PAYMENTS FOR ENVIRONMENTAL SERVICES: AMBITIOUS TOOLS FOR THE SUSTAINABLE USE OF NATURAL CAPITAL

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1 2011 Managing Sustainability? Proceedings of the 12th Management International Conference Portorož, Slovenia, November 2011 PAYMENTS FOR ENVIRONMENTAL SERVICES: AMBITIOUS TOOLS FOR THE SUSTAINABLE USE OF NATURAL CAPITAL Prof. Giovanni LAGIOIA, Dr. Annarita PAIANO Faculty of Economics- Department of Geographical and Commodity Science University of Bari Aldo Moro Largo Abbazia Santa Scolastica, Bari (Italy) ABSTRACT The flows of natural resources, goods and services (air quality, soil fertility etc.) from ecosystems are the natural capital of the economies. Among these flows the ecosystem services are critic and in decline. It has been underlined the need for ecosystem accounting techniques to study the relationship between economic sectors and their dependence from ecosystem goods and services, as well as the impacts on the last ones. Many countries are being developed payment programmes for ecosystem services (PES). This paper analyses definitions, scope, schemes and the main actors of the PES as tool to protect the natural capital. Keywords: payments for ecosystem services (PES), sustainability, natural capital, biodiversity. INTRODUCTION The flows of natural resources, goods (food, fibre, fuel, medicines) and services (air quality, water flow and quality, soil fertility and cycling of nutrients, climate regulation, pollination and others) from natural ecosystems are a vital necessity for humanity s economic and social development. These flows represent the material basis, or the natural capital, of economy. The main criticism is concerning the services from nature and the significant reason is that there are not alternative methods to obtain those services. In summary, if pollutants affect the natural ecosystems, these are not capable of flowing services to economy and it is not possible to search for alternative options. Today around two-thirds of ecosystem services worldwide are in decline. This is a heavy threat, probably greater than climate change and it often concerns the developing countries, where the most of the world s biodiversity lies. Biodiversity conservation is the key factor to maintain the global ecosystems and their services. 275

2 The need of knowing and assess these services to realize a suitable management it is clear by trends of health of the biodiversity of biomes, which has been and actually is heavily under pressure, as Figure 1 illustrates. Figure 1. Past and future trends of the main impacts on Earth s biodiversity per biome Source: Millennium Ecosystem Assessment, 2005 A policy framework has accomplished since several years, at European and international level, to face the deterioration of ecosystem. The first step was the Convention on Biological Diversity (CBD), signed by 168 countries under the aegis of the United Nations (today the total countries are 190), and it entered into force on 29 December The world public growing commitment to sustainable development inspired the CBD and the European Union (EU) is actively promoting its effective implementation, so the EU new policy should enhance treatment of biodiversity in international development programmes. 276

3 Some years later, the EU launched a new EU Biodiversity Action Plan (the previous was in the 2001), annex I to EU Council conclusions Halting the loss of biodiversity by 2010 and beyond, adopted in the 2006 (Commission of the European Communities, 2006; European Commission. 2010). This Action Plan underlines the importance of biodiversity and ecosystem protection as a prerequisite for sustainable development and protecting the natural capital. It provides a strategic European response to tackle biodiversity loss to undertake to halt the loss of biodiversity by the year The four key policy areas of the EU action plan are the following: biodiversity in the EU, the EU and global biodiversity, biodiversity and climate change, the knowledge base. These four policy areas are backed up by a range of supporting measures, as ensuring adequate funding for biodiversity conservation, strengthening EU decision-making, building partnerships with key stakeholder groups and encouraging greater public awareness and participation in biodiversity conservation. Yet, whilst important progress has been made, the change has been too slow to meet the 2010 target. Overall, biodiversity in Europe continues to decline. Another important step was the initiated preparatory work for a global and independent study, which is named The Economics of Ecosystems & Biodiversity (TEEB). It is hosted and organized by UNEP. Several countries and organisations have joined TEEB. The study is evaluating the costs of the loss of biodiversity and the associated decline in ecosystem services worldwide, and comparing them with the costs of effective conservation and sustainable use. The estimate of benefits of ecosystem goods and services is a key point. The conventional economics has failed to recognise the economic values of natural capital and the ecosystem services it provides. The European Environmental Agency (EEA) has underlined the need for ecosystem accounting techniques to study the relationship between economic sectors and their dependence from ecosystem goods and services, as well as the impacts on the last ones. These data should converge into policy-making and local management of natural resources. Worldwide in many countries there are being developed payment programmes for ecosystem services (PES programmes). They are very important in providing adequate rewards to landowners who protect ecosystem services that are useful to society. PES are part of a new 277

