What are Ecosystem and environmental services? Healthy ecosystems provide a variety of vital goods and services that contribute directly or indirectly to human well-being. However most of them are currently in decline and making their value clear to those who benefit from them can encourage investment in their protection and enhancement.

What are Payments for environmental services (PES) ? PES are an economic instrument designed to provide incentives to land users on behalf of service beneficiaries, for agricultural land, coastal, or marine management practices, that are expected to result in continued or improved service provision, benefiting a specific user or society more broadly. Current PES schemes focus on water, carbon, or biodiversity and respond mainly to public, but increasingly also to private, interest in addressing an environmental problem through positive incentives to land managers.

How can the poor benefit by PES? Poverty is a major cause of environmental degradation: thus paying poor producers to adopt more environmentally friendly systems of production would result in both environmental benefits and poverty reduction. Unfortunately, many aspects that might prevent or limit participation in a PES program are likely to be correlated with poverty: insecure land tenure, lack of title, small farm holdings, and lack of access to credit. There is the need to understand how PES programs can be designed to maximize poverty reduction and minimize possible negative effects, whilst not undermining the achievement of their environmental goals.

 

 

 

 

What are Ecosystem and Environmental Services?

 

Ecosystem services- what they are and their current status

The Millennium Ecosystem Assessment (1) found that ecosystems have experienced greater change over just the past fifty years than at any other time in human history and currently 70% of all regulating services, such as climate regulation and water and air quality regulation are in decline.

 

Ecosystem services (ES) are defined as all benefits that humans receive from ecosystems (2). These benefits can be direct (e.g. food production) or indirect, through the functioning of ecosystem processes that produce the direct services. The Millennium Ecosystem Assessment , an international assessment of the consequences of ecosystem change for human well-being, classified these ecosystem services in four categories (supporting, provisioning, regulating, and cultural) ( see figure 1.1 ).

Figure 1.1 - Ecosystem services categories (3)

 

 

For example, a forest at the source of a river will provide more than fruits or timber. It will also play in a role in water quality protection (filtering the water as it flows through roots and soil) , flood control (reducing runoff and erosion) , carbon storage and sequestration (in the form of additional biomass) , biodiversity conservation (providing habitat for plants or animals living in the woods) and landscape aesthetics (4).

One of the main findings of the Millennium Ecosystem Assessment was that ecosystems have experienced greater change over just the past fifty years than at any other time in human history (see table 1.1). Over 60% of the services (15 out of 24) were in decline while only four were improving (three of these four improving services were all are related to an increase in food production) . This decline affects 70% of all regulating services, such as climate regulation and water and air quality regulation, on which food production relies heavily and human life depends upon.

 

Table 1.1 - Status of ecosystem goods and services (increasing + , decreasing - , or stable +/ - ) (5)
Provisioning Services	Sub-category	Status	Notes
Food	crops	+	substantial production increase
	livestock	+	substantial production increase
	capture fisheries	-	declining production due to over harvest
	aquaculture	+	substantial production increase
	wild foods	-	declining production
Fibre	timber	+/ -	forest loss in some regions, growth in others
	cotton, hemp, silk	+/ -	declining production of some fibres, growth in others
	wood fuel	-	declining production
Genetic resources		-	lost through extinction and crop genetic resource loss
Bio chemicals, natural medicines, pharmaceuticals		-	Lost through extinction, over harvest
Fresh water		-	unsustainable use for drinking, industry, and irrigation;
			amount of hydro energy unchanged, but dams increase
			ability to use that energy
Regulating Services	Sub-category	Status	Notes
Air quality regulation		-	decline in ability of atmosphere to cleanse itself
Climate regulation	global	+	net source of carbon sequestration since mid-century
	regional and local	-	preponderance of negative impacts
Water regulation		+/-	varies depending on ecosystem change and location
Erosion regulation		-	increased soil degradation
Water purification and waste treatment		-	declining water quality
Disease regulation		+/ -	varies depending on ecosystem change
Pest regulation		-	natural control degraded through pesticide use
Pollination		- ª	apparent global decline in abundance of pollinators
Natural hazard regulation		-	loss of natural buffers (wetlands, mangroves)
Cultural Services	Sub-category	Status	Notes
Spiritual and religious values		-	rapid decline in sacred groves and species
Aesthetic values		-	decline in quantity and quality of natural lands
Recreation and ecotourism		+/ -	more areas accessible but many degraded

 

Modern agriculture has been very successful at providing the ES for which markets exist – crops, livestock, fish, fibre and wood – in ever greater quantities. But producing these ‘provisioning' services has often come at a cost to the other regulating and supporting ES that are not normally covered by markets - see next section for more on Ecosystem services, externalities and public goods.

