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From the SelectedWorks of Rohit Jindal
January 2012
Payments for Ecosystem Services (PES): evolutiontowards ecient and fair incentives formultifunctional landscapes
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AnnualReviewofEnvironmentandResourceshttp://www.annualreviews.org/toc/energy/37/1
Payments for Environmental Services: evolution
towardefficient
and
fair
incentives
for
multifunc
tionallandscapes
MeinevanNoordwijk1,BeriaLeimona
2,Rohit Jindal
3,GraceB.Villamor
4,MamtaVardhan
5,Sara
Namirembe6,DeliaCatacutan
7,JohnKerr
8,PeterA.Minang
9andThomasP.Tomich
10
1WorldAgroforestryCentre(ICRAF),Bogor16880,Indonesia;email:[email protected]
2WorldAgroforestryCentre(ICRAF),Bogor16880,Indonesia;email:[email protected]
3.BantingPostdoctoralFellow,DepartmentofResourceEconomicsandEnvironmentalSociology,UniversityofAlberta,
Edmonton,T6G2H1Canada;Email:[email protected]
4.CenterforDevelopmentResearch(ZEF),UniversityofBonn,GermanyandWorldAgroforestryCentre(ICRAF);email:
5. InstituteforSustainableEnergy,EnvironmentandEconomy,UniversityofCalgary,Calgary,Alberta,CanadaT2N1N4;
email:[email protected]
6.WorldAgroforestryCentre(ICRAF),Nairobi,Kenya;email:[email protected]
7. WorldAgroforestryCentre(ICRAF),Hanoi,Vietnam;email:[email protected]
8.DeptofCommunity,Agriculture,RecreationandResourceStudies,MichiganStateUniversity,EastLansing,MI 48824;
email:[email protected]
9.WorldAgroforestryCentre(ICRAF),Nairobi,Kenya;email:[email protected]
10AgriculturalSustainabilityInstitute,
UniversityofCalifornia,Davis,California956168523;email:[email protected]
Abstract
Paymentsforenvironmentalservices(PES),ornonprovisioningecosystemservices, target
alignment of microeconomic incentives for land users with meso and macroeconomic
societalcostsandbenefitsoftheirchoicesacrossstakeholdersandscales.Theycaninterfere
with or complement social norms and rightsbased approaches at generic (land use
planning) and individual (tenure, use rights) levels, and with macroeconomic policies
influencing the drivers to which individual agents respond. In many developing country
contexts,communityscalefactorsstronglyinfluencelandusersdecisionswhileunclearland
rights complicate the use of marketbased instruments. PES concepts need to adapt.
Multiple paradigms have emerged within the broad PES domain. Evidence suggests that
forms of coinvestment in stewardship alongside rights are the preferred entry point.
Commodification ofESandESmarketsmightevolvelateron,butrequirestronggovernment
regulationtosetandenforcerulesofthegame.Weframehypothesesforwidertestingand
noregretsrecommendationsforpractitioners.
KEY WORDS: Altruism, Ecological economics, Environmental governance, Rightsbased
approaches,Tradeoff
Pleaseciteas: vanNoordwijkM,LeimonaB,JindalR,VillamorG
B,VardhanM,NamirembeS,CatacutanD,KerrJ,MinangPA,
TomichTP,2012.PaymentsforEnvironmentalServices:evolution
towardefficientandfairincentivesformultifunctionallandscapes.
AnnualReviewofEnvironmentandResources37(inpress)
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IntroductionTheriseofagriculturecoincidedwiththeremarkable
climatic stability of the Holocene1, but land use
changeandfossilfuelusethreatentogetusbackto
thewilderfluctuationsofthePleistoceneandearlier
periods in the geological history of our planet2,3.
Much of agriculture and the dramatic change in
humanpopulationsizeandsocialorganizationthat it
made possible4 was based on reducing dependency
onnaturalecologicalprocessesforsecuringfood,by
finding effective technical substitutes to secure
growthand reproductionofplantsandanimalswith
the most desirable properties through
domestication5. The culture of land, with
agriculture as its shorthand, was contrasted with
wild and uncontrolled nature. Its key featuresapartfromgeneticselectionweremodification ofthe
soil environment by tillage, breaking out of the
constraints of the local nutrient cycle by use of
fertilizers, and controlling pests and diseases by
chemicalmeans6.Manipulationofthewaterbalance
by irrigationanddrainage,however, involved lateral
flows7 of water that created new dependencies on
thesurroundinglandanditswatershedservices.
The fossil record of the Neolithic revolution that
startedagriculturesuggeststhat ithadmixedeffects
onhumanwellbeingwhenhealthandqualityof life
rather thandemographicgrowthareconsidered8. In
terms of the human brain, it required and further
strengthenedtherational,reflectivesystem2 that
canoperateatdiscount rates thatallow investment
inactivitiesthatprovideyield inafewmonthstime,
balancing with the intuitive, subconscious, direct
system 1 that seeks immediate rewards9 and
dominatedinourhuntergatherhistory.Thesystem
3 that responds to and shapes social norms coevolvedwithsocietalorganization.
Aprimarymeasureofthesuccessofagriculturewasasocialsegregationwhenurbandevelopmentbecamepossible, as rural labor could be freed for otheractivities10.Expansionofagriculturealsoimpliedthatforest, landsbeyond theperimeterofthevillages,
and nature, land without direct human influence,declined in area11. Urban lifestyles developed, withdifferent norms, aspirations and expectations.Ironically,partoftheseexpectationsnowadaysrelatetoareturntomorenaturalformsoffarmingalongwithfairertraderelations12andforecoagriculture
landscapesastargetsforrecreationandleisure13
.Thedramatic success in increasing the goods that couldbederived fromagroecosystemscameatacost forthe regulatory and supportive ecosystem services14.Humankind may currently approach planetaryboundaries of safe operating space15: clean water,cleanair,floraandfauna,andmorerecentlythegascompositionoftheatmospherethataffectsclimate.
Econsandhumans
ThalerandSunstein16 positedthatwedeal
withtwospecies:EconsandHumans.Economics,asthetermsuggests,isgoodat
predictingthedecisionsmadebyEcons,but
thescienceofdecisionmakingbyHumans
remainslargelyunexploredterritory,and
needstobuildontheadvancesinpsychology,
neuroscienceandbehavioraleconomicsof
thepasttwodecades.Econsaretheefficient
calculatorsimaginedineconomictheory,able
toweighmultipleoptions,forecastallthe
consequencesofeach,andchooserationally.
Humansareordinarypeople,who,fallwell
shortofHomoeconomicus:theyareneither
fullyrational(asmostanalysesofeconomic
downturnsandcrashesimply)norcompletely
selfish,andtheirtastesareanythingbut
stable.CallingourselvesHomosapiens,
however,stretchestheconceptofwisdom
beyondhowitiscurrentlyunderstood,and
maywellreflectthecognitiveillusionand
overconfidencethatishardwiredinour
brains.TheliteratureonPESwasinitiallyfocusedonbringingenvironmentalissuesinto
theframeworkofefficiencyorientedEcons,
buthasgraduallyincorporatedmorerealistic
perspectivesonhumanbehaviorandits
abilitytodealcollectivelywiththreatsand
pressures.
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The urban segment of population started to attach
value to the natural capital and ecosystem services
andregrettedtheirloss;theyevenbecamewillingto
pay moderate amounts of money to have secure
accesstosuchecosystemservices(ES*).Bypaying,
somemightevenfeellessguiltyabouttheirpatterns
of consumption and its global consequences. The
social, cultural, political and economic differences
between those able to provide or enhance ES and
those interested in supporting such activities had
become substantial and the interaction required a
framing that referred tobothfairness (a system3
concept) and efficiency (system 2) to bridge that
gap. Analysis of system2 (micro) economics
suggestedthatthediscountratesusedweretoohigh
tojustifyinvestmentsinenvironmentalqualitiesthat
operate on decadal rather than annual timescales.Lowering the apparent discount rates might nudge
decisionmakerstowardsdecisionsenhancinghealth,
wealthandhappinesswithgreaterpubliccobenefits,
andas suchjustifiedpubliccoinvestment16.Dealing
with intergenerational equity and expected scarcity
of global ecosystem functions requires system 3
brain functions that operate at zero or negative
discount rates, complementing the system1 and
system2 functions that had much more time to
evolve
9
. Low or even negative discount rates mayseem surprising to conventionally trained
economists, but the conventional discounted cash
flow analysis assumes complete markets (including
marketsforinsuranceandrisk)aswellasreversibility
of asset transactions. Yet, missing and imperfect
markets, prospects of extinctions and other
BOXMiniglossary
Coinvestment:Investmentacrossassettypes
(capitals)inenhancementofESby
beneficiariesandprovidersofES;examples
canincludeinvestmentinconditional
tenurialsecurityinareasofhighESvalue
(includingecologicalcorridorsorbufferzones),combinedsocial+human
capitalenhancementininstitutional
development,improvementsofhealth,
educationandinfrastructure
Commodification: Thederivationand
definitionofstandardizedunitsofESthat
canbetradedwithinregulatedmarkets
and/ortheassociationofverifiableESwith
brandedcommodities
Compensation:Governmentmediated
paymentstooffsettheopportunitycosts
for(voluntarilyormandated)foregone
legallyalloweddevelopmentoptionsthat
woulddecreaseESfunctions
Ecosystemservices(ES*):Thebenefitshumans
derivefromecosystems;usuallycategorizedas
provisioning,regulating,culturaland
supportivefunctions(ananthropocentric
conceptthatcanincorporateintrinsicvalue
onlythroughitshumanambassadors)
Environmentalservices(ES):Ecosystemservices
minustheprovisioningservicesforwhich
marketscanbeexpectedtobalancesupplyand
demand
Gigaeconomics: Studyofmanagementoptions
anddecisionmakingonuseand/or
conservationofscarceresourcesatglobal
(supranational)scale
Picoeconomics: Studyofthewaythehumanbrain(atsynapselevel)processesnewlyacquired
information,memoryandaccumulatedvalue
judgmentsinevaluatingmanagementoptions
anddecisionmaking
Rightsbasedapproach:Developmentapproachthatbuildsonthebundleofuserightsthatindividualsandcommunitiescanacquirebasedonlegalpluralismandcrossscaleharmonizationofprinciplesandcriteriaforresourcemanagement,balancingprivateandpublicinterests
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essentially irreversible contingencies, and prospects
for only limited (if any) substitution among major
asset classes say between some forms of natural
and financial capital mean that some important
resourcesreallywillbescarcerinthefuture,entailing
verycostlyadjustments.16
Where markets have been generally acclaimed for
linking demand and supply of goods and nudging
producer decisions towards efficient use of
resources,threatstoecosystemservices14,17became
associated with market failure and
externalities18,19,20. Two types of solutions have
been tried to address this imbalance: 1) to restrict
marketfunctionsongoodsprovisionbyregulationof
resource access to secure conservation of natural
capitalandES*,and2) tobringmarketefficiencytothe supplyofES*,bymaking increasedprovisionof
such services pay at a level that the tradeoffs
betweengoodsandservicescanbemanagedat the
leveloffarmerorlandmanager.Thelatterapproach
is conventionally,butnot veryaccuratelyaswewill
see below, described as payments for ecosystem
services or PES. While the regulatory approach is
associated with sticks, the incentivebased
approaches are referred to as carrots with
sermonsasthethirdpolicyinstrumentreferringto
suasion and the hope that internalization of values
willleadtoselflimitation(system3).
