Payments for Environmental ServicesAn equitable approach for reducing poverty and

conserving nature

June 2006

1. Introduction 2

2. Common approaches to PES 42.1 Overview of current PES schemes and players 4

2.2 Limitations to traditional PES schemes 4

3. WWF’s approach: equitable PES 73.1 How does equitable PES differ from other approaches? 7

3.2 The importance of partnerships 7

3.3 Magnifying the views and interests of traditionally marginalizedpopulations 7

3.4 Equitable PES as one conservation finance mechanism 8

4. Examples of equitable PES projects 104.1 Equitable Payments for Watershed Services: A joint WWF,

CARE, and IIED project 10

4.2 Fostering PES: a WWF Macroeconomics for Sustainable DevelopmentProgramme initiative 11

Case studies:

Project site 1: Guatemala 12

Project site 2: Peru 13

Project site 3: The Philippines 14

Project site 4: Tanzania 14

Project site 5: Indonesia 15

Project site 6: Eastern Europe 16

5. Conclusions and recommendations 17

6. References 18

7. List of acronyms 18

Table of contents

Natural ecosystems provide a wide range ofenvironmental services1 from which peoplebenefit, and upon which all life depends. Theseinclude provision of food, fuel, building materials,and freshwater; climate regulation; flood control;nutrient and waste management; maintenance ofbiodiversity; and cultural services, to name a few.Collectively, the value of global environmentalservices has been estimated at US$33 trillion,higher than the entire world gross nationalproduct (Constanza, 2005).

While the benefits of environmental services arepublic goods, the cost of ensuring their provisionoften falls on local land managers. As land isusually managed for private benefit, it isgenerally more attractive for land managers toconvert their land to alternative uses such asagriculture rather than maintain it in its natural

1. IntroductionThe concept of payments for environmental services (PES) has received substantialinterest in recent years as a way of creating incentive measures for managing naturalresources, addressing livelihood issues for the rural poor, and providing sustainablefinancing for protected areas. The basic idea is that those who “provide”environmental services by conserving natural ecosystems should be compensated bybeneficiaries of the service.

state. This is particularly the case for poor,marginal land owners and users.

As a result, and despite the relative enacting oflegislation to prevent this, natural ecosystemscontinue to be degraded or lost at an alarmingrate, with nearly two-thirds of the world’senvironmental services now under threat(Millenium Ecosystem Assessment, 2005).Indeed, many argue that the failure of society tocompensate land managers for conserving theseservices is a key contributory factor to the rapidand environmentally damaging changes in landuse that are taking place globally (Pagiola et al,2005).

PES is a new market-based approach toconservation that aims to change incentives forland use in order to maintain or restore naturalecosystems so that they continue to provide thedesired environmental service(s). The basicprinciple is that those who “provide” environmentalservices should be rewarded for doing so.

This is achieved through a variety ofarrangements that transfer rewards from thosewho benefit from an environmental service tothose who conserve, restore, and manage thenatural ecosystem which provides it (seeWunder, 2005). Rewards may be monetary or inkind, may involve private sector or governmentfinancing, and can be made at local, national,and global levels. To be effective, the reward tothe land manager must make the net benefitsderived from maintaining environmental servicesgreater than those derived from alternative landuses. Alternatively, PES can be applied incombination with other sources of finance forprotection of natural resources.

PES has enormous potential to encourage andfinance conservation efforts. This is especiallyimportant in the current era of increased fundingneeds for the environment, as well as in thesecuring of global commons. PES may alsosucceed where other conservation approacheshave failed, by increasing the appeal ofconservation practices to land managers such as

1 Also known as ecosystem services

The strong link between how degradation ofenvironmental services affects poverty was recentlyhighlighted in the context of achieving the MillenniumDevelopment Goals (MDGs).

Agreed to in September 2000, the MDGs aim to halvethe number of people living in poverty by 2015.However, the recently published MillenniumEcosystem Assessment concludes that degradationof environmental services is a significant barrier toachieving these goals — and that this impedimentcould grow significantly worse over the next 50 yearsas global GDP increases 3-6 fold, accompanied byan expected explosion in the consumption ofimportant ecosystem services.

Furthermore, the assessment found that the harmfuleffects of environmental service degradation arebeing borne disproportionately by the poor, and areoften the principal drivers of poverty and socialconflict. The report concludes that “any progressachieved in addressing the MDGs of poverty andhunger eradication, improved health, andenvironmental sustainability is unlikely to besustained if most of the environmental services onwhich humanity relies continue to be degraded”(Millennium Ecosystem Assessment, 2005).

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Ecosystem services and povertyBox 1

farmers.

Certainly, in conjunction with other approaches,PES could become a central part of efforts underthe Convention on Biological Diversity (CBD) tofind sustainable sources of funding for protectedareas.

Although not originally designed to do so, PES isalso expected to have a positive impact on therural poor, both as beneficiaries of PES schemesand through conservation of the naturalecosystems upon which they are reliant for theirlivelihoods, health, and security. In addition, byproviding a means for dialogue and agreement,PES schemes may help poverty alleviationprogrammes run more efficiently through theestablishment of well-defined relations betweennatural and social capital. PES also has apotential role in solving social conflicts, such asthose between extractive industries and localcommunities. Furthermore, by stimulating thedevelopment of new skills and strengthening the

cooperative and hierarchical arrangements onwhich the poor often depend, PES can havepositive consequences for welfare.

Not surprisingly, there is high-level interest inPES. A number of schemes are currentlyoperating around the world involvinggovernments, business, government aidagencies, and non-governmental organizations.Although most schemes are still in their infancy,there is already an emerging consensus onseveral key constraints and opportunities to theprovision of poverty reduction and sustainablemanagement of natural resources through PES.

WWF’s approach of equitable PES, which it isdeveloping and implementing with partnersincluding CARE and IIED, aims to address theseconstraints by finding a balance betweenconservation and development outcomes; bydelivering conservation of biodiversity withsignificant benefits to the poor; and by doing soin a just and equitable way.

