USAID-CIFOR-ICRAF ProjectAssessing the Implications of Climate Change for USAID Forestry Programs (2009)

5.2. Introduction to Payments for Ecosystem Services (PES)

Sheila Wertz-Kanounnikoff, CIFOR

Overview

To introduce central concepts of PES and show how carbon finance fits into that framework

PES design features (contingent payments, performance-based, voluntariness)

PES concepts and experience relevant for performance-based carbon financing

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Overview

1. Logic of PES

2. Definition and scope

3. Bundling approaches

4. PES and carbon finance

5. Lessons from PES for carbon finance (REDD)

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1. The logic of PES

Benefits to ecosystem

managers

Costs to downstream

populationand others

Conversion to pasture Forest conservation

Carbon emissions

Reduced H2O services

Loss of biodiversity

Source: Engel, Pagiola & Wunder, 2008

Problem: costs > benefits, and forest conservation not profitable !

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1. The logic of PES

PaymentsBenefits to ecosystem

managers

Costs to downstream

populationand others

Conversion to pasture

Forest conservationwith ES payments

Reduced H2O services

Loss of biodiversity

Min. payment

Max. payment

Payment for service

Carbon emissions

Source: Engel, Pagiola & Wunder, 2008

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1. The logic of PES

Idea:

• Those who provide ES get paid for doing so (provider gets)

• Those who benefit from ES pay for provision (user pays)

PES are popular for perceived simplicity and cost-effectiveness

PES = new paradigm for contractual conservation

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Example from Costa Rica

Source: http://eltucan.co.cr

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2. Definition and scope of PES

At CIFOR, PES are defined as voluntary transactions in which a well-defined ES (or a land use likely to secure that service) is bought by a (minimum of one) buyer from a (minimum of one) provider if and only if the provider continuously secures the provision of

the service (conditionality).

Source: Wunder (CIFOR), 2005

Four areas of application: carbon, watershed, biodiversity and landscape beauty

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PES definitions – betweenhard core and periphery

PES Core 5 criteria

Theory & some private PES

“PES-like” Schemes:Some of 5 criteria

Public agro-environmental schemes; eco-labels

(e.g. ecotourism), etc.

Other Economic Incentives:

Any “payment” for any “environmental service” by

“anybody”ICDPs, park-ranger salaries, reforestation subsidies, etc.

PES Core

“PES-like” Schemes

PES Core

Other EconomicIncentives

“PES-like” Schemes

PES Core

Source: Wunder 2008 (CIFOR)9

Economic precondition of PES

PES only useful for strategic sub-spectrum of ES types and ES producing areas:

Environmental services (ES)

Environmental services (ES) ES = externality

(water quality, carbon

emissions)

ES = externality(water quality,

carbon emissions) ES = truly

threatenedES = truly

threatened WTP > WTA + TCWTP > WTA + TC

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Types of PES schemes(categories of ES buyers)

User-financed Government-financed

Features - Mostly small-scale- mostly single service/few buyers- focused (seldom side-objectives)

- large-scale (nation-wide)- many services- State acts as ES buyer- less focused (multiple side-objectives / politics)

Pros - Targeted to high-service, high-threat, & low cost areas - often close to 5 PES principles (efficient)

- Adequate for ES buy-in with stated WTP, but free-riding prevails- administrative economies of scale

Cons - hard to mobilize voluntary payments for multi-user externalities (biodiversity)- often high start-up costs

- Often non-targeted, uniform payments (low additionality)- max 4-5 PES principles (less efficient

Examples - Vittel, France- Pimampiro, Ecuador

- PSA, Costa Rica & Mexico- Vietnam 5MHP

Source: adapted from Wunder et al. 2008, SI Ecol Econ.

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Costs of PES Opportunity costs (+ land owner’s protection costs) Transaction costs

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3. Direct and “bundled” payments

Direct payments:

Payments are targeted specifically to ES of interest

Has potential to tap new funds (private sector)

Exist for water and carbon services, less for biodiversity

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Source: USAID 2007, PES Sourcebook

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Selling few ES may not cover OC of forest conservation scope for bundling?

(1) BUNDLING: A bundle of services is sold to the same single buyer (e.g. government-financed scheme)

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Direct and “bundled” payments

“Bundled” payments:

Three variants: bundling, layering, piggy-backing

Coordination and free-riding challenges

Despite attractiveness, few examples in practice

New opportunities with carbon markets, notably REDD (e.g. joint carbon-biodiversity payments)?

Source: Wunder and Wertz-Kanounnikoff (forth.), Journ. f Sust. Forestry

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4. PES and carbon finance

Carbon = ES

• Biological carbon sequestration (A/R CDM)

• Reduced C emissions from land use and forestry (REDD)

Carbon investors = buyers of carbon service PES & carbon finance seek output-based

performance contracts (voluntary, conditional deals) Carbon finance adds international dimension:

international PES (I-PES)

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Deal with projects (CDM)or sub-national entities (REDD?)

