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5.2. Introduction to Payments for Ecosystem Services (PES)

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1 5.2. Introduction to Payments for Ecosystem Services (PES)
Sheila Wertz-Kanounnikoff, CIFOR

2 Overview To introduce central concepts of PES and show how carbon finance fits into that framework PES design features (contingent payments, performance-based, voluntariness) PES concepts and experience relevant for performance-based carbon financing

3 Overview Logic of PES Definition and scope Bundling approaches
PES and carbon finance Lessons from PES for carbon finance (REDD)

4 1. The logic of PES Conversion to pasture Forest conservation
Benefits to ecosystem managers Reduced H2O services Problem: costs > benefits, and forest conservation not profitable ! Costs to downstream population and others Loss of biodiversity Carbon emissions Source: Engel, Pagiola & Wunder, 2008

5 Forest conservation with ES payments
1. The logic of PES Conversion to pasture Forest conservation with ES payments Benefits to ecosystem managers Payments Min. payment Reduced H2O services Payment for service Costs to downstream population and others Loss of biodiversity Max. payment Carbon emissions Source: Engel, Pagiola & Wunder, 2008

6 1. The logic of PES Idea: Those who provide ES get paid for doing so (provider gets) Those who benefit from ES pay for provision (user pays) PES are popular for perceived simplicity and cost-effectiveness PES = new paradigm for contractual conservation

7 Example from Costa Rica

8 2. Definition and scope of PES
At CIFOR, PES are defined as voluntary transactions in which a well-defined ES (or a land use likely to secure that 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 (conditionality). Source: Wunder (CIFOR), 2005  Four areas of application: carbon, watershed, biodiversity and landscape beauty

9 PES definitions – between hard core and periphery
PES Core “PES-like” Schemes Other Economic Incentives PES Core 5 criteria Theory & some private PES “PES-like” Schemes: Some of 5 criteria Public agro-environmental schemes; eco-labels (e.g. ecotourism), etc. Other Economic Incentives: Any “payment” for any “environmental service” by “anybody” ICDPs, park-ranger salaries, reforestation subsidies, etc. Source: Wunder 2008 (CIFOR)

10 Economic precondition of PES
PES only useful for strategic sub-spectrum of ES types and ES producing areas: Environmental services (ES) ES = externality (water quality, carbon emissions) ES = truly threatened WTP > WTA + TC

11 Types of PES schemes (categories of ES buyers)
User-financed Government-financed Features Mostly small-scale mostly single service/few buyers focused (seldom side-objectives) large-scale (nation-wide) many services State acts as ES buyer less focused (multiple side-objectives / politics) Pros Targeted to high-service, high-threat, & low cost areas often close to 5 PES principles (efficient) Adequate for ES buy-in with stated WTP, but free-riding prevails administrative economies of scale Cons hard to mobilize voluntary payments for multi-user externalities (biodiversity) often high start-up costs Often non-targeted, uniform payments (low additionality) max 4-5 PES principles (less efficient Examples Vittel, France Pimampiro, Ecuador PSA, Costa Rica & Mexico Vietnam 5MHP Source: adapted from Wunder et al. 2008, SI Ecol Econ.

12 Costs of PES Opportunity costs (+ land owner’s protection costs)
Transaction costs

13 3. Direct and “bundled” payments
Direct payments: Payments are targeted specifically to ES of interest Has potential to tap new funds (private sector) Exist for water and carbon services, less for biodiversity

14 Selling few ES may not cover OC of forest conservation  scope for bundling?
Source: USAID 2007, PES Sourcebook

15 (1) BUNDLING: A bundle of services is sold to the same single buyer (e
(1) BUNDLING: A bundle of services is sold to the same single buyer (e.g. government-financed scheme)

16 Direct and “bundled” payments
Three variants: bundling, layering, piggy-backing Coordination and free-riding challenges Despite attractiveness, few examples in practice New opportunities with carbon markets, notably REDD (e.g. joint carbon-biodiversity payments)? Source: Wunder and Wertz-Kanounnikoff (forth.), Journ. f Sust. Forestry

17 4. PES and carbon finance Carbon = ES
Biological carbon sequestration (A/R CDM) Reduced C emissions from land use and forestry (REDD) Carbon investors = buyers of carbon service PES & carbon finance seek output-based performance contracts (voluntary, conditional deals) Carbon finance adds international dimension: international PES (I-PES)

18 International buyers of carbon services (compliance/voluntary markets, aid)
$$ $$ $$ ER ER ER $$ ER $$ ER Deal with projects (CDM) or sub-national entities (REDD?) Deal with countries (REDD?) Deal with countries and projects (REDD?)

