Payments for Environmental Services: Are they a … · Payments for Environmental Services: Are they a solution for conservation? Esteve Corbera Institute of Environmental Science

Payments for Environmental Services: Are they a solution for conservation?

Esteve CorberaInstitute of Environmental Science and Technology, Universitat Autònoma de Barcelona

[email protected] School of International Development, University of East Anglia

[email protected]

European Forest Institute Winter SchoolFreiburg, March 24, 2011

Session outline

• Ecosystem services - key foundations

• Payment for Ecosystem Services (PES) - definitions

• Types of PES initiatives

• PES critiques

• Examples of PES (US wetland banking, Costa Rica program)

• Conclusions

• Group discussion

Ecosystem services - Common understanding

• Ecosystem services are the benefits obtained from nature that satisfy human needs and simultaneously fulfill other species requirements (Daily 1997; Costanza et al. 1997; Millennium Ecosystem Assessment 2005)

• Common conceptualisations of ecosystem services are utilitarian; they emphasize their utility in relation to human activities and well-being (use and non-use values)

• The MEA classifies ecosystem services in four categories:

1) provisioning services, e.g. food, water, timber and genetic resources

2) regulating services, e.g. the regulation of climate and flooding

3) cultural services, e.g. recreation and aesthetic enjoyment

4) supporting services, e.g. soil formation, pollination and nutrient cycling

• ES flows, derived from stocks of natural resources, recognised as key elements of wealth along physical, financial, human, and social capital (Vira and Adams 2008)

Ecosystem services - a historical view

• Emerges with utilitarian framings of ecosystem functions in 1970s

Ecosystem functions with ecological and social importance -a pedagogy of biodiversity conservation- (de Groot 1987; Gómez-Baggethun et al. 2010)

• Mainstreamed through economic valuation literature

ES are not quantified in terms comparable with economic services and manufactured capital (Costanza et al. 1997)

The degradation or provision of ES is not accounted in markets

Development may thus be counterproductive from a pure cost-benefit logic

• Progressively finds its way into policy

Forestry laws in Latin America - late 1990s and early 2000s

MEA 2005 - TEEB 2010

EU 7th Framework Program

Ecosystem services - Drivers of change

• There are direct and indirect drivers causing changes in ES - act synergistically

• Direct drivers influence ES provision and can be identified and measured to differing degrees of accuracy (e.g. timber logging, fertiliser use, fishing effort, climate events)

• Indirect drivers operate diffusely and alter one or more direct drivers:

a) Demographic, e.g. population size, age and gender structure, spatial distribution

b) Economic, e.g. per capita income, macro-economic policies, markets, investment

c) Socio-political, e.g. regulatory frameworks across scales, the roles of civil society and the private sector

d) Scientific and technological, e.g. adoption of new technologies and information

e) Cultural and religious, e.g. choices we make about what and how much to consume and what we value

• ES degradation has also to do with the progressive loss of traditional knowledge re: the conservation and long-term management of natural resources

Ecosystem Services - Interactions & assessment

• Some changes in ES may have little short-term impact but very significant implications over future decades, e.g. soil erosion/declining agricultural productivity

• Local changes in ES may impact larger geographical scales

• Each ES has often a typified spatial and temporal scale, e.g. food production/water regulation/climate regulation

• Critical mismatches:

‘Temporal’ mismatch: appropriate assessments of ES often need a long-term perspective, which does not match with the short-term perspective of political cycles - e.g. intergenerational concerns

‘Spatial’ mismatch: ecological processes often occur at scales differing from those of the required or competent decision-making level - e.g. climate change and ice melting

‘Knowledge’ mismatch: in some cases, only a particular type of information or data source is acceptable to decision-makers - e.g. traditional and practitioners’ knowledge

• Payments for Ecosystem or Environmental Services (PES) as one of the options we have to affect the drivers of ecosystem change, particularly direct ones

• Incentive-based instruments rewarding landowners (individuals and rural communities) for the provision of ecosystem services