Started some three decades ago in Europe and N.
America21,thePESapproachhasbeenadvocatedand
tested in the tropics for over a decade now.
Environmental services in the tropics are
considerably diminished by the development and
spreadoflandusepracticesthatprofitthelanduser,
butreducetheregularityandqualityofwaterflows,
habitat quality of the landscape for globally
threatened biota, carbon storage capacity, and
landscapebeauty22,23.Marketbasedinstrumentsthat
make the continued provision of environmentalservices(ES)moreprofitable,havebecomeanactive
area of experimentation and learning over the past
two decades24,25,26, as purely regulatory approaches
that exclude rural populations from forests have a
negative impact by perpetuating forestrelated
poverty27,28.
Figure1.PESisoneoffourcategoriesofresponseandfeedbackmechanismsthatallowthosewhoexperience
theESconsequencesofchangesinlandcoverandlanduse,totryandinfluencethegenericdrivers(A1
and B1) or actors/agents (A2 and B2) of land use change in specific places to modify behavior and
decisions, via spatial regulation and rights (A, sticks) or economic incentive structures (B, carrots); the
suasion(sermon)categorymodifiestheresponseofactors/agentstodrivers(modifiedfrom28)
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PES is one of multiple feedback mechanisms by
whichstakeholdersaffectedbychangesinlanduse
can try to influence the agents/actors directly
deciding on transformations of the landscape,
and/or theunderlyingdriving forces towhich they
respond29. A broad categorization (Figure 1)
distinguishes rules/rightsbased approaches from
economic incentive approaches, each with entry
pointsattwoscales.Afurtherdistinctioncanbethe
degreetowhichtheresponseandfeedbackoptions
arechanneledthroughpublicand/orprivatesector
entities. Inthisclassification andfigure,PESstands
for B2 approaches targeting the microeconomic
level of decision making. Its effectiveness is
contingent on the way it interacts with macro
economicincentivestructures(B1)andrightstouse
land (A1,A2).The languageofPES refersprimarilyto the efficiency of a quid pro quo (money for
services) but, as we will see in this review, the
fairnesssidedeservesatleastequalattention,asis
gradually rediscovered for the rest of the
economy30.Thenatureofboththequidandthequo
is often not as clear as it appears to be, with
additionality,leakageandpermanenceconcerns31,32
that straddle temporal and spatial scales and
requirecomplementarytypesofeconomicanalysis.
TheemergingPESliteraturedealswithfivescalesof
economic analysis, only two of which (micro and
macro)havebeenconventionallystudied:
Picoeconomics33 (or neuroeconomicsunderpinningbehavioraleconomics): individuals
andtheirbrainsynapses(pico)that involve in
decision making, interpretation of observations
and construction of perceived causal
mechanisms,
Microeconomics: household, farm enterpriseswith the cash flows and investment issues at
thatscale,asinfluencedbymarketfunctionand
thetotalityoftaxes,subsidiesandregulations,
Mesoeconomics34: landscape, community andlocalgovernancescalesaswellasprivatesector
actors where determinants of ecosystem
services interact with the paradigms of
integratedruraldevelopment,
Macroeconomics: nation states as part ofregional cooperation arrangements, at the
interface of world markets, political ambitions
fordevelopmentandtheeconomicdecisionsof
subnational actors, responding to taxes,
subsidies, regulations and public investment in
physicalinfrastructure,
Gigaeconomics:earthsystemmanagement,andthe rediscovery that humans can care about
their broader context if appropriately primed
and motivated, by concepts such as
footprint35.
PESdiscussionsusuallyfocusontheroleofpositiveincentives (carrots)at the interfaceofmesoand
micro economics, but the involvement of other
scalesisincreasinglyrecognized,as istheclose link
with sticks and sermons (or suasion) targeting
picoeconomics and the putative system 3. Yet,
the macroeconomic context of national
development and, increasingly, the gigaeconomic
scaleofglobalissuesareofdirectrelevanceaswell.
PES is usually framed within an environmental
economicsframeworkthatacceptsthestatusquo
of macro and microeconomic analyses and
associated policies, but aims at internalizing the
environmental externalities of current decision
making. In contrast, the ecological economics
tradition has articulated more fundamental
critiquesofstatusquoandhasbeenmoreopento
the emerging pico, meso and gigaeconomic
scales,thatmaysetnormative(sustainability)and
pragmatic constraints to micro and macro
economic scales. Within the environmental
economicsframingtheupsanddownsoftheglobaleconomy (at macrogiga scales) with more than
proportional impacts on carbon markets have
beenamajorconcern.
AsPESpraxishasevolved, its relationwith theory
haschanged.WhilemostofPESisstillperceivedin
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a decision support system mode of natural
resource management, where better informed
managers can take better decisions and PES can
involve negotiations of prices and contract details
but not of its fundamentals, the more complex
reality may be better understood if approached
from a negotiation support perspective36, 37
where multiple knowledge and value systems
interact in shaping a negotiation platform and its
outcomes. Further complications derive from the
way temporal scales are included in the analysis:
beyondasustainability timescalethatemphasizes
persistence, a sustainagility time scale38 may be
needed,thatbalancesthiswithacontinuedchange
perspective39.
Asabroaddelineationofthetopicsforthisreview,wewilldiscussemergingPESpraxis in thecontext
of these five scales of economic analysis, the five
capitals (assets) of the livelihoods approach40
(although alternative formulations41 also have
foundfollowers),andthreeaspectsofhumanbrain
function(systems1,2,and3).Inourview,theseall
need tobe reconciled inorder tounderstandhow
individualbehaviorsandchoices interactwith local
actions, their global consequences and the
opportunities for effective feedback mechanisms
(Figure2).Paymentsforecosystemservicescanbe
conceived and implemented by a government
mediated institution without explicit reference to
markets.Adjustmentsof levelsofcompensation to
whattaxpayersarewillingtoaffordwillovertime
provide a coarse feedback mechanism adjusting
supply to demand. Much of the PES literature,
however, suggests that marketbased schemes to
enhance ES will be more efficient and require
monetizing or commoditizing biodiversity
conservation, watershed protection, and carbonsequestration42. PES schemes depend on funds
derivedfromdirectbeneficiariesofsuchservices(in
case of commodification) , and/or an increased
publicinterestinsupportingconservation(incase
Figure2.Thefivecapitals(assets)ofthe livelihoodapproach38 interactwiththreesubsystemsofthehuman
brain (system1andsystem2ofKahneman9plusa system3 shapingand responding tosocialnorms),
influencingfivescalesofeconomicanalysis(pico,micro,meso,macroandgiga)ofhumandecisionsabout
governance,resourceuseanddevelopment
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of compensation). In the latter case, funds are
usedtocompensatefor involuntaryorvoluntaryr
estrictionson landuse. Theyaim tobesufficient
tooffsettheopportunitycostsofforegoingprivate
benefits from legal activities with negative
environmenttal effects43. In a marketbased
approach to enhancing environmental quality
throughfreelynegotiatedformsofPES,bargaining
position is crucially important44. Where potential
supplyofESdeliverycontractsislessthandemand,
ESproviderscannegotiateforprice levelsbeyond
compensationforopportunitycosts;ifdemandfor
such contracts is less than potential supply, the
marketmay settleonaprice that isjustaboutat
breakevenlevelforESproviders.Commodification
with price levels reflecting current supply and
demand can work where the timelags for
increasing supplyare less than the time scalesat
which demand varies, and where production
decisionsarereversible.Few,ifany,ESmeetthese
requirements and the mechanisms to set price
levels must reflect longer term societal values,
ratherthantheeconomicmoodoftheday.Whilethis may generally point towards a government
mediated compensation approach rather than
marketbased commodification, a third paradigm
(coinvestment) has been recognized in PES
literatureandpraxis..Primarilyonthebasisofthe
conditionalityof contracts, adistinctionhasbeen
suggested45betweencommodification ofES(CES),
compensationforopportunitiesskipped(COS)and
Coinvestmentinenvironmentalstewardship(CIS).
