1

Narration: In this presentation you will learn about the central concepts of payments for ecosystem services, or PES ,and about how carbon finance fits into that framework. You will learn about PES design features, such as conditionality, performance-based approach and voluntariness, and about performance-based carbon financing.

2

Narration: The presentation is divided into five sections. First, the logic of PES is presented. Second, we introduce the definition and scope of PES. Third, bundling approaches are described. Fourth, we cover the link between PES and carbon finance. Fifth and finally, lessons from PES for carbon finance, notably reducing emissions from deforestation and forest degradation (REDD), are presented.

3

Narration: Payments for Ecosystem Services, or PES, are schemes that are designed to compensate communities for creating, conserving, and restoring natural resources that provide public benefits.

PES are most effective in ‘win-lose’ or ‘lose-win’ scenarios, which are situations with hard trade-offs between the environment and the landowners’ economic self-interests. As depicted in thisslide, without any PES, a land user residing in the upper watershed may find it more profitable to gradually deforest his land for agricultural purposes than to conserve it. This could ultimatelyhave negative impacts on residents of the lower watershed due to the lost water regulationbenefits from forest cover, as well as on the global community in terms of lost biodiversity and carbon emissions. While land users in the upper watershed ‘win’, residents in the lowerwatershed ‘lose’. On the other hand, the downstream municipalities could enforce an environmental regulation that prohibits the upstream landowner from deforesting. Here, the land manager loses, while the broader society and the environment win. In these conflictsituations, PES can help bridge gaps through compensation.

4

Narration: Under PES, local landholders and users would receive direct, contractual and conditional payments in return for adopting practices that secure ecosystem conservation and restoration. This gives the land users incentives to consider ecosystem services in their land use decisions.

In recent years, the recognition of environmental services and their value has led to efforts to internaliseenvironmental services through direct payments for environmental services (PES). From an economic perspective, the loss of ES is explained by the fact that most of these services present externalities or public goods to which, as long as provided for free, their owners will not give much attention when making land use decisions. The idea of PES consists therefore of external ES beneficiaries making direct, contractual and conditional payments to local landholders and users in return for adopting practices that secure ecosystem conservation and restoration and thus the provision of ES (Wunder 2005). In this way land users are expected to receive a direct incentive to include ES in their land use decisions, ideally resulting in more socially optimal land uses than would occur in the absence of such payments.

Let’s illustrate this logic again by looking at two scenarios in this slides. In the first, to the left, we see the situation without any PES. Here, the land users residing in the upper watershed may find it more profitable to gradually deforest their land for agricultural purposes than to conserve it. Ultimately, this can imply negative impacts on residents of the lower watershed due to the lost water regulation benefits from forest cover (but also to the global community in terms of lost biodiversity and carbon emissions) which is depicted by the lower boxes to the left. While land users in the upper watershed “win”, residents in the lower watershed “lose”. On the other hand, the downstream municipalities could enforce an environmental regulation that prohibits the upstream landowner from deforesting. This is depicted by the light green box in the second scenario to the right. Here, upstream land managers “lose” in terms of lower benefits compared to the first scenario, while the broader society and the environment “win”.

In these conflict situations, PES can help bridging gaps through compensations - as depicted by the dark green box - which need to be higher than the benefits from converting forests to non-forest land uses (in economic terms: cover at least the opportunity costs of forest conservation).

5

Narration: Paying people for providing ecosystem services is sometimes referred to as the ‘provider gets’approach. It is a different approach to the more widespread ‘polluter pays’ principle. Policy measures that are based on the polluter pays principle, such as taxes or pollution charges, require those who create environmental damage to pay for the damage they cause. PES are becoming increasingly popular for their perceived simplicity and greater cost-effectiveness. PES presents a new paradigm for contractual conservation, which consists of incentive-based, voluntary deals rather than imposed command-and-control measures.

As has been pointed out (by Pagiola et al. 2005), it does not matter -- from a pure efficiency perspective –whether ‘polluter pays’ or ‘provider gets’ applies. According to the Coase theorem from economic theory, either approach will yield the same result provided that markets are competitive, property rights are enforceable, and there are no transaction costs (Coase 1960). In practice, however, few if any of these conditions hold in the case of environmental services (Pagiola et al. 2005). The argument is that (i) environmental services have the peculiar characteristic of being the cumulative result of a wide range of spatially dispersed land uses, and (ii) monitoring the impact of many land users scattered over a landscape on the provision of environmental services would be prohibitively costly. The latter is partly reflected by the insufficient compliance with many land-use laws, such as deforestation bans and fire prohibition, especially in developing countries where equity concerns play an additional role and where adopting a polluter pays approach would often impose the cost of environmental protection on poorer land users rather than on better-off service beneficiaries (Pagiola et al. 2005). These elements argue in favour of a provider gets approach rather than a polluter pays approach when seeking to internalise the generation or conservation of environmental services, especially in the context of developing countries.