• Reconnect decisions about land-use management across different actors through cooperation, mediated by existing institutions, which include property rights, legal frameworks, social perceptions and values

• Founded on three premises:

1) The loss of ecosystem services is not properly accounted for in current markets, therefore these fail to provide appropriate signals that might contribute to the efficient allocation and sustainable use of the services

2) Allocating property rights and establishing a bargaining process between those who manage natural resources and their associated services and those who are willing to maintain or enhance the provision of such services through a payment is desirable and feasible, as long as transaction costs are kept low

3) We can build supportive institutions and create capacities to market or pay for ecosystem services

Payments for Ecosystem Services (PES)

• Most-accepted definition of PES:

‘A voluntary transaction where a well-defined ecosystem service is bought by a buyer from a service provider if and only if the provider secures its provision (conditionality)’ (Engel et al. 2008)

• Three necessary conditions for a ‘genuine’ PES:

1) the relationship between the type of land use being promoted and the provision of the ecosystem service must be clear

2) stakeholders must have the possibility to terminate the contractual relationship (voluntary transaction)

3) a monitoring system must accompany the intervention, in order to ensure that the provision of services is taking place (additionality and conditionality of payments)

• From “the polluter pays” to “the provider gets” principle

Additionality - efficiency versus fairness?

PES definition

PES definition

Source: Engel et al., 2008, pp. 665

The logic of payments for environmental services

ES providerES seller

ES userES buyer

ES flow

$

Intermediary/ies

ES flow ES flow

$$

Regulatory frameworkDirect exchange

Indirect exchange

Source: own elaboration

PES exchange frameworks

• The previous ‘most-accepted’ PES definition has some problems:

Most ‘so-called’ PES schemes do not comply with all the criteria outlined, such as clear ES traded, voluntary transaction, additionality and conditionality

Strict criteria may generate frustration for policy-makers and practitioners, willing to test and develop PES in particular contexts

Separating environmental and poverty alleviation goals makes sense from a design/efficiency perspective but can be controversial

• Cases in which PES schemes may not meet such criteria include:

Government-funded programs that have been established without users’ consentES often not fully defined and no clear-cut causal relationship between land use practices and the expected enhancement of the targeted ESConditionality is assessed against compliance with expected land-use practices, not against the actual provision of ES

PES definition

• Muradian et al. (2010) propose a broader definition:

‘A transfer of (financial or non-monetary) resources between social actors which aims to create incentives to align individual and/or collective land use decisions with the social interest in the management of natural resources’

‘Such transfers are embedded in social relations, values and perceptions, and they may take place through a market, as well as through other mechanisms like incentives or public subsidies defined by regulatory means’

• PES is therefore not a clear-cut concept, and it is used in a variety of contexts

• The underlying rationale should comply with at least these premises:

1. Reward landowners for the provision of positive externalities or the avoidance of negative ones (through financial or non-monetary incentives)

2. Identify ES ‘providers’ and ‘buyers’, and generate the means for a sustainable rewarding mechanism

3. Support and monitor the provision of ES or proxies

PES definition

• Muradian et al. (in press) come up with a 3-pillar framework for classifying PES:

1. The importance of the economic incentive in steering the desired land-use

2. The directness of the transfer, i.e. the presence or absence of intermediaries)

3. The degree of commodification, i.e. the extent to which ES have been defined as a tradable commodity

PES classification

Degree of commodification

Impo

rtan

ce o

f eco

nom

ic in

cent

ive Directness of the transfer is

proportional to the size of the circle

D

C

B

A

A. Nest protection scheme in Cambodia (Clements et al. 2010)B. Kyoto Protocol’s reforestation projectsC. Costa Rica’s PES program (Pagiola et al. 2008)D. Community-based eco-tourism in indigenous reserves

• PES are increasingly used in developed and developing countries as a tool to promote conservation and support rural livelihoods

• PES are suitable when land cannot be purchased and set aside for conservation, or where protected areas cannot be established (TEEB, 2009)