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Forests can provide a full range of environmentalservices, including watershed services, carbonsequestration, landscape beauty, and biodiversityconservation.

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2.1 Overview of current PES schemesPES is a generic term for a variety ofarrangements where local communities, farmersand other water and land managers are paid forconservation activities that deliver environmentalservices (see Table 1 for some examples).

To date, the four main environmental servicesthat have been addressed by PES are watershedservices, carbon sequestration, landscapebeauty, and biodiversity conservation (Table 1).There is some crossover between these: forexample, preserving a natural forest for itscarbon sequestration services may also help withprovision of watershed services, biodiversityconservation, and/or landscape beauty.

Four main approaches to PES have emerged,determined largely by what is driving the scheme:conservation goals, social goals, market goals, orgovernmental goals. (Table 2).

Most current PES schemes are local levelarrangements and involve spontaneous, privatemarket-type arrangements. Such schemes tendto be modest in scale, and are very common innature-based tourism and protection of smallwatersheds. Large PES schemes tend to begovernment driven, working at the state andprovincial level (e.g., in Australia, Brazil, China,and USA), the national level (e.g., in Colombia,Costa Rica, and China), and the internationallevel (e.g., the EU). Large schemes can alsoinvolve PES markets created by regulation, suchas carbon sequestration markets created by theKyoto Protocol on Climate Change.

2.2 Limitations and constraints to traditionalPES schemesThe current tendency is that the majority ofcurrent PES schemes are small in size,cumbersome to manage, and not rural-poorfriendly. Each of the four main approaches hasdifferent limitations that can hinder the flow oflarge-scale benefits to conservation efforts andthe rural poor (Table 2).

One problem is that many PES schemes wereinitially designed as means of financing naturalresource management, with potential livelihoodconsiderations added later. A major concern is

2. Common approaches to PESA number of PES schemes are currently operating around the world. While these arelargely still in their infancy, there is a growing understanding of the potential of PES topromote conservation and improve livelihoods of the rural poor. There is also alreadyan emerging consensus that several key constraints exist to successful PES.

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NGOs, international organizations, andGAAs involved in PES schemes

Box 2

• CARE

• Center for International Forestry Research (CIFOR)

• Centro Agronómico Tropical de Investigacióny Enseñanza (CATIE)

• Conservation International (CI)

• Danish International Development Agency(DANIDA)

• Directorate-General for International Cooperation(DGIS) of theNetherlands Ministry of ForeignAffairs

• Edinburgh Centre for Carbon Management

• Forest Trends

• Global Environment Facility (GEF)

• German Technical Cooperation (GTZ)

• Inter-American Development Bank (IDB)

• International Fund for Agricultural Development(IFAD)

• International Institute for Environment andDevelopment (IIED)

• IUCN–The World Conservation Union

• Katoomba Group

• Rewarding the Upland Poor in Asia forEnvironmental Services They Provide (RUPES)

• The Nature Conservancy (TNC)

• United Kingdom Department for InternationalDevelopment, Forestry Research Programme(DFID)

• United Nations Environment Programme (UNEP)

• United Nations Food and Agriculture Organization(FAO)

• Wildlife Conservation Society (WCS)

• Winrock International

• World Agroforestry Centre (ICRAF)

• The World Bank

• WWF

Environmental service Natural ecosystem PES examples1 Limitations to PES2

Table 1 Overview of environmental services currently addressed by PES

Watershed services(flood control, erosioncontrol, sedimentationcontrol, water qualitycontrol, soil salinizationcontrol, maintenance ofaquatic habitats, andmaintenance of dryseason flows)

ForestsFreshwater

Lower watershed users(industry, municipalities, etc.)pay upper watershedcommunities for landmanagement practices thatensure continued supply offreshwaterPublic moneys are used to payfarmers to adopt ruralconservation practices (e.g., notusing pesticides, maintainingnatural forests or vegetation,planting trees, etc.)Land users investing in activitiesthat reduce soil and watersalinity (e.g., tree planting) areissued salinity credits that theycan sell to point source polluters

Until recently, suppliers ofwatershed services havegenerally lacked leverage fordemanding payment; howeverthis is improving with newgovernment regulations forimproved water quality in moredeveloped countries, as wellas improved buyerunderstanding of the benefitsprovided by watersheds andthe growing threats they arefacing

Carbon sequestration Forests Carbon-polluting companies payfor tree planting and forestconservation activities, either intheir country or another country

Uncertainties over rules forcarbon-trading at theinternational levelHigh transaction costsUncertainties related to long-term effectiveness

Landscape beauty All Tour operators pay landownersfor access to areas of highscenic beauty or containingcharismatic megafauna

Market for landscape beautyservices is still relativelyimmature, mostly dominatedby government provisions andcharacterized by below-costpricing

Biodiversityconservation

All Governments give tax breaks topeople setting aside land forconservationCompanies, governments,GAAs, and/or NGOs pay forconservation activitiesConsumers pay for foodproducts produced in a mannerthat protects biodiversityPharmaceutical companies payfor conservation of forests aspotential future sources ofmedicine

Most biodiversity conservationservices are intangible,making them difficult topackage for sale, and rarelyconsumed by a clearlyidentifiable clienteleThreshold effects in theservice supply (e.g., forestareas below a certain size willfail to deliver the demandedbiodiversity) make it difficult toportion out services toindividual buyersHigh transaction costs

1 These examples are by no means comprehensive2 Source: Grieg-Gran and Bann (2003)

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that the poor will actually become worse off dueto a PES scheme, for example as buyers of aservice that was previously free. There is also thedanger that the poorest and most marginalizedwill become further marginalized if they cannotparticipate effectively in the scheme.

Different analyses of current PES schemes haveidentified various common constraints. These

include the willingness or even ability and capacityof potential buyers to pay for environmentalservices; willingness to sell; high transactioncosts; property rights; and enabling policy andlegislation (Grieg-Gran and Bann, 2003; Waageet al., 2006; see also Table 1, Table 2, and Box 3).