PES are becoming increasingly popular for their perceived simplicity and greater cost-effectiveness. PES emerged partly in response to the perceived limited effectiveness of holistic, indirect, non-conditional approaches. One is integrated conservation and development projects (ICDPs) that seek to achieve conservation goals by changing production systems and broadly improving landowners’ livelihoods, but so far have achieved little in terms of shifting tropical land-use trends (Sayer 1995, Brandon et al. 1998). Sustainable forest management has been another major donor investment approach aiming for increased, lasting forest-based incomes, particularly from timber, but with only scattered successes in terms of changing silvicultural practices in the tropics (Rice et al. 1997, Poore 2003). There are increasing fundamental doubts as to how much sense it makes to forcibly link conservation and poverty alleviation agendas when trade-offs outweigh synergies (Wunder 2005). Moreover, there are compelling theoretical arguments that PES schemes are more cost-effective than ICDPs (Simpson and Sedjo 1996, Ferraro and Simpson 2002). Hence, instead of presupposing win-win solutions, PES recognise the existence of sometimes harsh trade-offs in landscapes with mounting land-use pressures, and seek to reconcile conflicting interests through compensation (Wunder 2005).

Finally, PES present a new paradigm for contractual conservation which consists of incentive-based, voluntary deals rather than imposed command-and-control measures.

6

Narration: This is an example of how PES plays out in practice: trees get protected for the environmental services they provide in Costa Rica.

7

Narration: No consensus definition of PES exists in the literature. While some prefer broader delimitations, a narrower one, based on the theoretical literature and also used at CIFOR, defines PES through five criteria: 1. voluntary transactions in which 2. a well-defined ecosystem service or a land use likely to secure that service 3. is bought by a minimum of one buyer 4. from a minimum of one provider 5. if and only if the provider continuously secures the provision of the service, which is called

conditionality

This definition captures the innovative features that characterise PES as a new type of instrument. The first innovative feature refers to voluntary participation. This reflects a bottom-up perspective to natural resource management that focuses on cooperation between stakeholders rather than the coerced top-down type approach of natural resource management of the 1970s and 1980s.

Other innovative features of PES are criteria 3 and 4, which describe a direct transaction between the supplier and demander of environmental services, and criterion 5, the conditionality requirement, which explicitly demands remuneration after the services have been rendered.

All these features together distinguish PES from other similar incentive payments, such as eco-subsidies or tax cuts for environmentally friendly actions. Currently, PES has been used mainly for four environmental services: carbon, watershed, biodiversity and landscape beauty.

8

Narration: This slide shows the link between PES and other economic incentives with ‘PES-like’ schemes as intermediate variant.

There are many more ‘PES-like’ schemes than genuine PES schemes. PES-like schemes are those that fulfill most but not all criteria. In an in-depth assessment of two developing countries, Bolivia and Vietnam, no single scheme strictly satisfied all criteria, but several were PES-like schemes. The predominance of PES-like schemes over ‘pure’ PES schemes can be illustrated by discussing each criterion separately.

First, PES is conceptualised as a non-compulsory, negotiated framework, which distinguishes it from command-and-control measures. This presupposes that potential providers have real land-use choices, which is not always the case.

Second, services that are bought need to be well-defined. In reality, what is thought to provide a given service is often not scientifically proven, and sometimes not even likely, especially when it comes to hydrological services.

Third, there should be resources going from at least one buyer to, fourth, at least one provider. However, in practice some initiatives are financed by external donors rather than service buyers, while others charge the service users but use these resources for traditional project activities rather than payments to service providers.

Finally, in a PES scheme, user payments should depend upon the continuous provision of the services. This conditionality criterion seems to be the hardest one to meet, and in many developing countries, this business-like PES feature, which means “you only pay for what you get”, raises substantial political resistance (Wunder 2005, 2007).

9

Narration: PES will not compensate all ecosystem services. It will apply only to smaller, strategic subsets of the most valuable services. These include externalities, such as the uncompensatedprovision of clean water from fertilizer-free agricultural practices. A further subset consists of only those services that are truly threatened, as only these will attract potential buyers. Of these, there will only be payments for those services that are most valuable, because the willingness to pay, or WTP, is greater than the willingness to accept compensation, or WTA.

Instead of compensating the generation or conservation of any ecosystem service (green box), PES will only pay for the sub-set of services that present externalities such as the uncompensated provision of clean water from fertilizer-free agricultural practices. This is depicted by the orange box. In addition, among the sub-set of ecosystem services that present externalities, only those truly threatened will attract potential buyers since otherwise there wouldn’t be an incentive to pay. This is depicted by the purple box. Moreover, among the threatened externalities, there will only be payments for those that are most valuable since the willingness to pay will be greater than the willingness to accept. This is depicted by the red box. Hence, PES will only affect a strategic sub-spectrum of ES types and ES producing areas.

10

Narration: The current PES literature distinguishes user-financed schemes and government-financed schemes to define who is the immediate payer and, more importantly, who has the authority to make decisions about paying the bill.

Cost-recovery measures are also considered. Both have particular pros and cons:

In a user-financed PES programme, the buyers are the actual users of an environmental services. A PES programme in which a hydroelectric power producer pays upstream land users to conserve the watershed above its plant is an example of this kind of PES programme. These schemes tend to be more targeted and close to the five PES principles. It has been argued that this kind of PES programme is likely to be particularly efficient, because the actors with the most information about the value of the service are directly involved, they have a clear incentive to ensure that the mechanism is functioning well, and they can directly observe whether the service is being delivered. They also have the ability to renegotiate or terminate the agreement if needed. This kind of PES programme is referred to as ‘Coasian’ as it most closely resembles the negotiated solution envisaged in the Coase theorem.