• Most common PES schemes to date involve rewards for:

Watershed regulation services by forested landscapes

Carbon sequestration through regulated and voluntary carbon markets

Biodiversity and wetland conservation through credit-based schemes

‘Bundled’ or landscape services through eco-tourism and policy-based direct incentives

• Grieg-Gran and Porras (2005) identify 287 experiences in developed and developing countries but there are presently many more (www.ecosystemmarketplace.com)

• World Bank supporting PES programmes in Colombia, Costa Rica, El Salvador, Mexico and Nicaragua, and preparing projects in the Dominican Republic, Panama, Venezuela and Kenya (Pagiola et al., 2008)

Why PES?

• PES critiques are structured around ethical/valuation and procedural arguments:

PES critiques

Ethical Procedural

Nature deserves to be preserved per se (intrinsic value), regardless of its use and non-use values (McCauley 2006)

Ecosystem dynamics are complex and the provision of one ES may contravene others’ -trade-offs- (MEA 2005; Peterson et al. 2010)

PES often support a single exchange-value (i.e. money) (Kosoy and Corbera 2010)

It is difficult and very costly to quantify the flow of ecosystem services and monitor such services over time (Robertson 2004)

Legitimizes the idea that market-like conservation tools are the best to accommodate conservation within capitalism (McAfee 1999; Sullivan 2011)

It is often difficult and contested to define who should become entitled to trade and benefit from ES (Corbera et al. 2007)

Market-like conservation tools may prioritize efficiency over fairness (Pascual and Muradian 2010)

Setting up the price for an ES is often a top-down, expert-led exercise, in which ES providers may not intervene (Kosoy and Corbera 2010)

“The poor sell cheap” and PES may reproduce unequal access to public goods (Martínez-Alier 2002)

Poor landholders may not always be able to participate due to: informal land entitlements or unfavourable procedural rules (Landel-Mills and Porras 2002)

• A wetlands mitigation bank is a wetland area that has been restored, established, enhanced or preserved, and that it is managed by a private firm and then set aside to compensate for future conversions of wetlands by developers - the mitigation bank

• Industrial/residential developers can purchase credits from a mitigation bank to meet their requirements for compensatory mitigation against the damage produced by their development over water courses, underground water or wetlands

• The value of these ‘credits’ is determined by quantifying the wetland functions or acres restored and the ‘bank’ manager is responsible for the success of the project

• Mitigation banking is performed "off-site", meaning that it is at a location not on or immediately adjacent to the site of impacts but within the same watershed

Wetland banking in the US (Roberston, 2004, 2006; EPA website)

Pictures source: EPA w

ebsite

• Wetland mitigation banking history and status:

Wetland banking in the US

Year/Period Regulation/facts Implication

1977Clean Water Act: US EPA to regulate dredging or dumping in seasonally or shallowly inundate land through a permitting system

Developers must apply for the permit at the local District of the US Corp of Engineers (COE) and conduct compensatory mitigation measures

mid 1980s Studies reveal that many compensatory mitigation sites were never developed or were in poor conditionStudies reveal that many compensatory mitigation sites were never developed or were in poor condition

1991 First wetland mitigation scheme in the Chicago district

early 1990s Federal Wetlands Plan 1993 Commercial wetland banking emerges

1995 Federal Guidance on the Establishment, Use, and Operation of Mitigation Banks

Commercial wetland banking consolidates across COE districts

2001 The Environmental Law Institute identifies 219 approved wetland mitigation banks nationwide, more than 130 of which were entrepreneurial banks, and 22 of which had sold out of credits

219 approved wetland mitigation banks nationwide, more than 130 of which were entrepreneurial banks, and 22 of which had sold out of credits. In total, they covered 139,000 acres (56,000 ha)

2005 The Corps' Institute for Water Resources estimates a total of 450 approved mitigation banks (59 of which have sold out of credits) and an additional 198 banks in the proposal stageThe Corps' Institute for Water Resources estimates a total of 450 approved mitigation banks (59 of which have sold out of credits) and an additional 198 banks in the proposal stage.

