author information: Sahan T. M. Dissanayake, Assistant Professor of Economics, Colby College, Waterville and Assistant Professor (by courtesy), Portland State University, Portland, OR.  Abebe Damte Beyene, Research Fellow, Environmental Economics Policy Forum for Ethiopia. Randall Bluffstone, Professor of Economics, Portland State University, Portland, OR. Zenebe Gebreegziabher, Senior Research Fellow and Deputy Director, Environmental Economics Policy Forum for Ethiopia and Assistant Professor of Economics, Mekelle University. Alemu Mekonnen, Senior Research Fellow and Center Director, Environmental Economics Policy Forum for Ethiopia and Assistant Professor of Economics, Addis Ababa University, Addis Ababa.  Peter Martinsson, Professor of Economics, University of Gothenburg. Michael Toman, Lead Economist, Development Research Group, World Bank.  Ferdinand M. Vieider, Head Junior Research Unit, Risk & Development, WZB Berlin Social Science Center. Financial support for this work was provided by the World Bank through the Knowledge for Change Program and the Trust Fund for Environmentally and Socially Sustainable Development. We would like to thank participants at the Seminar Series at the University of New Hampshire, the University of Maine, Reed College, and Resources for the Future, the 2014 World Bank Land and Poverty Conference, the 2014 Maine Economics Conference, and the 2014 World Congress on Environmental and Resource Economics for valuable feedback and suggestions on this work.

2
Reducing Emissions from Deforestation and Forest Degradation (REDD+) is a payment for ecosystem services (PES) system created under the Framework Convention on Climate Change (FCCC) tasked with creating markets for carbon sequestration services. Developing appropriate REDD+ carbon markets is a potentially important tool to give value to forest ecosystem services and create incentives for those who control forests to sequester carbon and for those who emit carbon into the atmosphere to pay for sequestration services (Bluffstone 2013).

From an economic point of view, carbon prices, payments to communities and the opportunity costs of carbon sequestration drive the decisions to adopt or not adopt REDD+. To achieve a welfare gain from the creation of the REDD+ carbon markets, the sellers (those sequestering carbon, typically in non-Annex 1 countries) must receive a price that is greater than the direct and indirect costs of participating in the carbon market by engaging in carbon sequestration. At the same time, the buyers in the carbon market (those paying for carbon sequestration services, typically in Annex-1 countries) will only engage in a REDD+ market if the price of carbon sequestration is competitive compared to the cost of alternate methods such as fuel switching and efficiency improvements (Bluffstone 2013). Therefore the costs borne by participants in non-Annex-1 countries, particularly the opportunity costs of participating in REDD+, will determine the success of a global REDD+ carbon market.

Despite the acknowledged importance of local level opportunity costs and preferences (e.g. McKinsey & Co, 2010; Gregorsen _et al._ 2011), the literature on opportunity costs of carbon sequestration in developing countries and preferences for programs to prevent deforestation like REDD+ is extremely limited. This paper attempts to partially close this critical research gap using choice experiment surveys conducted in three regional states in Ethiopia.<sup>1</sup> The main goal 3
of the analysis is to understand household preferences for REDD+ contracts and to estimate the cost to rural Ethiopian households of taking on fuelwood collection and grazing reduction obligations to sequester carbon. We also seek to shed light on respondents’ preferences for REDD+ institutional arrangements, such as the portion of payments going to communities versus households and the terms of REDD+ contracts.

We focus on Ethiopia because it presents an ideal case study to answer the above questions. In Ethiopia population pressure has led to the expansion of agricultural activities, and unsustainable consumption of fuel wood and the country’s forests are being lost at a rapid rate. Livestock grazing and to a lesser extent, illegal logging and forest fires also contribute to these problems. Though Ethiopia is not a major emitter of greenhouse gases, it has a significant potential for climate change mitigation. It is believed that the country’s participation in REDD+ will generate many benefits to the sustainable management of forests and the rural people who depend on natural resources for their livelihood.