In government-financed PES programmes, the buyers are a third party acting on behalf of service users. This is typically a government or state agency, but it could also be an international financial institution, or in the case of global externalities, a conservation institution. As these buyers are not direct users of the environmental services, they have no first-hand information on its value, and generally cannot observe directly whether it is being provided. They also do not have a direct incentive to ensure that the programme is working efficiently. On the contrary, they are often likely to be subject to a variety of political pressures. Because of these factors, it has been argued that such programmes are less likely to be efficient. However, it should be noted that government-financed PES programmes may be more cost-effective than user-financed PES because of economies of scale in transaction costs.

11

Narration: The costs of PES can be differentiated by the landowner’s opportunity costs, including protection costs, and by the transaction costs of managing the PES scheme. The different types of transaction costs are depicted in this slide.

Typically, the transaction costs involved in setting up PES schemes are substantial. However, once they are up and running, the costs are reasonably low. At the beginning, considerable time and effort need to be dedicated to identifying sellers and buyers of environmental services. This step is necessary to resolve possible situations of lacking service-provision baseline studies, unclear property titles, illegal resource uses, distrust between buyers and sellers, as for the negotiation and structuring of deals. Once established, most PES systems will have manageable monitoring, control and enforcement costs.

Sometimes the process of negotiating PES schemes might actually make it explicit that conservation is not profitable enough, compared to options that involve environmental degradation. For instance, PES-led biodiversity conservation may not be economically attractive compared to highly profitable land-use alternatives such as oil palms, soybeans, or perennial crops. In this case, the land manager will reject the PES offer. Negotiations might also reveal prohibitively high transaction costs associated with the structuring of PES deals. Even so, the discovery of these ‘deal breakers’ can be a valuable insight into the economic rationality of conservation on any particular land area.

12

Narration: Direct payments have the advantage of being targeted specifically to the environmental service of interest and therefore there is potential to raise new funds for conservation, especially from the private sector. In France, for example, a drinking water company pays local farmers for watershed conservation services to ensure high water-quality levels. Other new conservation clients could be municipal water companies or water-user associations paying for the upstream provision of watershed protection functions.

Direct payments exist for water and carbon services, but less for biodiversity. This is because although there is a general appreciation for biodiversity conservation efforts, few are willing to pay for them. The services provided by biodiversity include pollination services, genetic reservoirs or existence values. Yet, most of these services, or their decline over time, are intangible and their protection is perceived as a luxury, or at least as less urgent to human well-being than, for example, the effects of climate change.

As biodiversity benefits are public and non-excludable goods, many people benefit and there is a strong incentive to free-ride on service provision. Moreover, there are thresholds in the supply of biodiversity conservation, such as minimum forest cover, below which the desired biodiversity conservation will fail. All this makes it more difficult to commercialise biodiversity conservation services to targeted buyers than it does for other environmental services.

Still, pilot experiences of direct biodiversity payments exist. Conservation concessions, for example, are time-bound agreements to conserve a given land area instead of developing or degrading it. Often introduced to compete directly with use-related concessions such as timber, they have been applied by Conservation International. In Guyana, for example, Conservation International negotiated a renewable 30-year timber sales agreement with the national government to manage 80 000 hectares in southern Guyana for conservation. Grants from the Global Conservation Fund are another variant of direct biodiversity payments. The Fund uses private foundation funds to co-finance the creation, expansion and long-term management of private protected areas in the world’s biodiversity hotspots, including marine regions.

13

Narration: Another way to market environmental services is to sell conservation in a package along with other services provided from the same land area. Conserving a forest plot, for example, can provide a targeted water regulation service as well as additional benefits, such as carbon storage, scenic beauty and biodiversity conservation. Since the willingness to pay for these other services might be higher, biodiversity could possibly ‘piggy-back’ on these more marketable services. In other words, selling ecosystem services jointly can help access diverse sources of funding and make conservation a more competitive land-use option.

14

Narration: In practice, three main strategies of joint service sales have been applied that are illustrated in this slide. 1. Bundling. Bundling refers to packaging one environmental service with other services and selling them to the same single buyer. In general, service

bundling is an adequate strategy only when the same buyer has several simultaneous service interests, such as GEF having a broad environmental mandate involving several services.

2. Layering. Layering is when buyers of one particular service and other service buyers pool resources to continuously pay landowners for actions that promote the joint delivery of various services from the same plot. Unlike the previous scenario, layering sells multiple services to different buyers.

3. Piggy-backing. Piggy-backing attempts to integrate interests of conserving one environmental service into PES schemes providing other environmental services, but without explicitly or continuously paying for the biodiversity component. Watershed protection is the preferred biodiversity partner here, because continuous water provision to water users constitutes a convenient, lasting payment vehicle. In these schemes, biodiversity could be an entirely free rider, but it is more common that biodiversity conservation organisations help covering the significant start-up costs of a PES scheme, in return for not having to pay the recurrent future payments.

BundlingBundling refers to packaging one environmental service with other services and selling them to the same single buyer. For instance, this is the case of the aforementioned GEF-financed initiative in Colombia, Nicaragua and Costa Rica, paying for both the biodiversity and carbon benefits that the introduction of silvopastural systems provides. For each land-use change, an index figure denotes the assumed carbon and biodiversity benefits, respectively, and the sum of points gathered determines the size of the payment to the landowner (Pagiola et al. 2004). In several national PES schemes, such as the Costa Rican PSA or the EU and US ones, the state acts implicitly as representative of several service users and makes integrate payments for several services from the same plot, though here the partial service contribution from plots is usually not measured. WWF’s Danube initiative, financed by GEF, rewards conservation in the lower Danube and its delta (Bulgaria, Moldova, Romania and Ukraine), with joint biodiversity and watershed benefits. In general, service bundling is an adequate strategy only when the same buyer has several simultaneous service interests, such as GEF having a broad environmental mandate involving several services.