International buyers of carbon services(compliance/voluntary markets, aid)

International buyers of carbon services(compliance/voluntary markets, aid)

$$ ER

$$

ER

Deal with countries (REDD?)

Deal with countries and projects (REDD?)

$$

ER $$

ER

$$

ER

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“ideal REDD” = multi-level PES

Source: Angelsen and Wertz-Kanounnikoff, 2008ˆ

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5. Lessons from PES for REDD

Study by IIED-WRI-CIFOR, conducted in 2008, commissioned by the Government of Norway (Bond et al. 2009)

Review of 13 PES schemes with features relevant to REDD

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Selected PES and CBNRM programs

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Characteristics of Amazon cases

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Finding: Design features

Payments

• Theory: at minimum, payments need to meet opportunity costs (plus transaction costs)

• Our study finds: great diversity in payment levels (negotiated, administratively set) and forms (e.g. conditional land tenure)

Conditionality

• Theory: key criterion for performance-based schemes

• Our review finds: except for 1 case (Pimampiro, Ecuador), little evidence that fully applied

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a. Can PES be effective?

Promising tool, with regional differences (PES mainly in LA, emerging in SEA and Africa)

But, effectiveness difficult to assess because

• Many schemes still too recent

• Insufficient baseline data (no control area)

• Few analyses based on solid monitoring and evaluation methods

Performance payments (PES) = key for REDD , but upfront conditions needed

To address DD drivers, PES = promising, but not sufficient need governance investments & extra-sectoral transfers

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Regional distribution of PES schemes in 2007

Source: adapted from USAID 2007, PES Sourcebook

In total 145 PES schemes, 15 with unclear status (excluded in graph)

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Preconditions for PES

Preconditions

Economic - ES = externality AND value of the ES (user’s WTP) > providers opportunity costs (WTA) & transaction costs (TC)

Cultural - PES need social acceptance; where non-economic value systems are important and functioning, resistance to PES is likely (e.g. perception of water access as human right hinders ‘water PES’)- most cultural contexts seem to accept PES

Institutional - Need de-facto rights over ES-producing asset- in weak governance context, enforcement could be enhanced by contracts with independent provisions in case of non-compliance (e.g. reduced/suspended/stopped payments) rather than only reliance on local juridical system

Informational - Transaction costs of implementing PES schemes (negotiations, baseline setting, system design) need to remain affordable.- can be real challenge in small schemes, when buyers and sellers are highly diverse, or when ES is biophysically complex

Source: Wunder 2008, RFF paper

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b. Can PES improve livelihoods?

Concerns: Weakening of land and resource rights of

indigenous and forest dependent communities Equity in opportunities to participate as sellers of

carbon Equity in payment levels and terms – vulnerable

communities may be subjective to exploitative contracts

Local economy impacts which affect non-participants

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Can PES improve livelihoods?

Study findings: PES schemes have not led to weakening of land

tenure, and in some cases have strengthened it Direct evidence from our case studies on the

impact on livelihoods is limited Even if initially access constraints for poor,

subsequent corrections occurred (e.g. Costa Rica) Despite seemingly low payment levels, PES is

popular with farmers (Costa Rica, Mexico) Little evidence of local economy impact on prices

and employment

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PES and poverty

To enhance livelihood/equity outcomes: “no-harm” approach

• Narrow focus on environmental goal

• Undesired livelihood/equity side-effects are mitigated (e.g. ‘collective contracting’-provision in Costa Rica PSA)

“pro-poor” approach

• Poverty reduction objectives are explicit side-objectives (e.g. in areas where rural poverty is pervasive)

• participation of the poor is actively pursued (e.g. RUPES – rewarding upland rural poor for ES)

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…but possible trade-offs poverty vs environment

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Summary

Carbon finance (CDM, REDD) = I-PES

PES = new contractual conservation paradigm, can provide important lessons for notably REDD scheme design incl, accompanying policies

Poverty alleviation is important side-objective, but should not become primary goal

Payments for REDD provides new opportunities for securing other ES via ‘bundling’, notably biodiversity

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Further reading

USAID PES Sourcebookhttp://www.oired.vt.edu/sanremcrsp/menu_research/PES.Sourcebook.Contents.php

World Bank - Introduction to PES http://siteresources.worldbank.org/EXTEEI/Resources/IntroToPES.pdf?&resourceurlname=IntroToPES.pdf

CIFOR – PEShttp://www.cifor.cgiar.org/pes/_ref/home/index.htm

Rewarding Upland Poor for Environmental Services http://www.worldagroforestrycentre.org/sea/Networks/RUPES/index.asp

The Katoomba Group (Regional Network for China and East-Asia)http://www.katoombagroup.org/

Ecosystem Marketplacehttp://www.ecosystemmarketplace.com/

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Thank you for your attention!

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