Legal Mechanisms for Forest Conservation

Environmental Service Payments: A Costa Rican Case Study

Faculty of Environmental Studies

York University

Felipe Montoya-GreenheckENVS 4810AOriana Nanoa

210456168Friday June 27, 2014

In the last 20 years, Costa Rica has been on the front lines of environmentally centred

ideas, policies, thoughts and solutions for forest conservation. It is responsible for the pioneering

of formal, country wide programs of payments that have made substantial positive changes in

forest retention and recruitment. Over the last few decades, the government has developed many

new legal tools and mechanisms aimed to conserve the vast amount of green space that the

country holds its name to. This is a good example of the government exercising our need to

moral obligation by focusing on the environment as a top value in Costa Rica. This paper will

discuss the historical background of these programs meaning their evolvement over time, the

implementation and usage of the current programs and whether or not the outcome of the

programs have provided long-term benefits for the community or assisted in the country’s model

of sustainable development.

Background of deforestation in Costa Rica

Costa Rica is a small country with a total land and water area of 51,100 square km (Index

Mundi, 2013). As one of the top twenty bio-diverse regions in the world, it has certainly

managed to create a well-renowned system for forest and resource conservation. Costa Rica has

successfully managed to foster sustainable forest management and conservation after years of

poor resource allocation and use. Costa Rica’s rapid growth in population from 1950 to 1970

has impacted a significant conversion of forests into agricultural and grazing lands. Pastureland

increased from 0.8 million to 2.2 million hectares from 1950 to 1984 due to the demand for beef

in the 1970s, which substantially grew cattle farms and pasture lands (Rodricks, 2010, p. 1).

Between 1973 and 1989, deforestation reached one of the highest rates in the world, with an

average of 32,000 hectares of forest cut down each year (Brown and Bird, 2012, p. 3). The

highly centralized and bureaucratic management of Costa Rica’s forests speaks to its original

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agriculturally based economy in the central valley of the country (Miranda et al., 2006, p. 563).

The traditional based forestry management and active government policies, concentrated within

international meat and agro-industry markets, allowed a colonization of the forests and

ultimately turned it into pasture and croplands (Miranda et al., 2006, p. 563). Along with

political and economic instability and an industrial boom at the time of severe deforestation in

Central America, the collapse in the global meat, sugar and coffee markets, lead to abandonment

of plenty agricultural land. During this moment in its history, early voices of an emerging

conservation movement began to call for change and as a result the creation of national parks

was the first step (Porras et al., 2013, p. 8).

By 1983, only 26 percent of the original forested territory remained but the number

increased to only 36.3 percent by 2005 (McGinley and Cubbage, 2012, p. 358). Deforestation in

Costa Rica reached its peak in 1985 but dropped to almost zero in 2005; figure 1 displays the

drastic drop [see appendix] (Brown and Bird, 2012, p. 3). Ongoing deforestation in Costa Rica

motivated a flurry of forest policy directives that have evolved over the decades.

The evolution of forestry policy directives

Effective legislation, an integrated system of Conservation Areas and policy directives,

have assisted Costa Rica in being able to achieve these numbers and transform a highly wounded

environment to one that is thriving today. A breakdown of the previous convictions towards

forestry policy is essential to this paper in order to demonstrate diverse approaches that Costa

Rica has sought out to protect its forests. Established in 1969, Forest Law No. 4475 provided

financial rewards for those who invested in re-forestation measures by making the costs tax-

deductible (Rodricks, 2010, p. 2). Large forest companies and those with tax obligations initially

profited due to a focus primarily on tax rebates. This law further protected the forestry industry

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allowing reductions in forest reserves, tax exemptions being put in place, restrictions on

importing forest products and the ban of exporting unprocessed timber (Rodricks, 2010, p. 2).

In 1977, Forest Law No. 6184 allowed for no less than two percent of all agricultural

loans of total commercial and state bank credits to be allocated for reforestation products. The

interest rates on these loans were capped at eight percent for reforestation projects and trees were

allowed to be used as deposit and collateral. In essence, this law established re-forestation as a

legal imperative for Costa Rica (Rodricks, 2010, p. 2).

Nearly a decade later, Forest Law No. 7032 (1986) and No. 7174 (1990) were introduced.