LayeringLayering is when buyers of one particular service and other service buyers pool resources to continuously pay landowners for actions that promote the joint delivery of various services from the same plot. Unlike the previous scenario, layering sells multiple services to different buyers. This is sometimes also referred to as ‘bundling,’ but really has distinct marketing implications, because different buyer interests here need to be addressed through separate sale strategies. For instance, in the Noel Kempff Mercado Climate Action Project in Bolivia, nature conservation groups and American electricity producers interested in carbonoffsets came together to jointly finance the extension of a natural park that would avoid deforestation and forest degradation, especially from pre-existing logging concessions. Under the umbrella of the Costa Rican national PSA programme, private buyers of particular watershed services, such as utility companies and breweries, can also earmark funds to be spent in priority areas of their particular watershed of interest, where they are jointly applied with state resources paying for all four environmental services. This strategy of adding layers of buyers for conserving priority conservation areas would seem to be the most promising joint strategy. Getting all beneficiaries to pay would eventually make conservation a more competitive proposal. In practice, however, few such multiple-buyer deals have been developed. One reason is that the transaction costs of coordinating between several independent buyers are often high: it is hard for many PES schemes to identify one reliable buyer, so the challenges of managing several of them may be daunting. Secondly, priority interventions in the landscape for different services may often diverge. There are not only synergies but also partial trade-offs in the provision of ecosystem services. A study in California, for example, found surprisingly low, and various negative spatial correlations between biodiversity and six other locally desirable ecosystem services. In other words, the calculation of targeting one single service, such as watershed protection, as an umbrella service for others to be provided in synergy may not necessarily work out, even because they happen to be concentrated in different places in the landscape. Finally, some potential service buyers may from the outset shy away from deals that other buyers are already paying for, since the additionality of their own incremental payment may be rendered dubious: “are we not actually ‘paying money for nothing’ here, if our separate and incremental contribution cannot be unambiguously classified?” Successful multiple buyer schemes may require that scheme implementers are able to clearly delimit the impact of different buyers’ contributions. Even when these new service buyers do believe that their payments would have a marginal effect, an incentive emerges for them to deliberately try to free ride on the payment of the alternative service buyers—at least as long as there is significant synergy in the provision of the two services.

Piggy-backingPiggy-backing attempts to integrate interests of conserving one environmental service into PES schemes providing other environmental services, but without explicitly or continuously paying for the biodiversity component. Watershed protection is the favorite biodiversity partner here, because continuous water provision to water users constitutes a convenient, lasting payment vehicle. In these schemes, biodiversity could be an entirely free rider, but it is more common that biodiversity conservation organisations help covering the significant start-up costs of a PES scheme, in return for not having to pay the recurrent future payments.In Fundación Natura’s PES scheme in the Los Negros Valley in Bolivia, 27 farmers are paid for protecting about 1300 hectares of a forested watershed providing water to downstream irrigation farmers, but at the same time also protecting the threatened cloud forest habitat of 11 species of migratory birds. A foreign conservation donor has provided significant funding in the start-up phase, while the downstream municipality recently has started contributing payments, and irrigator payments are hoped to start in order to secure the scheme’s financial sustainability over time.

Source: Wunder, S. and Wertz-Kanounnikoff, S. 2009 Payments for ecosystem services: a new way of conserving biodiversity in forests. Journal for Sustainable Forestry 28: 573-593.

15

Narration: However, there is relatively little use of service “bundling” and “layering” in practice. Obstacles include a lack of demand for multiple services, trade-offs from services, high transaction costs and free-rider behaviour. Promising fields of application include joint carbon-biodiversity payments, given the strong renewed interest in REDD. By having deals implemented at the national level, the root problems could be kept in check.

If service “bundling” and “layering” are catchwords in the current PES debate, why has relatively little of this so far been happening on the ground? One reason could simply be that lacking maturity of PES tools has hitherto inhibited greater sophistication. Yet, there are several real problems. Few service users are genuinely interested in buying more than one service, implying solid obstacles to “bundling.” There can be trade-offs between the solutions that optimize the provision of each ecosystem services, e.g., fast- growing exotic trees being best for carbon sequestration, but the resulting forests containing little biodiversity. These trade-offs are obstacles both for “bundling” and “layering”. Finally, multiple buyer identification and satisfaction can imply high transaction costs, and free-rider behavior may arise among them. Conservationists sometimes tend to overestimate the synergies between ecosystem services, and to neglect the costs associated with the implementation of bundled PES schemes.

Nevertheless, there are also some promising fields of application where “layering” or “bundling” are a natural choice. Joint carbon- biodiversity payments are an obvious option vis-à-vis the strong renewed interest in “reducing emissions from tropical deforestation and degradation (REDD),” following the proposal by Papua New Guinea and Costa Rica at the 11th Convention of Parties of the United Nations Framework Convention on Climate Change (UNFCCC) in 2005 in Montreal. There is probably a clear spatial correlation between the interests of preserving high-biodiversity forests and dense tropical forests with high carbon content. If deals are being implemented at the nation-state level, the incremental transaction costs of packaging and the incidence of free-rider incentives may be kept low, thus keeping some checks and balances on the two root problems identified in this section.