Much of the literature on PES focuses on
identifying the payment level needed to change
land use 46, targeting land users, structuring
payments and contracts25, effectiveness of public
versus private sector arrangements47, and design
of public policy48. Few empirical studies so far
havedescribedthemediumtermimpactofPESon
1)thelandmanagers,2)thesocialsystemtheyare
partof,and3)theEStargeted49.Someofthefirst
PES efforts in Southeast Asia and Africa are now
reachingapointwheretheseissuescanbestudiedempiricallyandmostof theauthorsof thispaper
aredirectlyinvolvedinsuchstudies.
Wewill focusour reviewon various typesofPES
applicationsinthecontextofdevelopingcountries,
but explore the way paradigms, concepts and
approaches have been influenced by the
BOXAcronymsused
CES:Commodification ofES(CES1=ESas
such,CES2=ESpackagedwithbranded
commodities)
CIS:CoInvestmentinenvironmentalStewardship
COS:CompensationforOpportunitiesSkipped
CRES:CompensationandRewardsforES
ES*:EcosystemServices(seeminiglossary)
ES:EnvironmentalServices(seeminiglossary)
PES:PaymentsforEnvironmentalServices
REDD+:ReducingEmissionsfrom
Deforestationand(forest)Degradationplus
foreststockenhancement
System1:Brainfunctionasdescribedby
Kahneman2011thatisrapid,intuitive,
subconsciousandsyntheticandthatleadsthe
primaryresponseofhumanstoopportunities
andchoices
System2:Brainfunctionasdescribedby
Kahneman2011thatisslow,rational,
consciousandanalyticalandthatleads
problemanalysisandrationalizationof
choicesmade
System3:Brainfunctioncomplementing
systems1and2andreflectingsocialnormsto
whichanindividualhaslearnedtocomply
with
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experience in countrieswithdifferenthistoriesof
land use patterns, land ownership and tenure
regime, rural population densities and degree of
market integration. Financial incentives can both
support and undermine social norms compatible
with ES enhancement. External coinvestment
e.g., through incentives fromprograms to reduce
emissions from deforestation and degradation
(REDD) and ecocertificationneeds to synergize
with localeffortsbyunderstanding localdynamics
and conditions for free and prior informed
consent.
Inthisreviewofrecentliteraturewewill:
Analyze the different interpretations of PES insegregation perspectives on landscapes
functions and those based on integration in
multifunctionallandscapes
DiscussPESdefinitionsandtheirrelationshiptoRealistic, Conditional, Voluntary and ProPoor
performancecriteriaandevolvingparadigms
Provide a brief history of PES concepts andapplicationindevelopingcountries
Position PES in the debate aboutmultifunctionalityoflandscapes
Summarize critiques of PES theory andquestionsarisingfromemergingPESpractice:
Missing metrics for environmental serviceperformance
Arealbusinesscase?Motivationforbuyers Motivational crowding out: motivation for
ESproviders
PESinthepoverty*environmentnexus Areclearpropertyrightsapreconditionfor
PES?
IsthereenoughPESfundingforapplicationsatscale?
Can international REDD+ funding supportlocalPES?
In the discussion, beyond reviewing published
literature, we provide a new comprehensive
altruism frameworkanddiscuss itsapplications.
Wewillendwithasetoftentativeconclusionsand
frame hypotheses for the interface of praxis and
research.
2. PES definitions and their relationship toRealistic, Conditional, Voluntary and
ProPoorasperformancecriteria
Early work on the interface of giga and macro
economics
50
tried toquantify thesustainablepartofnationalandglobaleconomic systems (roughly
50%)47 by focusing on the loss of ES associated
with economic growth as conventionally
measured51.Environmentalservice functionswere
definedasthepossiblehumanusesofthenatural
and biophysical surroundings. For national
accounting, the concept of flows (services) was
linked to stocks (capital). Analyses in the 1990s
thusemphasized natural capitalasessential for
development52. In2000, itsderivative in the form
of services53 became the key concept for the
Millennium Ecosystem Assessment, but was
relabeledasecosystemservices14.Itexpandedthe
domainofenvironmental concerns toall benefits
that humans gain from ecosystems, ranging from
provisioning services supplying tangible value to
people, suchas food, fuel,andotherconsumable
goods;toregulatingservices(suchasairandwater
purification, climate buffering), habitat or
supportingservices(e.g.breedinggroundsforfish,
regeneration of soil fertility), and cultural andamenity services that give intangible benefits to
human wellbeing54. Originally intended to focus
on the value of nature53, there was no logical
demarcation along the naturalmanaged system
continuum,andtheconceptcametoincludeallof
managed forests and agricultural landscapes. By
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including the provisioning services that support
commodity production and market function, the
concept of ecosystem services gained in public
attention; however, the externality argument
and market failure does not apply to these
provisioning services,although the clarificationof
property rightsmaybe an issue.Wewilluse the
term environmental services (ES) for all
ecosystem services (ES*) except for provisioning,
following18,21,24,26,41.Currentliterature,however,is
split over ecosystem services or environmental
servicesaspartofthePESacronym.
ThemosthighlyciteddefinitionofaPESremains24:
avoluntary,conditionaltransactionwhereatleast
onebuyerpaysat leastoneseller formaintaining
or adopting sustainable land managementpractices that favor the provision of welldefined
environmental services. The definition applies
binary, qualitative standards to the concepts of
conditionality, welldefined ES, voluntarily agreed
contracts at the level of individual buyers and
sellers. Strictapplicationofthedefinitionmaylead
totheconclusionthatPESdoesnotcurrentlyexist
in pure form, but that there are PESlike
approaches thatapproximate the ideal to various
degrees.Thesamemaybetrueforthemajorityof
economic concepts16, but the binary definitions
can also be replaced55 by gliding scales of the
degreetowhichrealistic,conditionalandvoluntary
contracts the provision of welldefined
environmental services are negotiated and
implemented, with additional attention for the
fairness dimension of propoor approaches.
Basedonvariationsinthewaythecriteriaaremet,
threecomplementaryparadigmscancoexistwithin
abroadPESframework45,with1)commodification
of welldefined environmental services so thatbuyersandsellerscannegotiateprices (closestto
the Wunder24 definition), 2) compensation for
opportunitiesforegonevoluntarilyorbycommand
and control decisions, and 3) coinvestment in
environmental stewardship as key features,
respectively.
In the basic PES concept, payments (flows of
financial capital) are the primary vehicle through
whichthebuyerscanexpresstheirappreciationfor
the ES.As long as the sellers keepproducing the
ES, it is up to them how they use this financial
capital: to invest in natural capital, quality of
houses,meansoftransportorsavingsaccountsor
payforschoolingofchildren,healthcare,amenities
and luxuries of life or any other expenditure. In
practice,however,buyersmaybedisappointed if
they dont see the sellers invest a considerable
share of payments into direct enhancements of
naturalcapital;theyexpectamultipliereffect56.
BuyersofESarenotwillingtoforegotheircontrol
at least partly because indeed the production
functionofESasemergentpropertiesofcomplex
landscapesystemsremainspoorlyunderstood.
Efficiencycanbeconsidered from theperspective
ofthebuyer,thesellerortheprocessasawhole,
including its intermediaries and longerterm
dynamics (sustainability).Akeyeconomicconcept
here is that of Pareto efficiency, where an
equilibrium has been found where no further
transactions can increase the wellbeing of any
actorwithoutmakinganyoneelseworseoff57. Like
laws of physics that ignore friction, Pareto
efficiency can be most easily be perceived in a
worldwithperfect informationtoall,fullyrational
decision making about the true interests of all
agentsand in theabsenceof transactioncosts. In
therealworld,however,transactioncostsexist,as
do intermediarieswhoserveasbrokerstoprovide
information and influence decisions. These third
party brokers also have their own longerterm
interests and business models that need to be
understood.Efficiencyconsiderationsforthebuyer
consistofeffectivenessandcosts,weighedagainstalternative opportunities to satisfy their ES
demand. Efficiency considerations for the seller
require understanding of the production
function forES,aswellashow the provisionof
the ES fits into the production function for
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agricultural and other goods of the farm or local
economy.
