This paper seeks to answer the question, What are the key design features that make payment for environmental services (PES) schemes effective?

1. What are the key design features that make payment for environmental services (PES)
schemes effective?
Ashley L. Camhi
Duke University
Public Policy 501
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2. Introduction
Payment for environmental services (PES) has been touted as a successful market mechanism for
conservation for over the past ten years and has become a much-researched topic (Engel et al,
2008). As James Salzman observed in his keynote lecture at Pace Law School in 2010, the
number of articles published in academic journals regarding environmental services has
grownnearly one hundred fifty-fold since 1990 (Salzman, 2011). With increased focus on cost
effective methods used to mitigate and adapt to climate change, the need to address the ever-
growing threat ofwater scarcity, and the exponential reduction in critical biodiversity, PES has
been thrown into the limelight as a panacea; the popular policy toolof choice to value, protect,
and restoreenvironmental services. Yet, despite the scholarly attention and rapid increase in PES
projects (approximately 172 projectsin 36 countries [Camhi, 2010]), there has been
littleevaluation to demonstrate that these PES schemes are actually effective.
This paper establishes a list ofcriteria that contribute to the effectiveness of a PES scheme.
Effectiveness is defined as the ability of a PES scheme to produce an environmental service.
According to the Millennium Ecosystem Assessment, environmental servicesare the benefits
humans obtain from ecosystems.These are broken down into four types of services:
(1)supporting services such as soil formation, photosynthesis, and nutrient cycling;
(2) provisioning services such as food, water, and fiber; (3) regulating services that affect climate
regulation, water quality, and water quantity; and (4) cultural services that provide recreational,
spiritual, and aesthetic benefits (Millennium Ecosystem Assessment, 2005).
Based on rigorous literature review, field studies, and personal
experience,eightcharacteristicshave been determined. These eight criteria have been grouped into
three categories:
1. Contracts provide incentives that are likely to result in compliance.
a) Existence of a monitoring system for compliance;
b) Tenure security is present;
c) Payments go to those providing services;
d) The time horizon of payments must be comparable to the project time horizon;
e) Payments are contingent on performance;
f) Payment level is adequate for land use change;
2. Contracts are written in a way so as to ensure that if the agent complies, additional
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3. environmental services will be produced.
g) Existence of a monitoring system to verify the provision of environmental services; and
3. Administrative costs of contracting, monitoring, and enforcement are reasonable.
h) Low transaction costs.
Four PES schemes have been chosentodemonstrate the usefulness of a PES effectiveness list.
These include: (1) Germany‟s conservation procurement auction; 2) Costa Rica‟s national PES
program; (3) Coopeagri, a reforestation project in Costa Rica that is implemented outside the
auspices of the national program;and 4) New York City‟s watershed. The eight criteria for each
case study are rated on a scale of 0-4: 0 if the criteria are not present in the PES scheme, 1 if they
are minimally present, 2 if there is moderate presence, and 3 if there is significant presence. A
high score on all eight dimensions indicates that the PES scheme is likely to be effective (ie.
produces the desired environmental services). By analyzing these four cases utilizingthe list for
effective of a PES scheme, lessons can be drawn that are informative for the future design of PES
schemes as well as the evaluation of current schemes. This paper concludes with preliminary
observations that can be drawn from the utilization of the PES listto determine effectiveness.
PES as an Incentive Mechanism
PESis a market-based policy tool for conservation established on the principle that those who
benefit from environmental services should pay for them, and those who contribute to generating
these services should be compensated for providing them (Engel et al, 2008; Pagiola and Platais,
2007; Wunder, 2005). The main characteristics of a PES mechanism are that it is
(1) A voluntary transaction where
(2) awell-defined environmental service (or land use likely to secure that service)
(3) is being bought by a (minimum of one) service buyer
(4) from a (minimum ofone) service provider
(5) if and only if the service provider secures service provision (conditionality) (Wunder, 2005).
PES alters an individual‟s actions by compensating him or her for making appropriate land use
decisions that are linked to environmental service provisions. Climate regulation, water quality,
water quantity, andecosystem integrityare the traditional services that have been valued in PES.
There is a wide range of activities that could lead to the creation, preservation, or maintenance of
environmental services. In a particular watershed these could be reforestation, avoided
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4. deforestation, agroforestry, natural regeneration, and/or silvopastoral systems. The results lead to
collective outcomes: reduction of carbon dioxide (CO2) emissions in the atmosphere, reduction of
sedimentation, regularity of water flow, water source protection, reduction of contamination, or
protection of critical species and their habitats. These outcomes are not mutually exclusive.
Traditional conservation activities have focused on command-and-control regulation. Yet, it has
been shown that institutional weaknesses in developing countries tend to prohibit the
effectiveness of such programs. The provision of environmental services has been most
successfully accomplished through market-based mechanisms. Incentive-based policies address
externalities by altering the economic incentives private actors face, while allowing those actors
to decide whether and how much to change their behavior. Most incentive-based mechanisms
have been initiated through public policies, although privately negotiated incentive-based
solutions are possible. Incentive-based mechanisms include charges, subsidies, tradable permits,
and market friction reduction (Jack et al, 2007). As an incentive-based mechanism, PES is seen as
a policy solution for realigning private and social benefits resulting from decisions related to the
environment (Jack et al, 2007).
The Economic Backbone of PES
The failure to assign values to environmental services is a market failure. Dating at least as far
back as Pigou (1920), economic theory suggests that some form of subsidy from the beneficiaries
(buyers) of environmental services to the providers (sellers) of these services could result in an
optimal supply. Experience has shown that command-and-control institutions are not sufficient to
regulate non-point sources of pollution, such as those occurring when downstream water
pollution or water scarcity are the result of a combination of individual actions carried out by
geographically disparate and heterogeneous upstream economic agents (Kosoy et al, 2007).