Source: Wunder, S. and Wertz-Kanounnikoff, S. 2009 Payments for ecosystem services: a new way of conserving biodiversity in forests. Journal for Sustainable Forestry 28: 573-593.

16

Narration: Carbon finance can be viewed as one variant of PES. With carbon being one type of environmental services, there are two main forms of carbon-based PES schemes. One is biological carbon sequestration, which has become the afforestation and reforestation CDM. Another is reduced carbon emissions from land use and forestry which is currently discussed under REDD. Both carbon finance and PES consist in output-based performance contracts, which means payments are conditional on actual performance. Since carbon buyers are mainly from different countries than are the sellers, these schemes are also referred to as international payments for environmental services.

17

Narration: A key question for carbon-IPES – notably REDD - concerns the scale at which accounting should be done and incentives offered for REDD activities. Should international accounting be limited to sub-national or to project-level activities or to reductions at the national level, or should they occur at both levels, which is the nested approach?

The current debate on REDD leans towards promoting a national approach, as depicted in the centre of this slide, where deals are made directly between carbon investors and country governments. Still, while moving towards a national approach, the transition period will likely reflect the situation of a nested approach, where deals are made at both project and national levels.

Source: Angelsen, A. et al. 2008 What is the right scale for REDD? The implications of national, subnational and nested approaches. Infobrief 15, CIFOR, Bogor.

18

Narration: An ideal REDD consists of a multi-level PES scheme. One level is between international carbon investors and national governments, seen in the upper part of the figure. The second level takes place within the country to distribute carbon revenues from the national level to landholders in the form of a national PES scheme, seen in the lower part of the figure.

Source: Angelsen, A. and Wertz-Kanounnikoff, S. 2008 What are the key design issues for REDD and the criteria for assessing options? In: Angelsen, A. (ed.) Moving ahead with REDD – Issues, Options and Implications. CIFOR, Bogor.

19

Narration: In support of the N-CFI, the Norwegian Royal Ministry of Foreign Affairs commissioned the International Institute for Environment and Development (IIED), the Center for International Forestry Research (CIFOR), and the World Resources Institute (WRI) to carry out a joint review to help inform the design and implementation of national and sub-national REDD mechanisms.

The review had three objectives:

Objective 1 was to review the design and performance of selected PES and other incentive-based initiatives in four major tropical forest regions that are broadly aligned with the geographic focus of the N-CFI. These are the Amazon Basin, the Congo Basin, the miombowoodlands of eastern and southern Africa, and Southeast Asia.

Objective 2 was to review the current state of knowledge on key cross-cutting issues related to payments for avoided deforestation and forest degradation, and the challenges they pose for REDD, including estimating the costs of REDD, improving governance of forests, and measuring forest emission reductions.

Objective 3 was to produce recommendations and design criteria for Norway’s International Climate and Forest Initiative.

20

Narration: The study focused on the national and sub-national levels, and looks at 13 case studies (Table 1) from the four regions that reflect key features of PES-type schemes: i) payment design features; ii) effectiveness and efficiency; iii) equity or distributional impacts; and iv) livelihood impacts on households (Wunder et al. 2008).

This includes the role of incentives in selected examples of community- based natural resource management (CBNRM) programmes. In many of these programmes, devolution of responsibility has been accompanied by fiscal benefits to the communities. In some of the wildlife-based programmes of eastern and southern Africa, the incentives from these programmes have been substantial, especially at the local scale (i.e., to communities) and in cases to local governments.

Source: Bond, I. et al. 2008 Incentives to sustain forest ecosystem services: A review and lessons for REDD. IIED, CIFOR, WRI (http://www.iied.org/pubs/pdfs/13555IIED.pdf)

21

Narration: In this slide you will find more in-depth information on PES schemes from Latin America.

Source: Wertz-Kanounnikoff, S., Kongphan-Apirak, M. and Wunder, S. 2008 Reducing forest emissions in the Amazon Basin: A review of drivers of land-use change and how payments for environmental services (PES) schemes can affect them. Working Paper No. 40, CIFOR, Bogor.

22

Narration: The key finding from the case studies is that there is considerable diversity in all aspects concerning payments, in terms of the amounts paid and how they are agreed. Forms of payment also vary: Cash is only one form of payment and alternative forms – such as conditional land tenure – can also be effective.Conditionality and sanctions are important design features but there is little evidence of them being used outside the Pimampiro Scheme, where some families were excluded because of non-compliance. This deficiency occurs because the rules are too flexible and ad hoc, the programmeis too new or because programme monitoring is inadequate.