Source: own elaboration based on EPA data and Robertson, 2004

• Elements of the commercial wetland bank:

1. Bank site: physical location of the restored wetlands, usually a former wetland site that had been drained for agricultural usage

2. Bank instrument: administrative document establishing ecological criteria for the COE approval of bank credits, the financial sureties the banker must provide against site failure, the kind of ecological monitoring required, and other details

3. Service area: geographic area within which impacts can be mitigated at a given bank

4. Mitigation bank review team (MBRT): scientists who work for the local offices of state and federal regulatory agencies. Their role is to assess the banker’s restoration of a site, and to monitor the site’s continuing performance of ecological functions

5. Impact site: area where the development takes place and that requires compensatory wetland mitigation credits

Wetland banking in the US

• The problem of measurement (Robertson 2004; 2006):

a) Wetland banking involves a definition of a commodity (i.e. `the mitigation credit’)

Rapid Assessment Method: each wetland receives a score according to biological characteristics and this translates into ‘units of incremental ecological function’ or wetland credits

b) Are ecosystem functions at impact site commensurable with those at bank site?Simplification one acre destroyed at impact site = one wetland credit

A bank site may have 100 hectares, but may only be able to generate credits for the equivalent of 50 hectares at impact site

Wetland banking in the US

• First government-driven PES program in the world - 1996 Forest Law recognized four ES provided by forests

• Managed by the National Funding Forestry Fund (FONAFIFO), a semi-autonomous agency governed by representatives of government and the private forestry sector

• PES funding comes from a 3.5% of the revenues generated by a fossil fuel sales tax (US$10 million/year) and a grant/loan of the GEF and the World Bank (2001-2006)

• Funding sources have been diversified over time:

Costa Rica’s PES program (Pagiola 2008)

Water Biodiversity Carbon

Private contracts with hydropower producers, agribusiness and water supply companiesRevision of the national water tariff, introducing a conservation fee earmarked for watershed conservation through PES contracts and conservation areas

GEF Ecomarkets Project (US$8 million grant)Donations from Conservation International

Fossil fuel taxNorwegian government and power producers (US$2 million)World Bank BioCarbon to cover the sale of about 0.61 million tons of CO2e

• The PES program targets private landowners outside protected areas

• Two types of contracts:

Forest conservation (US$64/ha/year over five years) with a 15 year commitment

Reforestation (US$816/ha over ten years), split in five payments

• Monitoring of plantations and forest permanence is conducted by licensed foresters on-site, regular audits by FONAFIFO and satellite imagery

• Popularity among landowners:

Costa Rica’s PES program

Source: Pagiola, 2008, pp.717

Forest conservation contract predominates (95%, 684 contracts, 256,000 ha)

Mixed evidence regarding poor’s participation (early land titling restrictions; costly and time consuming application process)

• Low and untargeted payments have two problems:

1. Involves landowners who have already adopted conservation practices

2. Unlikely to induce the adoption of conservation where it has not happened yet

• Difficult to establish the causal relationship between conservation and the PES program

Co-existence with a ban on clearing forest land

Reduced profitability of cattle grazing and forest clearing

Studies (e.g. Zbinden and Lee 2005) document higher forest cover % in PES participants than non-participants but data are inconclusive

• Monitoring of ES provision is generally low, based on assumptions and without a clearly established evaluation program

35% of forest conservation area located in watersheds with downstream users

60-65% of forest conservation contracts fall into high biodiversity priority areas

1 million tC sequestered in reforestation contracts and 11 million tC avoided

Costa Rica’s PES program

• Permanence uncertain but likely to be guaranteed through:

Existing forest clearing ban

Likely extension of plantation payments to 10 years

Likely extension of payments in high biodiversity priority areas

• Key to maintain sustainable sources of PES revenue:

The use of compulsory payments through fuel and water fees ‘disconnects’ users from suppliers - monitoring and conditionality become less relevant

