Center for International Forestry Research

Changing land uses in forestry and agriculture through payments for environmental services Sven Wunder & Jan Börner

Structure I. Introduction to PES II. PES and land uses III. Results IV. Conclusions

I. Introduction to PES

Definition of PES 1. a voluntary transaction where 2. a well-defined environmental service (ES) - or a land-use likely to secure that ES - 3. is being bought by a (min. one) ES buyer 4. from a (min. one) ES provider 5. if and only if the ES provider continuously secures ES provision (conditionality). = purist definition more PES-like than PES-pure out there but good to have a prototype in mind!

Application of PES Four services: carbon, watersheds, biodiversity and landscape beauty protection Contractual conservation conservation paradigm is a response to hard conservation trade-offs compensations creating win-win Goal: conservation; side-objectives: variable challenge to adapt PES to legal gray zones (illegal deforestation, unclear tenure, etc)

1. Can money help keeping the trees standing? REDD=Global PES 2. Can keeping the trees standing give good compensation? 3.03.2009, MMA, Brasília

Case 1: Pimampiro (Ecu), user-financed 3.03.2009, MMA, Brasília - Service: Watershed protection Buyer: Municipal water company Seller: Comunity in upper watershed, 550 ha protected Voluntary: individual contracts 2000 Conditional: Previous sanctions

Case 2: PSA Costa Rica, gov t financed 3.03.2009, MMA, Brasília - Services: biodiv, C, watershed, landscape Buyer: State C Rica Seller: Forest owners, nationally Voluntary: contracts 5 years, 1996- Conditional: Monitoring, sanctions Uniform rate, politics

II. PES and land-use change

Typology Use-restricting Forest conservation, incl. REDD, biodiv, water Agric. land retirement Use-modifying [Reduced impact logging forest certification] Afforestation & reforestation (AR), incl. CDM Agroforestry silvipasture Improved agriculture (organic, no-tillage, no-burn, etc.) Agriculture Forestry

Q: Why so few ag-modifying PES? Use-restricting Forest conservation, incl. REDD, biodiv, water ~80% Agric. land retirement ~8-9% Agriculture Use-modifying [Reduced impact logging forest certification] Afforestation & reforestation (AR), incl CDM Agroforestry silvipasture Improved agriculture (organic, no-tillage, no-burn, etc. ~1-2% Forestry ~10%

Hypotheses 1. Services provided. Use-modifying agricultural change tends to produce less environmental services than restricting use to secure the presence of trees and forests. 2. Provision costs & risks. Opportunity costs and technological complexity in usemodifying PES are higher than in userestricting PES, thus limiting their adoption

Hypotheses (cont d) 3. Transaction costs. In use-modifying PES, transaction costs tend to be higher than in use-restricting PES. 4. Spillover effects. When improved agricultural practices are very attractive to farmers, their upscaled adoption would tend to create more negative spillover effects than for use-restricting interventions.

III. Results

Hypothesis 1. ES potential: a) Carbon Annual CO 2 mitigation potential, selected LULUCF Activity Practice Dry Moist Source: Metz et al. (2007) [tco2 2/ha/year] Land retirement 1.61 3.04 Manure/ biosolids Management/Application 1.54 2.79 Croplands Water management 1.14 1.14 Tillage and residue management 0.33 0.7 Agro-forestry 0.33 0.7 Agronomy(e.g. improved varieties) 0.29 0.88 Nutrient management 0.26 0.55 Grasslands Grazing, fertilization, fire 0.11 0.81 Restoration/ Land retirement Organic soils (e.g. wetlands) 1 73.33 73.33 Degraded lands 3.45 3.45 Forestry (A / R) 1-35

Brazilian Amazon: Forest Carbon 3.03.2009, MMA, Brasília Saatchi et al. 2007

b) Biodiversity Plant species counts in different land cover types Land use / cover type Number of plant species Little disturbed 80 102 rainforest Old secondary forest 50 111 Fallows 54 82 Agro-forestry / tree plantations 15 66 Annual crops 14 51 Planted Pastures 7 18 Source: Based on Gillison (2005)