One of the biggest challenges is the identificationof buyers. Problems include a lack of awareness,

Approach PES definition Motivation Environmental Focus LimitationsServices (ES)

Table 2 Summary of traditional PES approaches1

Pro-market Narrow: limitedto markets forES

Efficiency gains,economicdevelopment

Unbundled

Socialdevelopment

Broad Improvedlivelihoods forproviders

Unbundled

Conservation Broad Sustainablefinancing forconservation

Wary ofunbundling

Governmental Broad Mixed; securingES may only bea minor goal

Bundled orunbundled

Valuation of ES,conditionality,efficiency,market pricing

Property rights,entitlements,social capital,income needs

Overall ecosystemintegrity andconservationgains

More aboutincomeredistributionand pay backs toconstituencies;less aboutenvironment

Most market-basedschemes are small scale,hence a marginal sourceof both ES to users andincome to providers

Issues of equity andaccess to basic services:for example, in somecases PES schemeshave benefited “richer” orwell-entitled farmers andland managers ratherthan poorer, moredisadvantaged groupsPES approaches faceresistance in manydeveloping countries

Unbundling of ES riskslosing funding for less“marketable” services, orpitching one ES againstanother

Few conservation gains,high costs, and poorsocial targeting

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the feeling that PES schemes are too risky, and alack of clarity over what is being bought. Thelatter concern stems from uncertainties relating tothe linkages between environmental services andspecific practices for management of naturalresources.

Another challenge is the actual setting up of the PESscheme. Barriers here include high transactioncosts for identifying sellers and assessing theirservices as well as difficulties with negotiatingand structuring deals and ensuring accountabilityand transparency. The main problem is a lack, onboth sides, of necessary technical skills andknowledge relating to land managementpractices in specific ecological contexts that willlead to maintenance of the desired ecosystemservice(s) (Waage et al., 2006).

2.3 The role of intermediary organizationsIn their assessment of barriers to PES, Waage etal. (2006) identified the role of intermediaries and

specialists in providing technical assistance andcapacity building to all parties involved in settingup a PES scheme, as well as in administeringand managing the scheme. Indeed, most PESschemes already involve various non-governmentalorganizations (NGOs), international organizations,and government and aid agencies (GAAs) asfacilitators, capacity builders, and intermediaries(Box 2), as well as providers of projectdevelopment funds.

Clearly, intermediary organizations involved inPES schemes must have relevant skills, contacts,and areas of experience. This ranges from countryor regional knowledge of the linkages betweenspecific management practices and environmentalservices, to the know-how for establishingaccountability and transparency mechanisms formoney exchange and deal security.

1 Based on Gutman (2005)

The map of rural poverty overlaps with the mapof rural biodiversity, and in many cases the ruralpoor, including indigenous people, are thestewards of natural ecosystems. Clearly, thesepeople should be key, active players in anyconservation efforts. At the same time, they needsecure and improved livelihoods in order to breakout of poverty. This is why a key tenet of WWF’swork is to integrate social development intoconservation efforts right from the start.

However, poverty reduction and environmentalsustainability are not always complementary.Without careful design, the poor are likely not tobenefit from a PES scheme (see Wunder, 2005)and there is a danger that part of the povertyreduction will be met by unsustainableexploitation of natural capital. Equitable PESaddresses this by pursuing a balanced approachtowards poverty reduction and sustainablemanagement of environmental services.

3.1 How does equitable PES differ from otherapproaches?Equitable PES differs from regular PESmechanisms in two ways. First, equitable PESschemes aim to bring substantial benefits to thepoor. This can include both direct and indirectbenefits, such as:

• direct financial benefits to individual farmersand households

• direct benefits that accrue at a communitylevel, such as hospitals, schools, and roads

• indirect benefits such as communityempowerment and land tenure

• indirect benefits from landscape restoration,such as decreased vulnerability to climatechange

• indirect benefits derived from stable social,cultural, and environmental conditions.

Second, equitable PES schemes aim to makepayments to the poor in a just and equitable way.This implies that:

• resources are applied to the priorities andneeds of the poor

• local values, knowledge, and practices areincorporated into natural resourcemanagement practices

• women and marginalized groups, includingindigenous communities, directly participatein, and benefit from, the PES mechanism.

Key enabling conditions for equitable PES areoutlined in Box 3.

3.2 The importance of partnershipsWWF is a strong believer in, and promoter of,partnerships. Building partnerships is particularlyimportant for PES schemes because they involvestakeholders of environmental services atdifferent levels — from upstream localcommunities that supply the environmentalservices to downstream potential buyers ofenvironmental services, such as privatecompanies, plantation owners, and local andnational government agencies. Furthermore, inorder to successfully implement equitable PESthat benefits conservation and contributes to thelivelihoods of the poor, partnerships are neededbetween communities, conservation anddevelopment NGOs, research institutes,marketing agents, and others. Collaboration andcontributions from all these stakeholders iscritical in being able to build effective equitablePES mechanisms.

3.3 Magnifying the views and interests oftraditionally marginalized populationsIn equitable PES, the providers of theenvironmental services are poor ruralcommunities. Historically, these communitieshave often been seriously underrepresented inprovincial and national decision-making fora,and as a result their views, interests, and needshave been neglected. They are oftengeographically isolated, and usually lackfinancial and other resources to defend theirinterests in provincial and national decision-making processes.

In its work on equitable PES, WWF thereforeaims to strengthen the capacity of community-based organizations as they seek to build

3. WWF’s approach: equitable PESWWF and its partners are developing a new, holistic PES approach that explicitlyaims to balance poverty reduction with conservation, and to do so with social justiceand equity. We see this equitable PES as one financing mechanism for conservationthat, in the appropriate circumstances, will deliver both sustainable natural resourcemanagement and improved livelihood security for the rural poor.

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relationships with provincial and national decisionmakers as well as with a host of otherorganizations and agencies, including the privatesector.