 

 

Ecosystem services, environmental services, externalities and public goods

Provisioning services, such as food and timber, are generally produced intentionally for sale or direct consumption but other ecosystem services are normally provided as unintended consequences of land management activities.

 

D irect benefits of provisioning services, such as food and timber, are generally produced intentionally for sale or direct consumption and buyers and consumers can influence production through the market. However, other ecosystem services are provided only as “externalities” (6), in that they are unintended consequences of primary land management activities.

The term “ecosystem service” is sometimes used interchangeably with the term “environmental services”. In this website, the term environmental services is used to refer to the subset of ecosystem services characterized by externalities.

Also, many services have the characteristic of “public goods” in that people usually cannot be excluded from benefiting from them, and the use of the service by one person does not diminishes the availability of that service to other users (7). Nevertheless, people can degrade the capacity of ecosystems to supply these services, either through changing the composition and the structure of a system and how it works, or through extracting material from the ecosystem at a rate that is above the replenishment capacity of the ecosystem.

From an economic perspective, the most important source of ecosystem degradation is the perception that many of nature's services are “free”, in the sense that no one owns them and therefore no one has an incentive to preserve them. As a result, there are no direct market mechanisms to signal the scarcity or degradation of a service until it fails (at which point their non-market value becomes obvious because of the restoration or replacement costs) .

This is partly why 70% of our planet's regulating services are in decline. In order to reverse this trend, the production of negative and positive externalities resulting from our current management of ecosystems must be made clear. For that, it is important to have a notion of how important these services are - see more in the next section of the value of ES .

 

The value of ecosystem services

In 1997, a group of economists and ecologists estimated the value of nature's services at approximately $16 to $54 trillion per year while the globe's gross product only reached $18 trillion that year...

For provisioning ecosystem services, such as the production of food or provision of water, market prices indicate their direct use value, because their products are bought and sold. But for many ecosystem services, market prices do not exist, therefore quantifying their importance or estimating their value is difficult.

The total economic value of an ecosystem service can be estimated from the different types of uses we draw from them - direct use, indirect use and the value of keeping the option open to use them later (see figure 1.2).

Figure 1.2 - The total economic value of ecosystems (8)

Direct use values are those drawn from provisioning services as marketed goods or services, like whose market price indicates the value we put on their direct use. This applies to commodities like food, timber and water, but also to entrance fees to a protected area for education purposes, or salmon fishing licences for recreation in the countryside.

However, this consumable part of the ecosystems is only the tip of the iceberg. Underlying their production are regulating services that control water or air quality, and our use of them feels indirect. Yet they have a value that can be estimated from our behaviour as consumers. For example, although we might not pay for the maintenance of a healthy lake per se, we may be willing to pay a higher price for a house near such a lake or to drive longer to visit the especially pleasant landscape around this lake (9).

Other more indirect values can still be traced in the benefit of preserving the possibility of future direct or indirect use. For example, investment in biodiversity conservation is often based in the option values of preserving ecosystem, species and genes for potential future use.

Furthermore, people may value ecosystem services without ever actually deriving any use value from them. For example, some of us may value the preservation of some environmental amenity for its existence value alone, or for knowing that an ecosystem will be conserved for future generations (bequest value).

As an example, the table 1.3 shows estimates of economic value of the various ecosystem services provided by watersheds.

Table 1.3 - Estimates of economic values of watershed ecosystems services (10)

It is in this context that Payments for Environmental services (PES) have developed as incentives to help incorporate the indirect and existence use values in the products and services of ecosystems that are already bought and sold. On one hand, these schemes encourage land managers to consider the impacts of their land use decisions on the regulating, cultural and supporting services of the ecosystems they manage. On the other, they highlight these underlying values of the goods and services that consumers use, and secure a contribution for their protection and enhancement.

