Designing Payments For

Ecosystem Services

PABASARA GUNAWARDANE

Ecosystem Functions

“The capacity of natural processes and

components to provide goods and services that satisfy human needs, directly or

indirectly”(de Groot, 1992)

Ecosystem Services

• Food

• Fiber

• Genetic Resources

• Bio-chemicals,

Natural Medicines

and

PharmaceuticalsProvisioning services

Ecosystem Services

• Air Quality

Regulation

• Climate

Regulation

• Water Regulation

• Erosion

Regulation

• Water Purification

and Waste

Treatment

Regulating services

Ecosystem Services

• Cultural Diversity

• Spiritual And

Religious Values

• Knowledge

Systems

• Educational

Values

• Inspiration

• Aesthetic Values

• Social Relations

Cultural services

Ecosystem Services

• Soil Formation

• Photosynthesis

• Primary

Production

• Nutrient Recycling

• Water Cycling

Supporting services

Platowrote about the service of soil retention

An Inquiry into the Nature and Causes of the Wealth of Nations

Adam Smith, 1776

“I believe that the great part of the miseries of mankind are brought upon them by false estimates they have made of the value of things.”

Benjamin Franklin, 1706-1790

of the environmental services are being degraded faster than they can recover*

*Millennium Ecosystem Assessment. 2005

Why are Ecosystem Services Under-protected?

Ignorance

Institutions

Market Failure

Limitations in valuationMost ecosystem services are not exchanged in robust markets

Economic value of ecosystems

Direct values Outputs that can

be consumed directly, such as fish, medicines,

wild foods, recreation, etc.

Indirect values

Ecological services,

such as catchment

protection, flood control,

carbon sequestration,

climatic control, etc.

Option values

The premium placed on

maintaining resources

and landscapes for

future possible direct

and indirect uses, some

of which may not be

known now.

Existence values

The intrinsic value of

resources and landscapes,

irrespective of its use such

as cultural, aesthetic,

bequest significance, etc.

Non useUse

Total economic value of ecosystems

Environment ValuationEconomic techniques Non-economic techniques

Market price approaches

Market cost approaches

Replacement costs approaches

Damage cost avoided approaches

Production function approaches

Revealed preference methods

Travel cost method

Hedonic pricing method

Stated preference methods

Choice modelling

Contingent valuation

Participatory approaches to valuation

Deliberative valuation

Mediated modelling

Benefits transfer

Consultative methods:

Questionnaires

In-depth interviews

Deliberative and participatory approaches:

Focus groups, in-depth groups

Citizen juries

Health-based valuation approaches

Q-methodology

Delphi surveys

Rapid rural appraisal

Participatory rural appraisal

Participatory action research

Methods for reviewing information:

Systematic reviews

Market-based Approaches

Market-price approaches

Utilise directly observed prices and / or costs from actual markets related to the provision of an environmental good or services as a representative to the value of that environmental good or service

South Africa, market-price approaches based on resource use

patterns and trading prices and tourism revenues have been used

in estimating the direct use values of biodiversity in terms of

consumptive use

Market-Costs Approaches

The Replacement Cost Method

Uses the costs of replacing an environmental service as a representative to the value of that service

Has been used within a number of developing countries to value the cost of soil erosion, including in Sleman, Java (Moller, A. & Ranke, U., 2006), and in Sri Lanka (Gunatilake, H. M. & Vieth, G. R., 2000)

Market-Costs Approaches

The damage cost avoided approach

Uses the costs associated with mitigation of environmental damage was the representative to value

• Used to value the storm protection services delivered by mangroves forest in Thailand in terms of the reduction in expected future storm damage (barbier, E. B., 2007)

• The value of rodent pest control in Tanzania (Skonhoft, A. et al., 2006)

Market-Costs Approaches

The opportunity costs approach

• Assessing the opportunity cost of land preservation in landscapes that are changing from natural habitats towards agriculture in Paraguay - Naidoo and Adamowicz (2006)

Revealed Preference methods

Travel Cost Method

• Uses data on people’s actual behavior in real markets that are related to the environmental good in question; rather than their conjectured behavior in hypothetical markets

The method has been used to estimate the recreational value associated with particular aspects of biodiversity in developing countries

Revealed Preference methods

Hedonic Pricing Method

• The value of a non-market, environmental good is revealed through observations of the demand for a related complementary marketed good

• In Windhoek, Namibia, this method was applied to find meaningful relationships between biodiversity and house prices.

• The analysis indicated that close proximity to the Goreangabreserve raised house prices by $1980 US dollars (Humavindu, M. N. & Stage, J., 2003).

Stated Preference Methods

The contingent valuation method (CVM)

• Estimates economic values by constructing a hypothetical market and asking survey respondents to directly report their willingness to pay (WTP) to obtain a specified good, or willingness to accept (WTA) to give up a good

The CVM method has been widely used for valuing biodiversity benefits around the world (Nunes, P. & Van Den Bergh, J., 2001)

$ 16-54trillion (Costanza et al. 1997).

The estimated value of nature’s services

$ 200Billion

of world agricultural output

Source: www.fao.org/nr/sustainability/ecosystem-services

$ 3.7trillion

of climate-induced damage could be avoided

By halving deforestation rates by 2030

Source: www.fao.org/nr/sustainability/ecosystem-services

The PES ConceptPayments for Ecosystem Services

• The environment provides critically important services• Some of these are captured by markets, but many are not• They are positive externalities that are therefore regarded

by the beneficiaries as free• As a result, many ecosystem services tend to be both

under-conserved and undervalued• Payments for ecosystem services (PES) seek to “get the

incentives right” by capturing the positive externalities, by providing accurate signals to both service providers and users that reflect the real social benefits that ecosystem services deliver.