These laws allowed significant headway and ameliorative intervention in the use of forest

resources. The 1986 law officially introduced forest reserves and restricted land use change

because it prohibited logging in areas 20 meters alongside a water channel (Miranda et al., 2006,

p. 563). Further fiscal incentives were established through certificates rewarding landowners for

their reforestation efforts. One instrument, Forest Bond Certificates (or Certificado de Abono

Forestal – CAF), broadened the benefits of tax-deductible reforestation costs beyond only large

timber companies. Introduced in 1992, Forest Bond Certificates for Forest Management (or

Certificado de Abono Forestal para e Manejo del Bosque – CAFMA), made direct subsidies

available for the first time. Another ground breaking legislative change was also introduced

called ‘Forest Protection Certificates’ (Certificado para le Protecion del Bosque – CPB); it

sought to support forest conservation over timber production. Any land enrolled could not be

exploited but ecotourism was an exception (Rodricks, 2010, p. 2). However, these certificates

had nominative value and could be sold or used to pay taxes and government fees.

The most recent policy, Forest Law No. 7575, was developed in 1996 and legally

introduced a payment for ecosystem services program (or Programa de Pago por Servicios

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Ambientales – PSA). This law is now a primary component to Cost Rican forest policy as it

provides the legal basis for landholders to be compensated for providing ecosystem services.

The following sections will highlight a specific case where payments for ecosystem services

proved to be a success, along with the details of this law as it has proven to be a monumental

leap forward in the preservation of forest cover throughout Costa Rica.

Payments for environmental services in Costa Rica

Since the 1992 Rio Conference, Costa Rica has been a primary participant in searching

for initiatives to shift the negative effects of climate change. The amendment of the 1996

Forestry Law and its instruments allowed landowners to capitalize; landowners could make twice

the money by cutting and selling primary forest and by re-foresting the open areas (Miranda et

al., 2006, p. 563). An Environmental Service Payment (ESP) or Payments for Environmental

Services (PES) is a financial instrument that rewards forest owners for the environmental

services that the forests are perceived to provide. This means direct payments to the owners of

forest parcels for services their land provides, including (Fletcher and Breitling, 2012, p. 405):

(i) The mitigation of greenhouse gases (fixation, reduction, sequestration, and storage);

(ii) The protection of water sources for urban, rural and hydroelectric purposes;(iii) The protection of biodiversity; and(iv) The protection of ecosystems, life forms and scenic beauty for tourism and

scientific purposes (Barton et al., 2008, p. 902).

The implementation of ESPs requires several functions to be fulfilled and a solid

communication structure. The functions are funding, making land available through farmers’

participation, awareness and knowledge generation about land conversion and compliance

control. The Forestry Law of 1996 fashioned Fondo Nacional de Financiamiento Forestal

(FONAFIFO) or the National Forestry Financing Fund; a spearhead organization of the

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Ministerio de Ambiente, Energia y Mares (MINAE) or the Ministry of the Environment Energy

and Technology. This government agency is responsible for the coordination of all issues

regarding conservation and natural resources in Costa Rica (MINAE Who, 2014).

Since ESPs introduction in 1997, requests for payments were allocated on a first come

first serve basis. However the interest far outweighed the capacity of the program to provide

funding so different strategies had to be put in place by the ESP management to prioritise

contract allocation (Porras et al., p. 20, 2013).

Who manages ESP and how is it funded?

The administration of ESPs, under the Forestry Law, was assigned to the respective

government agency FONAFIFO. Since 1990, this agency existed and provided subsidies for re-

forestation efforts and managed aspects of the pre-dating forest policy (Fletcher and Breitling,

2012, p. 405). The main objective of FONAFIFO is to acquire funds for the ESPs and other

necessary activities in order to develop the natural resources sector (Miranda et al., 2006, p.

565). The main source of funding for FONAFIFO comes from the fossil fuel tax raised by the

Costa Rican state at US$11.3 million per year (Porras et al., 2013, p. 13) which goes directly to

FONAFIFO. Another subsidiary body of MINAE is the Costa Rican Office for Joint

Implementation (OCIC). The OCIC aids FONAFIFO with funds from sales of carbon bonds on

the international market (Miranda et al., 2006, p. 565). However, these programs failed to

develop sustainable sources of financing to support ESPs as well as capacity building within

FONAFIFO itself. This forced ESPs to look into international financial institutions such as the

World Bank and the Global Environmental Facility (GEF) for loans and grants; these institutions

now account for nearly 45% of the total funding for ESPs, making up almost half of the ESP

budget (Blackman and Woodward, 2010p. 1629). These sources of funding are intended to

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provide temporary support to the current payment system while encouraging the future

development of self-regulating markets, but Sierra and Russman argue that in present day, they

reflect the program’s current ‘state dominated’ structure in that they are collected and

redistributed by the “very government organs the ESP market was intended to circumvent”

(Sierra and Russman, 2006, p. 133).

