Contracting for ecosystem services

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How to make contracts in payments for ecosystem services (PES). Presentation by Slayde Hawkins

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  • First, the words “contract” and “agreement” can be, and often are, used interchangeably.The parties to the contract are the buyers and sellers, the people or organizations that agree to do something, to transfer something, or to pay something according to the terms in the contract.A contract outlines the rights and obligations of the parties. Right are things that a party may do under the contract – typically something that the party would not be allowed to do without the contract, while obligations are things that a party is required to do under the contract.Default is a violation of the terms of the contract. A contract generally defines what will be considered to be a default or breach of its terms in order to make sure that trivialities are not considered to be a contractual default.
  • Before a PES contract can be entered into, there are a number of preconditions that must be satisfied. This topic is dealt with more fully in the presentation on Policy Issues for PES, but outlined here for clarity.First, there must be one or more parties with clear authority to enter into the contract on the buyer side. In other words, there must be someone who is able, legally and otherwise, to perform ecosystem-enhancing services or to generate and sell credits for ecosystem services. The question of who is entitled to act as a seller depends on things like ownership and use rights over land and natural resources, as well as technical requirements in terms of titling and registration. It is a complex topic that is beyond the scope of this presentation, but an important issue that should be flagged.As with any commercial transaction, for successful PES, there must be a minimum degree of social, political, and regulatory stability, generally over long time frames of 20 years or more to ensure continued ecosystem service provision. Similarly, mechanisms for dispute resolution and enforcement must be accessible to the parties.
  • Moving on to the PES contract itself, the first question is whether the contract will be structured as a contract for the purchase of credits, for example for proven carbon sequestration or reduced carbon emissions, or as a purchase of specific services from the seller(s). If it is to purchase credits, the contract requires certain results, like carbon sequestration and storage or increased water flows. If it is to purchase services, the contract requires certain inputs, in terms of actions that are intended to generate ecosystem restoration, protection, or enhancement, but doesn’t guarantee these results.
  • A purchase contract is mostly about the final product, the ecosystem service benefit itself, rather than the methods used to generate ecosystem services benefits. Therefore, there must be some method for verifying that ecosystem services benefits have been (or will be) created as a result of a particular project, and for quantifying the benefits. Once the benefits are measured and quantified, they can be turned into tradeable credits, which can then be used to offset the buyer’s environmental impacts in a concrete, quantifiable way.
  • Another way to structure the contract is as a purchase of services to restore, protect, or enhance an ecosystem, for example by planting trees, revegetating with native plant species, or planting beside streams to prevent erosion and filter the runoff that goes into the waterway.Payment depends upon the provision of labor and/or raw materials (inputs), rather than concrete ecosystem services outputs. Structuring the contract in this way may be most suitable where the contracted services are certain or very likely to generate desired environmental benefitsServices contract example: Ex. Buyer pays Seller to replant 10 ha of grassland with native forest at 50 trees per ha, to maintain seedlings, and patrol regularly to enforce logging and use restrictions. If Seller does all of these things, Buyer must pay, even if all of the trees are lost due to fire, flood, or other causes.
  • ECOTRUST: The Environmental Conservation Trust of UgandaGeographic location: 258 hectares of agricultural lands within the boundaries of the Bushenyi District in Southwestern Uganda per initial Rainforest Alliance audit/verification. Plans to extent to Northern and Eastern UgandaProject coordinator works with supporting organizations, manages reporting to validation/verification organizations and others, handles marketing and sales, and oversees distribution of benefitsOutput: each credit represents one ton of CO2 that has been removed from the atmosphere and stored in trees and biomass due to project activitiesBuyers: the project will create credits for the voluntary market, which is now largely driven by PR and philanthropic purchases.
  • PES agreements may be oral or written, binding (that is, enforceable in court) or non-binding, and may vary in complexity. While variation in these dimensions exists within as well as between different categories, an illustration of different levels of “formality” appear on the left of the slide. At the informal end of the spectrum is an oral handshake agreement. At the most formal end would be a lengthy, legally-binding, written agreement. In between these two extremes are everything from complex oral agreements to non-binding memoranda of understanding, to simple written contracts.As formalities and legal protections are added, the specificity and the clarity of the agreement increases, but so does the complexity and the cost to negotiate and draft the agreement.Despite the added cost, it is generally advisable for parties to have a written agreement. Putting it in writing helps the parties to have a clear understanding of rights and obligations at the outset, to minimize misunderstandings over the course of the project, and simply to have easy reference to what was agreed.
  • Key elements of a contract generally include: Clearly defined right and obligations telling the buyer and seller what they must do, may do, and may not do – this is the basis of why the parties are entering a contract Payment amounts and timing are central to the contract – this is the major reason the seller is entering the contract! Setting the price and timing depends on the cost to the seller of providing services or creating credits, market prices for such services or credits, the risks for each party, and other project costs that are allocated to one or the other party Also, the contract will define what it means to default under the contract, and what the consequences will be for the defaulting party.
  • Deciding on the contract terms that are acceptable to each party can be the subject of a lengthy negotiation process, or can be quite straightforward, as in many government-run programs where participants simply sign on to an existing form that is not customizeable.Otherwise, the parties must balance the desire to get the best deal possible against the practical need to come to an agreement with the other party. In most cases, PES agreements will be fairly negotiable, within set parameters and according to accepted contractual conventions.One common challenge for PES projects is unequal bargaining power between buyers, often large, multinational companies or brokers, and sellers in the developing world, often small-scale land users. Especially where this is the case, it is very important for sellers to have their own legal representation. The buyer’s lawyer has an obligation to get the best deal for the buyer and cannot fairly represent the interests of the seller as well.
  • Special considerations for PES contracts, as compared with other commercial transactions, are numerous. First, many PES projects involve multiple sellers, potentially even whole communities that will participate. Consulting with and coordinating between participants, distributing benefits, and resolving internal disagreements can raise difficult issues. Second, monitoring PES project to make ensure that promised services are provided and any promised governance or safeguards aspects are present can be difficult and costly. Moreover, if PES credits are being generated, the actual provision of ecosystem benefits must be assessed and quantified. Also, PES projects generally are long-term undertakings – up to 20 years or more – because ecosystem benefits like carbon storage or critical habitat restoration can take many years to generate and yet can be lost very quickly.
  • Contracting for ecosystem services