PES is an example of an incentive mechanism intended to internalize externalities. An externality
as defined by Hindriks and Myles (2006) is present whenever some economic agent‟s welfare is
directly affected by the action of another agent in the economy. These authors posit that if there
are competitive markets for externalities, efficiency will be achieved. In accord, Coase believed
that in a competitive economy with complete information and zero transaction costs, the
allocation of resources would be efficient with respect to legal rules of entitlement. According to
Hindriks and Myles, the implication of the Coase theorem is that there is no need for policy
intervention with regard to externalities except to ensure that property rights are clearly defined.
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5. Where they are, the theorem presumes that those affected by an externality will find it in their
mutual interest to reach private agreements with those causing the externality to eliminate any
market failure (Hindriks and Myles, 2006).
Complete information and zero transaction costs will almost never occur in PES. Nevertheless, it
is still possible to design PES schemes that work towards the valuation of environmental services
in the market, though their efficiency and efficacy should be evaluated on a case-by-case basis.
Four Case Studies
This section is designed to provide the reader with a brief understanding of the four-
abovementioned case studies in preparation for the analysis of the effectiveness list.
Germany’s conservation procurement auction
This PES scheme was established in Northeim in Lower Saxony of Germany in 2007. The pilot
region is dominated by farms and canbe regarded as a typical agricultural region of
WesternEurope. Regional stakeholders allocated the availablebudget towards the conservation of
arable plant diversityand the associated environmental services on conventionallymanaged fields.
Farmers received payments for their arable fields only if aconservation threshold of ten different
arable plant speciesassessed in plots of 100 m2 was achieved. Two conservation procurement
auctions with a total budget of €50,000 were conducted. Thefirst auction was carried out in 2007-
2008 with 12 farmers participating and submitting 26 bids;and the second auctionin 2008-2009
with 11 farmers submitting 48 bids and 7 farmers participating with 30 bids.Within each auction,
farmers submitted a sealed bid by mail with a corresponding bid price per hectarefor the delivery
of the environmental service on their fields. Bid prices were accepted from the lowest bid
upwardsuntil the budget was exhausted.Paymentswere made annually immediately after the
compliancemonitoringof participating fields (Ulber et al, 2011).
Costa Rica’s national PES program
The National Institute of Biodiversity (Instituto Nacional de Biodiversidad, INE) of Costa Rica
established the first nationwide PES program (Pagos por ServiciosAmbientales, PSA) in 1997.
The PSA program is operated by the National Fund for Forest Financing, (Fondo Nacional de
Financiamiento Forestal, FONAFIFO).The PSA program compensateslandowners for value
created by either planted or naturalforest on their land and recognized four services: carbon
dioxide mitigation, hydrological services, biodiversity, and scenic beauty. The program‟s primary
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6. focus has been on forest conservation, which accounts for approximately 95% of the enrolled area
(Pagiola, 2008). The PSA program is financed primarily by an earmarked portion of fuel tax
revenues, which provides about US$ 12–13 million a year, and to a smaller extent by voluntary
agreements with individual water users who are paying to conserve their watersheds (generating
about US$ 0.5 million a year) (Zhang and Pagiola, 2011).The PSA program currently covers
approximately 275,000 ha of land.
Analysis of PSA within the PES list will be restricted to the first phase of the program since that
is where the largest body of information exists to date. Payments in the first phase of the program
were designed to addressrelevant forest conservation failures from a legal and
institutionalstandpoint. Three types of contracts were part of the first phaseof the PSA program:
forest conservation, reforestation,and sustainable forest management. Forest
conservationcontracts required landowners to protect existing (primaryor secondary) forest for 5
years, with no land coverchange allowed. Reforestation contracts bound owners toplant trees on
agricultural or other abandoned land andto maintain that plantation for 15 years. Sustainable
forestmanagement contracts compensatedlandowners who prepared a sustainable loggingplan to
conduct low-intensity logging while keepingforest services intact. Just as in the reforestation
contracts,obligations for sustainable forest management contractswere for 15 years, although
payments arrived during thefirst 5 years (Sanchez et al, 2007).
Coopeagri Forestry Project is a PESschemeinitiated in 2006 that was funded through the
BioCarbon Fund1 and is located in the Perez Zeledon County of San José Province, Costa Rica. The
scheme‟s initial objective was to sequester 588,565 tons of CO2by reforesting 4,140 ha of privately
owned lands (World Bank, 2006). At project start, these lands were being used for pasture and for
crops, primarily coffee and sugarcane. The BioCarbon Fund was to purchase the Certified Emission
Reductions (CERs) at US$4.15 per ton of CO2 sequestered until 2017, providing an estimated 65
percent of total project cost. Afforestation/reforestation activities were projected to occur over the
first 3 years of the project, including natural regeneration of 3,600 ha of pasture lands, establishment
of forest plantations on 300 ha, and conversion of 450 ha of crop and pasture lands to agroforestry
systems (planting 180,000 trees). At least 150 small and medium size farmers were expected to
participate in project activities; there are currently 143 farmers participating.
1
Part of the World Bank‟s carbon financing is the BioCarbon Fund. It acts as a mediator between companies and countries
that donated funds towards reducing greenhouse gas emissions and pilot projects that received the funds upon validation
of reducing GHG emissions by the UNFCCC.