FONAFIFO shared management of the ESP program with the National System of

Conservation Areas (SINAC) in the span of a four-year period from 1998-2002. The criteria for

receiving payments varied and ultimately there was no national-level strategy in place and this

wide range of criteria was not an effective way of targeting priority areas for conservation

(Porras et al., 2013, p. 21). Priority setting at the regional level came about six years after the

programs inception. From 2003 to 2010, when FONAFIFO assumed management of the ESP

program, applications to the program were selected still on a first come first serve basis but then

prioritized if the space met any of the listed relevant criteria (see table 2 in appendix). Each of

the FONAFIFO regional offices was assigned a quota per contract type per year.

Today a priority setting matrix has been put in place in favour of the first come first serve

evaluation and regional quotas:

“For example, an application from forest in an area defined as a ‘conservation gap’ receives 85 points. If it is a small property (less than 50 hectares) it will receive 25 additional points, making a total of 110 points. A similar sized property with forest located in a non-priority area will receive 55 initial points and an additional 25 points for its size, making a total of 80 points” (Porras et al., 2013, p. 21).

Allocation of contracts within the first year was geared more towards regions with high scores,

such as the Osa Peninsula. At a national level, this method will lead to longer term, periodic

shifting of contract supply from one region to the other.

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The amount of money distributed varies, depending on the different aspects of the

program and on which a given parcel of land is enrolled in. The ESP program focuses on five

uses of private land, forest protection, commercial re-forestation, agroforestry, sustainable forest

management and regeneration of degraded areas; depending what a given parcel of land is

classified in, the amount of money given differs (Fletcher and Breitling, 2012, p. 405). Table 1

(see appendix) demonstrates the payment amount in correlation with the activity that a parcel of

land is said to exhibit. Payment levels can be influenced by three factors: (i) administrative

decisions on the available budget; (ii) the estimated value of the ecosystem provided by the

forest; and (iii) the ‘opportunity costs’ to the landowner associated with participating (Porras et

al., 2013, p. 16). Opportunity costs are the difference in income between the most profitable

land use (before ESP) and forest conservation. The income received is by a landowner who

chooses to participate in ESP where they would see revenue derived from growing crops (Porras

et al., 2013, p. 6).

In 2007, compensation ranged from approximately US$210/hectare paid over five years

for preservation to $327/hectare paid in decreasing installments over several years for forestry.

This brought about average annual returns of between $22 and $42 per hectare per year prior to

maintenance costs (Fletcher and Breitling, 2012, p. 405).

Case Studies: Osa Peninsula, the San Juan-La Selva Biological Corridor and Cloudbridge

Nature Reserve

In a study conducted in the Journal of Environmental Management, the Osa Conservation

Area (ACOSA) was evaluated. The purpose of the study was to evaluate the cost-efficiency of

ESPs to private landowners in the Osa Conservation Area in terms of the trade-offs between

biodiversity representation and the opportunity costs of conservation to agricultural forestry

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land-use. ACOSA is located in the Brunca region along the Southern Pacific Coast of Costa

Rica and it was one of the eligible conservation areas for Ecomarkets’ funding of ESP. Rosero-

Bixby et al. (2002) found that national parks in the Osa Peninsula have been effective in

controlling deforestation with a 0.1 percent probability of forest loss from 1980 to 1995. At the

time that the study was conducted, it was the only conservation area in Costa Rica with a full

GIS-based ecosystem characterisation. During this period, the ACOSA administration was

responsible for coordinating the conservation efforts in all public protected land within its

territory and provides technical support to prioritise the allocations of ESPs.

Sierra and Russman’s study revealed that during this 15-year period, there was an

increase in the probability of deforestation and forest fragmentation, but a decrease in the

probability of reforestation on agricultural land (2006). Their study comprised of an efficiency

evaluation of ESPs for forestry conservation using forest cover data from 1977 to 1997 and land-

tenure surveys in 2003 of PES and non-PES farms. Results found that landholders who used

ESPs as upfront payments as capital, abandoned agricultural land to initiate other off-farm

activities, often urban. Data also revealed that after five years of ESP contracts, there was no

significant difference in forest cover between non-ESP and ESP beneficiary farms after five

years of ESP contracts.