The Wunder PES definition24 referred to at least
one buyer and seller exchanging ES for money
(Figure 3A), withPareto efficiencydeterminedby
therelativeshortageofESandsurplusoffinancial
capitalonthebuyerside,andreverseendowments
onthesellerside.Inpractice,mostofthecurrently
known PES applications in the tropics58,59,60,61,62
involve linkagesof complex systems inbuyerand
sellercommunities, involvingexchangesinmultiple
asset types (Figure 3B). Contracts involve
investments and linkages in social capital and
individualhumancapital.The initialcurrencymay
be recognition and respect as social capital
exchanges,ratherthanmoney
63
.Whentakentoitsfullconsequences,thisimpliesthatthebuyersand
sellersbecomecoinvestorsincrosslinkedsystems
3. BriefhistoryofPES conceptsandapplicationindevelopingcountries
After the initial excitement of PES, approaching
silverbulletstatus21,thepromiseandperilsof
PESformedthetitleofreviewsinboth200564and
201120.BothreviewsassertedthatPESexperiences
hadalreadydemonstratedthatinvestinginnatural
capital rather than built capital can make both
economicandpolicysense,butthatmarketsforES
orES*(seedefinitions)createchallengesincluding
moral hazards, rentseeking, free riders and
perverse incentives. Lack of market reflection of
the full social cost of ES production can lead to
incorrectmeasuresofthescarcityofsomeESand
nomeasuresfortherest.
EarlyliteratureonPESclassifiedtheformsofPESin
practiceand recognizedat least fourtypesofPES
schemes, differentiated by the degree of
government intervention in administration of the
schemes,by thecharacteristicsof thebuyersand
sellers,andbythesourceofpayments(65,66)65,66.
By pointing out the weaknesses of indirect
environmental interventions such as Integrated
ConservationandDevelopmentPrograms,others67
argued that PES can create a direct incentive
Figure3A.PES interpretedasexchangeof financialcapitalforES,usuallybetweenpartsofsociety thatare
shortinnaturalcapital(N)buthavefinancialcapital(F)tospare,andcommunitieswherethebalanceisthe
otherwayaroundandwheretheESsellersarefreetousethefinancialcapitalobtainedaccordingtotheir
ownprioritiesaslongastheEScontractualobligationsaremet;B.Exchangesthatinvolverelationshipsin
terms of human capital (H), social capital (S) and/or infrastructure (I) as well, and can be termed co
investmentinES45
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scheme between ES sellers and buyers and thus
might better achieve both conservation and
development objectives by better targeting and
lowering transaction costs. PES concepts were
testedasapossibility to increaseeffectiveness in
environmental protection and reduced (public)
conservationbudgetsinLatinAmerica,theUSand
Europe21,46,68. It appears that the coinvestment
paradigm seeks a middle ground between ICDP
and PES concepts, with partial conditionality and
escapefromaprojectcycle.
CostaRicabecameapioneer inPES indeveloping
countriesbasedon its1996 forest legislation that
provided a publicly funded incentive scheme for
private landowners tomaintainorenhance forest
as provider of valuable ES. Payments tolandownerscanbemade fortheprovisionoffour
types of ES, i) carbon sequestration and storage
(mitigation of greenhouse gas emissions); ii)
watershed protection (hydrological services); iii)
biodiversity protection (conservation); and iv)
landscape beautification (for recreation and
ecotourism). Landowners receivedirectpayments
for theES their landsareassumed toproduceby
adopting sustainable forest management
techniques thatdonothavenegative impactson
theforestcoverandthatmaintainqualityoflife69.
The Government of Costa Rica acted as the
buyer/investor, seeking international stakeholder
buyers for carbon sequestration services and
domestic ones for expected hydrologic services.
This combination of domestic and international
sales together with tax revenue, international
loans and donations was used to finance
environmental service provision70. The country
made substantial progress in (involuntarily)
chargingthecaptiveaudienceofwaterusers,andmore limitedprogress inchargingbeneficiariesof
thebiodiversityandcarbon sequestrationusers71.
Strongpathdependencyinthewaypaymentsto
service providers originated in previous forest
subsidy schemes, however, implies considerable
roomforimprovementintheefficiencywithwhich
it generates ES71. While the initial success and
visibilityoftheCostaRicaprogramhasencouraged
experimentation elsewhere72, a more critical
literature on the Costa Rica case73 and its
followers28,74,75,76,77isnowemergingthatsuggestsa
reframingoftheway incentivebasedmechanisms
areperceived,andadeeperanalysisof the social
and psychological dimensions of human decision
making in response to external signals45,68,78.
Approaches that support collectiveactionat local
communitylevelandaddressissuesofconflictover
land use rights are now seen as essential to
achieve success (see section 5.4). Proponents of
fairness dimensions as elements that need to be
added to effectiveness and efficiency prefer the
useofthebroaderconceptofrewards(RES)rather
than payments for ES32,45,79. The notion of RESfocuses on the multiple goals of ecological
sustainability, just distribution and economic
efficiency and favours a variety of payment
mechanisms to achieve these goals, both market
and nonmarket80. RES further involves the
integration of propoor elements into economic
instruments to enhance ES with the basic
argument that poverty alleviation has to be
included into any portfolio to protect the
environment, especially in developing
countries81,82. This contrasts with the view that
poverty alleviation can be a positive side effect,
that canbe includedas longas itdoesnot imply
efficiency losses83 . PES schemes are likely to
change (and sometimes reinforce) existing power
structure and inequalities indecision making and
access to resources, with significant equity
implication82,84.Whiletheprimarydecisionmaking
powermaybe in thehandsof the buyer, their
lack of knowledge of local conditions and
opportunity costs isadisadvantage.Procurementauctionsweredesignedtoreducetheincentivefor
sellerstoinflatetheircontractprices85.
Swallow et al.43 introduced the term
compensation and rewards for environmental
servicestorefertoarangeofmechanismslinking
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ecosystem stewards and environmental service
beneficiaries, including the mechanisms normally
included under the term payment for ecosystem
service.Theynotedthattherelationshipsbetween
ecosystem stewards, environmental service
beneficiaries and intermediaries may be more
complex than a simple transaction, with
agreements that are not wholly voluntary and
payments that are not wholly conditional. Based
ontheseenrichedconcepts,recentstudiesofPES86
tested multiple paradigms andhypotheses. Many
oftheconclusionsofthepastdecadesupportthe
earlier assertion that environmental functions
dontlendthemselvestomarkettransactions87.
4. PES and multifunctionality based on
segregation
(sparing)
or
integration
(sharing)
of
landscapefunctions
Other interpretations of the terms PES exist88 ,
however, (Figure 4A) and inform part of the
literature.Theyrelatetoalternativeviewsonhow
multifunctionality of land can be achieved, by
spatialsegregationorintegration.
In the use of marketbased instruments to
increase ecosystem services, as applied in
Australia88 (Figure 4A), the ecosystem services
production function is dominated by the natural
capital of an area and is best served by a
segregationapproach, inwhichagricultural inten
sification on the best land can lead to land
sparing, aided by incentives to take marginally
productivelandoutofproduction.Incontrast,the
integrationand landsharingperspectiveofFigure
4B, suggest that the various services can be
obtained within a land use system, with PES
incentives modifying the internal tradeoffs
between provisioning and other ecosystem
services.
The contrasting definition and perception of
ecosystem and environmental services of Figure
4A and B can be understood in response to the
types of landscape in which they apply, and the
perspective on the sparing versus sharing
debate that reframed the segregation versus
integration issue
89,90
.
Landsparingbyreductionofthe area needed for food, feed and fiber
production through forms of agricultural and
silvicultural intensification (Borlaug hypothesis),
isassociated, inaparadigm that remainspopular
in the conservation world as well as agricultural
industry,withexpectationsofhighlevelsofESthat
can be provided on the land taken out or not
neededforagriculturalorforestryproduction.The
primarytradeoffisbetweenhowmuchlandcanbe
taken out of production, at what cost, and what
quantity of services this land will then provide.
Landsharing,bycontrast, isbasedontheconcept
ofoptimizinglandproductivityintermsof
Figure4.Twoways the termenvironmentalservicesareunderstood in thePES literature:A.Environmental
servicesarethesustenanceorenhancementofnaturalcapital linkedto landuse,asbasisforecosystem
services of all types88; and B. Environmental services are ecosystem services beyond provisioning but
influencedbylandusethatisprimarilytargetingprovisioningservices18,21,24,26,41
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provisioning, regulating, supporting and cultural
functions in integrated systems, rather than for
provisioning alone.. The primary tradeoff in this
perspective is internal to the landuse:what level
of services can be coproduced with tradable
goods, and how do economic incentives for ES
modify the optimum point for the local decision
maker. The land sparing approach may focus on
generic instruments 1A and 1B of figure 1, the
sparing approach requires the more specific
targetingofinstruments1Band2B.
PartofthePESliterature isabouttaking landout
of production91, ecological restoration and
nature management. Another part is about
marginal changes in intensity of agriculture and
use of inputs, where ES are coproduced withtradable goods. In terms of decisionmaking, the
firstcasedealswithdiscreteoptionsandadrastic
shiftintheprimaryfunctionofparcelsoflandwith
relatively simple compliance checks; the second
dealswithcontinuawith thresholdsand theneed
to create sufficient performance criteria for
contracts. The first situation refers to a
segregation of landscape functions, and the
second to integration in multifunctional
landscapes56,57.