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7. New York City’s watershed is perhaps the oldest and best example of a PES scheme. New York
City (NYC) is a surface water system that gathers its water from three watersheds that
cover an area of 2,000square miles. The watershed serves 9 million people, half the
population of the state of New York. It delivers 1.1 billion gallons per day and is operated and
maintained by the NYC Department of Environmental Protection (DEP) (Appleton, 2002).A
major component of the institutional framework of the NYC water is that the NYC DEPhas the
responsibility for management of the water and sewer system.In 1986, outbreaks of Giardia and
microbacteria led to the implementation of the American Drinking Water law. This is the point at
which the connection was made linking farming with the environment in order to promote
environmental stewardship as an economic activity. The desire of farmers and others to maintain
their ways of life (i.e., not sell their land) was the ultimate driver of the program. The city
abandoned the “traditional” way to deal with water (i.e. water filtration plant) and bypassed
desires to utilize regulation to address water providers. Whole farm planning was instituted in
order to look at the environmental and business aspects of the farmers in the NYC watershed. The
plan was to invest in the long-term agriculture industry as opposed to income support, which
fostered a landscape based economy. NYC paid the capital costs for the farms, a small annual
stipend for employment, and expanded the sustainable tourism and forestry industries as part of
the agreements with the communities of the Catskills watershed. Thus, New York was able to
avoid the enormous expenseof building filtration works to treat and purify its drinking
water.
Eight Characteristics to Determine theEffectiveness of PES Schemes
Numerous articles have analyzed individual PES schemes to demonstrate whether the schemes
achieved cost effectiveness and compliance. Based on these analyses, economic theory on
externalities, and field base evidence, eight criteria (as enumerated in the introduction) have been
designatedto determine the effectiveness of PES schemes.The criteria for each case study are
rated on a scale of 0-4, 0 if the criteria are not present in the PES scheme, 1 if they are minimally
present, 2 if there is moderate presence, and 3 if there is significant presence.
Figure 1. PES Effectiveness List for Four Case Studies
Time horizon
Existence of payments Existence of
of Payments go must be Payment level monitoring
monitoring Tenure to those comparable to Payments are is adequate for provision of Low
Score
system for security is providing the project contingent on land use environmental transaction
compliance present services time horizon performance change services costs
Germany 3 3 3 3 3 3 2 3 23
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8. Costa Rica PSA 2 3 2 3 3 2 1 1 17
Coopeagri 3 2 1 1 3 1 1 1 13
New York City 3 2 3 3 3 3 3 1 21
1. Contracts provide incentives that are likely to result in compliance.
a) Existence of a monitoring system for compliance.
While it seems obvious that monitoring should be incorporated into the design and
implementation of a PES scheme, it is often neglected due to lack of funding or experience in
designing an appropriate monitoring system. There are two types of monitoring that are necessary
for a PES scheme: 1) compliance and 2) verification of environmental service provisions. The
former is an output-based system that ensures that the sellers are fulfilling their contractual
obligation to modify their land uses. The latter is an outcome-based system that certifies
environmental services are actually being created. Output-based monitoring is significantly easier
to establish than outcome-based monitoring since the valuation of environmental services is still a
contentious issue that needs further research.
The goal of PES is to make privately unprofitable but socially desirable practicesbecome
profitable to individual land users, thus leading to their adoption (Engel et al, 2008). This target
dictates that compliance must be ensured through site inspection and sometimes combined with
remote-sensing satellite images. Yet, while a compliance monitoring system may be sufficient, it
does not guarantee that service providers are actually complying since monitoring quality or
frequency is not often known. It is possible that hidden action may arise after a contract has been
negotiated.That is, the conservation agent may find monitoring contract compliance expensive,
andsanctioning noncompliance politically costly, and will thus fail to enforce the contract. Under
such conditions, the landowner has an incentive to breach contractualresponsibilities. In most
case studies the primarysanction for noncompliance is the loss of future payments rather than the
return of past payments. In addition, monitoring quality typically varies over time, anddepends on
funding and politics (Pattanayak et al, 2010).
Germany (Score: 3) – Compliance monitoring was an integral component of the German
conservation procurement auctions. To verify whether the contracted farmers complied, plots of
100 m2were locatedrandomly in each field by the conservation agency.Monitoring was conducted
at the end of the contract period of each of the two auctions. Monitoring of participating fields
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9. revealed that 73%and 90% of the bids were successful in achieving the defined compliance
threshold in the first and second auction, respectively (Ulber et al, 2011).
Costa Rica PSA (Score: 2) – Compliance monitoring is undertaken by FONAFIFO, who has
limited staff with which to supervise allPSA activities. FONAFIFO utilizes a database to track
compliance. Once applicants have submitted land use plans to FONAFIFO and they have been
approved, landowners begin adopting specified practices and receive payments. The
initialpayment can be requested at contract signing, but subsequent annual payments are made
afterverification of compliance by inspectors. Noncomplyingparticipants forfeit further payments.
Coopeagri (Score: 3)– In this case study compliance monitoring was conducted on an annual
basis by the five forestry specialists of the Coopeagri cooperative. Since the project was limited to
one region within Costa Rica, it was determined to be less challenging to monitor than the
national PSA program. That being said, forestry specialists expressed concerns that they faced
difficulties in reaching participants that lived in isolated areas of the Brunca region.
New York City (Score: 3) – While the DEP is the enforcement agency for the NYC watershed, it
relies heavily on local and community NGOs to monitor for compliance on farms. This has been
extremely effective since local extension agents are able to build a critical level of trust with local
landholders that permits them to do effective compliance monitoring. Each property in the whole
farm planning program is monitored twice annually. This includes one aerial monitoring,
photographing of the property, and one land-based inspection with the landowner to discuss any
changes that may have occurred since the last visit (NYC Watershed Monitoring website, 2011).
b) Tenure security is present.