“Voluntary transactions where a service

provider is paid by or on behalf of service beneficiaries for land, coastal, or marine management practices that are expected to result in continued or improved

service provision”

Payments for Ecosystem Services

(Wunder 2005)

The logic of PES

Idea:• Those who provide ES get paid for doing so

(service provider gets)• Those who benefit from ES pay for provision

(service user pays)

PES are popular for perceived simplicity and cost-effectivenessPES = new paradigm for contractual conservation

What are Payments for Environmental Services?

• Voluntary agreements …• Between buyers and sellers of ecosystem

services …• For cash or other rewards …

creating markets for ecosystem services…• Which provide incentives and finance to land

and resource managers …• Thereby strengthening conservation and

livelihoods

Uses of PES

Key PES Design Questions

• What is the service being provided?- Can landscape management efficiently provide the service?

• Who provides the service and who benefits?- Are there discrete groups of providers and beneficiaries?

• What level of service is needed?- Can this be adequately monitored?

• What is the most effective payment mechanism?- Direct payment, mitigation and offsets, or certification?

• Are the supporting institutions adequate?

PES Cycle

PES as a response to market failures

• The market fails to: o reward on-site ecosystem service providers, or to

compensate them for their costs (e.g. changing land use)

o charge off-site users for the benefits they enjoy (e.g. clean water)

• PES create a market for natural resources making conservation a more profitable land-use proposition

Potential buyers

Government bodies

Depending on the ecosystem service, there is a wide range of potential buyers….

• This might include government payments to landowners for the services of water quality (local government)

• Flood control (regional government)

• Carbon sequestration and biodiversity conservation (national government)

Potential buyers

Corporations

• A Hydroelectric company may be willing to pay upper watershed landowners to keep their forests intact in order to maintain the service of erosion control (so the lake behind the dam does not silt up)

• Similarly, ecotourism operators may pay a local community to ensure conservation of attractive biodiversity in the surrounding areas.

Potential buyers

Consumers

• A category of consumers may wish to direct its purchases toward companies and products that act in what they view as an environmentally responsible manner

Payments are made to land owners willing to change their land use so that it provides greater services

The goal here is to maintain the status quo

Potential sellers

Two Categories

Sellers who are paid for change

Those whocurrently provide services

The range of PES mechanisms

• Direct Paymentsgeneral subsidy (The Chinese PES scheme, the Sloping Land Conversion Program)

scored subsidy (The Conservation Reserve Program in the US)

reverse auction (BushTender program in Australia)

negotiation (Perrier Vittel in France)

• Mitigation and Offset Paymentsclean development mechanismwetlands mitigation banking (US)

biodiversity offsets• Certification

eco-labelsforestry certification

Payment Type

In a PES watershed project in Los Negros, Bolivia, the payments are not in cash.

The participating communities are

paid with BEE BOXES, technical

training and barbed wire

Trust is so

fundamental to the programs’

long-term success

Key Challenges

Information: There is too little information on PES and that which does exist is often too generic to be of much use to policy makers.Technical barriers: There are too few people with the appropriate skills and knowledge to design and implement effective PES projects and programs.Policy and regulation: Generally legal and policy frameworks for environmental and resource management are fragmented, outdated and often lack cohesion. Institutional barriers: In addition to the limited human skills and fragmented legal and policy frameworks, there are insufficient organizations, such as financial intermediaries, certification bodies, national registries etc. to support the development of PES in the region.

• A promising tool, with regional differences (PES mainly in S. America, emerging in SEA and Africa)

• Should practice in Sri Lanka• But, effectiveness difficult to assess because

Many schemes still too recentInsufficient baseline data (no control area)Few analyses based on solid monitoring and

evaluation methods• Performance payments (PES) = key for REDD , but

upfront conditions needed• To address Decision makers, PES = promising, but not

sufficient >>> need government investments & extra-sectoral transfers

Suggestions

POLICY MAKERS CAN,

* Create economic incentives that encourage PES schemes, including environmentaltaxes and subsidies, transferable discharge permits and environmental labeling.* Develop specific PES projects with farmers, foresters and/or fisher folks in theirregion, or their watershed.* Provide incentives for the private sector to engage in PES schemes

CONSUMERS CAN

* Encourage the involvement of local and national governments in PES programs.* Convince their community to initiate PES schemes.* Choose, where possible, food products coming from producers involved in PES schemes

References• Salzman, James. (2012) A policy maker’s guide To designing payments For ecosystem

services, Duke University United States

• FAO. (2012) Payments for ecosystem services, Available at www.fao.org/

nr/sustainability/ecosystem-services (0116hr 01.09.2015)

• Ministry of Environment & Renewable Energy. (2013) Annual report

• Dunn, Helen. (2011) Payments for Ecosystem Services, The department for environment,

food and rural affairs

• Forest Stewardship Council. 2009. http://www.fscus.org/

• Aththanayake, W.K.A.M.D.S. (2014) Payment for Ecosystem Services (PES) for Kandyan

Forest Garden Conservation, Post Graduate Institute of Agriculture, University of

Peradeniya

• Cross, Catherine. (2012) Economic valuation and Payment for Ecosystem Services, IUCN

• Christie, Mike. (2012) Approaches to Valuing Ecosystem Services in Developing Countries,

Institute of Biological, Environmental and Rural Sciences, Aberystwyth University, Wales

• Forest Trends. 2006. Developing Future Ecosystem Service Payments in China: Lessons

Learned from International Experience. Washington, D.C.

• Costanza et al. 1997. The value of the world's ecosystem services and natural capital. Nature

387:253-260.