Ethiopia has committed to developing REDD+; the government submitted a REDD+ Program Idea Note (R-PIN) in 2008, a final REDD+ Preparation Proposal (R-PP), and Climate Resilient Green Economy (CRGE) strategy in 2011 with the objective of reaching carbon neutral economy by 2025 and established a REDD Secretariat in 2013 under the Ministry of Environment and Forest.

We use a choice experiment survey, which allows us to analyze preferences for individual attributes and to calculate part-worth utilities. In addition, we use an experimental design that includes attribute interaction terms to analyze the trade-offs between attributes. Finally, we analyze the robustness of the results by using the “WTP-Space” approach in addition to the standard “Utility-Space” approach to calculate the marginal values for attributes. The data 4
were collected from 504 randomly selected households in 36 randomly selected villages from the three largest regions in Ethiopia.

The results show that respondents have particular preferences about how REDD+ programs are structured with regard to the manner in which the payments are divided between the households and the communities, the restrictions on using grazing land and the level of payments received for the program. We also find that there are significant interaction effects between attributes that need to be accounted for when considering the preferences for the REDD+ contracts. Finally we find that regional indicators and respondents’ beliefs influence preferences, in particular beliefs about institutional structure and governance influence respondents’ preferences for the REDD+ contracts.

# **2. Key REDD+ Literature**

Differential opportunity costs are at the heart of REDD+. To be economically viable as a climate change mitigation strategy, carbon sequestration must be low-cost compared to other approaches. Using simulation techniques Kindermann _et al._ (2008) estimate the cost of carbon sequestration by reducing deforestation at less than $20 per ton of CO2 for up to 4.3 Gt of CO2 per year. Similar values are identified in a study by McKinsey and Company (2010) that ranks costs to reduce carbon concentrations in the atmosphere per ton of carbon reduced and a study by Strassburg _et al._ (2009). These findings suggest that sequestration of carbon in forests can indeed effectively compete with other mitigation approaches such as renewable energy sources and alternate fuels. At the same time, as discussed by Bluffstone (2013), there is some controversy on whether all local opportunity costs of carbon sequestration were included in these studies (Dyer 5
and Counsel 2010; Gregorsen _et al._ 2011). By conducting in-person surveys with local communities we get at the heart of this question of what are the opportunity costs of carbon sequestration faced by households by directly calculating the costs faced by potential participants in a REDD+ program.

The potential for REDD+ to contribute to climate change mitigation appears significant, but to-date preferences of potential participants and related costs have not been fully explored. Costs associated with community negotiations, meetings, monitoring, risk aversion and high discount rates (Yesuf and Bluffstone, 2009; 2013) could turn out to be potentially significant and make communities unwilling to participate in REDD+ at prices carbon buyers would be willing to pay. A key overarching question therefore is how REDD+ benefits can effectively be transferred to the local level without disrupting the successful adoption of REDD+, especially at the community level (Bluffstone 2013). Further, understanding the preferences for the various attributes of REDD+ contracts allows planners to tailor the REDD+ contracts to better suit the preferences and local conditions. By using a choice experiment survey we are able to analyze the preferences for the various attributes of REDD+ contracts and the overall opportunity cost faced by the participants.