Cooter and Ulen (2011) define property as a bundle of rights. Some form of property rights in the
form of land tenure is necessary for PES schemes. This is more often an issue in developing
countries, where rights to land are tenuous. The issues of land tenure are not new. It has been
recognized for decades to be a significant constraint to tree cultivation among small landholders
(Thacher et al, 1997).Many studies have highlighted the importance of land and tree tenure for
promoting long-term investments and activities such as adoption of agroforestry systems and
program participation (Godoy, 1992).
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10. Germany (Score: 3)– Tenure rights were not an issue in this case study.
Costa Rica PSA (Score: 3) – Legal land title was required in all three PSA program modalities. In
orderto participate in the PSA program landowners alsohad to present a sustainable forest
management plan preparedby a licensed forester. These plans described the proposed land use
and includedinformation on land tenure and physical access; topography, soils, climate, drainage,
actual landuse, and carrying capacity with respect to land use; plans for preventing forest fires,
illegalhunting, and illegal harvesting; and monitoring schedule (Pagiola, 2008).Zbinden and Lee
conducted a study in 2002 of 133 farmers participating in the national PSA program and 141 non-
participants in the northern lowlands of Costa Rica. Discussions with landowners suggested that
land tenure and legal land title were critical to participation. Any PSA contract creates a legal
easement that remainswith the property if it is sold. For carbon sequestration, owners transfer
rights to the CO2mitigation potential of the parcel to thenational government. Costa Rica can then
sell these abatementunits on any international market.
Coopeagri (Score: 2)– In the Coopeagri case study, adherence to the requirement of land tenure
security was taken through satellite imagery at the regional level. It has been stated that land titles
and property boundaries were verified, but no data exists on land title eligibility at the parcel
level. Farmers often had land titles where the boundaries overlapped with their neighbors. Those
that were not able to have those clarified in court were rejected from the applicant pool of the
project. Land tenure was demonstrated to be the greatest constraint in the regeneration modality.
42 percent of project applicants were lost due to lack of land title. In the regeneration modality
farmers without land title were initially allowed to apply and then were not allowed to participate.
The highest number of losses for reforestation applications was from discrepancies in land title.
In addition, 12 percent of applicants to the reforestation modality had discrepancies in land title.
The acceptance of farmers with sole land possession would have gone a long way to increase the
number of farmers that participated in the regeneration modality (Camhi and Pagiola, 2009).
New York City (Score: 2)– In 1905, NY State gave NYC the authority to regulate land outside of
its borders based on state health law. This unique situation gave NYC the ability to acquire land
to show that they were protecting the watershed for the long term. In 1965, eminent domain was
one of the main tactics used to free up land to create reservoirs in the Catskills. This created a
poor relationship with upstream residents for many years, but it did allow NYC to have greater
control of land use.Currently, the NYC owns about 30% of the land in the watershed.
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11. c) Payments go to those providing services.
What is drawn into question under this criterion is whether or not land uses paid for under a PES
scheme would exist in the absence of a payment. This is called additionality. Simply put, if this
cannot be proven then there is no need for a payment. Additionality would lead to a financially
inefficient outcome as funds could have been used elsewhere and transaction costs would be
unnecessarily incurred. PES programs that offer low, undifferentiated payments are particularly
likely to experience this problem (Engel et al, 2008). What is implicit in this criterion is the link
between land use change and the provision of environmental services.
Germany (Score: 3)- A recent paper by Ulber et al. (2011) demonstrates that arable plant diversity
(i.e. specific weed species) has the potential to provide multiple environmental services (Ulber,
2011). In this study, arable fields that were participating in the PES scheme were matched with
control fields that were not enrolled. The two groups of fields were matched on the basis of their
similar shape, size, soil, and landscape. In the first auction, a total of 45 and 26 different
arableplant species were detected on the surveyed PESand control fields respectively.Farmers
received payments for their arable fields only if aconservation threshold of ten different arable
plant speciesassessed in plots of 100 m2 was achieved. This threshold was established based on
expert knowledge from regional stakeholders.
Costa Rica PSA (Score: 2) - Particularly in the case of forest protection it has been shown
through a rigorous impact evaluation conducted by Sanchez et al (2007) that the 1997-2000
deforestation rate was not significantly lower in areas that received payments. It is thought that
policies that were previously in place prior to the inception of the PSA may explain the reduction
in deforestation rates. The Sanchez et al study concluded that PSA contracts might not have
targeteddeforestation pressure explicitly. In fact, the PSAcontracts may have been targeted where
there was a lackof deforestation pressure because the level of PSA contractscorrelated negatively
with the 1986–1997 forestclearing. This could have resulted from a policy designin which the
PSA contracts were fixed across space (i.e.,each of the locations in the country is assumed to
providethe same services and is offered the same level of paymentper hectare) and enrollment
was voluntary. Targeting these kinds of lands could lead to unprofitableor low-profit land being
the dominant land participants enrolled in the program. While the estimated impact of PSA on
forest cover is small, it is possible that theprogram has a larger impact on forest quality by
encouraging better management andprotection of forests.