Revenue from off-farm labour can have a significant effect on determining the

importance of ESP's. A study done by Sierra and Russman (2006) along with Rosero-Bixby et

al. (2002) looks at the cost-efficiency of ESP allocations in ACOSA from 1999 to 2003;

spanning three years before and two years after Ecomarkets ESP allocation criteria were put in

place. The periods before and after show that that the priority setting criteria changed as shown

in Figure 2 (see appendix) where ESP contracts were spread out around ACOS. But by 2003,

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well-defined areas became eligible including biological corridors and buffer areas around

Corcovado and Piedras Blancas national parks. The map displays the results of the ESP

contracts signed from 2002-2003, showing a concentration mainly in the biological corridor.

A second study was done in the San Juan-La Selva Biological Corridor located in

Northern Costa Rica bordering Nicaragua (see appendix fig 3). The purpose of this study was to

examine the ESP policy and to determine the programs influence on landowner decisions that

affected forest change, carbon services and connectivity in a 2,425 square kilometre area. It was

determined that the 1996 Forestry Law and ESP had a positive contribution to forest retention

and recruitment; rates of forest loss declined from -1.43 percent to -0.10 percent (Morse et al.,

2009, p. 1). All of this was determined using Landsat images to compare the subsequent land

cover changes before and after 1996 [see appendix fig 4]. A number from the study showed that

400 ESP contracts with landowners were initiated between 1996 and 2005. More than US$169

million was distributed on 5,300 square kilometres of land from 1995-2007 with most of it being

concentrated on biological corridors.

The Cloudbridge Nature Reserve adjoins the primary forest of Chirripó National Park and

is a UNESCO World Heritage Site. In an interview with John the tour guide of the reserve, I had

the opportunity to ask him some questions of interest: Where do you receive the funding to

renaturalize the area? The funding of Cloudbridge is on a donation basis as well as volunteer

basis. Volunteers pay up to $100 dollars to be able to use the space or even work as tour guides.

At the same time they offer independent study programs which John mentioned are much more

economical, whereas in other places you would spend thousands of dollars to study. Other

funding for the reserve comes from wealthy pockets in which apparently also pays John’s salary.

Sometimes the founder, Tom Gode, receives funding from outside sources. When asked if there

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is information sharing between Cloudbridge and the government, John said there was. What this

entails is compiled research, for example if there is a threatened species inhabiting the

Cloudbridge area, any documented and relevant research of that particular species must be

shared with the government. Finding out what I did about Cloudbridge, lead me to question

whether or not those who fund the reserve have a private share or interest in the land and revenue

coming in or are they actually concerned with the conservation of the reserve?

Critical Analysis and Conclusion

The evolution of forestry laws and the programs put in place for funding create

scepticism; are they ideal models for sustainability in Costa Rica or should we be critical of

them? After researching the facets behind the ESP program, is it likely that ESPs reflect a

neoliberal agenda? The basic principle of ESP is that forestry should be valued as an ecosystem

with the implication that the services forestry provides are rewarded as a commodity (Miranda et

al., 2008, p. 564); it follows the rise of the concept of nature as a “service provider” (Fletcher

and Breitling, 2011, p. 402). According to Fletcher and Breitling, in a study conducted at the

University for Peace in the Department of Environment, the emergence and implementation of

ESPs can be looked at as a growing neoliberalization. Essentially, the Costa Rican society

recognizes the environmental services in economic terms (Miranda et al., 2008, p. 564),

implying that natural resources play a large role in the Costa Rican market:

“ESP is commonly described as a “market-based mechanism,” intended to ascribe monetary value to in situ natural resources based on the assumption that deforestation is largely due to “market failure,” creating “perverse incentives” for forest clearing” (Fletcher and Breitling, 2012, p. 402).

Further studies on ESPs in the Costa Rican context by Fletcher and Breitling have

demonstrated that the program’s governance structure actually deviates from central neoliberal

principles in significant ways. Through outlining the market model envisioned to govern the

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program, they analyze the divergence between this and the program’s actual practise thus far

(Fletcher and Breitling, 2012, p. 403):

“ESP was designed to encourage Costa Rican forest policy to move away from deficit-plagued, subsidized operations that are only able to survive with the aid of state ‘alms’ and toward a form of profitable, competitive land use based on sound business principles” (Fletcher and Breitling, 2012, p. 405).