# **3. Study Site and Data**

Ethiopia is a low-income REDD+ partner country of over 90 million people. With closed canopy forest cover of only about 4%, increasing forest cover is a critical policy goal. As a result, in 2000 forest sector reform was initiated and a variety of community-level devolution pilots, experiments and initiatives are underway around the country. CFM is a focus of the Ethiopia REDD Readiness Proposal, which was funded in August 2009 by the World Bank 6
Forest Carbon Partnership Facility (FCPF). The proposal was submitted in October 2010 and revised in 2011. The REDD+ Phase was launched in January 2013 with funding from the FCPF and the Royal Norwegian Government, and DFID (Moges and Tenkir 2014). The Proposal specifically notes that the key aspect of the enabling environment is to “reinforce and clarify the user rights of forest dependent people as this has been identified as a fundamental prerequisite for sustained protection of the forest.” Data were collected from 504 randomly selected households in 36 randomly selected villages in Amhara, Oromiya and Southern Nations, Nationalities and Peoples (SNNP) Regional States using in-person surveys. These regional states represent 80% of the population and over 70% of the land area of Ethiopia. The number of villages from each regional state included in the sample was stratified based on the forest cover of each state. As Oromia Regional State is the largest state and contains about half the forest area, 50% of respondents are from Oromia, with the remainder living in Amhara (22%) and SNNP (28%). Within each of the 36 surveyed communities 14 households participated in the survey, giving a total of 504 completed surveys. Data were collected in May and June 2013 by 20 enumerators and 5 supervisors who were trained on choice experiment surveys and had prior experience working with similar respondent groups.

# **_Household Characteristics_**

In this section we briefly overview respondent and household characteristics. All three regional states are multi-ethnic and respondents report membership in a total of 9 ethnic groups (one group per household). The most important ethnic groups are Oromo (39%), Amhara (25%) and Wolayta (14%). Slightly over half of respondents follow the Ethiopian Orthodox religion, 29% are Muslim and the remainder (17%) are non-Orthodox Christians. All Muslims in the 7
sample live in Oromia Regional State and almost all non-Orthodox Christians live in SNNP.

Respondents in general are middle-aged (average age 42 years) males (90%). The average respondent is poorly educated, with 45% having a maximum of primary education and 38% being illiterate. Average household size in the sample is 4.9 adult equivalents, with a mean of 3 children under 15 years old. Households live at an average of 2,214 meters, but as low as 1,434 and as high as 3,150 meters. The sample can therefore reasonably be characterized as a highland sample.

Almost all respondents report being farmers (91%) and own an average of 1.8 hectares of land, with a maximum of 10.5 hectares. As is the case for the country as a whole, in the sample irrigation is unusual, only 8% of respondents have any irrigated land. Farmers both cultivate and raise animals, with virtually all households having animals, with an average of 5 tropical livestock units (TLU).<sup>2</sup> Only 7% of households had less than the equivalent of one cow and 10% had more than 9.5.

# **4. Methodology**

# **_Choice Experiment Surveys_**

CE surveys are based on Lancaster's (1966) consumer theory and are used to elicit preferences for environmental goods and policies (Boxall et al. 1996, Louviere et al. 2000). Lancaster (1966) proposed that consumers obtain utility from the characteristics of goods rather than the good itself. Therefore, CEs can be considered the analog of hedonic analysis for stated preference valuation methods and they allow the researcher to gain a detailed understanding of the respondents’ preferences for the policy or scenario being analyzed. In a typical CE survey, the respondent repeatedly chooses the best bundle/choice from several hypothetical bundles/choices. The attribute values appearing in each bundle/choice are identified using 8
experimental design techniques to ensure a balanced representation of values across choices. Alpizar et al. (2003) Hanley et al. (2001), Hensher et al. (2005), and Hoyos (2010) provide reviews of the choice experiment methodology.

# **_Survey Instruments_**

The survey for this particular study presents respondents with opportunities to express preferences over hypothetical REDD+ contracts that have the following attributes: Contract payment denominated per household, duration of the contract, percentage of the payment going to the household (as opposed to the community), required reduction in fuelwood and the required reduction in grazing. The exact list of attributes was refined after studying the REDD+ literature and analyzing results from 20 focus groups. The attribute levels and the descriptions for the attributes are provided in Table 1.