The key finding from our small number of case studies is that there is considerable diversity in all aspects concerning payments features. Two programmes in Latin America – Pimampiro(Ecuador) and the PSA-H (Mexico) – pay between US$6–12 and US$27–£6 per hectare per annum respectively. In Vietnam, the government pays between US$3 and US$6.5 per hectare per annum, although this is considered to be low compared with alternative land uses (Liss2008) and payments have recently been doubled (Pham Thu Thuy, pers. comm.) In Brazil’s BolsaFloresta, payments are made to both families (US$50/month) and to the community (US$2,500 per annum). Similarly, under the Nhambita Community Carbon Project in Mozambique, individual farmers can benefit from carbon sequestration payments, but the community as a whole also benefits from payments for avoided land-use change in an area adjacent to the Gorongosa National Park. Cash income is only one form of payment and experience suggests that alternative payment forms – such as conditional land tenure – can also be effective. The Sumberjaya site in Indonesia is one where facilitators are experimenting with securing land rights for farmers rather than direct cash payments per se. Other alternative conditional payment forms could also be explored.

Although conditionality and sanctions are important design features, there is very little evidence in our case studies of them being fully applied outside of the Pimampiro Scheme, where some families were excluded from the programme due to non-compliance (Wunder and Alban 2008). Elsewhere, the use of conditionality has been deficient – either because the rules are too flexible and ad hoc, and the programme is too new (Bolsa Floresta), or because programme monitoring is inadequate, making exclusion and non-payment difficult when contract breaches are discovered (Mexico PSA-H).

Source: Bond, I. et al. 2008 Incentives to sustain forest ecosystem services: A review and lessons for REDD. IIED, CIFOR, WRI (http://www.iied.org/pubs/pdfs/13555IIED.pdf)

23

Narration: There are four key messages from our review regarding the effectiveness of PES, as summarised in this slide. The next three slides present more in-depth information on these points. PES is promising, but the effectiveness is still difficult to assess. For PES to work, certain preconditions must be met and investments that enable the system are required.

This slide summarises the key messages from our review regarding the effectiveness of PES. The subsequent 3 slides present more in-depth information to support the points made here.

First of all, our review showed that PES can be a promising tool although there are regional differences. PES schemes are mainly concentrated in Latin America and still emerging in Southeast Asia and Africa (see also next slide).

Secondly, our selected case studies from the four regions provide little insight into the effectiveness and, indeed, the efficiency of the selected initiatives. There are several important reasons for this: a) in many cases the time elapsed since the start of the initiatives is too short.b) there is insufficient baseline data (and no control area) to compare changes as a result of the project. c) there are very few analyses based on solid monitoring and evaluation methods.

Thirdly, while PES are promising and important instruments for REDD schemes, certain preconditions need to be met in order for PES to be able to function effectively. These refer to economic, institutional, informational and cultural preconditions. For example, there needs to be a willingness-to-pay for environmental services (economic precondition), while there also need to be clear and secure tenure (institutional precondition). Alike, we need to know the linkages between land use practices and environmental service provision to know what type of land use change to pay for and where to target efforts (informational precondition). Finally, there needs to be cultural acceptance of the PES concepts. In some places, water is considered a public good that is free for everyone. Here it may be very difficult to introduce the idea of ‘paying’ for water flow provision.

Fourthly, and particularly relevant to address the drivers of forest emissions (the core objective of REDD), PES are promising but investments in these enabling conditions – notably governance investments – are equally important. Other important investments needed to address the drivers of forest emissions are extra-sectoral transfers.

Source: Bond, I. et al. 2008 Incentives to sustain forest ecosystem services: A review and lessons for REDD. IIED, CIFOR, WRI (http://www.iied.org/pubs/pdfs/13555IIED.pdf)

24

Narration: PES schemes are mainly concentrated in Latin America and are still emerging in Southeast Asia and Africa.

25

Narration: This slide depicts the information on efficiency and effectiveness that was assembled from PES schemes in Latin America where PES is most advanced. As mentioned before, it shows that baselines are hardly explicitly studied, as is the risk of leakage and non-permanence.

Source: Wertz-Kanounnikoff, S., Kongphan-Apirak, M. and Wunder, S. 2008 Reducing forest emissions in the Amazon Basin: A review of drivers of land-use change and how payments for environmental services (PES) schemes can affect them. Working Paper No. 40, CIFOR, Bogor.

26

Narration: There are several preconditions for PES.

Economic precondition

The key economic rationale for PES is that an ‘externality’ exists, that is, compensating an outside service benefit that the landowner (potentially or de facto) provides to external beneficiaries. PES thus recognises hard tradeoffs in conservation: the landowner and the external beneficiaries (downstream water users, global carbon buyers, etc.) have diverging interests, and unless the latter compensate the former, the service will be lost. Secondly, the value of the service(s) at hand (determining the environmental service user’s willingness-to-pay *WTP+ for PES) must exceed the environmental service provider’s opportunity costs, i.e., the profit foregone from abandoning the first-best land-use plan (determining the environmental service provider’s willingness-to-accept [WTA] PES, plus transaction costs [TC]). In some situations, profits from alternative land uses may be too high for conservation to compete or transaction costs are prohibitive for PES (i.e., minimum WTA + TC > maximum WTP).

Cultural precondition

Economic incentives constitute the core of PES. But if environmental service providers feel little motivated by receiving payments or consider them socially inappropriate, then PES will not work. When non-economic value systems are important and functioning, there may be strong resistance to the introduction of PES. Nowhere is this as apparent as with water access, often considered a human right that is threatened by PES monetisation. The so-called “Andean Water Vision,” built on indigenous systems of upstream-downstream reciprocity, has in particular proved to be at odds with watershed PES and is locally considered a neoliberal Trojan horse. According to psychological experiments, introducing (small) monetary payments on top of (strong) pre-existing intrinsic values (e.g., paying people to protect their own revered forest) could at worst undermine rather than strengthen conservation. In most cultural contexts, however, PES are currently being accepted. Where traditional systems become dysfunctional (e.g., due to increased resource pressures), PES can also gain acceptability. Using non-monetary PES payments can in some cultural circumstances be preferable. The PES mechanism may thus be designed adaptively, tocomplement pre-existing values and natural resource management systems.

