Center for International Forestry Research

Payments for Environmental Services: Concepts and Theory Sven Wunder Principal Economist

Structure I. Definition II. III. Typology Concepts and scope

I. PES definition

In CIFOR studies we defined the PES principle as: 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). - Four areas of application: carbon, watershed, biodiversity, and landscape beauty

PES definitions -- between hardcore and periphery PES Core All 5 criteria Theory & some private PES PES Core

PES definitions -- between hardcore and periphery PES-like Schemes PES Core All 5 criteria Theory & some private PES PES Core PES-like Schemes: Most but not all of 5 criteria Donor-financed watershed PES; PES with ill-defined services

PES definitions -- between hardcore and periphery Other Economic Incentives PES-like Schemes PES Core PES Core All 5 criteria Theory & some private PES PES-like Schemes: Most but not all of 5 criteria Donor-financed watershed PES; PES with ill-defined services Other Economic Incentives: Any payment for any environmental service by anybody ICDPs, park-ranger salaries, land purchases, etc.

Economic incentives vital + Use of economic incentives No economic incentives Integrated conservation Environmental taxes & subsidies ICDPs Social markets PES Commandand-control Certification Directness + SFM & production Land acquisition Direct conservation

II. PES types

I. User-financed schemes - Examples: many watershed (Vittel, Catskills, Pimampiro ) and carbon schemes (Scolel Te, FACE ) - Characteristics: mostly small-scale, single service - single buyer, seldom side objectives; focused - Pros: targeting to high-service, high-threat & low-cost areas (e.g. differentiated payments), often close to pure PES ; => effective - Cons: a) hard to get voluntary buy-in for multiple-user externalities (biodiversity) free riding; b) tend to have large start-up costs => maybe not cost-effective? challenge to make them cheaper to install (=costefficient)!

II. Gov t-financed schemes - Ex: PSA Costa Rica, Mexico, agri-envir (EU,US, China) - Characteristics: large scale (nation-wide), many services, state acts as ES buyer, multiple sideobjectives (politics), less focused - Cons: often flat uniform payments, non-targeted, widespread money for nothing (low additionality) => often less effective in ES delivery - Pros: a) adequate for ES with free riding dominance (biodiv, multi-service layering); b) admin economies of scale => low-cost potential challenge to make them more targeted and effective!

III. PES concepts and scope

PES are made to address hard conservation trade-offs (TEEB 2009) PES relevance 1. Beneficiaries ( winners losers ) 2. Spatial ( benefits here costs there ) 3. Service type ( provisioning other services ) 4. Temporal ( benefits now costs tomorrow )

Win-lose scenario Conservation with PES Benefits to land users in upper watershed Q 1 Q 3 Q 4 Providers net surplus = Q4 + Q3 Q1 Q1 Costs to downstream population Q 2 Q3 Users net surplus umbrella service water = Q2 Q3 Q 1 : Most profitable land use (e.g. deforestation for farming) Q 2 : External effects from Q1 (e.g. decline in water quality) Q 3 : PES paid by downstream users; conditions: Q3 < Q2 and Q3+Q4 > Q1 Q 4 : Service-friendly land use (e.g. agro-forestry, pure protection) Source: Pagiola & Platais (2007)

Win-lose scenario Conservation with PES Benefits to land users in upper watershed Q 1 Q 3 Q 4 Providers net surplus = Q4 + Q3 Q1 Q1 Costs to all external users Biodiversity Carbon Q 2 Scenic beauty Watershed Q3 Users net surplus = Q2 Q3 Q 1 : Most profitable land use (e.g. deforestation for farming) Q 2 : External effects from Q1 (e.g. decline in all four services) Q 3 : PES paid by all external ES users; conditions: Q3 < Q2 and Q3+Q4 > Q1 Q 4 : Service-friendly land use (e.g. agro-forestry, pure protection)

PES baselines: example REDD Forest Carbon Stock Additionality With payment Without payment REDD Implementation Time

Will PES pay for all the Ecosystem Services identified by the MEA? No! - MEA provisioning services are really products not services (ex: fuelwood, NTFPs) - Among services, PES pays for externalities, not internalized ES (ex: downstream flood protection yes; enhance on-farm soil fertility no) - Among externalities, only credibly threatened ES will normally be paid for - Among threatened externalities, only those perceived as most valuable (WTP > WTA) are paid for => PES will target strategic subset of ES

When can PES not be used? 1.Economics: Costs of service provision exceeds the benefits 2.Culture: Altruistic service providers + low pecuniary motivation = dubious effect 3.Information: Land- and resource-use outcomes cannot be safely predicted 4.Institutions: Trust between providers and users cannot be established 5.Institutions: Land stewards have de facto no effective exclusion rights critical!

PES & legality: theory vs. practice Source: Adapted from TEEB (2009) Service values, provision costs (or increase forest cover, biodiv ) No ES