4 and more direct conservation pattern that makes clear the linkage between the interests of landowners and outsiders. This paper will analyse definitions, scope, schemes and the main actors of the PES. Moreover some of PES programmes put into practise, both in developed and in the developing and poor countries, will be reviewed. The aim is to highlight the main aspects of this new tool, underlining its several drawbacks and perspectives for managing the sustainability of economies. PAYMENTS FOR ECOSYSTEM SERVICES Definition and scope The implicit idea of PES is those who benefit from ecosystem services (ES), like climate regulation, water quality, protection against natural and human made hazards, soil formation, biodiversity conservation, natural recreation, and so on should pay those who provide these services. But many definitions exist for the PES, for instance one commonly used defines them as voluntary transactions in which a well-defined environmental 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 (Farley and Costanza, 2010; Werz- Kanounnikoff and Wunder, 2010). This is a restrictive definition for PES. In the PES scheme it is possible to delineate many steps for their implementation. The first one is to choose and clearly define the environmental goods and service and the second one has to be the identification of stakeholders involved in this programme. The following step is the economic evaluation of the specific ecosystem service and finally it has to carry out the relative payment, according to the type of economic and/or financial tools chosen. Each of these steps shows several issues and controversial aspects, due to many reasons so as it has illustrated in the following sections. The identification of ecosystem goods and services Ecosystem services derive from interactions between the organisms and their function within the ecosystems. The purification of air and water, carbon sequestration and soil fertility are services that result from interaction, rather than organisms themselves. Each ecosystem (forest, wetland, grassland, coral etc.) has different functions and services, which in turn depend on the health of the ecosystem, the pressures weighing upon it and the way they are used by society in a given bio-geographical and geo-economical context (such as local, regional and global). This issue of ecosystems in connection with social wellbeing was 278

5 underlined by the Millennium Ecosystem Assessment (MEA, 2005), a study published in 2005 that involved over 1,000 experts from 95 countries, which defined the concept of ecosystem services as the multiplied benefits provided to human beings by ecosystems and, then, ecosystem services are the end products of nature that yield human wellbeing. The basic concept is that generally our wellbeing strongly depends on services (material and notmaterial) provided by nature. The Figure 2 shows the identification of the main ecosystem services provided by Hearth s biomes. Figure 2. Main ecosystem services provided by Hearth s biomes Source: Ministero dell Ambiente della Tutela del Territorio e del Mare, 2009 It is possible to consider several classifications of ecosystem services, narrow or broad ones. In the first case only the environmental services, such as carbon sequestration, biodiversity, water quality and erosion control (Wunder, 2005), can be included. Instead the broader interpretation include four macro-categories, which are extracted from Millennium Ecosystem Assessment and illustrated in Figure 1: 279

6 - Supporting services, e.g. services necessary for the production of all other ecosystem services, like soil formation, nutrient cycling and primary production. - Provisioning services, e.g. products obtained from ecosystem, like food, fresh water, fuelwood, fiber, biochemicals and genetic resources. - Regulating services, e.g. benefits obtained from regulation of ecosystem processes, as climate protection, disease regulation, water regulation and water purification. - Cultural services, e.g. non material benefits obtained from ecosystems, as spiritual and religious, recreation and ecotourism, cultural heritage. The exact identification of the main ecosystem services it is important to focus the analysis that is carrying out, besides to limit the bio-geographical scale and territory which must be considered. Identification of stakeholders involved The identification of stakeholders involved is very important and, at the same time, sometimes difficult. It is possible to divide them in beneficiaries or end users of ecosystem services and buyers of the same. Almost always, in fact, the actual purchaser of an environmental service is often not the same as the beneficiary. This is due to the difficulty to exactly identify the spatialtemporal scale of service delivery: establishing where (at local, regional or global level) and when (at present or into the future) the benefits from ecosystem services occur are essential elements for evaluating the potential demand for them and identifying as many buyers as possible from the longer list of potential beneficiaries (FAO, 2007). But since these services are public goods and beneficiaries are frequently diffuse (e.g. local or global community), buyers tend to be public organizations. However there is a growth in demand and willingness to pay for ecosystem services at the global or local scale mainly driven by environmental regulations. So, private and public firms and individuals are ready to pay for such services when they provide a low-cost way of complying with a regulation. Carbon sequestration payments, for instance, are driven by international regulation limiting carbon emissions and creating a market for offsets (Gutman, Davidson, 2007). The economic evaluation of ecosystem services: the main issues The defining of ecosystem services and their spatial and temporal scale are essential to identify buyers and beneficiaries of these services but the core problem is the economic 280