A simple example on how a payment scheme could work would be a city's water supply company collecting an extra charge on their water use fee, to be invested in the protection of the water regulation and purification services provided by the watershed that supplies their river with water. Schemes exactly like this hypothetical example are already happening all around the world. For more details on how these schemes work see the next section on “What are PES”.

 

What are Payments for Environmental services (PES)?

 

Public policy approaches for environmental management

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While regulations can play a critical role in penalizing negative externalities, flexible incentive mechanisms such as Payments for Environmental services (PES) can encourage the conservation and enhanced provision regulating and supporting ecosystem services, the base for all the others.

Different policy options for environmental management exist when there is discrepancy between the actual level of environmental quality and the preferred one: “decentralised” policies (liability laws, changes in property rights, voluntary action), “command-and-control” policies (direct regulation, e.g. environmental standards) and “incentive-based” policies (taxes, subsidies and transferable discharge permits).

One approach to environmental management, therefore, is to rely on liability laws, making polluters liable for the damages they cause: knowing that they will be held liable for environmental damages, potentially polluters will make careful decisions. As an alternative, when private property rights are well defined, enforceable, and transferable, the conditions under which decentralised bargaining can produce efficient levels of environmental quality are established. In some other cases, individuals may engage in pollution-control behaviour in the absence of any formal or legal obligation to do so (voluntary action).

With direct regulation (commonly referred to as “command-and-control” policies) the behaviour considered as socially desirable is mandated in law and then monitored and enforced appropriately. In the case of environmental policy, such an approach consists of relying on standards of various types to bring about improvements in environmental quality.

As environmental degradation advances and human demand for resources intensifies, direct regulation may not be effective enough due to enforcement problems (high costs or monitoring problems) and efforts to internalize the value of environmental assets in economic activity are likely to become a more important component of sustainable management efforts. Therefore, economic incentives (environmental taxes and subsidies, cap and trading regimes, environmental labelling) are among the most widespread incentive-based strategies for environmental management. These mechanisms seek to internalize environmental costs or benefits into production and/or consumption decisions and induce more efficient use of natural resources.

 

PES: one tool in the incentive-mechanism box.

Payments for Environmental services (PES) are one of the tools in the incentive-mechanism box, seeking to “get the incentives right” by supporting and motivating the production of positive externalities in the long run.

Although a variety of terms to describe PES can be found in the literature, for our purposes Payments for Environmental services refer to:

i) voluntary transactions where

ii) a service provider is paid by or on behalf of service beneficiaries,

iii) for agricultural land, forestry, coastal or marine management practices,

iv) that are expected to result in continued or improved service provision beyond what would have been provided without the payment.

Most PES schemes have a common basic structural design, in which beneficiaries pay (through financing and payment mechanisms) land users for providing environmental services (figure 1.2).

 

Figure 1.2 – Operation of PES schemes: a simplified representation

 

PES schemes often appear in combination with other incentive mechanisms. For example, they always require a clarification of the property rights of the ecosystem service being produced in order to identify the provider who should receive compensation for their provision. Similarly, PES can also be a vehicle to fulfil commitments under a cap and trade regime such as those regulating the emission of greenhouse gases.

Direct payment schemes are the most common type of PES. In these cases, the government pays landowners, on behalf of civil society, to adopt land management options and address a particular environmental problem.

For example, in the United States , the Conservation Reserve Program pays farmers for their protection of endangered wildlife habitat, open space and/or wetlands. Similarly, in China the government is investing US$ 4.3 million a year, to restore erosion-prone sloping land within the upper watersheds of the Yangtze Yellow rivers, to reduce the risk of flooding.

Normally these schemes are financed entirely by the government, on behalf of society, but they may also include contributions from the private sector.

For example, i n the case of the Costa Rican National PES programme, the private sector firms have also contributed with funds to the programme's budget, made up primarily of a percentage of the annual fuel tax revenues. These companies are mainly hydropower companies, interested in managing the risk of increased sediment load in the rivers.