• Program future needs:

Increase targeting of critical hydrological basins

Increase the payment offered to compensate for opportunity costs in these basins (water tariff revenues to address this)

Develop a sustainable funding mechanism for high biodiversity priority areas and other land-use practices for ES provision (Biodiversity Conservation Trust Fund)

Costa Rica’s PES program

• PES is a contested conservation approach, in continuous evolution

• It may be a solution for conservation in particular contexts, but not everywhere

It may not a cost-effective and equitable mechanism in all contexts

Requires low transaction costs, a supporting institutional framework and sustainable financing mechanisms

• ES need to be better defined and monitored, but we should be careful not to ask scientists to simplify complexity in order to render ES tradable

Sophisticated science underscores market-driven PES and it is used to define the spatial limits and units appropriate for exchange - incommensurability?

• Accountability of project developers and ‘ES providers’ is central to PES in order to ensure transparency and credibility

• Informal property rights should be acknowledged and benefit-sharing arrangements negotiated very openly among participants

Conclusions - are they a solution?

• Divide yourselves in 4 groups of 4-5 people

• Each of you should discuss (15-20 min) and later present (5 min) on how you would design and start-up one of the following PES initiatives:

1. A regional PES initiative (e.g. Mercosur, EU) for biodiversity offsets2. A national PES initiative (e.g. at county council level) for wetlands services3. A sub-national PES initiative for watershed regulation

4. A national PES for soil/ecosystem carbon sequestration/conservation services

• Key points to address:

a) Who would be the scheme’s participants?

b) How you would define the ES and how you would measure/trade them?

c) How you would set up the institutional structure, inc. regulatory framework?

d) What will be the most likely implementation opportunities and challenges for the actors involved?

Group discussion (Developing a PES scheme)

References (In text and further reading)

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Corbera, E., Brown, K., Adger, W.N., 2007. The Equity and Legitimacy of Markets for Ecosystem Services. Development and Change, 38(4), 587-613.

Corbera, E., González Soberanis, C., Brown, K., 2009. Institutional Dimensions of Payments for Ecosystem Services. An analysis of Mexico’s carbon forestry programme. Ecological Economics 68, 743-761.

Costanza, R., de Groot, R., et al., 1997. The value of the world's ecosystem services and natural capital. Nature 387 (6630), 253-260.

de Groot, R., 1987. Environmental functions as a unifying concept for ecology and economics. The Environmentalist 7(2), 105-109.

Daily, G.C., 1997. Nature‘s Services: Societal dependence on natural ecosystems. Island Press, Washington, DC.Engel, S., Pagiola, S, Wunder, S., 2008. Designing payments for environmental services in theory and practice: An

overview of the issues. Ecological Economics 62, 663-674.Gómez-Baggethun, E. et al., 2010. The history of ecosystem services in economic theory and practice: From early notions

to markets and payment schemes. Ecological Economics, 69, 1209-1218.Grieg-Gran, M., Porras, I., Wunder, S., 2005. How can market mechanisms for forest environmental services help the

poor? Preliminary lessons from Latin America, World Development 33(9), 1511–1527.Kosoy, N., Corbera, E., 2010. Payments for Ecosystem Services as Commodity Fetishism. Ecological Economics, 69,

1228-1236.Millennium Ecosystem Assessment, 2005. Ecosystems and Human Well-being: Synthesis. Island Press, Washington, DC.Landell-Mills, N and Porras, T. I. 2002. Silver bullet or fools’ gold? A global review of markets for forest environmental

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References (In text and further reading)

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Society and Space 17(2), 133-154.McCaulay, J., 2006. Selling out on nature. Nature 443, 27-28.Muñoz-Piña, C., Guevara, A., Torres, J.M., Braña, J., 2008. Paying for the hydrological services of Mexico's forests:

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Zbinden S., Lee, D., 2005. Paying for environmental services: An analysis of participation in Costa Rica’s PSA program. World Development 33 (2), 255-272.