3.4 Equitable PES as one conservation financemechanismWhile WWF believes that equitable PES willsucceed where other approaches have faltered,it is not a blueprint “one-size-fits-all” tool that canor should be applied to every conservation ordevelopment problem. Neither should it be usedin isolation. Instead, PES is one of a broad range

of finance strategies for conservation and socialdevelopment that is best suited to particularcircumstances.

It is important to remember that there are majorconstraints to the development of equitable PES(see Box 3). A number of key questions shouldbe posed when considering a PES scheme for aparticular area:

1.Can both the social and conservation goalsfor the area in question be clearly stated?

2.Does achieving these goals require significantchanges to the current use of natural resources?

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Key enabling conditions for equitable PESBox 3Willingness to payWithout a buyer for environmental services, PES schemes are inappropriate. Willingness or even ability topay for environmental services has been a major constraint to the widespread use of PES, especially inwatersheds.

Willingness to sellLikewise, PES schemes need a seller. Some communities refuse to “negotiate” natural resources because ofcultural guidelines, or out of fear or ignorance that PES “payments” and “markets” are euphemisms for controlor appropriation of natural resources by western-based multinationals (Wunder and Vargas, 2005).

Well-defined property rightsWell-defined property rights to both land and natural resources are essential for viable and sustainable PESinitiatives. For equitable PES, with its focus on conservation and poverty reduction, ideally the right to sell theservices of the natural resources will be in the hands of the rural poor. However the poorest people are oftenlandless and lack appropriate property rights to the land on which they are settled. Furthermore, they may lackthe skills, knowledge, and resources to participate effectively in a PES scheme and therefore be marginalizedfrom the process (Landell-Mills and Porras, 2002). PES mechanisms that work for those who own or haveaccess to land should not have a negative impact on those who are landless and/or disadvantaged.

Good understanding of environmental characteristics and linkagesIt is very important to clearly understand and document the relationship between land use, the provision of theenvironmental service, and the economic benefits. This gives buyers a degree of certainty that the interventionupon which their payment is based will realize the quantity and quality of the service. Long-term paymentmechanisms that emphasize contingency must be underwritten by appropriate data and models.

Minimal transaction costsThe costs of establishing and maintaining PES schemes are often relatively high and a constraint to thedevelopment of equitable mechanisms. The key is to establish a mechanism where the costs of capturing theenvironmental service are lower than the benefits it provides. Benefits are easiest and cheapest to capturewhen users are already organized (such as through municipal water supplies, irrigation systems, etc. in thecase of freshwater services) and when some form of payment mechanism is already in place (such as adomestic water fee).

Mechanisms for regular and contingent paymentsFinancial transfer mechanisms must enable regular and contingent payments between buyers and sellers ofenvironmental services.

Appropriate legal frameworksIdeally, legal frameworks in favour of poor communities will be in place that support PES schemes and serveas an enforcement and compliance mechanism. However, in many developing countries where equitable PESmechanisms are relevant, policy governing natural resources and land use are not integrated. This presentsa significant challenge to the scaling up of successful local level pilot projects. At the very least, there can beno critical policy or legal constraints that could prevent implementation.

Dialogue between stakeholdersFora for stakeholders and organizations involved in a PES scheme (including buyers, sellers, intermediaries,and facilitators) need to be established and strengthened in terms of governance, negotiation, conflict resolution,monitoring, information sharing, and natural resource management.

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3.Is there is a clear relation between theconservation goals and an ecosystemservice(s) that are valuable to would-bepayers, or at least to a relevant sector of society?

4. Are payers that actually can pay, and may bemotivated to pay, being targeted?

5. Is there a good idea of how the moneycollected will be used?

6. Is there a good idea of how the rural poor wouldparticipate in and benefit from the PES scheme?

7. Are regulatory and institutional frameworksalready in place that may facilitate the adoptionof a PES scheme and the participation of therural poor?

If there is not a good answer to question 1 and

mostly positive answers for the remainingquestions, then other financing schemes areprobably more appropriate for the conservationand development project in question.

In addition, the long-term sustainability ofequitable PES as a finance strategy should beconsidered. This is hard to assess at presentgiven that most initiatives are relatively new.Pagiola et al. (2002) identify three crucial factorsfor sustainability:

• Continued demand for the services being sold

• Continued ability of suppliers to provide theservices

• Maintenance of the necessary institutionalstructure.

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Cities, industry, mines, and dams may seem unlikelypartners for conservation efforts — but in fact they canbe valuable buyers of environmental services.

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4. Examples of equitable PESprojects

Together with various partners, WWF is working on a number of equitable PES schemesaround the world, with a focus on those for watershed services. We are particularlyconcerned with addressing the identified limitations and constraints to traditional PESschemes outlined in Chapter 2. Most of our projects and sites are still in their earlystages, but nevertheless provide valuable insights into what is needed for successfulschemes that can be replicated and up-scaled.

4.1 Equitable Payments for Watershed Services:a joint WWF, CARE, and IIED projectWWF is working with CARE and IIED on a jointprogram to establish Equitable Payments forWatershed Services (PWS) in 10 selectedwatersheds in Asia, Africa, and Latin America. Inall project sites, the providers of the environmentalservices are poor rural communities. The selectedwatersheds are characterized by a high degreeof complexity, but all have two common features:

1.High levels of biodiversity combined with highrates of land-use change affecting biodiversity

2.High levels of poverty

The program proposes to demonstrate howequitable PES can reverse forest loss throughaddressing the core drivers of land-use change.Improved land management in the water

catchment areas is also expected to lead toimproved water quality for both rural and urbanconsumers. In this way, the program aims tocontribute significantly to the MDG 7 targets onenvironmental sustainability in the selectedcountries and watersheds.

The program is currently in Phase 1, an 18-month preparatory phase whose main objectiveis to prepare and establish solid, verifiablebusiness cases for equitable PWS in the 10project sites. Those sites that have delivered aviable business case and Memorandum ofunderstanding (MoU; see Box 4) within 18months will receive funding for full implementationof the remainder of the site-level activities. ForPhase 1, the program has received funding fromthe Dutch government (DGIS) and Danish

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Summary of the WWF-CARE-IIED Equitable Payments for Watershed Services projectBox 4

Overall Goal: Payments for watershed services are delivering sustainable natural resource management andimproved livelihoods for the rural poor.