Once an initial list of attributes was developed, we conducted focus groups with potential survey respondents. The final survey instrument contains background information about the REDD+ program, a description of the attributes and the levels, seven sets of binary choice question sets, and a small demographic questionnaire. Appendix A provides an example of one of the choice questions and the actual background information document used. These documents were pretested in the field before launching full implementation. For each of the choice sets the respondents choose between the two given alternatives and the status quo option.

# **_Empirical Design_**

We created an efficient experiment design that incorporates both main effects and interaction effects (Adamowicz et al. 1997, Adamowicz et al. 1998, Carlsson and Martinsson 2003, Louviere et al. 2000). The design for the choice experiment was generated following Kuhfeld (2010)<sup>3</sup> and achieved a 100% D-efficiency. The REDD+ survey design resulted in 84 9
unique choice profiles<sup>4</sup> (Kuhfeld, 2010; Vermeulen et al. 2008). Carlsson and Martinsson (2008) investigate the effect of the number of choice sets and the design of the first choice set as context dependence in a choice experiment, and they found no significant impact on estimated marginal willingness to pay. We created a block design where each of the surveys were separated into blocks of six choice profiles, giving fourteen unique REDD+ surveys with six questions each. Carlsson et al. (2010) test for learning and ordering effects in CE surveys and show that dropping the first choice question can decrease the error variance of estimates. We follow this suggestion and add an additional choice question before the six choice questions in each survey and drop the first choice question when conducting the analyses to account for possible learning effects. In order to account for possible ordering effects we reversed the order of the questions in half the surveys and obtained 28 unique versions of the REDD+ survey.

# **_Model and Estimation_**

The standard conditional logit model (CL), which has been used for analyzing discrete choice models for many years, assumes that the respondents have homogeneous preferences (estimate a mean value for the sample for each attribute). To account for heterogeneity of preferences we also use a mixed multinomial logit model (MMNL)<sup>5</sup> that estimates both a mean and a standard deviation for each attribute ( Carlsson _et al_ . 2003; Hensher and Greene, 2003; Train, 2003, Hensher _et al_ . 2005; Dissanayake 2014). Assuming a linear utility, the utility gained by person _q_ from alternative _i_ in choice situation _t_ is given by where _X qit_ is a vector of explanatory variables. Following standard practice for logit models we assume that ε _qit_ is independently and identically distributed extreme value type I. We assume the density of β _q_ is given by _f_ ( β | Ω ) where the true parameter of the distribution is given by Ω .

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In the choice experiment questions, option A and option B are REDD+ contracts that can be viewed as being closer substitutes with each other than with option C, the status quo option (Haaijer, _et al._ 2001; Blaeij et al. 2007). To account for this difference in substitution between options we use an econometric specification for the mixed multinomial logit model that contains an alternative specific constant (ASC), the parameter α _qi_ that differentiates between the status quo option and the choices that represent deviations from the status quo.

To better interpret the estimation results we calculate average marginal WTA for a change in each attribute _i_ by dividing the coefficient estimate for each attribute with the coefficient estimate for the payment term, as given in (2).

Though the above formulation has been the standard practice in the literature to calculate willingness to pay (or willingness to accept for this particular case), some recent work has shown that taking the ratio of two coefficients can be structurally incorrect when the coefficients are drawn from specific distributions. Specifically Train and Weeks (2005), Scarpa , Thiene and Train (2008), Daly, Hess and Train (2011) and Hole and Kolstad (2012) show that ratios of coefficients can have infinite variances and therefore an estimator compromising of a ratio of coefficients may not have finite moments. They propose a solution by reformulating the estimation equations from “preference space” to “WTP space”. Specifically equations (1) can be expanded to separate out the cost/payment terms as where _C_ is the cost or payment attribute and γ is the coefficient on the cost term. The RHS of the above equation can be reformulated by dividing by the coefficient on the cost term, γ to get 11
which can be presented as Equation (5) represents a specification in “WTP Space” since the coefficient estimates are the ratios of the coefficients from specification (3), β _q_ = β _q_ / γ _q_ . The specification is now nonlinear but can be estimated using both NLOGIT (Greene, 2013) and a new Stata module by Gu, Hole and Knox (2013).