The Tinbergen principle92,93,94, first formulated in
1952, follows the basic matrix algebra principle
whereby the number of equations has to match
the number of unknowns for a problem to be
solvable. Accordingly, the number of policy
objectivesandnumberofpolicy instruments also
have to match. As attractive as multipurpose
policiesmayseem,theyrequirestrongcorrelations
in the realworldbetween the targets.As carbon
stocks and biodiversity in tropical forest margins
areonlypartiallyrelated,optimizationforreduced
C emissions does not give the same results as
optimization forbiodiversityconservation,andan
additional, corrective policy instrument may be
needed. Similarly, poverty and environmental
issues can be correlated over part of the space
timedomain,buttheyarenotsufficientlycausally
linked to expect propoor PES to maximize
efficiency of (shortterm) ES enhancement94. The
EU Agrienvironment scheme has only partially
achieveditsgoals95,asadditionalgoalswereadded
in itsdesignbeyondenhancementofES.The fully
segregatedandfullyintegratedlandscapefunction
options are extremes of a wide range of partial
integrationsolutions(Table1).Intheupperpartof
thetableahighlyreducedmatrixshowsthateach
policyrelevant objective has its own part of the
landscape. Synergy between objectives in such
configuration is minimal, but policy makers can
rapidly switch land use allocations if objectives
changeinweight.Inthelowerhalfofthetable,all
land use types potentially contribute to all
objectives, and land use planning has to find a
solution that satisfies theminimum requirementsfor each function and maximizes the aggregate
benefit beyond this minimum condition. Under
certain parameter conditions, a multifunctional
approach as in the lower part of the table can
achieve more overall functionality on the same
landarea;thetableprovidesaformalcriterionfor
suchanoutcome.Configurations inthe lowerhalf
of the table can be strongly interlinked, in which
caseallfunctionsmaybebufferedbuttheflipside
ofthismaybethatthestatusquo istooresilient.
As posited by various authors independently55,96,
theconditionswheresegregationor integration is
superior and/or where sparing or sharing would
work best depends on the convex or concave
shape of the tradeoff curve between multiple
functions. Inreality,however,suchtradeoffcurves
as the one between productivity andbiodiversity
may have convex as well as concave parts.
Regardless of the detailed shape of the curve, a
graphical representation can explore under what
conditions mixed systems can be superior,dependingonthe levelofrewardsforES.Figure5
explores the plausible relations between flows
(e.g., provisioning services) and stocks of an
(agro)ecosystem. If all the utility for users
depends on the flow, the system will be driven
towardsthemaximumflow,regardlessofthe
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Table 1. Relationship between land use category and policy objectives under fully segregated (only
diagonalcellsarenonzero)andfullyintegrated(nocellsarezero)extremes56
Land use
category
Policyobjective
A
Resource
extraction
B
Economic
growth
C
Centre
based
welfare
D
Decentralized
welfare
E
Environmental
integrity
Segregated land
useplan
f(A) A 0 0 0 0
f(B) 0 B 0 0 0
f(C) 0 0 C
0 0
f(D) 0 0 0 D 0
f(E) 0 0 0 0 E
Integrated land
useplan
1 f(1,a) f(1,b) f(1,c) f(1,d) f(1,e)
2 f(2,a) f(2,b) f(2,c) f(2,d) f(2,e)
3 f(3,a) f(3,b) f(3,c) f(3,d) f(3,e)
4 f(4,a) f(4,b) f(4,c) f(4,d) f(4,e)
5 f(5,a) f(5,b) f(5,c) f(5,d) f(5,e)
Total f(i,a) f(i,b) f(i,c) f(i,d) f(i,e)
Equivalence
requirement
f(i,a)=A f(i,b)=B f(i,c)=C f(i,d)=D f(i,e)=E
Multifunctionality
advantage ifthere is a set of
f(i)forwhich
f(i)
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Figure5A.Concaveandconvexshapesoftradeoffcurvesbetweenflow(harvestableyieldandotherservices)and
stock(e.g.biodiversity,landhealthorCstock)oflandusesystems;B.totalincomebasedontheflowsplusPtimes
the stock, forconcaveand convex tradeoffcurves;arrows indicate incomemaximizing solutionsand theupward
shiftofstocksatincomemaximizinglandusechoices
shape of the curve, as long as it is monotone.
However, if economic value can be assigned to
the secondary function (Yaxis) relative to the
primary function (Xaxis) before optimization,
mixed systems may be superior. For concave
curves, there isno such solutionandoptimality
implies a choice between the two functions; for
convex curves intermediate solutions exist, for
any nonzero value of the value ratio. Adding
income value to landscapelevel, carbon and/orbiodiversitystockseffectivelymeanstiltingtheY
axisofthebiplot(Income=Flow+P*Stock)and
mayshiftthepointofmaximumeconomicreturn
toahighercarbonstocktrajectory.Dependingon
the ratio between stock and derived income
stream and the shapeof the stockflow tradeoff
curve,rewardsystemsforESrelatedtocarbonor
biodiversitystockscanbeexpectedtoshiftfarmer
decisionsonly where convex tradeoff curves are
involved.
5.Critiques ofPES theory andquestions arising
fromemergingPESpractice:
5.1 Missing metrics for environmental
serviceperformance
In order to get ES into the domain of market
functions, the spatial and temporal scales at
which performance can be measured are
important for the way conditionality can be
included in contracts23,24,45,97. For goods there
typically is a value chain in which the price per
unit substance shifts with processing, transport,
qualitycontrolandbranding,but there isaclear
relationshipbetweentheunitsinwhichendusers
buy or consume goods and the way they areproduced. For most ES such relationship is
lacking98.Whatisoneunitofwatershedfunction,
apartfromwaterquality?99,100.Whatisoneunitof
biodiversity, apart from the populations of
specific, flagship species?101 Carbon stocks and
greenhouse gas emissions are relatively easy to
quantify, as they scale with area, in contrast to
watershed functions and biodiversity that have
fractal dimensions on a length scale other than
the 2.0 of areabased scaling7. Most PES
arrangements cannot deal with the actual
services, buthave to accept proxies such as the
condition of land cover that is supposed to
enhance ES; in other cases it has to go a step
further back towards the human actions taken
that affect the condition of the land45. In many
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cases trees and forests are associated with
perceptionsofES,buttheevidenceonwhichthis
is based may be relatively weak when held to
scientific scrutiny102,103. Also, the contrast
between forest and nonforest agricultural lands
in terms of tree cover is less than often
perceived104.However,thetypeoftreesand lack
of right tree at right place concepts may be a
limitation to actual ES enhancement where tree
coverisusedasproxy105,106,107.
Aninterestingalternativetodirectcommoditizing
ofES (theCESparadigm45maybe split intoCES1
and CES2, accordingly), is to tie ES to existing
commodity flows. Ecocertification in its various
forms is doingjust that108. It usually implies an
aggregated ES concept rather than sharplydefined separate ES, and leaves the details to
interactionsbetweenproducers(farmers)andthe
design and quality control agency of the
certificationprocess,butmultiplestandardstend
tocompeteforconsumerattentionandintroduce
a market element in the shaping of operational
rulesforcertification.
Even for carbon, performance metrics remain
contested. Concerns over global climate change
haveresultedinthecreationofpartialmarketsforcarbon credits, but their exchange between
trading systems (such as the European and
Americanmarkets)hasbeen constrainedby lack
ofpoliticalagreementonhowtotacklethe issue
at global scale. Partial successes in emission
reductionwithinAnnexB countriesof theKyoto
protocolmaywellhavebeennegatedbytheshift
of highemission production sectors to countries
outside the reach of the agreements. Emissions
embodied in tradehavenot yetbeenaddressed
by agreements and are a rapidly rising share of
the total anthropogenic emissions. Credibility of
national scale accounting of land use and land
coverchange in industrializedcountries isstillso
lowthatthissector(currentlyabout9%ofglobal
CO2 emissions3 but a larger share for nitrous
oxidesandmethane) isexcluded from theKyoto
protocol. In order to create credible results, the
voluntary Verified Carbon Scheme (VCS) and
similar approaches have created protocols that
aresoheavyindatarequirementthattransaction
costsmaytakeupamajorshareofmarketvalue
oftheresultingcredits.Thisisthecaseevenwhen
localcommunitiesare involved indatacollection
andmanagement109 ,andevenwith the typesof
public funding subsidies that have characterized
thefieldsofar.
AninterestingaspectoftheCES2approachisthat
it linksareabasedES concepts toproductbased
marketsandvaluechains.Productivitylinksthese
twomodesofexpressionandsomeofthenewer
ecocertification approaches, such as those for
cacao
110
, indeed have minimum standards forproductionperha,toreducetheleakageriskthat
locally ESfriendly but lowproductivity land uses
mayotherwisehave.
5.2 A real business case? Motivation for
buyers
Theprofileofcompaniesonpollutionprevention
has been found111 to correlate with firmlevel
financial performance after controlling for
variables traditionally thought to explain such
performance. Reduction in emissions of toxic
chemicals,within the legal limits,wasassociated
witha substantial increase inmarketvalue,with
magnitudeoftheeffectsvaryingacrossindustries.
This correlation may reflect that good
management practices that reduce the
environmental loading can also, independently,
increase asset value. Data such as these have
already led to reduced costs of borrowing for
clean companies from banks an indirect but
potentially important aspect of the businesscaseforenvironmentalmanagementinpolluting
industries.
What about the "business case for PES"? A
wellquoted example of the early PES literature
refers to the New York drinking water company
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and its interactionswith theCatskills catchment.