Specific Objective: By 2010, equitable approaches to PWS have been established in 5 countries, and promotedwithin a wider learning network of government, private sector and civil society organizations in 20 countries.

Outputs Phase 1: For 10 sites in 5 countries (1) a documented business case for payments for watershedservices; (2) an MoU between buyers, providers and facilitators; (3) an indicative work plan and costs forimplementation.

Activities Phase 1: (1) Conduct situation analysis and baseline studies; (2) facilitate PWS planning processes;(3) promote economic values of watershed services with potential buyers and sellers, and develop and implementmarketing strategies to sell these services to a range of potential buyers; (4) assess and monitor strengths andweaknesses in the institutional framework and capacity of participating organizations; (5) analyze existing policyand legal frameworks relating to equitable PWS; (6) engage key experts in PWS and related issues of businessmanagement and socio-economic monitoring to identify and develop relevant methodologies and tools; (7) pre-test and evaluate relevant methodologies and tools for equitable PWS; (8) within each core country, establishand facilitate an action learning network for sharing and reflecting on equitable PWS experience; (9) gatherinformation and training materials relevant to equitable PWS and make these available through a website andnewsletter.

Countries: Peru, Guatemala, Tanzania, Philippines, Indonesia

government (DANIDA). The specific outputs andactivities for this phase are summarized in Box 4,with some of the key features of the projectdiscussed in more detail below. Overviews of afew project watersheds are provided on pages12–15 (Project sites 1–5).

Making the business caseOne of the biggest challenges in facilitating PWSmechanisms, often under-emphasized in thecurrent experience, is the process of engagingthe buyer of the watershed service from the start.Instead, emphasis has often been placed onpolicy and on the engagement of serviceproviders. As a result, potential buyers ofenvironmental services, and watershed servicesin particular, are often unconvinced that theopportunities are either ecologically oreconomically justified.

The WWF-CARE-IIED project takes a differentapproach by developing a compelling businesscase with potential buyers at the start of theprocess. This will be achieved by quantifying theproblems associated with land-use changes inthe upper watershed to buyers, and byconducting rigorous financial cost-benefitanalyses.

Defining equitable PWSEnsuring that PWS achieves certain standards ofsocial justice and equity is a tough challenge,and raises the question of what standards shouldapply. Equity at the community level is aparticularly challenging condition given thatpoorer households tend to have little or no landand marginalized groups, by definition, have littleor no influence over decision-making atcommunity level. The WWF-CARE-IIED projectwill directly address this question and help toidentify supporting factors and obstacles toachieving these standards. In this sense, theproject aims to help define equitable PWS.

Forming partnershipsPartnerships are key to the success of PESschemes. The WWF-CARE-IIED project willengage a wide range of local and nationalpartners for its implementation, with particularemphasis on partnering local communities, localand national NGOs, the private sector, andgovernment agencies. The project also aims tomagnify the views and interests of traditionallymarginalized populations, as well as forge strongcollaborations with other actors working on PWS,notably DGIS, DANIDA, the World Bank, GTZ,IUCN, Forest Trends, and CIFOR. Thesepartnerships must be effective and efficient, andremain accountable to the stakeholders whoseinterests the project serves.

Sharing experiences and methodologiesPES is an approach in its infancy. The WWF-CARE-IIED project will develop importantmethodologies and lessons that will contribute tothe growing understanding of equitable PES.Critically, the project will contribute groundedexperiences from initiatives that will deal directlywith the challenge of developing equitable PWS.By sharing this experience between countries aswell as between and within environment anddevelopment agencies, the project will contributeto the collective understanding of the potentialand constraints of PWS. This will allow PWSfacilitators to capitalize on successes whileavoiding pitfalls.

4.2 Fostering PES: a WWF Macroeconomicsfor Sustainable Development PrograminitiativeThe WWF Macroeconomics for SustainableDevelopment Program Office seeks to promotethe integration of environmental sustainabilityand social equity into economic developmentstrategies at national and international levels.One initiative within the program is focusing onhow to scale-up current PES schemes to theinternational level, particularly at the river basinlevel, so that they deliver substantial and long-lasting conservation while alleviating rural poverty.

The initiative is giving special attention to:

• Increasing the participation of the rural poorin PES schemes

• Bringing the marketing and economicexperience and perspectives of the privatesector into PES planning

• Delivering better conservation results andintegrating PES into current conservationactivities

• Building capacity on PES best practices

• Gaining better understanding of theprospects and limitations of small-scalereplication of PES schemes.

This three-year initiative started in early 2005. Anoverview of one river basin project site, theDanube, is provided in the case study on page16 (Project site 6).

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Location: Guatemala’s Atlantic Coast; the Motaguaand Polochic rivers form part of the largerMesoamerican Reef Ecosystem river basin.

Origin: Tropical montane cloud forests within theSierra de las Minas Biosphere Reserve (SMBR).

Importance to biodiversity: One of the mostbiodiverse regions within the MesoamericanBiological Corridor; the SMBR itself is one of thelargest unbroken extents of cloud forest inMesoamerica, covering around 1,300km², of whichsome 65% is primary forest. Water flowing from thissystem also impacts on the Mesoamerican Reef,the second-longest barrier coral reef in the world.

Human population: Over 400,000 resource-poorpeople, including several indigenous groups ofwhom up to 90% live below the poverty line.

Water users: Industry (hydroelectricity, coffeeprocessing, bottling, paper); export and subsistenceagriculture; domestic.

Threats to watershed services: Forest and

Motagua-Polochic River SystemProject site 1: Guatemala

freshwaterhabitats arebeing lost anddegraded mainlydue todeforestation,cattle ranching,forest fires,agriculturalexpansion, andpollution frompesticides,fertilizers, and domestic and industrial effluent. Thishas led to declines in water quality and quantity forthe various stakeholders in the system, andthreatens biodiversity in the wider MesoamericanReef system.