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12. Coopeagri (Score: 1)This was an extremely contentious issue for the Coopeagri project due to the
fact that the participants received the same payment as they would have had they participated in
the national PSA program. Without clear proof of additionality on the basis of barriers to
implementation or carbon finance being economically unattractive, the emissions reductions
created through this project will not be validated. The designers of the Coopeagri project argue
that this particular region of Costa Rica had traditionally low levels of participation in the PSA
program and would not have participated without the additional work done by forestry specialists
of Coopeagri to inform them and assist them in the application process.
New York City (Score: 3)– Given the history of the NYC watershed, it is clear that farmers would
not have participated in a whole farm planning program without the introduction of in kind
contributions. In this program, farmers received technical assistance and environmental
infrastructure development, such as efficient septic tanks. Altogether, NYC provided US$ 60
million to assistin the economic development of the NY state region. There was a clear shift in
farmers‟ attitudes and behaviors that continue to allow NYC water to remain unfiltered.
d) The time horizon of payments must be comparable to the project time horizon.
Whether payments are front-loaded or distributed throughout the duration of the project can affect
the participation rate of a PES scheme. It is important to look at the distinction between no land
use change (forest protection) and a land use management change. Where there is no land use
change, there is no need for a front loaded payment since the opportunity cost is simply that of
not cutting down the trees. The farmer may be actually saving money if he or she does not need to
take the time to cut the trees down. On the other hand, if a farmer needs to clear his land, buy
seeds, put up a fence, etc. then there is little incentive to invest without a front loaded payment,
even if the revenue he or she would receive in the future would exceed the money that he
originally invested. Risk of not receiving the payment also plays a large role when looking at the
time horizon of a PES scheme. Hindricks and Myles (2006) demonstrate that because externality
effects will generally be different, payments need to be differentiated in order to achieve
efficiency. Whether PES schemes are set up with differentiated payment streams or a uniform
payment for land use changes can greatly impact the success of a PES scheme.
Germany (Score: 3)– Payments in this PES scheme were made annually immediately after
compliance monitoring of participating fields. The PES scheme was limited to one-year
conservation contracts. Since there was no land use change, there would have been no need to
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13. front load payments. This was clearly effective since most of the farmers who participated in the
first auction enrolled substantially more land in the section auction.
Costa Rica PSA (Score: 3) – Within the PSA program, forest conservation contracts provide for
equal annual payments over the five-yearlifetime of the contract. These contracts are renewable by
mutual agreement. In contrast, timberplantation contracts front-load most of the payment into the
early years of the contract: 50% ofthe payment is paid in the first year, 20% in the second year, 15%
in the third, 10% in the fourth,and 5% in the fifth. These contracts call for participants to continue
with the agreed land use for15 years, a restriction that is written into the land title so that it transfers
to the new buyer shouldthe land be sold (Pagiola, 2008). The time frame of these payments is much
longer than those of the other identified PES schemes.
Coopeagri (Score: 1) Adoption of agroforestry and reforestation in the Coopeagri project were
limited due to high initial costs and a long wait for benefits that made adoption only marginally
attractive to farmers. It is difficult to get farmers to participate when the payments are received
after the establishment of the project. This is a critical issue in terms of who bears the risk. Many
farmers needed funds in advance to purchase supplies, clear the land, hire labor, etc. Unless the
farmer already had another large source of funding, lack of initial funding was prohibitive to
participation.
New York City (Score: 3) - It took seven years to come to an agreement with environmentalists,
regulators, the city, farmers, etc. Despite numerous challenges to the initiation of the NYC
watershed program, participation remains high and there has been little backlash on the level and
duration of the payments.
e) Payments are contingent on performance.
Conditionality is one of the main tenets of a PES scheme. Without conditioning payments on
whether sellers are actually “performing” there is no incentive for sellers to actually change their
land uses. Payments should also be contingent on users accepting the services, so that they would
decide not to pay if they are not receiving the service as designated in the contract. This is
appropriate on the level of the institution, company, or agency that is often the intermediary
between the providers and the direct users. The rationale for a PES approach is that therecipients
of the services have some measurable value or willingnessto pay for those services. However,
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14. converting that latentdemand into funding that reaches the suppliers of environmentalservices is a
central challenge of PES schemes (Jack et al, 2007).
Germany (Score: 3) – Performance in the German conservation procurement auctions was
defined as a conservation threshold of ten different arable species assessed in plots of 100 m2.
Payments were clearly contingent on performance. As soon as monitoring was completed farmers
were informed as to whether they had met the requirement or not. Only those who completely
complied received their stated bid price. Here the third party conservation agency, considered the
“user,” was responsible for deciding if farmers were compliant in achieving the conservation
threshold.
Costa Rica PSA (Score: 3) – Landowners must have a land management plan approved by
FONAFIFO. Once their plans have beenapproved, landowners begin adopting the specified
practices, and receive payments. The initialpayment can be requested at contract signing, but
subsequent annual payments are made after verification of compliance by regulators. There is a
clear compliance contract in existence for those who participate in the PSA program.
Coopeagri (Score: 3) – For the Coopeagri project, payment contingency was decided on an
annual basis upon conclusion of compliance monitoring. Here Coopeagri acts as the “user” and
represents global citizens who are receiving the benefits of the reduced CO2 emissions.
New York City (Score: 3) – For the NYC watershed New York City, payments were contingent
on compliance with contracts designated by the farmers and the local extension agencies.Failure
to comply resulted in non-payment and farmers had the opportunity to adjust contracts on an
annual basis.
f) Payment level is adequate for land use change.
