Designing Payments for Ecosystem Services

This Policy Series by James Salzman brings attention to a rapidly developing phenomenon—payments for ecosystem services (PES). Salzman, the Samuel F. Mordecai Professor of Law and the Nicholas Institute Professor of Environmental Policy at Duke University, explains when and where ecosystem services can be provided by voluntary markets rather than government actions. The key to understanding how PES work is rooted in the basis of any voluntary market transaction—gains from trade. One party agrees to take action because another party offers an incentive. Both parties benefit. A beekeeper, for example, brings her hives to an orchard to provide pollination services for a fee. But Salzman explores the less obvious services such as forests at the top of a municipal watershed that act as a filter providing clean water to people below. Salzman states that we receive many environmental benefits for “free,” which provides little or no incentive for people to pay for them or for entrepreneurs to provide them. Because price signals that alert individuals about scarce resources in traditional markets are absent, ecosystem services are taken for granted—until they stop providing benefits. Then the cost of remediation or building infrastructure, such as a water treatment plant, makes their value obvious. For decades the solution to environmental protection has been government action. Today, knowledge about environmental processes combined with increased environmental sensitivity provides opportunities for entrepreneurs to find innovative ways of developing markets for ecosystem services

A Policy Maker’s Guide to Designing Payments for Ecosystem Services

Over the past five years, there has been increasing interest around the globe in payment schemes for the provision of ecosystem services, such as water purification, carbon sequestration, flood control, etc. Written for an Asian Development Bank project in China, this report provides a user-friendly guide to designing payments for the provision of ecosystem services. Part I explains the different types of ecosystem services, different ways of assessing their value, and why they are traditionally under-protected by law and policy. This is followed by an analysis of when payments for services are a preferable approach to other policy instruments. Part II explains the design issues underlying payments for services. These include identification of the service as well as potential buyers and sellers, the level of service needed, payment timing, payment type, and risk allocation. Part II contains a detailed analysis of the different types of payment mechanisms, ranging from general subsidy and certification to mitigation and offset payments. Part III explores the challenges to designing a payment scheme. These include the ability to monitor service provision, secure property rights, perverse incentives, supporting institutions, and poverty alleviation

A Policy Maker’s Guide to Designing Payments for Ecosystem Services

Over the past five years, there has been increasing interest around the globe in payment schemes for the provision of ecosystem services, such as water purification, carbon sequestration, flood control, etc. Written for an Asian Development Bank project in China, this report provides a user-friendly guide to designing payments for the provision of ecosystem services. Part I explains the different types of ecosystem services, different ways of assessing their value, and why they are traditionally under-protected by law and policy. This is followed by an analysis of when payments for services are a preferable approach to other policy instruments. Part II explains the design issues underlying payments for services. These include identification of the service as well as potential buyers and sellers, the level of service needed, payment timing, payment type, and risk allocation. Part II contains a detailed analysis of the different types of payment mechanisms, ranging from general subsidy and certification to mitigation and offset payments. Part III explores the challenges to designing a payment scheme. These include the ability to monitor service provision, secure property rights, perverse incentives, supporting institutions, and poverty alleviation

Payments for Ecosystem Services: Legal and Institutional Frameworks

Analysis and engagement with partners working on ecosystem services transactions, policies and laws over the past 10 years have demonstrated a clear need to better understand the legal and institutional frameworks that have the potential to promote or hinder the development of payments for ecosystem services (PES) schemes, as well as the complex legal considerations that affect ecosystem services projects. In response, the IUCN Environmental Law Centre and The Katoomba Group have worked on a joint initiative to analyze the legal and institutional frameworks of water-related PES schemes and projects in four Andean countries: South America (Northeastern)-Brazil; Bolivia, Colombia and Peru. It has resulted in this report. Country-based analysts with experience in ecosystem services transactions have developed country and project assessments to define existing and recommend future regulatory and institutional frameworks that enable equitable and long-lasting ecosystem services transactions. Partners from North America (Central America)-Costa Rica; North America-Mexico; Ecuador and the North America-United States provided feedback on the assessments. The country assessments yielded lessons which were used to develop a set of recommendations on legal frameworks, property rights, enabling institutions, PES contracts, and governance issues supporting the future development of PES schemes

Social Equity Matters in Payments for Ecosystem Services

Although conservation efforts have sometimes succeeded in meeting environmental goals at the expense of equity considerations, the changing context of conservation and a growing body of evidence increasingly suggest that equity considerations should be integrated into conservation planning and implementation. However, this approach is often perceived to be at odds with the prevailing focus on economic efficiency that characterizes many payment for ecosystem services (PES) schemes. Drawing from examples across the literature, we show how the equity impacts of PES can create positive and negative feedbacks that influence ecological outcomes. We caution against equity-blind PES, which overlooks these relationships as a result of a primary and narrow focus on economic efficiency. We call for further analysis and better engagement between the social and ecological science communities to understand the relationships and trade-offs among efficiency, equity, and ecological outcomes