7 evaluation of ecosystem services. The conventional economics has failed to recognise the economic values of natural capital and the ecosystem services it provides (Gomez-Baggethun et al, 2010). It is therefore important not to limit assessments to monetary values, but to include qualitative analysis and physical indicators as well, like Figure 3 illustrates. Measurement approaches vary depending on what it should be measured. For provisioning services (fuel, fibre, food, medicinal plants, etc.), measuring economic values is relatively straightforward, as these services are largely traded on markets. The market prices of commodities such as timber, agricultural crops or fish provide a tangible basis for economic valuation, even though they may be significantly distorted by externalities or government interventions and may require some adjustments when making international comparisons. For regulating and cultural services, which generally do not have any market price (with exceptions such as carbon sequestration) economic valuation is more difficult. However, a set of techniques has been used for decades to estimate non-market values of environmental goods, based either on some market information that is indirectly related to the service (revealed preference methods) or on simulated markets (stated preference methods). These methods have been stated by the MEA in 2005 and they have been applied to many components of biodiversity and ecosystem services. Fig 3: Valuing ecosystem services Source: TEEB,

8 The TEEB study, that continues the work of the MEA, made a preliminary attempt to evaluate the loss of ecosystem services. Particularly the loss of biodiversity that would have produced ecosystem services is about 50 billion per year, only for land based ecosystem alone. Taking 2000 as the baseline, within three years this loss amount to 150 billion so, by 2010 the loss will be to over 500 billion, equal to 1% of world GDP. It forecasts that the loss in the value of flow of services, in case that any conservation action shall not be made, could cost about 14 trillion, around the 7% of total GDP by 2050 (Table 1). It is necessary to highlight that the loss of services from natural ecosystems will require costly alternative options or simply no alternatives. This analysis suggests that without halting biodiversity loss, the world in 2050 shall benefit much less from the flow of ecosystem services than in Figure 4: Annual Flow of benefits from forest from selected countries. Source: Millennium Ecosystem Assessment, 2005 The relevant lack of balance between the economic value commonly used for resources and the economic value of the entire flow of services of specified ecosystem is underlined by 282

9 Figure 4. In most countries, in fact, the marketed values of ecosystem, for example, associated with timber and fuelwood production are less than one third of the total economic value, including non marketed values such as carbon sequestration, watershed protection and recreation. Among these countries Italy, the author s country, has a very marked difference. Table 1. Annual monetary estimate of loss of ecosystem services in 2050 Value of loss of ecosystem services per year in billion of Euros (10 9 ) Relating to 2000 Relating to 2010 Relating to 2000 Relating to 2010 Area Billion of Euros Billion of Euros % GDP in 2050 % GDP in 2050 Natural areas - 15,568-12, Denuded natural areas Managed forest 1,852 1, Extensive agriculture -1, Intensive agriculture 1, Ligneous biofuels Cultivated pasture , Artificial surfaces Global total (terrestrial ecosystems) -13,938-11, Source: (Braat, and ten Brink, 2008; Chevassus-au-Louis et al, 2009) SOME EXAMPLES OF WORLDWIDE PES TRANSACTIONS It should underline there are many tools for managing environmental resources and their services and they can classified according the voluntary of their. So, PES can be included in public provision, direct regulation or voluntary and educational approaches and they utilize many mechanisms, like subsidies, incentives and others, or in the latter case, information and communication, green labelling and green marketing. In this frame, through eco-labels and certification programmes for sustainable production, consumers pay for environmental services with their purchases. The private sector is increasingly involved in paying to promote environmental service provision, for example in the case of voluntary carbon sequestration and biodiversity conservation. But, as already mentioned, most PES programs are led by the public sector. Frequently International public sector funding is also very important for PES programmes: for instance the World Bank and the Global Environment Facility (GEF) have been the main contributors in developing countries, regarding large scale projects, and often they have led to development of national level of PES programmes, as in Costa Rica and Mexico (Kosoy et al., 2008). In Costa Rica, for instance, where, from 1997 to 2004, US$ 200 million in PES 283