Biodiversity: Amazon endemism 3.03.2009, MMA, Brasília Rodrigues et al. 2007

Hypothesis 2: Opportunity costs Mitigation potential and opportunity cost of UR and UM options in the Eastern Amazon 150 125 100 75 50 25 0 700 600 500 400 300 200 100 0 Mulch.Ann/Forest Trad.Ann./Forest Mech.Ann./Forest Trad.Ann./Mulch.Ann. Pass./Forest B.P./Forest B.P./Pass. Mech.Ann./Mulch.Ann. Mech.Ann./Trad.Ann. Mech.Ann./Past. C (tc/ha) Opportunity cost (NPV US$/tC)

Opportunity costs (cont d) Mitigation potential and opportunity cost of UR and UM options in the Western Amazon 150 120 125 100 75 50 25 0 100 80 60 40 20 0 C (tc/ha) Trad.Past./Forest Imp.Ann/ASFC_B Trad.Past/Trad.Ann Imp.Past./Forest AFSCof_Rub./Forest Imp.Ann./Forest AFSCof_ Ban./Forest Imp.Ann/ASFC_R Imp.Past/Trad.Ann Opportunity cost (NPV US$/tC)

REDD supply for 10 years 3.03.2009, MMA, Brasília

Cost determinants Custo de oportunidade R$/tCO2 30 25 20 15 10 5 0 + Biomass - Extensive cattle CCX temporario Slash & burn ag CCX permanente Intensive cattle 0 5000000 10000000 15000000 20000000 Desmatamento evitado (ha) Intensive perennials Precious timbers Soy 3.03.2009, MMA, Brasília

Hypothesis 3: Transaction costs Transaction cost category Comments S ta rt-u p c o s ts R e c u rre n t c o s ts 1. Information and procurement Knowledge about ES markets and entry requirements (-) 2. Scheme design and negotiation Number of ES buyers and providers (+) Knowledge about ES land-use links (-) Tenure security (-) Level of trust between stakeholders (-) Accessibility (-) 3. Verification and certification Complexity of ES land-use links (-) (Approval) 4. Implementation Institutional capacity (-) Local infrastructure/accessibility (-) 5. Monitoring Easily observable ES provider compliance (-) ES providers land spatially delimited tenure (-) 6. Enforcement and protection Conditionality of payments (-) Tenure security (-) Accessibility (-)

Evidence on transaction costs PES schemes often have high start-up costs; recurrent costs one order of magnitude lower Scale, monitoring: Access, tenure: ~ forestry cheapest ~ ag cheapest => No universal bias UR >< UM PES scheme

Hypothesis 4: Spillover effects 1. Losing other services. Unintended negative environmental externalities as a result of PES scheme implementation 2. Overshooting adoption scale. Technology promotion through PES encourages expansion into unused land (e.g. forests) 3. Leakage. Intervention partially shifts env. pressure to areas not covered by PES.

Spillover 1: Other services lost Intensive perennial cash-crop production and set-aside payments, Eastern Amazon Area under high-input cash crop production (%) 112 110 108 106 104 102 100 30 40 50 60 70 80 90 100 Set-aside payment (US$/ha)

Spillover 2: Victim of own success Opportunity costs of set-asides with and without technology adoption, Eastern Amazon Carbon payment (US$/t CO2 2 8 6 4 2 Without technology adoption With technology adoption 0 1 2 3 4 5 Secondary forest set-aside (ha)

Spillover 3: Leakage Reduced Extent of leakage Increased Low (a) Labor and capital mobility High Constrained (b) Occupation of adjacent lands Easy Elastic (c) Output demand Inelastic Flexible input ratio (d) Technology Fixed coefficients Segmented, localized (e) Land market Competitive, cross-scale High (f) Carbon density ratio: REDD lands/ substitute lands Low Low (g) Returns from REDD -barred activities High Source: Wunder (2008)

III. Conclusions

Why so few ag. (use-modif.) PES? 1. Forests & trees tend to produce higher quantity of environmental services (C, species, watersheds protected ) than (treeless) ag systems 2. Almost invariably, the cost of providing services in (threatened) standing natural forests is also more cost-competitive (caveat: a) hot air; b) high-value converted uses soy, oil palm, etc.) 3. The transaction costs of forest-based PES are also favored by monitoring scale, but not always lower 4. Spillover effects: more ag over-adoption into env sensitive areas; more leakage for REDD/ userestricting conservation.