In the context of cap-and-trade programmes , PES can be used to meet government or a regulatory body limits or "caps" on the amount of emissions or pollution permitted in a given area. In order to reduce emissions or pollution targets firms or individuals can buy offsets in form of carbon credits for example from farmers or forest companies planting trees, which sequester carbon, or protecting a park.

This is the case for the Kyoto-regulated greenhouse gas emissions and the biodiversity mandated offsets in the USA . Land managers interested in supplying credits for these programmes may do so by implementing land management options that can increase carbon sequestration or conserve biodiversity, respectively.

There are also product-based PES schemes , where consumers pays a green premium in addition to the market price of a product or service, in order to ensure an environmentally friendly production process, which is verified through independent certification. When consumers choose to pay this price-premium they are choosing, in a sense, to pay for the protection of environmental services. Ecolabelling certification programs have been developed for a variety of products including shade-grown coffee, organic farming, certified timber-for more on this see menu 3 on buying ES.

 

Examples of application of PES schemes

Current PES schemes focus on water, carbon, or biodiversity and respond mainly to public, but increasingly also to private, interest in addressing an environmental problem through positive incentives to land managers.

So far PES schemes have been developing mainly around for three groups of environmental services:

w ater quality and quantity, often including soil conservation measures in order to control erosion and sediment loads in the rivers and reservoir (which decreases storage capacity and increases treatment costs) and reduce the risk of land slides and flooding;

carbon sequestration (and in some cases protection of carbon storage) respond to demand from the voluntary and regulatory greenhouse gas emissions markets (Kyoto, EU ETS);

biodiversity conservation, by sponsoring the conservation of areas of important biodiversity (in buffer zones of protected areas, biological corridors or even in remnant patches of native vegetation in productive farms) and protecting agricultural biodiversity.

Most PES schemes are area-based, that is, direct payments (in cash or in kind) are provided upon adoption and maintenance of a particular type of land use or management (e.g. adoption of soil and water conservation measures or tree plantations or agro forestry to increase carbon sequestration). In these cases, funds are normally collected from users, by charging an ecosystem service management fee added to water bills or park entrances.

These schemes can be part of large national programmes of public payments, private agreements or can respond to demand from credits from cap and trade schemes, for carbon or biodiversity offsets, for example.

 

Providers, beneficiaries, and buyers

Agriculture lands include many important ecosystems (forests, riparian areas, sloping lands...) and can offer many environmental services. Although most PES programs are funded by the public sector, the private sector is increasingly becoming involved in purchasing environmental services.

Farmers, forest users and protected area managers are the most common providers of environmental services.

Direct users range from local water consumers or hydropower generation companies to international individuals or businesses interested in buying carbon offsets to compensate their emissions or ecotourism enthusiasts supporting the preservation of the integrity of the ecosystems they visit. Current PES schemes are often supported mainly by indirect users, such as governments or international cooperation agencies acting on behalf of civil society- for more on providers and buyers of ES, see menus 2 and 3 respectively.

In this way, the scale of the transaction may vary from direct payments between upstream providers and one main downstream beneficiary to consumers paying for a cup of “shade grown” coffee beans half a world from where they were grown.

Apart from being an effective incentive mechanism for environmental management, PES has also been credited with poverty alleviation potential- see the next section for more on this.

How can the poor benefit by PES?

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Potential for the poor to benefit as suppliers of environmental services

Poor farmers, living in ecologically fragile, economically marginal and environmentally degraded areas are potentially upstream service providers (e.g. small farmers located along the steep slopes of the upper watersheds). If poverty is a major cause of environmental degradation, then paying producers to adopt more environmentally friendly systems of production could result both in poverty reduction and increased environmental benefits.

Small-scale agricultural producers tend to be among the poorer groups of the society, living and working in ecologically fragile, economically marginal and environmentally degraded areas and potentially being upstream service providers (e.g. small farmers located along the steep slopes of the upper watersheds). Farmers could diversify the output from their agro ecosystems to include environmental services along with agricultural products. PES could bring additional income to these farmers, help reduce income variability and generate other social and cultural benefits. The ability of poor farmers to benefit from PES programs depends on their location and the characteristics of their livelihood systems.