Rather than spending $8$10 billion (112)112 on
mandatedwaterpurificationinstallations,thecity
engaged in preventive actions and negotiated
withlocalgovernments intheCatskillswatershed
toenact landuse restrictions thatwouldprotect
the water supply. Although in general this case
demonstrated that prevention can be cheaper
than cure, the business case arose in a well
regulatedenvironmentwherethecitycouldavoid
costs imposed by rules that were themselves
preventive.Similarly,asurveyofthebusinesscase
ofexistingPES in thePhilippines113with indepth
interviews of public and private enterprises
engaged in PES brought to light that most
companiessawaclearbusinesscase for themto
make such payments, but the business caseconsistedlargelyoftheneedtomaintainrelations
withgovernmentauthoritieswhoseconsentthey
needed to continue operating permits. Early
investors inPES inKenya include flowergrowers
in the Lake Naivasha area whose business case
depends on export markets and associated
customerperceptions inEuropeanmarket.Inthis
sense ES probably relate to customer loyalty in
thesamewayasotherservicedimensionsviaan
aggregate corporate image in the system1
brainofcustomers114.
5.3Motivationalcrowdingout:motivationforES
providers
The role of social motivation and persuasion as
the thirdpart of the carrot, stick, and sermon
triangle115isonlygraduallyenteringthedebateon
environmental and resource management116,117.
The interface of social motivation and
monetization of ES is not trivial, and an
economicceteris paribusassumption that PES
should enhance the supply of such services has
been challenged both by laboratory evidence
from behavioral economists118,119,120 and
emerging experience in the context of rural
development61,121,122,123. Numerous experimental
studies have found that a monetary incentive
crowds out alternate sources of motivation to
performa taskorengage inprosocialbehaviour.
Thesestudieshavefoundthatsmallpaymentscan
actually reduce levels of desired behaviour
relative to abaseline118, or that when payments
end,thelevelofthedesiredbehaviourreducesto
a level below its baseline before payment was
introduced124 (Deci1971).Thisbodyof research,
which is largely outside the realm of natural
resourcemanagement,raisesthequestionofhow
theutilitarian framingofecologicalconcernsand
market strategies can modify the way humans
perceiveandrelatetonature. Additionalstudies
areneeded intherealmofconservation inorder
tohelpgainabetterunderstandingoftheextent
to which monetary incentives are more likely to
have positive or counterproductive effectsregardingconservationaims125.
Concernsaboutmotivationcrowdingoutalsoare
relevant where collective action is required to
protectnaturalresourcesthatcommunitygroups
manage as common property. The theoretical
literature on PES cited in this review tends to
ignorethechallengesofelicitingcollectiveaction
in a group contract; there is an implied
assumptionthatcollectiveactionwilltakecareof
itself if the payment is well calibrated126.
However, research on management of the
commonsandonthepsychologicalfoundationsof
motivation give strong reasons to anticipate
difficulties in theuseof monetary incentives for
environmental services derived from common
property.Commons literaturearguesthatgroups
must build trust gradually to be able to
function127,128 . In addition, inmany casespro
socialmotivationsamongstindividualsarerooted
in intrinsic motivators, such as long standingtraditionsornorms that favorcollectiveaction129130
or concern about self image131, or public
image132. Where collective action is driven by
social, nonpecuniary norms, the introduction of
monetary incentives can undermine the social
norms and thus weaken instead of strengthen
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collective action133. Although such studies were
notundertakenspecifically in thecontextofPES,
they point to a need for more research to
understand how monetary or other incentive
types interact with prosocial motivation and
collectiveaction.
The emerging experience with auctions in a
developing country context suggests that these
aresocialinteractionsofarathercomplexnature,
rather than simple experimental procedures to
establishacorrectprice134,135,136.
5.4PESinthepoverty*environmentnexus
PES literature often highlights a potential
compatibility between environmental
conservation and poverty reduction especiallywhenpoorhouseholdsarecontracted to receive
payments in return for theirconservationefforts21,137.An importantreasonbehind thispremise is
that in many developing countries, landscapes
with high potential to provide ES are also
inhabited by a high proportion of poor people.
However, it would be simplistic to assume that
the poor can easily participate in such PES
projectsorthattheywillbenefitsignificantlyonce
incentive payments are disbursed 138. In some
projects, researchers have found that poorhouseholds are able to participate79, while in
others participation seems to have been limited
torelativelywelloff landowners75.Indeed,there
arestrongbarriersthatmayrestricttheextentto
which poor households can access PES projects.
These include lack of clear tenure, lack of land,
high transaction costs, and high upfront
investments needed to adopt new land use
practices26,94. Thepooroftendonothavesecure
landtitle,whichmaybarthemfromobtainingPES
contracts.This isespecially true forservicessuch
ascarbonsequestration,wherepaymentsaretied
tointendedpermanenceoftheservice.Withouta
clear land title, it may be difficult for those
withoutlandtitletoconvincebuyersthattheycan
ensure the flow of services in the future139.
Landlesspoororthosewithouttitlemayinfactbe
ineligible to participate in such PES programs.
Similarly, in the case of rented land, tenants
cannot promise anything about longterm land
usewithoutinputfromthelandowner.Also,ifthe
possibility of environmental service payments
makes the land more valuable, the landowner
may either increase the rent or discontinue the
lease, possibly disrupting the renters
livelihood140.
Transaction costs (here interpreted as costs of
negotiating, implementing, monitoring and
enforcing PES contracts) are generally
independentof thesizeof thecontract involved,
which means PES programs that contract many
smallholdersfacemorecostsperunitoflandand
servicesthanthosethatcontractwithonlyafew
largelandowners.ThusPESarrangementsfocused
on individual landholdings may be less viable
wherethere isahighconcentrationofverysmall
farms. Service buyers may try to contract with
large landholders rather than small ones, which
would exclude the poor. For instance, to limit
transactioncoststhePROFAFORcarbonprojectin
Ecuador signed individual carbon contracts only
withfarmersowningat least50hectaresof land,
thus restricting the participation of the local
smallholders in project activities104. Similarly,
initialinvestmentcosts(buyingseedlingsorhiring
labor), opportunity costs (loss of benefits from
existing landusethatneedstobereplaced),and
risksassociatedwithpotentialbenefits fromnew
landuseallaffecttheparticipationbythepoor141.
Itispossibletopayanadditionalsumtocoverthe
additional costs for poor households to
participate; empirical estimates142 of what such
approachwouldcostforatreeplantingprojectin
Tanzania are available. However, it is hard to
imagine thatallbuyersofESwouldbewilling topaythispremium.
The second related issue is theactual impacton
households once they do participate in PES
projects.EvidenceofeconomicbenefitsfromPES
is mixed. In one of the first studies on local
impactsofforestcarbonprojects143,theScolelTe
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project in Mexico was found to have a positive
effectonhousehold incomes in theprojectarea.
In contrast, an evaluation144 of the Noel Kempff
project in Bolivia had a mixed effect, with net
benefitsforthelargemajorityoflocalpeoplebut
a large proportion of community members
expressing dissatisfaction with the project as it
had not met their expectations . Managing
expectations isachallenge inall suchefforts;an
initialhypephasehelpstogetattention,butmay
lead to disappointment later on . In a more
comprehensive impactstudy 145ofPESpayments
in a local community in Mozambique, effective
levels ofper capita payment and impacts were
found to be small when compared to increased
employment benefits from developmental
activities of the project. On the other hand,provision of rewards in the form of longterm
tenuresecurity for localfarmers in Indonesiahas
had a positive impact on the households
livelihoods146.The interactionofPESwithpoverty
is therefore still far from well understood and
moreempiricalresearch isneededtounderstand
thepovertyenvironmentnexus.
Gender dimensions of the poverty*environment
nexus have been studied in terms of gender
differentiated roles in interactingwithwaterand
landresources147.Perspectivesonrelativemaleor
female poverty depend on the criteria and
methods of assessment148. Where PES contracts
arenegotiatedatcommunityscaleitmaybehard
for outsiders to challenge existing gender roles
and biases, without introducing an additional
objective to an already complex set of social
norms149.
5.5Areclearproperty rightsaprecondition for
PES?
Skewed landdistributionoftencompels thepoor
tosurvivebycultivatingmarginal landerosion
proneslopesandotherenvironmentalproblems.
Without tenure, and often with only passing
claimsonthelandtheycultivate,thepoorareless
likely to make investments to protect natural
resources36. Looking back at Figure 1, the PES
arrow(B2)iscontingentonrightstouse(A2),and
the rights for individual households are
constrainedbyoverall landusepolicies (A1),just
asPES isconstrainedbyoveralleconomicpolicies
(B1). For Indonesia, where large tracts of forest
land are underperforming in terms of ES but
remain claimed by the state, the forestry
regulatory framework may (over some parts of
thedomain?)havetobereplacedbyanagrarian
one150. Conflicting claims are the primary
bottleneck to any carbon related PES in the
peatlandsof centralKalimantan 151. Yet,positive
examples exist where resolution of conflicts and
implementation of community forest
management, with certain conditionality with
regards to maintenance of ES, has allowed localESfriendly investment in land uses152. In other
cases, formal recognition was not required153
when the general positive perception of ES
friendly landuseallowedfarmerstoreclaimtheir
de facto landuse rights from the state. Inother
situations,resolvingtenureissueshasbeenapre
cursortootherformsofPES154.Thecoinvestment
paradigm45 allows such steps to be discussed
under the wide umbrella of PES, rather than
putting tenure securityasaprecondition forPES
effortsanddisqualifyingalargepartoftherural
poor.