PWS project approach: At present there are nofinancial mechanisms in place to charge andchannel user fees upstream to the managers of theSMBR or to compensate forest owners for theimportant environmental services they provide.

The WWF-CARE-IIED project isaddressing this by focusing initially onlarge water users with the greatestfinancial capacity and willingness to pay.These potential buyers include 15municipalities, agro-industrial exporters,the Coca-Cola bottle plant (ABASA), apaper mill plant (PAINSA), a rum plant(LIZASA), a beer company (CerveceríaCentroamericana), and a hydropowercompany.

Wider implications: This PWS schemeis anticipated to have broaderimplications at the policy level inGuatemala and to serve as a replicablemodel in Latin America and the world forlandscape-scale conservation linkingforest, freshwater, and coastal marinebiomes.

Other work: This project is one part of amuch broader initiative that takes intoaccount other approaches, includingintegrated river basin management,efficient irrigation systems, scientificresearch development, clean production,strengthening local water managementand governance capacities, andundertaking environmental education andawareness-raising among target groups.

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Large industrial water users in the Motagua-Polochic RiverSystem will pay for the maintenance of the ecosystemsfrom which the water they use comes.

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Location: Northwestern Peru, draining into the PacificOcean; the river basin is within the Tumbesian-Andean Valleys Dry Forests Ecoregion.

Origin: Andes mountains.

Importance to biodiversity: The northern coastalprairies, the western slopes, and the surroundingAndean valleys are dominated by highly vulnerableand fragile ecosystems. The watershed’s dry andhumid forests are centres of biodiversity, and play afundamental role in the stabilization of micro-climateconditions as well as in water and soil conservation.

Human population: Around 1 million people, withthose in the upper basin amongst the poorest in thecountry. 65.5% of people living in rural highland areasand 64.4% living in rural coastal areas arecategorized as poor. Of these, 30.2% in the highlandsand 27.3% on the coast are categorized as “extremelypoor”.

Water users: Agriculture, mining, industry, cattle,trade, and domestic.

Threats to watershed services: Land-use changeexacerbated by the El Niño oscillation is leading todeforestation and increased erosion. During El Niñoyears, increased rainfall favours expansion of theagricultural frontier, while years without rain bringabout severe droughts forcing people to fell or burntrees for domestic use (mostly firewood) and slash-and-burn. The region is also facing increasedvulnerability to climate change-induced natural disasterssuch as floods, loss of biodiversity, and land slides.

Piura River BasinProject site 2: Peru

PWS projectapproach:Forests within thePiura River Basinare crucial formitigation againstfloods anddroughts causedby the El Niñocycle and climatechange. TheWWF-CARE-IIEDproject is aimingfor ForestLandscapeRestoration to beseen as anenvironmental service for flood and drought control,provided by upstream communities and paid for bydownstream stakeholders. Potential buyers includingmining companies, public sector organizations, smalllandowners, and urban dwellers have indicated theirwillingness to participate in such a PES scheme.

Wider implications: The project has widerimplications for adaptation to climate change aspreparation for climate-change related naturaldisasters (El Niño-related). The project also directlydeals with conflict management between extractiveindustries and local communities.

Other work: This project is part of a largerdevelopment and conservation programme of CARE,WWF, and others.

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Aiming for Forest Landscape Restoration to be seenas an environmental service for flood and droughtcontrol, provided by upstream communities.

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Cantingas/Panangcalan watershedsProject site 3: The Philippines

Location: Sibuyan Island, part of the Philippine MoistForests Ecoregion.

Origin: The island’s mountain forests.

Importance to biodiversity: Sibuyan Island is knownas the “Galapagos” of Asia, with around 60 endemicspecies and several rare, threatened, andendangered plants and animals. It is also one of thefew remaining Philippine islands with significant forestcover (about 70%).

Human population: Some 47,000 people, including335 upland households belonging to the indigenousgroup Sibuyan Mangyan Tagabukid. Theseindigenous people, together with other upland migrantgroups, form the poorest communities on the islandand in the wider province.

Water users: Agriculture; domestic; subsistenceactivities; proposed mini-hydropower plant.

Threats to watershed services: Forests are beinglost and degraded due to illegal logging, unsustainableharvesting of non-timber forest products, and soilerosion from unsustainable farming practices.

PWS project approach: The Sibuyan MangyanTagabukid, who hold ancestral domain title to twoupland forest blocks, are entirely dependent on theforests for their survival. In 2000 they formed anorganization, Asosasyon ng Tribung SibuyanMangyan Tagabukid (ATSMT), to implement anancestral domain management plan, which providesfor the conservation and sustainable use of theirdomain. The WWF-CARE-IIED project will providefunding for the ATSMT to continue its work. The local

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government unitof San Fernando,Romblon ElectricCooperative, andWWF-Philippineswill pool resourcesto seed a waterfund, which willfinance nurseryestablishment,tree planting, andforest patrols tostop illegallogging activities.Romblon ElectricCooperative hasalso committed toset aside an annual amount for watershed protectiononce the power plant is operational.

Wider implications: The project will facilitate theempowerment of the Sibuyan Mangyan Tagabukidthrough capacity building of the ATSMT, as well asfacilitate the development of linkages between theSibuyan Mangyan Tagabukid and external supportinstitutions.

Other work: This project is part of an ongoingIntegrated Conservation and Development project onSibuyan Island. WWF, in close collaboration with otherNGOs and government agency partners, has assistedthe Sibuyan Mangyan Tagabukid in securing tenureand improving natural resource management in andaround Mt Guiting-Guiting Natural Park.

Location: 200km west of Dar es Salaam, draininginto the Indian Ocean; part of the Eastern ArcMontane Forests Ecoregion.

Origin: Forests on the Uluguru Mountains.