Although scholars have widely debated and criticized the ESP approach, some consider

the ESP either redundant or that it overlaps the ban on deforestation. There has been other

criticism of the program being a mere rebranding of previous subsidy programs or an incentive

that is necessary to keep forests standing, given the low capacity for enforcement and a pre-

condition for popular acceptability of the deforestation ban (Porras et al., 2013, p. 13). However,

the numbers prove otherwise, if the main purpose of the program is to increase natural land

cover, maintain forest retention and protect forests, than the ESP has successfully managed to do

so. A report on Payments for Ecosystem Services in Costa Rica published in 2013, gives us a

sense of scale: between 1997 and 2012, it has protected more than 860,000 hectares of forest,

reforested 60,000 hectares and supported sustainable forest management in almost 30,000

hectares totalling nearly one million hectares. Since 2003, 4.4 million were trees planted under

the agroforestry systems (Porras et al., 2013, p. 9-10).

The direct benefit of the ESP program is the financial benefits of receiving the payments

and the indirect impacts are job creation by ESP and significantly better provision of ecosystem

services – ensuring greater resilience to climate change and inputs to production (agricultural,

generation of hydroelectricity, and the ecotourism industry) (Porras et al., 2013, p. 63). The

ESPs direct target to indigenous communities plays an increasingly large role in the program and

the social benefits are important because this program is one of the few cash sources in these

communities. By directly targeting indigenous communities, participation has significantly

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increased from three percent of budget allocation in 1997 to 26 percent in 2012 (Porras et al.,

2013, p. 63).

The ESP program’s main intention in Costa Rica was not designed to be a poverty

reduction program. FONAFIFO has sought to maximize their poverty impact by adding

particularly disadvantaged districts to the priority areas for the ESP program. According to

Stefano Pagiola, several studies have shown that benefits from the ESP programs are most likely

to be allocated to wealthier farmers (Pagiola, 2008, p. 721). However, studies have been mixed,

where the ESP program is said to hold a valuable role in the livelihood of poor land holders in

the Osa Peninsula. Although ESP supporters justify the program as being additional source of

income for rural families, it does not function to aid rural poverty (Miranda et al., 2006, p. 568).

As opposed to areas like Colombia’s Cauca Valley, Costa Rica’s ESP program provides poorer

land users protection of conserved forests, preventing land grabs. Costa Rica has worked on

improving land security because as Pagiola argues, when land becomes more valuable, ESP

programs could result in political powers overtaking land from poor land users (Pagiola, 2008, p.

722).

In addition to landowner protection, the ESP program in regions like Sarapiqui, located in

the Northern lowlands of Costa Rica, has allowed and motivated landowners to organize and

improve their quality of life Miranda et al. (2006). This notion speaks to the model of neoliberal

conservation, in that it promotes a certain type of market principle where the landowners are

“entrepeneurs of themselves” as described by Foucault. However, he believes that the model of

neoliberal conservation can be manipulated by changing the cost-benefit ratio of alternative

courses of action via increasing or diminishing incentives (Fletcher and Breitling, 2012, p. 404-

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5). In other words, the conditionality of contracts has vulnerable landholders on a tight leash as

well as program managers who often work under the spearhead of the state and its regulations.

The amount of support for ESP has initiated a number of studies surrounding its

governance, structure and socioeconomic benefits. As a legal instrument, ESP works in Costa

Rica and judging from the case studies described in this paper, it is successful in increasing land

cover as well as forest retention. What is evident though, is less state control and more market

control but in the Costa Rican context, they are on the right track and ESP has worked well

largely in part because of government support in sustaining the environment. This leads me to

question what the future of this program looks like for Costa Rica’s model of sustainable

development and if it is providing long-term benefits for the environment or for the best interest

of the government. The national entities involved seem to have a stronghold on the direction of

this program, which will dictate the long-term sustainability for Costa Rica’s natural resources.

My interest in law and policy has evolved after my trip to Costa Rica due to the fact that

all of our experiences have been enshrined in a law or policy in one way or another and they

have a tendency to be overlooked. After doing research along with fieldwork experiences, the

preservation of forests in Costa Rica forces one to think about what the ecosystem does for us

and how we use the ecosystem for our own benefit. Perhaps this is why Costa Rica has

immersed itself into forestry policy – to set an exemplary paradigm of forest conservation in

stone for generations to come.

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Appendix

Table 1. Environmental service payment criteria

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Table 2. ESP payment levels and categories

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Figure 2. Payments for environmental services: priority areas and location of contracts 1999-2003 within the Osa Conservation Area (ACOSA)

Figure 3. Map of the San Juan-La Selva (SJLS) Biological Corridor. Depicted natural forest cover is for year 2000

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Figure 4. Mapped forest cover in the San Juan-La Selva Biological Corridor indicating land cover change at each time interval from 1986 to 2001. Using forest categories: natural forest

(dark green), forest regeneration of charral and secondary forest (bright green), and reforestation (orange).

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