Institutional precondition

Although natural resource externalities are widespread globally, in a few places, PES have been developed locally in a bottom-up way. PES require trust between service users and providers—expecting mutual contract compliance and excluding misleading motives (e.g., users taking over providers’ lands). Since users and providers have inherently conflicting interests, trust seldom develops naturally between them; an honest intermediate broker is required. In fact, the idea of applying PES in most cases comes from external intermediaries. Yet, in situations of great conflict and when rights to the land providing the service are not (and cannot be rendered) exclusive, PES cannot be applied. Given the frequency of these situations in the southern hemisphere, institutional PES constraints are often binding.

Informational preconditionPES are relatively information-intensive, which triggers transactions costs. However, TCs tend to be comparatively higher in the start-up period prior to the first payment (costly negotiation, environmental-service baseline assessment, system design, etc.) than in the operational phase (monitoring, enforcement/sanctioning, administration) when the direct implementation method of PES usually enhances cost effectiveness. For instance, in the two Ecuadorian cases of Pimampiro (watershed) and PROFAFOR (carbon sequestration), start-up costs were US$ 76/hectare and $184/hectare, respectively, while recurrent transaction costs in the operational phase were $7 and $3, respectively (Wunder and Albán 2007). Transactional costs could be a real bottleneck for PES-led conservation, especially when there are multiple environmental service buyers and sellers which are socially diversified, and when the targeted service is biophysically complex. For instance, measuring hydrological linkages to scientific standards may come at costs grossly exceeding the required payments proper, which in most cases will constitute a deal breaker. Small-scale schemes particularly suffer the drawbacks of high start-up costs.

Source: Wunder, S. 2008 Necessary conditions for ecosystem service payments. Paper presented to the conference Economics and Conservation in the Tropics: A Strategic Dialogue. Moore Foundation/CSF/RFF, San Francisco, Jan 31 – Feb 1. Conference Paper Series.

27

Narration: One of the recurring concerns with payments for ecosystem services, particularly in the context of the much larger-scale payment schemes that would be required for REDD, is that indigenous and forest-dependent communities will not benefit or, worse, will suffer harm. This is a critical issue because there are an estimated 60 million indigenous people and a further 400 to 500 million who live in, or close to, forests and depend on them for their survival.

Prospective areas of concern that payments for REDD might impact include: 1. Weakening of land and resource rights of indigenous and forest dependent communities. 2. Equity in opportunities to participate as sellers of carbon. 3. Equity in payment levels and terms. Vulnerable communities may be subjected to exploitative contracts. 4. Local economy impacts, which through effects on food prices and employment can affect both participants and non-participants in PES.

Source: Bond, I. et al. 2008 Incentives to sustain forest ecosystem services: A review and lessons for REDD. IIED, CIFOR, WRI (http://www.iied.org/pubs/pdfs/13555IIED.pdf)

28

Narration: There were five main study findings:1. PES schemes have not led to weakening of land tenure, and in some cases have strengthened it.2. Direct evidence from our case studies on the impact on livelihoods is limited.3. Even if initially access constraints for poor, subsequent corrections occurred. 4. Despite seemingly low payment levels, PES is popular with farmers.5. There is little evidence of local economy impact on prices and employment.The hypothesis that PES tools could lead to inequity and make poverty worse is not borne out by the literature review or by the four regional case studies. The evidence is that some programmes have made small and modest impacts on livelihoods. Recent work on payments for watershed services also concludes that these mechanisms have not yet directly impacted on poverty reduction to any great extent, although their indirect impacts have significant potential for poverty reduction.

