Payment for ecosystem services

Payments for Ecosystem Services (PES), also known as Payments for Environmental Services (or Benefits) broadly defined, is the practice of offering incentives to farmers or landowners in exchange for managing their land to provide some sort of ecological service. These programmes promote the conservation of natural resources in the marketplace. Ecosystem services have no standardized definition, but might broadly be called “the benefits of nature to households, communities, and economies,”^[1] or, more simply, “the good things nature does." ^[2] Twenty-four specific ecosystem services were identified and assessed by the Millennium Ecosystem Assessment, a 2005 UN-sponsored report designed to assess the state of the world's ecosystems. The report defined the broad categories of ecosystem services as food production (in the form of crops, livestock, capture fisheries, aquaculture, and wild foods), fiber (in the form of timber, cotton, hemp, and silk), genetic resources (biochemicals, natural medicines, and pharmaceuticals), fresh water, air quality regulation, climate regulation, water regulation, erosion regulation, water purification and waste treatment, disease regulation, pest regulation, pollination, natural hazard regulation, and cultural services (including spiritual, religious, and aesthetic values, recreation and ecotourism).^[3] Notably, however, there is a “big three” among these 24 services which are currently receiving the most money and interest worldwide. These are climate change mitigation, watershed services and biodiversity conservation,^[4] and demand for these services in particular is predicted to continue to grow as time goes on.^[5] One seminal 1997 Nature Magazine article estimated the annual value of global ecological benefits at $33 trillion, a number nearly twice the then global gross product.^[6]

PES programs are voluntary and mutually beneficial contracts between consumers of ecosystem services and the suppliers of these services. The party supplying the environmental services holds the property rights over an environmental good that provides a flow of benefits to the demanding party in return for compensation. The beneficiaries of the ecosystem services are willing to pay a price that is lower than their welfare gain due to the services. The providers of the ecosystem services are willing to accept a payment that is greater than the cost of providing the services. These programs are practical examples of the Coase theorem. According to the Coase Theorem, environmental externalities can be solved through private bargaining between people who are willing to pay in order to reduce an environmental hazard and people willing to accept compensation in order to reduce the activity that generates the environmental burden.

The Various Organizations and Motives for Incentivizing Production of Ecosystem Services

Though the goal of all PES programs is the procurement of some sort of ecosystem service, the reasons why organizations or governments would incentivize the production of these services are diverse. For example, the world's largest and longest running PES program is the United States' Conservation Reserve Program,^[7] which currently pays about $1.8 billion a year under 766,000 individual contracts with farmers and landowners to “rent” a total 34,700,000 acres (140,000 km²) of what it considers “environmentally-sensitive land.”^[8] These farmers agree to plant “long-term, resource-conserving covers to improve water quality, control soil erosion and enhance habitats for waterfowl and wildlife.”^[9] This program has existed in some form or another since the wake of the American Dust Bowl, when the federal government began paying farmers to avoid farming on poor quality, erodible land.^[10] In 2000, the Chinese central government announced an even more expensive project under its $43 billion Grains for Green program, by which it offers farmers grain in exchange for not clearing forested slopes for farming, thereby reducing erosion and saving the streams and rivers below from the associated deluge of sedimentation.^[11] Many less extensive nationally-funded PES projects which bear resemblances to the American and Chinese land set-aside programs exist around the world, including programs in Canada, the EU, Japan and Switzerland.^[12]

Additional examples

In Jesús de Otoro, Honduras, the Cumes River is the town’s main source of clean water. Coffee producers were dumping their waste into the river upstream, polluting the source and directly affecting the consumers downstream. To solve this problem, the local Council for Administration of Water and Sewage Disposal (JAPOE) created a payment program to benefit coffee producers upstream and the town’s inhabitants that lived downstream. The villagers downstream paid around $0.06 per household per month to JAPOE, who redirected the money towards the upstream farmers. The farmers complied with various guidelines, such as construction of irrigation ditches, proper management of waste, and use of organic fertilizers.

In Jamestown, Rhode Island, United States, farmers usually harvest the hay in their fields twice a year. However, this practice destroys the habitats of many local grassland birds. Economists from the University of Rhode Island and EcoAssets Markets Inc. raised money from residents of Jamestown who were willing to help the birds. The range of investments was between $5 and $200 per person for a total of $9,800. This money was enough to compensate three Jamestown farms for the cost of reducing their yearly harvests and getting their hay from another source. In this way, the birds have sufficient time to nest and leave the grounds without being subject to a hay harvest. In this example, the farmers benefit because they only have to harvest their fields once a year instead of two and the contributors benefit because they value the lives of the birds more than the money they contributed to the project.

The Scolel Té program in Chiapas, Mexico, aims to create a market for positive externalities of shade-grown coffee plantations. Designed by the University of Edinburgh’s Institute of Ecology and Resource Management along with the Edinburgh Centre for Carbon management, using the Plan Vivo System, Scolel Té is a PES program under which farmers agree to responsible farming and reforestation practices in exchange for payment for carbon offsets. The NGO Ambio manages Scolel Té. Farmers submit their reforestation plans to Ambio, which then judges their financial benefits and the amount of carbon sequestration associated with each plan. The farmers then receive payments from the Fondo BioClimatico, managed by Ambio. Funding for the Fondo BioClimatico comes from the sale of Voluntary Emissions Reduction (VERs) to private groups at a price of $13 per ton of Carbon sequestered.