The payment needs to be greater than the opportunity cost of the farmer, but not so much larger
that the environmental service is being overvalued. Opportunity costs of conservation are those
associated with the benefit foregone from alternative land activities (Wunder et al, 2008). While it
is necessary that sellers perform specified activities there will be no buy-in to the PES scheme if
valuations are incorrect. Landholders have better information than the buyer about the
opportunity costs of supplying environmental services. As is well known, hidden information can
lead to inefficient equilibria (Pattanayak et al, 2010). Opportunity costs are not static (they are
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15. subject to changes in the market, weather, etc.) and the adequacy of payment levels is likely to
change and difficult to assess.
Germany (Score: 2) – Opportunity costs ranged quite extensively in this PES scheme and were
mainly associated with reduced crop yields on PESfields, which accounted for 65% of overall
opportunity costsand also differed widely among farmers. Mean variable costs were higher on
PES fields and made up 28% of the total opportunity costs. Onone hand, farmers were able to
reduce costs for fertilizerson PES fields, which might have partially offset the increasein
opportunity costs generated by lower yields. On the otherhand, variable costs for plant protection
products were higheron fields participating in the scheme. Farmers‟ bid prices submitted in the
first auction generallyexceeded the estimated opportunity costs. Inaddition, there was no
significant relationship betweenopportunity costs and bid prices. This demonstrates that while the
payment level may have been adequate for the seller, it may have not been what a buyer had been
willing to pay if the conservation agency had set a bid price. It is possible that overbidding could
have made the conservation auctions more expensive than a uniform-price PES scheme.
Costa Rica PSA (Score: 2)- The PSA program has to compete with other land usereturns.
Average returns from PSA vary from US$22 toUS$42/ha/year before fencing, tree planting, and
certificationcosts. The main competing land use is cattle ranching,which shows returns from
US$8 to US$125, dependingon location, land type, and ranching practices. One measure of cattle-
ranching returnsis the cost of renting 1 ha of pasture. In Cordillera Central,in the heart of Costa
Rica, pasture rental rangesfromUS$20 to US$30/ha/year (Sanchez et al, 2007). It is difficult to
derive the opportunity costs for all of the individuals that participate in the PSA program.
Coopeagri (Score: 1) – The Coopeagri project fell short of its goals. Reforestation has only achieved
54 percent of its target, while regeneration has only achieved 16 percent of its target. Agroforestry
has done the best, achieving 77 percent of its target. From the survey conducted of non-participants
it is apparent that 22 percent of responses were related to issues of funding (lack of financing;
project not being as profitable as other options; and insufficient payments). This response is
corroborated by the low number of applicants to the regeneration modality. Once charges were
deducted the payments offered were insufficient to make adoption profitable for farmers. Even with
payments, natural regeneration would incur a net loss of US$70/ha. That any regeneration occurred
at all is due to heterogeneity among farmers: only farmers whose opportunity costs were below
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16. average (because of particularly poor or degraded soils, or because of isolation, for example) were
likely to find the offered payments attractive enough to allow regeneration to occur.
New York City (Score: 3) - In its entirety, NYC spent US$ 500 million and saved 5 billion in
water conservation. Payments were deemed adequate for the appropriate services or land use
changes decided on by the local extension agencies and the farmers.
2. Contracts are written in a way so as to ensure that if the agent complies, additional
environmental services will be produced.
g) Existence of a monitoring system to verify the provision of environmental services.
This criterion is perhaps the most challenging to achieve. To date monitoring of the provision of
environmental services is largely nonexistent. In addition, there has been little data shown to
corroborate that farmers‟ compliance with a particular land use change necessarily indicates that
the environmental services are being provided. Pattanayak et al. point out that PES programs can
induce land use changes without necessarily improving the provision of environmental services,
as the biophysical links between land use and services are complex for services such as regulation
of water flows (Vincent, 2010). In order to prove that environmental services are actually being
provided, this criterion is critical and, as mentioned, often not included in PES design for lack of
information on how to value local environmental services.
Germany (Score: 2) – This case study monitored the provision of environment services by the
change in the number of ten critical weed species. In the first auction, a total of 45 and 26
different arableplant species were detected on the surveyed paired PESand control fields.
Compared to the control fields, plantspecies richness was almost three times higher on PES
fields.Interviews with farmers revealed that this difference was mainly attributableto reduced
input of fertilizer and broad-spectrum herbicideson PES fields (Ulber, 2011). The environmental
services provided by the biodiversity (i.e. pollination, water purification, nutrient cycling,
etc.)were not actually measured in this study. It is just assumed that there is an improvement as a
result of increased weed species. Just as importantly, this scheme did not take into account the
potential difference in ecological quality of environmental services provided on different lands.
Costa Rica PSA (Score: 1) – It is impossible to determine the extent to which the PSA program
has successfully generated environmental services since the program remains weak in monitoring
its effectiveness in generating desired environmental services (Pagiola, 2008). That being said,
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17. some limited research has been done on the valuation of these provisions. Tattenbach et al. (2006)
found that 35% ofthe area under forest conservation contracts are in watersheds with downstream
surface waterusers. Using their estimates of avoided deforestation, they established that 644
million m3/year of waterfor consumptive uses and 7,224 million m3/year of water for hydropower
production are being protected from deterioration in quality. Thus a substantial part of the
program‟s resources was spent in areas where few water services were likely to be generated.
Tattenbach et al. (2006) also estimated that the PSA program prevented the loss of 72,000 ha of
forests in biodiversity priority areas between 1999 and 2005. Agroforestry also appears to have a
significant impact on biodiversity in agricultural landscapes. The number ofobserved diversity of
bird species, as well as the number of individuals, is higher in land useswith trees, and higher yet
when the tree density is higher. With regard to carbon sequestration, Tattenbach et al. (2006)
useda model of avoided deforestation and anestimate of 100 tons carbon/ha, to estimate that the
PSA program avoided the emission of 11 million tons of carbon between 1999 and 2005. While
this information is a step in the right direction, much more rigorous monitoring and investment in
knowledge towards the creation of environmental services is still needed.