19 “ideal REDD” = multi-level PES
Source: Angelsen and Wertz-Kanounnikoff, 2008ˆ

20 5. Lessons from PES for REDD
Study by IIED-WRI-CIFOR, conducted in , commissioned by the Government of Norway (Bond et al. 2009) Review of 13 PES schemes with features relevant to REDD

21 Selected PES and CBNRM programs

22 Characteristics of Amazon cases

23 Finding: Design features
Payments Theory: at minimum, payments need to meet opportunity costs (plus transaction costs) Our study finds: great diversity in payment levels (negotiated, administratively set) and forms (e.g. conditional land tenure) Conditionality Theory: key criterion for performance-based schemes Our review finds: except for 1 case (Pimampiro, Ecuador), little evidence that fully applied

24 a. Can PES be effective? Promising tool, with regional differences (PES mainly in LA, emerging in SEA and Africa) But, effectiveness difficult to assess because Many schemes still too recent Insufficient baseline data (no control area) Few analyses based on solid monitoring and evaluation methods Performance payments (PES) = key for REDD , but upfront conditions needed To address DD drivers, PES = promising, but not sufficient  need governance investments & extra-sectoral transfers

25 Regional distribution of PES schemes in 2007
In total 145 PES schemes, 15 with unclear status (excluded in graph) Source: adapted from USAID 2007, PES Sourcebook


27 Preconditions for PES Preconditions Economic
- ES = externality AND value of the ES (user’s WTP) > providers opportunity costs (WTA) & transaction costs (TC) Cultural PES need social acceptance; where non-economic value systems are important and functioning, resistance to PES is likely (e.g. perception of water access as human right hinders ‘water PES’) most cultural contexts seem to accept PES Institutional Need de-facto rights over ES-producing asset in weak governance context, enforcement could be enhanced by contracts with independent provisions in case of non-compliance (e.g. reduced/suspended/stopped payments) rather than only reliance on local juridical system Informational Transaction costs of implementing PES schemes (negotiations, baseline setting, system design) need to remain affordable. can be real challenge in small schemes, when buyers and sellers are highly diverse, or when ES is biophysically complex Source: Wunder 2008, RFF paper

28 b. Can PES improve livelihoods?
Concerns: Weakening of land and resource rights of indigenous and forest dependent communities Equity in opportunities to participate as sellers of carbon Equity in payment levels and terms – vulnerable communities may be subjective to exploitative contracts Local economy impacts which affect non-participants

29 Can PES improve livelihoods?
Study findings: PES schemes have not led to weakening of land tenure, and in some cases have strengthened it Direct evidence from our case studies on the impact on livelihoods is limited Even if initially access constraints for poor, subsequent corrections occurred (e.g. Costa Rica) Despite seemingly low payment levels, PES is popular with farmers (Costa Rica, Mexico) Little evidence of local economy impact on prices and employment

30 PES and poverty To enhance livelihood/equity outcomes:
“no-harm” approach Narrow focus on environmental goal Undesired livelihood/equity side-effects are mitigated (e.g. ‘collective contracting’-provision in Costa Rica PSA) “pro-poor” approach Poverty reduction objectives are explicit side-objectives (e.g. in areas where rural poverty is pervasive) participation of the poor is actively pursued (e.g. RUPES – rewarding upland rural poor for ES)

31 …but possible trade-offs poverty vs environment

32 Summary Carbon finance (CDM, REDD) = I-PES
PES = new contractual conservation paradigm, can provide important lessons for notably REDD scheme design incl, accompanying policies Poverty alleviation is important side-objective, but should not become primary goal Payments for REDD provides new opportunities for securing other ES via ‘bundling’, notably biodiversity

33 Further reading USAID PES Sourcebook k.Contents.php World Bank - Introduction to PES df?&resourceurlname=IntroToPES.pdf CIFOR – PES Rewarding Upland Poor for Environmental Services asp The Katoomba Group (Regional Network for China and East-Asia) Ecosystem Marketplace

34 Thank you for your attention!

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