5.6 Is thereenoughPES funding forapplications
atscale?
Most of the PES literature so far has looked at
specialcaseswhereahighlocalinterestinESwas
the starting point of PES experiments. To check
how special those situations must be, a recent
study 65 considered the supply/demand
relationship and the relative income additions
that upland people might obtain from supplying
watershed services to their downstream
neighbors. Thepercapitabenefitspossibleinthe
uplands,RPu,werefoundtobe:
RPu=(AdAu1)(IdIu
1.)(du1)d(1T)(1u).
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which consists of a number of dimensionless
ratios of values upstream (subscript u) and
downstream (subscript d): area (A), income (I),
populationdensity (P), thewillingness topay by
downstream beneficiaries (d) relative to their
income,transactioncostsTandtheoffsetfraction
u of what is received in upstream areas. If a
tentativethreshold forRPu issetasa5% income
increase before upstream land users might take
noticeoftheopportunityandrespond,theresults
areatleastafactor4off,whendataforIndonesia
areused. This implies that this typeof financial
transfercanhardlybeexpectedtomakeadentin
rural poverty in the uplands, but it can be
significantinanonnegligiblesubsetofsituations.
Nonfinancialpaymentpotentiallyopensaccesstocritical livelihood capitals that might be lacking
within theESprovidercommunities.This typeof
payment is usually considered as indirect and
patronizing, while cash payment is frequently
seenasmore flexible forESproviders toconvert
to localgoodsandservices.Casestudies inAsia65
andLatinAmerica63indicatedthata nonfinancial
payment was preferred by some of the local
communitiesinvolvedbecauseofseveralreasons,
suchaslimitedcapabilityoflocalcommunitiesfor
savings, investment and entrepreneurship.
Observations in developing countries reveal that
both financial and nonfinancial payments might
face complexbureaucraticandhighly contagious
collusion because the PES governance is still
unclear, formally and informally. However, this
situation might be contextual as an Indonesian
case in Cidanau watershed62 showed that cash
payment had been successfully transformed to
independent smallscale business and
infrastructure(i.e.,publicaccesstocleanwaterbydevelopingsimplepipingsystem).
5.7 CanREDD provide international funding for
localPES?
ThepotentialforinternallygeneratedPESfunding
may be limited, once expressed on a per capita
basis,but theCostaRicacasepresentedanearly
example of international funds supporting a
domesticpolicyforESoriented incentives.Atthe
start of the international debate on REDD+,
reducing emissions from deforestation and
(forest) degradation plus forest stock
enhancement, the focus was on national scale
efforts. As the preceding avoided deforestation
had shown, leakage cannot be contained in a
piecemeal projectbyproject approach. To
achievetheREDD+goals,atgigaeconomicscale,
a multiscale, layered effort is needed that
reaches down to micro and picoeconomic
aspects.Intheinternationalnegotiationsissuesof
pride and sovereignty have been at least as
important and hard to deal with as issues of
carbon price and data collection to supportrealistic performancebased systems. As soon as
expectationsoffundingforadditionaleffortswere
raised, existing norms for national forest policy
appeared to be crowded out. Yet, international
effortstobringtransparencytosectorsknownfor
corruption and highlevel support for illegal
logging,seemedtorequireafullcommoditization:
if the same currencies (money and carbon stock
changes) are used across the value chain, elite
capture can be more easily quantified and
reported.
EarlyclaimsonperverseincentiveswithPESapplications in the context of tropical forests,suggesting that direct payments forenvironmentalservicesspelldoomforsustainableforest management in the tropics, could still beeasily dismissed155. In view of the complexity ofmultiscaledriversofchange inforestextentandcondition, in socioecologicaleconomicsystems156, and the contested nature of tenureand ownership of large tracts of forest, theclaimants for a piece of the pie are many andnegotiationscomplex.Manyattemptsweremadeto bypass local and/or national governments inlinking international finance to local action toprotectforestandclaimemissionreductiontheymay all be bound to fail. A nested, multiscaleapproachmaywellhavetobepolyparadigmatic,
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changingfacebetween,butsynergizing,CES,COSand CIS paradigms157. In countries with existingpublic sector payment schemes for forestmanagement,REDD+canbeaddedtothebundleofservicesrewardedatrelatively lowtransactioncosts,aslongasthecorrelationsbetweenforestC
stocks and other services are sufficientlytight158,159,160,161.
6.Discussion
6.1Challenges inbridgingacross temporal scales
andassociateddiscountrates
PESwasconceivedasalternativeorcomplement
togovernmentprograms,givingagreaterstaketo
local communities and landusers,with a simple
way to convey the relative merit of variousalternative land uses through the details of the
conditionalityclausesinacontract.Wemayhave,
however,come fullcircleback to the conceptof
investing in natural capital: the ecological
economics approach to sustainability162. The
financial transfers that have so far been
effectuated49, 163are farbelow thetruevalueto
society that studies such as TEEB (19)19 are
documenting164.Thismightimplythatthecurrent
framing of ES is less universally shared among
stakeholders than assumed and that it needs to
be further contextualized165. In the meso
American countries Costa Rica and Mexico that
pioneered in thePESapproachatnational scale,
the link between measurement, value and
paymentisfarfromresolved166
It may also imply that the interaction betweengovernmentpoliciesandPESmechanismshasnotbeen fully understood167. The crowding out ofsocial norms at the community and government
level may reduce the effectiveness of the fundsspent (picoeconomic leakage). The concept ofaltruismandprosocialbehaviorhaveemergedaskeytoadeeperunderstandingofthese feedbackmechanisms.Referringback to the five scalesofeconomicanalysis,wehave so far seen thatPESwasinitiallyperceivedasprimarilyaimingtobringmicroeconomic decision making at individual,
household or farm level in line with the longerterminterestsatmeso ormacroeconomiclevels.Much of the discussion so far has been on therecent advances in picoeconomics of decisionmakingwhen humans are offered choices. Fromthe other side of the scale, gigaeconomics, an
equally important challenge arises, as futureresourcescarcityneeds tobeproperlyweighted;iftemporalscaling(discountrates)differasmuchassuggested inTable2, it isunrealistictoexpectanysinglepricetoemergeasreflectingtruevalue.Differential time scales and discount rates makeadaptation a more tangible entry point fordiscussionson climate change than mitigation,even though treesand forests canplaya role inboth107,168.Two main differences between pico and micro
economics can be summarized in the way future
options are discounted. While microeconomics(system2 brain functions) operate at apparent
discount rates that relate to the costs and risks of
borrowing money, the system 1 goes for instant
rewards,preferringwhat's in frontofone'seyesover
almostanypromiseoflargeramountsinanearfuture.
Atthesametime,picoeconomicsrespondstronglyto
socialnorms(tentativelylabeledassystem3here,but
requiringfurtherstudy inrelationtosystems1and2),
whichappears tooperateatnearzerodiscountrates,
as lifetime values appear to be at play. Financial
motivations tend towinoutwhen socialand financial
motivationsaremixedinexperimentalsettings169,andthe way pico andmicro economic spheres interact is
incompletelyunderstood.
In micro as well as macroeconomics,
importantcategoriesofhumanmediatedservices
are considered as equivalent to goods, with
markets approximating a price (exchange rate)
that reflects options for producers to switch
betweenways toearna living.Macro economic
scales differ in discount rates, linked to lower
levels of perceived risk for aggregated entitiessuch as nation states or large companies
comparedtohouseholds especially ifthe latter
don't have secure ownership or resource use
rights. The difference between private and
socialdiscountratesisanimportantpartofthe
PolicyAnalysisMatrixapproach170,171,andcan
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Table2.Comparisonacrossfivescalesofeconomicanalysisoftheapparentdiscountrates
Economics Decisionmaking Discount rate for goods
and human/ social
services
Environmentalserviceissues
Pico Brainsynapse Goods:>100%/day
Social:~0%
Crowdingoutsocialnorms Suasion efforts for inter
nalizationforESproducers
Feelgood social statusmotivationforbuyers
Micro Household ~20%/year
PES operational domain, adaptation
to global climate change, dealing
withinvasivesandbiodiversityloss
Meso Landscape,
Enterprise
~10%/year
Macro Nation ~5%/year
Giga Global natural
resources
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system1 feature thatmodifies thesystem2
utility. There appear to be clear patterns in
theconditionsunderwhichrisktakingcan
be expected (i.e., i. hope to avoid loss,
perceived high probability of loss but small
chance to get bailed out; and ii. hope of
large gain, perceived low probability of
substantialnetgain,withoutriskofloss),and
when riskavoidancemayprevail (iii. fear
ofdisappointment,highprobability,butno
certainty, of net gain; and iv. fear of large
loss, low probability of substantial loss).
Wheretheportrayalas lossorgaindepends
on theanchoringorbenchmark, rather than
objectiveeffect,shiftsfromrisktakingtorisk
avoidance can be under the influence of
communicationstyles
Prospecttheoryallowsmuchofthegains in
economicequationstoberetainedbymerely
replacingutilitybyprospect.Theframingof
issues, however, suggest incomplete reverse
bility.
PES instrumentsgenerallytry toreducethe
gap between the overall prospects for the
decision maker (at a specific scale) and the
prospects as evaluated at other scales.