Coopeagri (Score: 1) – For the purposes of this project, the reduction of CO2 was estimated at the
start of the project and the growth of trees was monitored periodically by forestry specialists of
Coopeagri. Since there is limited data available on the levels of CO2 sequestration by native tree
species, farmers were constrained to plant non-native species which some considered as invasive.
Biodiversity and water services were not monitored.
New York City (Score: 3) – Water quality and quantity is measured by the DEP daily. The NYC
DEP performs more than 900 tests daily, 27,000 monthly, and 330,000 on an annual basis from
up to 1,000 sampling locations throughout New York City. This work is in addition to 230,000
tests performed in the watershed (NYC Drinking Water website, 2011). The City has been
monitoring for major forms of bacteria since 1992 as part of its comprehensive watershed
monitoring program. Over 1,000 routine samples are analyzed each year from nearly 100 sites.
Samples are collected weekly from the Catskill and Croton effluents. Reservoir levels are
primarily determined by the balance between streamflow into the reservoirs, diversions for water
supply, and releases to maintain appropriate flows in the rivers below the dams.
3. Administrative costs of contracting, monitoring, and enforcement are reasonable.
h) Low transaction costs.
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18. To accurately assess the cost of aPES scheme, transaction costs must be included. Coase used the
term “transaction costs” to encompass all of the impediments to bargaining (Cooter and Ulen,
2003). Transaction costs include the expense of negotiating contracts, performing scientific
baseline studies, and monitoring and enforcement.Implementation,monitoring, and enforcement
costs can be high underincentive-based approaches if contracts are tailoredto individual users. All
else being equal, contracting andmonitoring are cheaper when the number of agents is small. It is
possible,however, that working with an intermediary such as anNGO or a community could
reduce the costs of working with alarge number of providers(Kelsey et al, 2007).
Germany (Score: 3) – One might argue that in this case transaction costs were relatively low since
no bargaining occurred. The buyer of the biodiversity services, the conservation agency, did not
provide a price level for what they were willing to accept. Bids were accepted from lowest to
highest until the budget was expended. In addition, no attempts to weight the values of the
environmental services were made. Monitoring of compliance was conducted at the end of each
one-year contract period and bids were submitted from farmers minimizing contractual costs.
Some costs incurred by the conservation agency accrued from having to provide informational
sessions prior to the auctions, but these remained minimal.
Costa Rica PSA (Score: 1) – The PSA program is considered to have high transaction costs in
relation to site-level PES schemes. FONAFIFO as a government agency is in charge of handling
applications, signing contracts, and monitoring implementation for the PSA program.
International organizations, primarily the World Bank, have provided substantial loans to Costa
Rica to maintain the PSA program. A $32.6 million loan in 2000 was designed to support current
PSA contracts. $3 million of that was intended to increase human, administrative, and monitoring
capacity in the various institutions associated with the program. In addition the net value of
payments are lower than their face value, since landowners must pay for the initial management
plan and monitoring; these fees are about 15%of payments. Complying with the provisions of
management plans further reduces the net value of payments. The PSAprogram initially imposed
very high transaction costs on participants, requiring applicants to fulfilleleven separate demands,
many of which (such as providing proof of payment of local taxesand being unburdened by debt
to the national health system) had nothing to do with their abilityto provide environmental
services.
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19. Coopeagri (Score: 1) – The cost of project implementation during the first 20 years of the
Coopeagri project is estimated as US$ 4.140 million. FONAFIFO was to cover US$0.739 million,
Coopeagriwould cover US$0.120 million, and the remaining US$3.281 million would come from
carbon credits sales, at least US$2.207 million of which were coming from the World Bank
BioCarbon Fund (World Bank, 2006). The carbon credits value represents 51.6% of the project
costs; therefore FONAFIFO and Coopeagriwould have to invest additional funds in the project to
pay for the other environmental services – biodiversity protection, water protection, soil protection
and scenic beauty generated by the forestry activities (Camhi and Pagiola, 2009). After
administrative costs have been deducted from the aforementioned organization, nearly 79% of the
total costs are estimated to go to the farmers participating in the project.The majority of preparatory
costs incurred were fixed costs. 21 percent of the individual contracts were from farmers that had
already submitted contracts for other project modalities. Since a farmer had to submit an application
for each project modality and for each farm that he or she owned, this led to the creation of
unnecessarily high transaction costs.
New York City (Score: 1) – Transaction costs occur in relation to monitoring; landowner
relations; recordkeeping; processing landowner notices, reserved rights requests for approvals,
and amendment requests; managing stewardship funds; enforcement and legal defense (NYC
water website). Transactions costs are likely to be high due to the multitude of buyers, sellers, and
activities that constitute the PES program. That being said, it has been demonstrated that the
whole farm planning in the NYC watershed has saved $1 billion annually in lieu of a water
filtration plant. It is interesting to think about the scale in comparison to the PSA program and the
relative level of transaction costs that result in effectiveness. Perhaps even though the transaction
costs by definition might be higher than the PSA program, it is likely much more effective.
Lessons learned from the establishment of a PES listto determine effectiveness
There are many contending issues to consider when establishing a PES listto ascertain
effectiveness: determining the definition of effectiveness itself, deciding whether the appropriate
criteria have been included or important criteria excluded, considering how useful it is to rank
criteria on a 0-4 scale etc. As we can see through the ranking in the PES list, the German
conservation procurement auctions scored the highest(23), followed by the NYC watershed (21),
Costa Rica‟s national PSA program (17), and lastly the Coopeagri project (13).