Location is a key factor driving the potential costs and returns to farmers for the provision of environmental services. Most rural poor live in ecologically fragile, economically marginal and environmentally degraded areas. Specifically, an indication of how many people living in an area that can supply environmental services are poor could be given using poverty rate measures. Geographical maps have been built as a result of spatial intersection of poverty, low agricultural suitability and provision of environmental services (for more on this see: The State of Food and Agriculture 2007 ). These maps could help identifying potentially good sites for programs that combine environmental protection and poverty reduction objectives, showing locations whit a combination of high poverty rates, low agricultural productivity and high potential for environmental service supply.

Even if the poor are located in areas that could supply environmental services, their participation to PES programs depends on their overall livelihood strategy. Most of the poor live in fact in rural areas and depend on agriculture for survival. In deciding whether participating or not in a PES program, it is crucial to determine if only minor changes to current land-management systems are required or if a complete change of land use is needed in order to produce environmental services. PES programs allowing mix-use activities that provide diversified sources of income (e.g. agro forestry) have better chances to be implemented than those imposing land use-restriction rules (e.g. programs discouraging unsustainable grazing or cropping).

The poor are most likely to benefit from participation in PES programs where land distribution is relatively equitable, and where they are found on lands of poor quality for agricultural production but high quality for environmental service supply. They are most likely to benefit from programs that involve a change of farming system, rather than land use, since the small size of the land holdings and food security concerns will limit their ability and inclination to take land totally out of agricultural production.

 

Obstacles for the poor to participate in PES programs

Unfortunately, many aspects that might prevent or limit participation in a PES programme are likely to be correlated with poverty: risk, insecure land tenure, small farm size, lack of access to credit and technical assistance, high transaction costs.

Many of the obstacles preventing poor from rising out of poverty are the same ones that inhibit their participation in PES programs and the realization of investments for sustainable land management. Access to the productive assets needed to generate environmental services is essential for participating in PES programs. Lack of access to productive resources (land, water, financial and human capital), together with lack of information and property rights could inhibit the poor from adopting more productive and sustainable land management practices, prevent them from rising out of poverty and represent major barriers to their participation in PES programs.

Ownership of resources is a prerequisite for entering into contracts for the provision of environmental services. Tenure issues are critical as it may not be possible to undertake a PES program if tenure is insecure, especially if PES programs require long-term investments. Also, the rights over the resources often take the form of common property rights, with implications for the implementation of PES programs.

High investment costs – with returns occurring only later in the future – are frequently needed in order to satisfy the requirements of the program, but poor land users may be unable to finance the necessary investment and they lack financial means to cope with an eventual, albeit temporary, reduction in production consequent to the adoption of changes in agricultural production systems required by the program. Rural credit is effectively unavailable in many areas or poor farmers cannot have access to it. Poor households may be unable to finance the necessary changes from their own assets, which wealthier PES program participants could do.

 

When PES programs promote a change in resource management, farmers may face increased risk while they are learning about these new practices. Poor farmers are generally risk-averse and may be less inclined to participate in a PES program than the well-off producers. Also, the implementation of PES schemes implies technical difficulties. Poor are less likely to have access to extension than better-off households and they may lack education or access to information and expertise needed to engage in markets for environmental services. Lack of information regarding the implementation and benefits of more ES-friendly production practices or technologies is one of the most common obstacles poor farmers face in adopting these measures.

Transaction costs may represent a big barrier to the participation of poor households in PES programs. Working with many small, dispersed farmers imposes high transaction costs, i.e. costs to the PES program of contracting with each participant and the costs imposed on participants. Thus, it is often more attractive for PES programs to focus on large and better-off households. Most transaction costs are fixed ones, such as the costs to develop a project proposal, set a baseline and identify a buyer. Increasing project size by fostering collective action among suppliers, reducing contracting costs by utilizing existing management structures and reducing information costs through guidelines and free data provision could help reducing transaction costs.

 

Indirect impacts of PES programs on the poor

PES programs may have indirect impacts on the poor via land price, wage and food price effects. Therefore, three different groups can be affected by PES programs: consumers of food products, wage labourers and buyers of environmental services.