10 programmes have been invested (funding by World Bank and GEF, co-financing by national governments), protecting around 460,000 hectares of forests and forestry plantations and indirectly contributing to the well being of more than 8,000 people (TEEB, 2008; UNEP, 2010). Several examples of PES since many years have been fulfilled also in the developed countries, like the US and one of them regards the water services management in New York. An agreement between the municipal company for water supplying of the city and the forest owners of the catchment basin has been signed. The last ones have undertaken to manage their forests according suitable practises to assure the steady water run-off to reduce water pollution impact. The off-set for these ecosystem services is paid by the end-users, through an additional rate of water services. The program implementation, by cost of 1.5 US$ billion, allowed savings expense of 6-9 US$ billion, equal to a amount necessary to build a filtration system to comply with more stringent regulation on drinking water quality. PES schemes have also been used to achieve quality standards beyond those required by law. Vittel-Evian in France has been paying farmers to adopt more environmentally sound practices to reduce agricultural run-off (pesticides and nitrates) and improve soil natural filtration capacity. Investment reached 980 Euros per hectare per year, equivalent to 1.52 euro per m3 of bottled water produced and the French National Agronomic Institute demonstrated that under the assumption that one hectare of well-managed pasture produced 3000 m3 of mineral water every year (Branca et al, 2009). Other common PES example, more simply than the previous ones and widespread in the world, could be considered the payments for guided tours of marine protected areas or the management of fishing licenses, in the same areas. A share of these revenues is used to preservation and conservation of these areas (Ministero dell Ambiente della Tutela del Territorio e del Mare, 2009). CONCLUSION Payments for Ecosystem Services are surely new feasible tools to manage the natural capital to prevent further loss and damage in its goods and services. In this paper frequently it has been underlined that the knowledge of natural ecosystem and its services is a priority for suited managing them. In this direction the studies and analysis concerning the material base of economy are very critical. It should be stressed the importance to know the material and energy flows of the production cycle to obtain goods, services and others so as to use some 284

11 indicators, such as Ecological Footprint, Environmental Input-Output analysis (EIOA), Material/Substance Flows Accounting (M/SFA), to create specific and physical databases concerning this subject. This would to account and monitor the true consumption of natural resources and to obtain a better comprehension concerning how much natural capital is necessary to support human economy and in particular how many ecosystem services have been used for. The issue of ecosystem services and their relationship to human activities that oppose or enhance them falls within the large field of the externalities, related to taking out of alignment of the benefits (or costs) between individuals and community. In the past, most of the ecosystem services, those are externalities, are not adequately remunerated by the market, so frequently PES have been implemented through regulatory instruments, particularly in the European countries. At present, instead, the attention focuses on other incentives based tools and market mechanisms, so through voluntary transactions. The suited solution would be an appropriate mix of instruments that have to be used by decision makers. In this context, the implementation of the PES may involve the transformation of public goods and services into new products of market, with the expected consequence and potential distortions. REFERENCES Branca, G., Lipper, L., Neves, B., Lopa, D., Mwanyoka, I New Tools for Old Problems: Can Payments for Watershed Services Support Sustainable Agricultural Development in Africa?, ESA working paper no Braat, L., and ten Brink, P. (eds) The Cost of Policy Inaction: The Case of not Meeting the 2010 Biodiversity Target, Study for the European Commission, DG Environment in support to the TEEB First phase. last access June Chevassus-au-Louis, B., Salles, J.M., Pujol, J.L An economic approach to biodiversity and ecosystems services. Contribution to public decision-making. Centre d analyse Strategique, Paris. Commission of the European Communities Halting the Loss of Biodiversity by and beyond. Sustaining Ecosystem Services for Human well-being, Commission Staff Working Document, Annexes to the Communication from the Commission, 285

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13 Wertz-Kanounnikoff, S., and Wunder, S How Redd+ can learn from PES, CIFOR (Centre for International Forestry Research, Washington D.C. Wunder, S Payments for Environmental Services: Some nuts and bolts. CIFOR (Centre for International Forestry Research), Occasional Paper no last access July