Our review of PES schemes, and of equity issues in particular (Background Paper 9), highlights useful lessons on the potential for equitable payment schemes. Importantly, there is little evidence of long-term adverse effects on equity for the four issues above. If anything, PES schemes have proved to generally yield positive impacts on poor people in the areas where they were implemented. Specifically, we have found that:(i) PES schemes have not led to weakening of land tenure and in some cases have strengthened it. (ii) The direct evidence from our selected case studies on the impact on livelihoods is limited. In most cases evidence is absent for the same reasons that it is not possible to ascertain the effectiveness of the case studies (i.e., short time periods and limited data). In Southeast Asia, where PES mechanisms are just emerging, the approach of strengthening land rights (Sumberjaya) or enforcing traditional rights (UluMasen) do have potential livelihood impacts where local people’s rights too often have been ignored.(iii) PES mechanisms have a longer history and are being more widely applied in Latin America than elsewhere (Porras et al. 2008). Initial assessments showed that the first generation Costa Rica national PES scheme was failing to reach poorer farmers and land users who held no formal land titles and could not afford the associated transaction costs. Subsequent iterations of the programme have developed mechanisms to specifically ensure that they are targeted to poor people and that the barriers to entry are either lowered or removed (Grieg-Gran forthcoming). (iv) Small-scale farmers with informal land tenure have been able to participate in some PES schemes, notably the national payment for watershed services scheme in Mexico. One of the measures used in Mexico and more recently in Costa Rica to facilitate participation of small-scale farmers and communities is ‘collective contracting’, where several small-scale farmers conduct the contracting process together and in this way reduce individual transaction costs. Moreover, all national-level PES schemes appear to be making concerted efforts to target poor and marginalised groups, sometimes to an extent that poses a risk to the primary environmental goals of the programmes. (v) The livelihood and equity impacts of the CBNRM programmes in the miombo woodlands are ambivalent. Under CAMPFIRE, the gross benefits per household were substantial compared with alternative sources of revenue in only a few locations characterised by large areas of wild land and low human populations (Frost and Bond 2008). In Namibia, recent household surveys have shown that there are statistically significant benefits to households in the arid western conservancies, but not necessarily in the semi-arid (eastern) conservancies which fall into the miombo woodlands (Bandyopadhyay et al. 2008). The only substantive quantitative survey that addresses equity finds no evidence of elite capture in Namibia (Bandyopadhyay et al. 2004), although qualitative surveys in the northeast do highlight some challenges to community governance that could lead to elite capture (Child et al. 2007). (vi) In spite of seemingly low levels of payment, PES is popular with farmers. There is an eagerness to enter PES schemes (both Costa Rica’s and Mexico’s schemes are over-subscribed) and sometimes a willingness to negotiate permanent payments after a pilot, as in Pimampiro. This enthusiasm is an indication that PES schemes are perceived as advantageous by those involved. (vii) There is little evidence of local economy impacts on prices and employment.

In sum, the hypothesis that PES tools could lead to inequity and exacerbate poverty is not borne out by the literature review or the four regional case studies. The evidence is that some programmes have made small and modest impacts on livelihoods. Recent work on payments for watershed services also concludes that these mechanisms have not yet directly impacted on poverty reduction to any great extent, although their indirect impacts have significant potential for poverty reduction (Porras et al. 2008; Bond and Mayers 2009).

Source: Bond, I. et al. 2008 Incentives to sustain forest ecosystem services: A review and lessons for REDD. IIED, CIFOR, WRI (http://www.iied.org/pubs/pdfs/13555IIED.pdf)

29

Narration: To enhance livelihood and equity outcomes, pilot initiatives must be closely monitored.

This includes the socio-economic impacts on poor households that are both directly and indirectly affected by REDD activities. By rigorously monitoring and assessing poverty effects, and by building on recent and emerging work on REDD and the poor, it is easier to better respond to country-specific conditions and needs.

Up-front clarity about strategies and country needs can help to identify and address potential trade-offs between cost-effectiveness and equity and livelihood concerns. For example, in cases where poverty is less pervasive and there is a narrower focus on the environmental objective of reducing emissions, a ‘no-harm’ strategy, where undesired side-effects on the poor are mitigated, may be more cost-effective. However, in areas where rural poverty is pervasive and contributes to forest emissions, a more ‘pro-poor’ strategy, where participation of the poor is actively pursued, will be more effective.

Source: Bond et al. (2008): “Incentives to sustain forest ecosystem services: A review and lessons for REDD”, IIED-CIFOR-WRI, (http://www.iied.org/pubs/pdfs/13555IIED.pdf).

30

Narration: An example of trade-offs between poverty and the environment is the Mexican PSAHprogramme. This figure shows where the emphasis has been in this project from 2003 to 2006. For example, in 2003, the scheme targeted areas with high poverty, or ‘very high marginality’.However, areas of scarce or threatened environmental services, that is ‘overexploited aquifers’ and ‘deforestation’, were little targeted. Over the years, the emphasis shifted, but at the expense of the other areas. In 2006, it became less focused on zones truly threatened by deforestation, which lowers the programme's additionality.

One example is the Mexican PSAH program, which since 2004 has progressively achieved higher poverty-targeting levels, but correspondingly has become less focused on zones truly threatened by deforestation, which ceteris paribus lowers the program’s additionality (Munoz-Pina et al., 2008). This is depicted in the figure here where the years and the spatial targets are depicted in different colors (2003 in yellow, 2004 in green, 2005 in purple and 2006 in red).

One can see that in 2003, the scheme was targeting areas with high poverty (‘very high marginality’) whereas the areas of scarce or threatened environmental services (i.e. ‘overexploited aquifers’ , ‘high and very high risk of deforestation’) were little targeted. However, over the years, the latter areas were increasingly targeted as well – notably in 2004 (green lines) though then at the expense of targeting the areas where the poor lived (one can see that the green dot on the line ‘very high marginality’ is to the right of the previous year depicted in yellow, whereas the on the line ‘high and very high risk of deforestation, year 2004 yielded greater emphasis compared to year 2003 depicted in yellow).

31

Narration: In conclusion, the key points in this presentation are that1. Carbon finance is essentially an ‘international payment for environmental services scheme.’2. PES refers to a new tool for contractual conservation that can provide important lessons for REDD design and accompanying policies, such as governance investments and extra-sectoralpolicies.3. Poverty alleviation is an important side-objective but should not become a primary goal. This is because there are other instruments that are likely more effective in achieving poverty alleviation than PES and overloading PES schemes with such side-objective risks reducing the overall environmental effectiveness of the system. 4. Payments for REDD provide new opportunities for securing other environmental services via ‘bundling’, especially for biodiversity.

32

33

34

35

36

37