PES could indirectly affect non participants in areas where PES programs are implemented and in the whole country through effects on the markets of land, labor, food and environmental services.

By increasing the value of currently marginal land, PES can increase the incentive for powerful groups to take over control on land thus exacerbating problems when land tenure is insecure.

PES programs may have impacts on rural wages thus affecting the poor who depend on this source of income for their livelihoods. Changes in farming systems or land use may cause changes in labor use (e.g. retiring lands from agricultural production or converting land from agricultural production to forestry will release labor, while moving to silvo-pastoral production systems from conventional systems may absorb labor). PES programs that release labor can have a downward effect on wages by increasing the availability of unemployed labor in the market. Alternatively PES programs could increase wages if they increase the demand for labor, particularly in areas where labour is already scarce.

If food markets are not well functioning and food supplies largely locally procured, even a small reduction in local food production – as a result of the implementation of a PES program – could have significant impacts on poor food consumers.

Last, PES could provide benefits to the poor as consumers of ecosystem services as well (e.g. water quality and quantity). Rural women are often the households members in charge of collecting water, fuel wood and other natural resources and could therefore be major beneficiaries.

 

Synergies between PES programs and poverty reduction

Reducing poverty and enhancing the provision of environmental services are two distinct policy objectives that would need to be addressed separately. However there is the interest towards multi-objective PES programs.

In many cases there are strong potentials for poor farmers to supply environmental services. For location-specific services (e.g. water and biodiversity) the poor may be located in areas with high potential for environmental service provision, making their participation necessary for the success of PES programs.

Nevertheless, it should be noted that poverty reduction and environmental protection are two distinct policy objectives and using one policy instrument to reach both objectives could reduce its effectiveness in achieving either. This requires a good understanding in how PES programs can be designed to maximize poverty reduction and minimize possible negative effects, whilst not undermining the achievement of their environmental goals - for more on this see menu 4 providing guidance on Setting up a PES scheme.

 

Endnotes

(1) Millennium Ecosystem Assessment (MA), (2005). Ecosystems and human well-being: current state and trends. Washington , D.C. , Island Press.

(2) Daily, G., (1997). Introduction: What are ecosystem services? In: Nature's Services: Societal Dependence on Natural Ecosystems, G. C. Daily (ed.), Island Press, Washington DC.

(3)Source: FAO. (2007). The State of Food and Agriculture 2007. Part I: Paying farmers for environmental services. Rome .

(4) FAO. (2007). The State of Food and Agriculture 2007. Part I: Paying farmers for environmental services. Rome .

(5)Source: Millennium Ecosystem Assessment (MA), (2005). Ecosystems and human well-being: current state and trends. Washington , D.C. , Island Press.

(6)An externality is a cost or benefit resulting from an economic transaction that is borne or received by parties not directly involved in the transaction. An externality occurs when the consumption or production of a good impacts on people other than the producers or consumers that are participating in the market for that good. Externalities can be either negative (e.g. water pollution caused by industrial production) or positive (e.g. the role of agriculture in maintaining the countryside and rural communities) .

(7) Consumption of “Public Goods” is non-rival (consumption of the good by one does not reduce the amount left for others) and non-excludable (individuals cannot be excluded from consuming the good). Many ecosystem services, ranging from flood control to climate stability, provide non-rival and non-excludable benefits.

(8)Smith, M., de Groot, D. and Bergkamp, G., (2006). Pay- establishing payments for watershed services. Gland , Switzerland , IUCN- The World Conservation Union .

(9)These examples refer to the use of methods for valuation of indirect use values, such as hedonic pricing or travel cost. For more on this see section Capturing enough demand , in Menu 3 Setting up a PES

(10)Smith, M., de Groot, D. and Bergkamp, G., (2006). Pay- establishing payments for watershed services. Gland , Switzerland , IUCN- The World Conservation Union .

(11)Field, B.C., M. K. Field (2002). Environmental Economics: An Introduction, McGraw-Hill/Irwin, New York , NY , 10020 .

(12)FAO. (2007). The State of Food and Agriculture 2007. Part I: Paying farmers for environmental services. Rome.