# **_Econometric Specification_**

We present a main effects (no interactions) specification and specifications with attribute interaction terms, regional interaction terms, and respondent belief interaction terms. The specifications are given in Equation 6 – Equation 9: The data were analyzed using the clogit and mixlogit commands in STATA for the Conditional Logit and MMNL specifications. The WTP estimation was conducted in STATA 12
using the generalized mixed logit GMNL estimator created by Hole (2013).

# **5. Results and Discussion**

Table 2 presents results for the main effects specifications analyzed using a conditional logit model (column 1), the main effects specification analyzed using an MMNL (column 2), the attribute interactions effects specification analyzed using an MMNL (column 3), the geographical interaction effects specification analyzed using an MMNL (column 4), and the respondent beliefs interaction effects analyzed using an MMNL (column 5). Table 3 identifies the presence of significant individual heterogeneity in the multinomial-logit setting (MMNL). As can be seen many of the variables exhibit individual heterogeneity and therefore it is necessary to account for this in the analysis by using an MMNL model.

The overall results from the five specifications indicate that the percentage of the payment going to the community, the duration of the contract, the required grazing reduction and the payment are all significant variables in determining the respondent s’ willingness to adopt REDD+ contracts. The significant coefficient results are robust across the econometric specifications and have expected signs. The significant results indicate the following:

1. As the percentage of the payment going to the household increases, respondents are more likely to choose that option;

2. As the duration of the contract increases, respondents are more likely to choose that option; 3. As the required grazing reduction increases, respondents are less likely to choose that option; 4. As the payment values (amount) increase, respondents are more likely to choose that option The results that include attribute interaction terms (column 3) indicate that the interaction term for the _firewood reduction_ variable and the _payment to the community_ is significant. Since 13
this variable is negative it indicates that at higher levels of required firewood reduction, the respondent would require more of the payment to be given to the household (as opposed to the community) compared to the low levels of firewood reduction. Implicitly the respondent is willing to trade-off between a higher firewood restriction and more of the payment going to the household.

The significant interaction term between _grazing restriction_ and _payment_ in the results from the attribute interaction specification (column 3) indicates that as the payment level increases respondents are willing to accept a higher grazing restriction (the marginal disutility of grazing decreases). Two of the regional interaction terms are significant implying that there is regional heterogeneity with regard to respondents’ preferences for REDD+ contracts. Specifically the results state that

1. Compared to respondents from Oromia, respondents from Amhara require a higher payment when a larger portion of the payment is given to the community.

2. Compared to respondents from Oromia, respondents from SNNP require a higher payment to reduce the amount of grazing.

The significance of the regional interaction terms indicate that REDD+ programs should be designed at the regional level to account for differences in regional preferences.

We currently observe a result that is puzzling; we find that the required reduction in fuelwood collections is not a significant determinant of willingness to adopt REDD+ contracts in three of the first four specifications. This result is counter to what was suggested by focus groups and survey pretests and may be explained by the individual heterogeneity in the sample. Different respondent groups having varying preferences and access to firewood substitutes or beliefs about the enforcement of regulations may lead to this result. We include interactions 14
terms based on respondents’ beliefs in an effort to understand the specific structure of respondents’ preferences for the firewood reduction variable. Column 5 in Table 2 presents results from a specification that includes variables for the respondent’s beliefs on if the community follows rules, if climate change will have an impact on the respondent, and if the REDD program will benefit the respondent. All the main attributes and two of the interactions terms are significant for this specification. Specifically if respondents believe the community members do not follow rules<sup>6</sup> they perceive firewood reduction as a cost. This gives weight to the idea that beliefs about enforcement and the likelihood of the community following rules has an impact on if the respondents consider firewood reduction as a legitimate cost. We also find that the respondents beliefs about the REDD program personal benefit have a significant impact on the contracts they choose.