Pico Bonito Forests, near La Ceiba, Honduras, is a mission-driven, for-profit venture between the Pico Bonito National Park Foundation and the EcoLogic Development Fund. Carbon credits are generated by planting native trees to capture, or sequester, carbon dioxide. The credits are then sold though the World Bank’s BioCarbon Fund to countries aiming to meet their carbon emissions reduction targets. The project offers a unique business model because it is owned jointly by investors and the communities located near the park. Community members earn income and share profits from implementing the sustainable forestry practices that capture carbon. By 2017, the project is expected to sequester from .45-.55 Mt of carbon through reforestation and agroforestry and up to an additional .5 Mt of carbon through avoided deforestation as destructive practices are replaced with sustainable practices.^[13]

Costa Rica has started programs under FUNDECOR (an NGO) and the Ministry of Environment and Energy in order to protect natural resources. It began to develop in 1996 with the Costa Rican Forestry Law.^[14] The Costa Rican government implemented laws to ensure that a new concept could become a part of their market place; the idea that market incentives can be implemented to protect natural resources, because ecosystem services have inherent value. The Law 7575 took into account the value of carbon fixation, hydrological services, biodiversity protection, and provision of scenic beauty. People were able to receive tax breaks for protecting services through the new laws. The Private Forestry Project was created, forming Costa Rica's first project to reward carbon sequestration on private land. The Protected Areas project created the ability to transfer private land into parkland. FUNDECOR worked with the National Fund for Forestry Financing (FONAFIFO) to set up an institution that could manage small and medium sized forests. Some of the main goals are to create programs for the smaller farmers through advanced payment for woods, sustainable forest harvesting, reforestation projects, getting farmers the best prices for their wood, performing environmental education, and helping to develop property rights of forest workers by registering their properties on the National Register Property (fundecor.org). Since in this particular case, the PES project sets up systems for those with little money to get land titles and use natural resources to join the economy in a sustainable manner, it has proved successful in creating a pathway out of poverty for many individuals (by giving them property rights).^[14] It does require that the country has a stable government in order to implement these types of plans, but it is an affective way to include natural resources into the price of markets, giving people incentives to protect their environment.^[14]

References

1. ^ James Boyd and Spencer Banzhaf, What Are Ecosystem Services? The Need for Standardized Environmental Accounting Units. Resources for the Future Discussion Paper, available at: http://www.rff.org/Documents/RFF-DP-06-02.pdf
2. ^ Matt Jenkins, Mother Nature's Sum. Miller-McCune Online Article, available at: http://www.miller-mccune.com/article/677
3. ^ Living Beyond Our Means; Statement from the board of the Millennium Ecosystem Assessment, available at http://www.millenniumassessment.org/documents/document.429.aspx.pdf.
4. ^ Paying Farmers for Environmental Services: Demand For Environmental Services. United Nations Food and Agriculture Office Report. Available at: ftp://ftp.fao.org/docrep/fao/010/a1200e/a1200e04.pdf
5. ^ Paying Farmers for Environmental Services (Opening pages). United Nations Food and Agriculture Office Report. Available at: ftp://ftp.fao.org/docrep/fao/010/a1200e/a1312e00.pdf
6. ^ Robert Costanza et al. The value of the world's ecosystem services and natural capital. http://www.nature.com/nature/journal/v387/n6630/pdf/387253a0.pdf
7. ^ Matt Jenkins, Mother Nature's Sum. Miller-McCune Online Article, hereinafter Jenkins [1]
8. ^ United States Department of Agriculture news release: USDA Issues $1.8 Billion in Conservation Reserve Payments. [2]
9. ^ Id.
10. ^ Jenkins
11. ^ Caressa Gee, Grain for Green. [3] Notably, some sources cite the cost of the entire program at $95 billion. See Jenkins article.
12. ^ Id.
13. ^ World Bank Carbon Finance Unit. Website available at
14. ^ ^{a b c} Jessica Brown and Neil Bird 2010. Costa Rica sustainable resource management: Successfully tackling tropical deforestation. London: Overseas Development Institute

Further reading

• Callan, Scott J., Thomas, Janet M., Environmental Economics and Management, Thompson South-Western, Mason, OH, 2007
• Cacho, Oscar; Marshall, Graham; Milne, Mary. “Smallholder Agroforestry Projects: Potential for Carbon Sequestration and Poverty Alleviation” ESA Working Paper #03-06, (2003).
• Keohane, Nathaniel O, and Olmstead, Sheila M., Markets and the Environment, Island Press, Washington, DC, 2007.
• Sanchirico, James, and Juha Siikamaki, “Natural Resource Economics and Policy in the 21st Century: Conservation of Ecosystem Services,” Resources, 165 (2007): 8-10.http://www.rff.org/rff/Documents/RFF-Resources-165.pdf
• University of Rhode Island, "First U.S. test of Ecological Services Payment Underway." MongaBay.com June 27, 2007 <http://new.mongabay.com/2007/0627-ri.html>.
• Wexler, Mark. "The Coffee Connection." National Wildlife 41.1 (2003): 37.
• Ward, Frank A., Environmental and Natural Resource Economics, Prentice-Hall, 2006.
• The World Bank Carbon Finance Unit. "Honduras: Pico Bonito Forest Restoration". http://carbonfinance.org/Router.cfm?Page=BioCF&FID=9708&ItemID=9708&ft=Projects&ProjID=9637. 

External links

• Ecosystem Marketplace breaking news and features on payments for ecosystem services
• Plan Vivo is a standard used to certify PES projects and provides guidance on developing a PES programme