Importance to biodiversity: The Uluguru Mountainsare one of the ten most important tropical forest sitesfor conservation in Africa. They are a key element ofthe Eastern Arc Range, whose natural forests arerecognized as one of the 25 richest and most-threatened reservoirs of plant and animal life onEarth.

Human population: Around 100,000 people live in poorrural communities on the northern and eastern sides ofthe mountains. In addition, the 3 million people living inDar Es Salaam and 500,000 people living in MorogoroTown are dependent on this watershed for their waterand food.

Water users: Agriculture; domestic; subsistenceactivities.

Uluguru Mountains CatchmentProject site 4: Tanzania

Threats towatershedservices:Forests are beinglost andfragmented at analarming rate dueto felling of treesfor timber,collection offirewood andbuilding poles,uncontrolledfires, andclearance forsubsistence andcash-crop cultivation. As a result, the catchmentforests can no longer hold enough water during thewet season, giving rise to critical water shortages inmany parts of the Dar es Salaam, coast, andMorogoro regions.

forests. TheKapuas River isalso important forthe otherinhabitants ofWest Kalimantan.

Water users:Agriculture;industry;domestic;subsistenceactivities.

Threats towatershedservices: Forests are being lost and fragmented at analarming rate due to illegal logging, fires, illegal goldmining, and commercial extraction of forest productsat unsustainable levels. This is leading to flooding anderosion.

PWS project approach: The WWF-CARE-IIEDproject aims to improve watershed managementthrough incentive schemes to Kapuas Hulu as aConservation District as well as through building thecapacity of village institutions in planning andimplementation of development programmes.Potential buyers include the Public Water Service,other districts along the Kapuas River, the provincialgovernment, and industry, while the sellers arecommunities living in and around Betung KerihunNational Park.

Other work: WWF is working with various partners inthe Heart of Borneo to help conserve 220,000km² ofinter-connected Bornean rainforest, through a networkof protected areas and well-managed, productiveforest.

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Location: Kapuas Hulu District, West Kalimantan,Borneo; part of the Borneo Lowland & MontaneForests Ecoregion.

Origin: Betung Kerihun National Park, part of themountainous heart of Borneo that is the origin of mostof the island’s rivers. In addition to the Kapuas River,the longest river in West Kalimantan, two of Borneo’sother greatest rivers originate here, the Rejang andLupar River in Sarawak (Malaysia).

Importance to biodiversity: The watershed has arange of habitats, including lowland Dipterocarpforest, wet hill forest, montane forest, moss forest,and swamp forest. All are extremely biodiverse, hometo thousands of different plant and animal species,many of them endemic to Borneo. They also representsome of the last-remaining natural habitats on Borneo.

Human population: 203,000 rural poor, includingindigenous Dayak tribes and Melayu fishers; a largeproportion of the population lives in state-owned

Upper Kapuas BasinProject site 5: Indonesia

PWS project approach: Communities living in theUluguru Mountains are heavily dependent on theforests for their livelihoods. In addition, whileexpanding agriculture up the slopes has led toforest loss, these farms are now importantproducers of fruit and vegetables, and so vitallyimportant for the welfare of the mountaincommunities as well as the people of Dar esSalaam. The WWF-CARE-IIED project aims to helpmountain communities stabilize and improve the

productivity of their farms as well as prevent furtherforest loss. The water authorities of Dar es Salaamand Morogoro will be approached as buyers for theenvironmental services being provided by themountain communities.

Wider implications: The project will help promote thePES concept in Tanzania, as well as influencerelevant policy and create an enabling environmentfor PES to function in the country.

Building capacity of village institutions in planningand implementation of development programmes.

© WWF-Canon / Alain COMPOST

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Location: Bulgaria, Moldova, Romania, and Ukraine;part of the Danube River Delta Ecoregion.

Origin: Black Forest, Germany.

Importance to biodiversity: The lower Danube basinis home to a diverse system of natural habitats withrich and unique biological diversity. For example, theDanube Delta is the world’s largest reed bed; thebreeding and/or wintering area for 300 bird species,including the largest colony of pelicans outside ofAfrica; and home to 75 species of freshwater fish, halfthe European total.

Human population: About 83 million people live inthe wider Danube basin and more than 20 millionpeople depend directly on the Danube for drinkingwater. The lower basin includes some of the poorerrural areas of Europe.

Water users: Agriculture, industry, and domestic.

Threats to watershed services: Over 80% of theDanube’s wetlands, floodplains, and forests havebeen destroyed since the beginning of the 20th

century, due to development, dam-building, irrigationand drainage, canalization, artificial flood protectionschemes, and eutrophication and pollution fromindustrial, agricultural, and domestic discharges.While the lower Danube is currently less affected thanthe upper basin, rapid development is a major threatto remaining natural areas.

PWS project approach: Working with an array ofinstitutions and experts, WWF’s project aims toidentify and support land uses that protect the rural

The Lower Danube River Basin and DeltaProject site 6: Eastern Europe

environment andprovideenvironmentalservices that maytrigger paymentsfrom theEuropean Union(EU), from countryagencies, andfrom businessesor consumers. Inaddition, theproject will helpdevelop regulatoryframeworks andinstitutions tosupport andscale-up PES schemes, particularly regarding how tocomply with, and benefit from EU’s rural andenvironmental regulations and financing opportunities.

Wider implications: The project could be adopted oradapted by other stakeholders in the wider Danubebasin, in other European rural areas, and in otherinternational watersheds around the world.

Other work: The Danube countries, the basinagencies, and many other stakeholders, includingWWF and its partners, are working to addressenvironmental threats to the lower Danube and theDanube Delta through various programmes to reducepollution, restore wetlands and floodplains, conservebiodiversity, and support sustainable use of ruralenvironments.

Supporting land uses, such as traditional agriculture,that protect the rural environment and provideenvironmental services.