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20. Evidence supports the notion that lower scoring PES schemes are less successful than higher-
scoring PES schemes in their provision of environmental services. Under state water law, the
New York City watershed is under continuous threat of being forced to construct a water
filtration plant if water quality does not meet national standards. To date, the NYC DEP has been
able to utilize whole farming planning to produce adequate environmental services and
thisunderscores the second highest ranking amongst the four PES cases.In comparison,a rigorous
impact evaluation of the Costa Rica PSA program (Sanchez et al, 2007) demonstrated that there is
little evidence that the environmental services created through forest protection are in fact
additional. In the case of Coopeagri, the project failed to meet its goals for regeneration and is
highly unlikely to besanctioned by the international governing body on climate change for the
provision of additional CO2 sequestration.Lastly, in the Germany conservation auctions it is
challenging to validate the provision of environmental services since monitoring was not
conducted to link the land use change with increased environmental integrity. Nevertheless,
research on regeneration of weeds species in Germany has demonstrated increased levels of
pollination (Gabriel & Tscharntke, 2007).
I hope that this initial attempt at a PES list provides a foundation for which to move forward the
discussion and implementation of effective PES schemes. As a jumping off point to those
discussions, I believe there arefive take home conclusions from this paper:
1) Themonitoring of the provision of environmental services needs to be increased;
2)Rigorous impact evaluations need to be included in PES designs;
3)A balance between transaction costs and effectiveness needs to be found;
4)There needs to be a differentiation of payments where possible; and
5) There should be a serious attempt to ensure community buy in.
Monitoring of the provision of environmental services needs to be increased
As has been shown through the evaluation of four PES schemes in this paper, monitoring the
provision of environmental services is desperately needed to justify the existence and continued
use of PES as a cost-effective instrument for conservation. Innovative economic models are
currently being developed to scale-up the valuation of environmental services. The Natural
Capital Project out of Stanford University has created a tool, InVEST, to value environmental
services that outputs maps in either biophysical terms (e.g., tons of carbon sequestered) or
economic terms (e.g., net present value of sequestered carbon) (Natural Capital Project website).
20

21. In addition, ARIES, has been developed through the Gund Institute of Ecological Economics as a
web-based technology for rapid environmental service assessment and valuation (ARIES Online
website). Utilizing these innovative technologies with locally available information would greatly
expand one‟s ability to design and implement PES schemes and go a long way in justifying PES
as an “internalizer” of environmental services in the market.
Rigorous impact evaluations need to be included in PES design
Pattanayak et al.(2010) conclude in their most recent paper that PES is probably effective only in
certain institutional settings. As Vincent (2010) puts clearly, we have little understanding of what
those settings are, because so few rigorous impact evaluation studies have been conducted and the
sites where they have been conducted represent just a few points on the broad spectrum of
settings that exist in developing countries.Additionality is a problem that draws into question how
financially efficient PES actually is. Impact evaluations are an important means by which to
justify additionality. To date only eight impact evaluations have been conducted on PES schemes.
While including impact evaluations into PES scheme design may be challenging, it is essential to
demonstrate that funds are being appropriated efficiently.
Find a balance between transaction costs and effectiveness
In PES design, there is always a tradeoff between minimizing transaction costs and ensuring
effectiveness. Improvements in monitoring may increase transaction costs but nevertheless
provide information necessary to better tailor PES schemes to specific contexts. Large-scale PES
programs may have high transactions costs in order to include smallholders throughout a country,
but this could greatly increase the internalization of the provision of environmental services in the
market. What is more important is that transaction costs do not create a barrier to effectiveness, as
it wasin the failure of the Coopeagri project.
Differentiate payments where possible
The cost-effectiveness of PES policies, compared with a uniform set of regulations, will tend to
be higher where there is high variation in marginal provision costs across the population (Jack et
al, 2007).Auctions are an option that have recently arisen as was shown in the case of Germany.
Some research conjectures that competitive bids for conservation contracts could deliver
environmental services more cost-effectively than fixed payments (Naidoo, 2006). Since the
opportunity costs of the seller are often unknown, a procurement auction is a useful method to
eliminate information asymmetry and provide payments tailored to eachfarmer (Connor et al,
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22. 2008). The downside of auctions is that they say nothing about what they buyer is willing to pay.
Differentiated payments allow for targeting areas with high value environmental services.
Seek to ensure community buy in
The New York City PES program is a great example demonstrating a community‟s ability to
organize in order to protect a watershed. Landholders were able to develop mutually beneficial
goals that benefited both the upstream residents and the downstream water users allowing for the
building of confidence on all sides in order to maintain and protect the NYC watershed.As Elinor
Ostrom proffers in much of her work, good collective management can arise from communities
of people with a mutual interest in the sustainability of the commons (Ostrom, 1990).
As Vincent (2011) recently illuminated in his overview of innovative environmental programs,
“Generalizability [of PES schemes] is a tall order given the enormous heterogeneity that exists
across the 140-odd countries labeled „developing.‟Because developing countries are not one and
the same, the impact of a program in one country might not be replicable in another country
where participants face different institutional environments and thus a different set of benefits and
costs.” While it is certainly a great challenge to draw conclusions about PES schemes, it is
necessary to analyze the experiences of PES schemes to date in order to be able to justify their
relevance in the conservation field, look at how one might scale them up, and prove that they are
actually having their intended effects.
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