Next we calculate the marginal WTA and include multiple specifications to test for the robustness of the results. Table 4 contains the results for the marginal WTA for the conditional logit model (column 1), MMNL with fixed price term (column 2), and MMNL with a normally distributed price term (column 3). Following the recent progress in the choice experiment literature we also estimate the Marginal WTA in “WTP Space”, equation 8. The MWTA values are shown in (column 4) of Table 4 and the full estimation results are provided in Table 5. Figure 1 shows a comparison of the estimates from both preference space and WTP space and illustrates that for this data set there is no significant difference between the results obtained using the two methods.

We see from Table 4 that if the annual REDD+ payment per household increases by on average approximately 100 Ethiopian Birr (about $5.00) the proportion of payments to households can be decreased by 5%. We find that if under REDD+ households are required to 15
reduce their grazing by 10%, they would require an increased average payment of approximately 160 Birr (about $8.00). As already discussed, fuelwood collection reduction is not a significant determinant of REDD+ contract choice for this sample.

# **6. Conclusion**

Reducing Emissions from Deforestation and Forest Degradation (REDD+) is a payment for ecosystem services (PES) system tasked with creating markets for carbon sequestration services (Bluffstone 2013). Despite the acknowledged importance of local level opportunity costs and preferences (e.g. McKinsey & Co, 2010; Gregorsen _et al._ 2011), the literature on costs and preferences for programs to prevent deforestation like REDD+ is extremely limited. In this paper we use choice experiment surveys conducted in in Ethiopia to understand household preferences for REDD+ contracts and to estimate the opportunity cost to rural Ethiopian households of reducing fuelwood collection and grazing. We also shed light on respondents’ preferences for REDD+ institutional arrangements, such as the portion of payments going to communities versus households and the terms of REDD+ contracts.

The results show that respondents care how REDD+ programs are structured, particularly with regard to restrictions on grazing. A key REDD+ policy question is how to divide up REDD+ payments. Should they go to the community? To households? Or Part to households and part to communities? We find that respondents prefer that more of the payments go to households. This result may seem intuitive but similar ongoing work in Nepal finds that households prefer more of the payment to go to the community. It needs to be further investigated how the strength of the local institutions and the interactions between local, regional and government institutions may influence household preferences to how the payments are divided between households and the community.

16
We also find evidence that beliefs about enforcement and the likelihood of the community following rules has an impact on if the respondents consider firewood reduction as a legitimate cost. This result is implying that the strength of institutions and the enforcement of rules can change perceived opportunity costs of the contracts. It needs to be further investigated is these differences are caused by respondents acknowledging a potential for leakage or some other belief about the role of institutions. Further studies should be conducted that include different forms of enforcement as an attribute. This will allow a better understanding of how the form of enforcement will influence adoption decisions.

We also find that preferences for REDD+ contract attributes depend on the levels of other attributes. In particular we find that at higher payment levels respondents are willing to accept a higher grazing restriction (the marginal disutility of grazing decreases) and that at higher levels of required reduction of firewood collection respondents require more of the payment to be given to the household (as opposed to the community). These results show the importance of incorporating interaction terms when analyzing choice experiment data and in the context of REDD+ programs indicate that higher payments will not only increase the likelihood of contracts being adopted but also decrease the perceived opportunity cost of grazing restrictions.

We verify the robustness of the WTP estimates by analyzing the data using the “WTPSpace” approach and find that the results are robust to both estimation in “WTP-Space” and “Preference-Space”. Perhaps the most intriguing finding is that Ethiopian households appear to value cash payments much more than losses in access to forest resources. These results suggest that the opportunity costs of carbon sequestration may indeed be low. The results also find that personal beliefs about the community, enforcement of contracts and the impact of the REDD+ program can significantly influence respondents’ likelihood of adopting contracts.

17