Collective payments for ecosystem services

Payments for ecosystem services (PES) gained an increasing importance in science and politics within the last decades. Although the enthusiasm about PES is particularly high in Environmental Economics, opponents criticize the market-based character of PES and the associated commodification as well as privatization trends. By means of a systematic literature review we aim at shedding light on the complex and controversial debate about how to define commodification and related privatization processes and how they are linked to PES outcomes. We do so by setting a particular focus on the potentials and challenges of community-based and collective PES (C-PES), also in contrast to PES targeting land under private land tenure (P-PES). Our results reveal that C-PES show promising results when targeting local communities with a high level of social capital. However, there is a lack of studies that systematically assess the relations between different degrees of commodification and the ecological and social outcome of PES programs. For this reason, we provide a new conceptual framework of commodification by highlighting two interrelated spheres, where PES-related commodification processes take place: The first sphere relates to the commodification of ES-providing land, which greatly depends on the land tenure regime in place. The second sphere addresses the commodification of ecosystem services (ES). Our review indicates that C-PES show rather low degrees of commodification in the first sphere because the ES-providing land is often less embedded into private land markets. This is due to often missing alienation rights, more complex decision-making processes, and a potentially lower profit-orientation of the landowners. Empirical long-term studies are needed to investigate changes in both spheres of commodification over time, their potential interactions, and how they affect the outcome of C-PES and P-PES programs.Peer Reviewe

Alternative to Comprehensive Ecosystem Services Markets: The Contribution of Forest-Related Programs in New Zealand

Due to the public goods characteristics of many ecosystem services and their vital importance to human welfare, various mechanisms have been put in place to motivate private landowners in the provision of ecosystem services. A common approach is to try to develop a comprehensive ecosystem services market where landowners can receive payments from beneficiaries of ecosystem services. Much research has been directed at developing methods for valuing the range of ecosystem services so that they can be incorporated into ecosystem services markets. However, valuation methods are difficult, expensive and time consuming. Other approaches to the provision of ecosystem services such as payments for ecosystem services usually focus on a single service like water or biodiversity. However, in the provision of a particular ecosystem service, there are spill-over effects of providing other ecosystem services, and thus studying those spill-over effects may provide a simple and cost-effective way of ensuring the provision of a wide range of ecosystem services. In New Zealand, there are a variety of forestry programs which provide incentives to landowners to plant trees on their lands to meet particular objectives, but which also produce other ES. This research aims to evaluate the cost-effectiveness of the provision of a wide range of ES by these approaches, the New Zealand Emissions Trading Scheme, the East Coast Forestry Scheme, and the QEII National Trust.ecosystem services market, spill-over effect, cost-effectiveness, New Zealand, Environmental Economics and Policy,

The Vittel Payments for Ecosystem Services: A Perfect PES Case?

This paper describes and analyses the PES programme developed and implemented by Vittel (Nestlé Waters) in north-eastern France. In order to address the risk of nitrate contamination caused by agricultural intensification in the aquifer, the world leader in the mineral water bottling business is financing farmers in the catchment to change their farming practices and technology. The paper examines the methodology used by Vittel, and the tenyear process that was necessary to transform conflict into a successful partnership.The paper's main conclusion is that establishing PES is a very complex undertaking, one that requires the consideration of scientific but also social, economic, political, institutional, and power relationships. The ability to maintain farmers' income level at all times and finance all technological changes was an important element of success, but primary reasons for the programme's success were not financial. Trust-building through the creation of an intermediary institution (locally based and led by a "champion" sympathetic to the farmers' cause); the development of a long-term participatory process to identify alternative practices and a mutually acceptable set of incentives; the ability to link incentives to land tenure and debt cycle issues and to substitute the old technical and social support networks with new ones, were all fundamental conditions of success

Payment for Watershed Services: Opportunities and Realities

Many nations have found that regulatory approaches to land and water management have a limited impact. An alternative is to create incentives for sound management - under mechanisms known as payments for ecosystem services. It is a simple idea: people who look after ecosystems that benefit others should be recognised and rewarded. In the case of watersheds, downstream beneficiaries of wise upstream land and water use should compensate the stewards. To be effective, these 'payments for watershed services' must cover the costs of watershed management. In developing countries, they might also aid local development and reduce poverty. But new research shows that the problems in watersheds are complex and not easily solved. Payments for watershed services do not guarantee poverty reduction and cannot replace the best aspects of regulation

Performance Payments for Environmental Services : Lessons from Economic Theory on the Strength of Incentives in the Presence of Performance Risk and Performance Measurement Distortion

Payments for environmental services (PES) schemes have become an increasingly accepted and popular mode for governmental and non-governmental agencies to use in addressing local and regional declines in ecosystem services. A defining characteristic of performance payments, a sub-category of PES schemes, is the linking of individual payments to environmental outputs themselves rather than to the inputs that affect the production of environmental services. Such a focus raises several practical issues during implementation. We review and translate key aspects of the economic theory of incentives into the context of performance payments schemes with special attention paid to two practical issues. The first is that of structuring individual incentives to account for risks outside the individual’s control such as weather that can affect the level of environmental services generated. The second deals with the possibility of distortion in the measurements of environmental services used to determine individual payments under PES schemes. Each challenge is accompanied by a discussion of advice based upon economic theory and a discussion of examples from different countries where such implementation issues arise.Optimal Incentive Contracts, Payments for Environmental Services, Performance Incentives, Distortion