Internalization of externalities is fully achieved
when the prospect evaluations have become
independentof scale;maybe it helps if a term
such as weakly internalized replaces
externality, to indicate space forquantitative,
gradual shifts.PES relates financialbenefits for
privateorcorporatedecisionmakerstooptions
thatminimizeenvironmentaldamage forother
scale levels. Such financial transfers, however,
are part of a complex crossscale crossvalue
exchange, and cannot assume to be ceteris
paribus, as the financial transfers can involve
broaderinteractions.Wemay,however,havetogoonestepfurther ifwewanttobringpicoto
giga economics into a single framework. The
bounded rationality concept implies that, in
contrasttotheassumptionthatthere isperfect
information and unlimited intellectual
capacities,wemusttakeintoaccountthata
Table3.Classificationofprospectsovercapitaltypesxandactor levels i,withassociateddiscountratesand
affinityvector
Accountingstance (scaleof economicanalysis)
Affinity Discountrate
SumsofdiscountedbenefitsminuscostsFinancial Human Social Natural Infra
structure
Fin Hum Soc Nat Inf
Private (pico,
micro)
Apriv rpriv bF,p,cF,p bH,p,cH,p bS,p,cS,p
bN,p,cN,p
bI,p,cI,p
Local (pico,
micro)
Aloc rloc bF,l,cF,l bH,l,cH,l bS,l,cS,l bN,l,cN,l bI,l,cI,l
Downstream
(meso)
Adownst rdownst bF,d,cF,d bH,d,cH,d bS,d,cS,d
bN,d,cN,d
bI,d,cI,d
Corporate
(meso)
Acorp rcorp bF,c,cF,c bH,c,cH,c bS,c,cS,c
bN,c,cN,c bI,c,cI,c
National
(macro)
Anat rnat bF,n,cF,n bH,n,cH,n bS,n,cS,n
bN,n,cN,n
bI,n,cI,n
Global(giga) Aglob rglob bF,g,cF,g bH,g,cH,g bS,g,cS,g
bN,g,cN,g bI,g,cI,g
Universal Auniv Religionmediatedconcernsbeyondcapitalsapplyatscalesbeyondglobe
Note: 1 indicatesestimateofallcostandbenefittermsratherthantruevalue
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landownersmayfailtofindtheoptimaladoptionof
theirlanduseinthepresenceofcomplicatedspatial
evaluationrules174,175.Ingenericframeworkdecision
making at any scale can be analyzed to be the
outcomeofaweighing(bybrainsystems1,2and3
in different and still poorly understood ways) of
optionsbasedon176:
a)asetofoptions,
b)asetofcriteria(compareTable1),
c) expectations of how the various options will
performagainstthesecriteriaovertime,
d) incomplete information on merits (or costs and
benefits)
d) a way of summarizing timebased performance
intoasingleattribute,
e)anoperationalweighingofthecriteria,and
f)anallocationof resourcesacrossoneormoreof
theoptions.
Based on Table 3, we can conceptualize a
simpleprospectfunctionforeachaccountingstance
i could be an affinityweighted sum of expected
benefits and costs across the various asset types(capitals) x, and across allother scales (accounting
stances) i, each discounted with an appropriate
discountraterx,iandweightedbywx,i:
Prospecti = i Ai x wx,i t(bx,i,tc x,i,t)/(1+ rx i)t
(2)
Inpracticemanytermswillhavenegligiblysmall
values formanyoftheagents/decisionmakers,but
wecansee thattherearemultipleentrypoints for
nudging decisions towards greater ES performance
via,A,w,ror:
: increasing knowledge of costs and benefits to
othersofactionsanddecisionsbythefocalagent,
A:increasingaffinityandsenseofbelonging,
w: modifying the implicit weighting factors across
capitaltypes,
r:discountratecomponent reflectingthescaleand
itsassociatedriskaggregation,
: discount rate component reflecting the type ofcapital.
A number of parallel approaches have been
proposedthatcanbeseenassimplificationsofthis
genericscheme:
a) Valuingecosystemservices isaimedat findingthe exchange rates (wx,i) across capitals and
expressing all in financial terms19; however this
approach is challenged by the intrinsically
differentdiscountratesandinstitutionalcontextsthat tie any specific conversion factor to an a
priori choice of time frame, along with evolving
sciencebasedunderstandingofESdynamics
b) Carrots (positive incentives leading to increasebF,p)and sticks (enforced regulations leading to
increase cF,p) interact with sermons that
enhance the affinity vector for other scales,
reducethediscountratesforcapitalsotherthan
financial and scales other than private, and
increase knowledge of expected costs andbenefitsbeyondprivatefinancialgains.
c) Crowding out social motivation where bF,p,cF,pinteractwithbS,p,cS,p;preferencesexpressed ina
social (group) context may differ from those
expressedindividually(175)177
d) CES forms of PES/CRES, e.g., from national toprivatescales,translatethe(bN,n cN,n bN,p+cN,p)
differential into bF,p terms, with market
mechanisms determining the right price that
apparently expresses the value for external
stakeholders
e) COS formsofPES/CRESdoes the samebutwithpricesdeterminedatbroadernegotiation tables
andabroaderrangeofinteractionswithrules
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f) CISformsofPES/REScantakeinamuchbroaderrangeofvaluesanddiscountrates
6.3 A new comprehensive altruism framework
anditsapplications
In the simplified form of two levels, private andother and a uniform relative weighting of the
variouscapitals,equation2resemblestheequation
George Price developed for the emergence of
altruismasprobleminevolutionarybiology:
Figure 6. George Price178 clarified in 1968 that a cova
riancematrixbetween individualandaggregatebenefits
canreconcilealtruismandselfishgenes.
InasenseGeorgePricesequation foraltruism
(subordinating private utility to that of a broader
group) specifies conditions for internalization of
externalities,as itshowsthat thebest interestsof
the individualcanmatch thoseofabroadergroup,
as long as the benefitminuscost differential is
balanced by the social cohesion term. The affinityparameterisscaledbetween 1and+1andincludes
foesaswellasfriends.
6.4MultiscaleframingofREDD+linkedtomultiple
PESparadigms
Comingbacktothemultiscale institutionalframing
of the REDD+ agenda, a multiparadigmatic
approach appears to be logical: at national scale
property rights are clear (national borders),
performancemeasuresat this scalehave absorbed
most of the crosslandscape leakage, and
permanence can focus on continuity of accounting
rulesataggregated levels.ACESparadigmofcross
nationalcarbontradeisfeasible.Betweenanational
scale and its subnational entities (sectorbased or
geographically defined), a COS paradigm of
compensating for choices on the development/
environment possibility frontier is appropriate. At
locallevel,aCISparadigmisappropriateandcanbe
usedtocreatecomanagementregimesandgreater
clarity in resource use rights. A key challenge,
however, is to maintain transparency in such a
multiparadigmatic approach, given the tendencies
toelitecapture, lowaccountability (corruption)and
electioncyclepoliticalbiases.Inthefuturedirection
paragraph we therefore put these ideas in
hypothesis format: there is some evidence that
supportstheideas,butacriticalglobalcomparisonis
needed.
6.5Closingremarks
Finally,at thegigaeconomicscale theconcerns forplanetary boundaries179 and the need for more
targeted, more rapid, more transparent and moreinnovative feedback loops remains urgent, ascurrentfeedbackdoesnotkeepupwiththerateofchange intheplanetearthsystem.Theexpectationthat PES could provide flexible, effective and fairfeedback loops has only partially be met. Sometwentyyearsbeforethe1992Rioconference,adviceto the Club of Rome called for reshaping theinternational order (RIO)180. Twenty years after1992, that call is urgent as it was then181. Unlessglobal agreements and policies set the pace andclarifytheboundaries,marketbasedESapproaches
will only serve subsystems and may make thingsworse for others. We thus end on a ratherpessimisticnoteontheprospectsforPEStoserveasa panacea to align ecology and economics. Theoptimistwillnotehowfarwehaveprogressedfromthe stoneage economics182 at the start of theAnthropocene183andbe lessconcernedthatwestillhave a way to go. The realist will appreciate theprogressmade,butseethepaceastooslow184.
FUTUREISSUESThe following set of issues at the interface of PES
praxis and interdisciplinary research may guide
futureefforts:
H1: Crossscale mechanisms for fair and efficient
enhancementofES(betheywater,biodiversity
orclimaterelated)needtoacknowledge
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differencesinclarityofrightsandperformance
measures between local, subnational and
national scales that reshape fairness and
efficiencyconceptsatscaletransitions.
H2: At national borders an international form of
commoditized environmental services carbon
trade is feasible that links performance on
verifiable emissions reduction below
internationally agreed reference levels, to
financialflows(CES1paradigm).
H3: In response to consumer concerns over the
consequence of current modes of production
international trade will increasingly include
voluntary and mandatory standards for
emissions reduction and biodiversity
conservation linkedtocommodityvaluechains
that provide incentives for reduced emission
land use and reducing biodiversity threats
(CES2paradigm)
H4:Fromnational tosubnationalentitiesa formof
compensating for opportunities skipped is
appropriate,usingproxiessuchasforestcover
in relation to human population density,
combining biodiversity, watershed concerns
andGHGemissions(COSparadigm)
H5: At local level, property rights and outcome
basedperformancecriteriaareachallengetoa
$ per t CO2 exchange and coinvestment in
environmental services (interpreted across
water, biodiversity and Cstocks) and the
humanand