© WWF-Canon / Klaus-Henning GROTH

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5. Conclusions andrecommendationsWWF is working to conserve the world’s biological diversity and ensure that the useof renewable resources is sustainable. An essential element of our work is theintegration of social development into conservation efforts. We therefore see greatpotential for equitable PES as a valuable financing mechanism for conservation thatcan deliver both sustainable natural resource management and improved livelihoodsecurity for the rural poor.

WWF calls on all stakeholders — includinggovernments, development agencies,conservation organizations, business, industry,local communities, protected area managers —to explore the value and promote the use ofequitable PES.

In particular, we call on Convention on BiologicalDiversity (CBD) parties and other governments toinclude equitable PES as part of theimplementation of sustainable developmentstrategies and National Biodiversity Strategiesand Action Plans. In this context we note that:

• The important economic values of naturalecosystems and biological diversity need to beproperly recognized, priced, and internalized intomarkets through appropriate measures such asequitable PES.

• Sustainable use of biological diversity, one ofthe three objectives of the CBD, can beenhanced by the application of incentivemeasures such as equitable PES that reversethe perception of biological diversity as a low-cost externality and prevent its long-term declineand deterioration.

• In the context of increased funding needs forbiological diversity, equitable PES has significantpotential as a source of sustainable financing forconservation of biological diversity.

• Incentive measures that affect the rural poorcan only be sustainable if socio-economicdevelopment is integrated into the design phase ofthese incentives from the start. Equitable PES isdesigned to address this by bringing substantialbenefits to the poor in a just and equitable way.

Constanza, R. (2005) Ecosystem services: If they’re soimportant, why do we continue to abuse them? FourthHenry Wallace Scientific Conference, 1–3 November2005, CATIE, Turrialba, Costa Rica

Grieg-Gran, M. and Bann, C. (2003) A closer look atpayments and markets for environmental services. InFrom Goodwill to Payments for EnvironmentalServices, a survey of financing options for sustainablenatural resource management in developing countries.Edited by Pablo Gutman, WWF Macroeconomics forSustainable Development Programme Office

Gutman, P. (2005) What are PES? Opportunities andobstacles to implement pro-poor PES projects.Presentation, 15 December 2005

Landell Mills, N. and Porras, I.T. (2002) Silver Bullet orFool’s Gold? A global review of markets for forestenvironmental services and their impacts on the poor.Instruments for sustainable private forestry series.International Institute for Environment andDevelopment, London, U.K.

Millenium Ecosystem Assessment (2005)

6. ReferencesPagiola, S, Martin-Hurtado, R., Shyamsundar, P., Mani,M. and Silva, P. (2002) Generating public sectorresources to finance sustainable development—Revenue and incentive effects. World Bank,Washington, D.C.

Pagiola S., Arcenas, A. and Platais, G. (2005) Canpayments for environmental services help reducepoverty? An exploration of the ideas and the evidenceto date from Latin America. World Development Vol. 33No. 2. Elsevier, UK

Waage, S., Scherr, S., Jenkins, M. and Inbar, M.(2006) A scoping assessment of current work onpayments for ecosystem services in Asia, LatinAmerica, and East & Southern Africa. Forest Trends

Wunder, S. (2005) Payments for EnvironmentalServices: Some nuts and bolts. CIFOR OccasionalPaper No. 42, Jakarta, Indonesia

Wunder, S. and Vargas. M.T. (2005) Beyond “markets”:Why terminology matters. The Katoomba Group’sEcosystems Marketplace. Opinion, April 2005

ATSMT Asosasyon ng Tribung Sibuyan MangyanTagabukid

CATIE Centro Agronómico Tropical de Investigacióny Enseñanza

CBD Convention on Biological Diversity

CI Conservation International

CIFOR Centre for International Forestry Research

DANIDA Danish International Development Agency

DFID Department for International Development,Forestry Research Programme

DGIS Directorate-General for InternationalCooperation

ES Ecosystem Services

EU European Union

FAO United Nations Food and AgricultureOrganization

GAAs Government and aid agencies

GDP Gross domestic product

GEF Global Environment Facility

GTZ German Technical Cooperation

ICRAF World Agroforestry Centre

7. List of acronyms

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IDB Inter-American Development Bank

IFAD International Fund for AgriculturalDevelopment

IIED International Institute for Environment andDevelopment

IUCN International Union for the Conservation ofNature

MDG Millennium Development Goals

MoU Memorandum of Understanding

NGO Non-governmental organization

PES Payments for environmental services

PWS Payments for watershed environmentalservices

RUPES Rewarding the Upland Poor in Asia forEnvironmental Services They Provide

SMBR Sierra de las Minas Biosphere Reserve

TNC The Nature Conservancy

UNEP United National EnvironmentalProgramme

WCS Wildlife Conservation Society

WWF World Wide Fund For Nature

Edited by Emma DuncanDesigned and produced by Emma Duncan

Cover images, left to right:© WWF-Canon / Michel GUNTHER© Kirsten SCHUYT© WWF / KLEIN & HUBERT© WWF-Canon / Martin HARVEY

Published June 2006 by WWF – WorldWide Fund For Nature (Formerly WorldWildlife Fund), Gland, Switzerland. Anyreproduction in full or in part must mentionthe title and credit the above-mentionedpublisher as the copyright owner. Nophotographs from this publication may bereproduced on the World Wide Webwithout prior authorization from WWF.© text 2006 WWF. All rights reserved.© 1986, WWF – World Wide Fund ForNature (Formerly World Wildlife Fund).® WWF Registered trademark owner.

The material and geographicaldesignations in this publication do notimply the expression of any opinionwhatsoever on the part of WWF concerningthe legal status of any country, territory, orarea, or concerning the delimitation of itsfrontiers or boundaries.

Contact

Kirsten SchuytHead, Forests ProgramWWF-NetherlandsBoulevard 123707 BM ZeistThe NetherlandsKSchuyt@wwf.nl

WWF is one of the world’s largest and most experienced independentconservation organizations, with almost 5 million supporters and aglobal network active in more than 100 countries.

WWF’s mission is to stop the degradation of the planet’s naturalenvironment and to build a future in which humans live in harmony withnature, by:

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