Exploring Payments for Ecological Services (PES)

What are Payments for Ecological Services (PES)?                                                                                                                                            

PES is a strategy in which landowners or other stakeholders are paid to protect local ecological systems (also called natural capital) such as forests and watersheds. Ecological systems provide valuable benefits or services to our society such as maintaining biodiversity, natural cleansing, pollination, carbon sequestration, and soil fertility. However, these environmental services technically have no economic value. PES provides a framework and a market to recognize and monetize the long-term benefits or services that ecological systems provide to societies.

More specifically, payments for ecological services (PES) is the act of paying someone to protect the watersheds, conserve biodiversity or capture carbon dioxide (carbon sequestration). At the right price, PES programs can create incentives to preserve ecological systems even in the face of short term benefits that exploitation can often provide. PES sounds great, right?

Who is it directed at and who pays?
Although in the name of climate change we are all the beneficiaries of actions to capture carbon dioxide through forest cover, PES systems target local landowners and communities by providing them financing from various actors  like governments, international organizations, NGOs, and private firms. Transactions are usually voluntary and landowners are mostly in developing countries and rural areas which are being threatened by activities such as clear cutting, monoculture ag, and cattle ranching. Since the payments are conditional upon performances, these actors are incentivized to conserve ecological systems and/or refrain from using this natural capital that normally would have provided  them with economic benefits.

PES can take the form of market-based or fund-based financing. The role of the private sector is growing as companies either as part of corporate social responsibility (CSR) programs or cap-and-trade systems seek to ‘offset’ their carbon emissions through PES (mostly through Reduced Emissions from Deforestation and Forest Degradation (REDD+) initiatives). No matter the source of payment, PES schemes offer great potential for sustainable development- conserving resources and supporting some of the world’s most impoverished peoples.

PES Case Studies & Examples

Forests: BRAZIL. The Bolsa Floresta Program in Amazonas, Brazil has benefited 15 forest reserves and more than 30,000 people through government cash transfers in exchange for conservation and participation in local organizations. One of the reserves from the Bolsa Floresta actually became Brazil’s first certified REDD project. Brazil has also passed laws in the states of Acre and Amazonas to measure and value ecosystem services in order to successfully implement future PES programs.

COSTA RICA. The National Forestry Financing Fund (FONAFIFO) in Costa Rica has been helping to increase Costa Rican national forest cover since 1997. Most funds come from the revenues of the nation’s tax on fossil fuels, but also come from voluntary contributions by the private sector in the form of Environmental Service Certificates.

ECUADOR. Although Ecuador’s Socio Bosque  program has had tremendous success in conserving around 870,000 hectares of native forest,  the country recently approved to drill for the crude oil discovered under the country’s sacred Yasuni National Park which is said to have more tree species in a single hectare than in all of North America. After Ecuador’s request of the international community failed to help keep 850 million barrels of oil in the ground in exchange for $3.6 billion over the next decade, President Correa approved of extracting oil from 0.1% of the park. Some saw Ecuador’s requests as a unique form of conservation while others flagged it as a potential problem with PES systems similar to holding ecosystems hostage.

Water: COSTA RICA. Water utilities and supplementary government funds in Heredia, Costa Rica pay farmers upstream to protect clean drinking water and regular water flows. Through direct negotiation & user fees, farmers are paid for their opportunity costs and through Geographical Information System (GIS) monitoring, pollution threats have been managed and water flow controlled. A similar case takes place in the United States, where NYC paid farmers in the Catskills watershed upstate to keep grazing and runoff away from water rivers & streams. In the NYC case, the beneficiaries (NYC residents) and the Catskills farmers were able to come to an agreement through incentives without requiring outside regulations. The payment by NYC offset the farmers’ loss of income and NYC residents got clean water.

Challenges and Issues to Overcome

Of course, as with most programs that try and integrate so many different factors, there are various obstacles to PES systems that make critics wary of the real impact it has on conservation efforts and also on local populations.  Some of the most apparent challenges to PES schemes include:

  • Appropriate monetary valuations and incentives. Valuing individual services (and what methods to use in determining the value) is a difficult task especially since most ecological services are bundled.
  • Delivering incentives to landowners. Since PES programs are often perceived as being high-risk for all actors but especially for landowners & communities, ensuring that they receive the incentives is important in maintaining their participation.
  • Bureaucratic procedures, inter-sectoral cooperation & weak governance. PES systems require work and coordination from various actors & sectors often resulting in principle-agent problems, high transaction costs,  delays and conflicting agendas.
  • Overall high project transaction costs. Initiating contracts and establishing the logistics and technicalities of PES schemes is an information-intensive process, which can sometimes undermine the cost effectiveness of the project.
  • Insecure land and resource tenure of many poor people. Property rights and land tenure are essential in distributing responsibilities and incentives effectively but are often difficult to determine in rural areas where PES systems are being implemented.
  • Verification and monitoring of ‘services’ especially in the long-term. Although new technologies (like the Global Forest Watch) will provide new ways to monitor whether or not landowners and communities are complying to conditions,  investors need confidence that their finances are being used properly, while scientists, academics and policymakers need the resources and data to evaluate the impact of PES programs on the environment.

Another criticism is that the voluntary structure of PES schemes can sometimes mean that those who would not, for instance, deforest, regardless of payment, will be the ones most willing to sign up to a PES program. Or when it comes to enforcement, what do you do when a community is in desperate need of natural capital in five years and therefore cuts down the trees it pledged not to cut?

Overcoming these Barriers

In order to address the issue of enforcement, an alternative to PES systems in which actors are paid based on performance is to offer payments based on insurance. This would mean paying landowners and communities to refrain from certain actions in times that they would really need to use that natural capital. Because most the communities and landowners that are targeted in PES schemes are dependent on natural resources, this natural capital is their source of insurance when problems arise. By offering a system that specifically monitors and rewards actions during droughts or floods, times when the natural capital would be cashed in, we develop an easier way to evaluate conservation progress while also providing a form of monetary insurance for the local community or landowners. Of course with climate change and the increased risk of droughts this insurance-type system would have to be adjusted, but the most important dynamic of the system would be eliminating the need for natural capital as a driver of deforestation or other environmental degradation.

Enhanced enforcement and monitoring is vital in developing investor confidence (especially as PES become more market-based) but also to verify that conservation is in fact taking place. This is difficult when governance structures are lacking. Strong institutional mechanisms are required to eliminate corruption, but these mechanisms are sometimes missing in the countries in which PES systems are established. At the UNFCCC COP19 in Warsaw last year, a new framework for monitoring and verifying REDD+ was agreed upon which will increase understanding and transparency in international REDD+ programs. This initiative will help overcome challenges such as institutional arrangements and safeguards, which in turn can make REDD+, and more generally PES systems, more credible instruments for conservation efforts.


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