    1. 1. Training Workshop on Payments for Ecosystem Services (PES) and Reducing Emissions from Deforestation and Degradation (REDD+)<br />Nairobi, Kenya - August 8th, 2011<br />Contracting for Ecosystem Services<br />Slayde HawkinsForest Trends/Katoomba Group<br />
    2. 2. Preconditions<br />Type of agreement<br /><ul><li>Purchase/sale of ecosystem service credits
    3. 3. Provision of ecosystem establishment, restoration or conservation services
    4. 4. Example: Trees for Global Benefits</li></ul>Finding the right level of formality and complexity<br />Key elements of PES agreements<br />Negotiating to get the best deal<br />Special considerations for PES contracting<br />Overview: Issues in PES Contracting<br />
    5. 5. Terminology <br />© Rebecca Vonada<br />
    6. 6. One or more parties with clear authority to perform ecosystem-enhancing services or sell ES credits<br />Free, prior and informed consent (FPIC) from stakeholders and affected communities<br />A degree of social, political, regulatory stability and predictability, generally over 20 years or more<br />Mechanisms for dispute resolution, enforcement<br />These topics are covered in more detail in presentation on PES policy issues<br />Preconditions to Contracting<br />
    7. 7. May structure PES contract as a purchase agreement or an agreement for the seller to provide services to support healthy ecosystems<br />Purchase agreement – buyer pays for credits representing actual ecosystem benefits generated by seller’s project<br />Services agreement – buyer pays for seller to take actions that are intended to lead to restoration, protection, or enhancement of ecosystem services<br />Structuring the Agreement<br />© Rebecca Vonada<br />
    8. 8. <ul><li>Purchase of credits for quantified ecosystem benefits that were actually generated:</li></ul>VER (carbon)<br />Biodiversity offsets<br /><ul><li>Payment depends upon proven, verified ecosystem outputs or results
    9. 9. Used to offset buyer’s environmental impacts in concrete, quantifiable way</li></ul>Purchase Contract for Ecosystem Services Credits<br />
    10. 10. <ul><li>Purchase of ecosystem restoration, protection, enhancement services</li></ul>Tree planting<br />Habitat protection<br />Streamside restoration<br /><ul><li>Payment depends upon verified provision of labor and/or raw materials (inputs)
    11. 11. Suitable where contracted services are very likely to result in environmental benefits</li></ul>Contract for Services to Support Healthy Ecosystems<br />
    12. 12. Purpose: removal of CO2 from the atmosphere<br />Mechanism/Activities: Coordinated by ECOTRUST, 909 participants in Uganda’s Albertine Rift (1) plant trees, (2) implement agro-forestry, (3) practice improved forest management, (4) assist forest regeneration<br />Output: CO2 credits, independently validated/verified by Plan Vivo & Rainforest Alliance, for up to 80,000 tons of CO2 per year<br />Validation – Early assessment that project as designed is likely to generate claimed ecosystem benefits.<br />Verification – Later confirmation that ecosystem benefits were actually generated by project activities<br />Buyers: organizations or companies want to reduce carbon impacts for philanthropic or public relations purposes<br />Example: Trees for Global Benefits<br />
    13. 13. The Contract: Level of Formality<br />Ecosystem services agreements can vary widely in formality, length, and complexity<br />Formality generally increases: specificity, clarity, complexity, cost to negotiate and draft<br />Written agreements almost always required for PES<br />Important to minimize misunderstandings, reduce risk and overall costs<br />Absolutely necessary in well-established markets, as for carbon<br />Oral “Handshake” Agreement<br />Non-Binding Memorandum of Understanding (MOU)<br />Legally-Binding Written Contract<br />
    14. 14. Key Elements<br /><ul><li>Clearly-defined rights & obligations</li></ul>What is the ecosystem service?<br />What each party must do, may do, may not do<br />Payment amounts, timing, based on:<br />Cost of providing services or creating offsets<br />Market prices<br />Risks for each party<br />Other costs allocated to each party<br />Definition of and consequences for failure to perform<br />© Rebecca Vonada<br />
    15. 15. Negotiating the Contract<br />Negotiation is a balancing act between getting the best deal and successfully coming to an agreement<br />PES negotiation issues and pitfalls<br />Unequal bargaining power<br />Buyer’s lawyer represents the buyer, not both parties<br />
    16. 16. Special Considerations<br />
    17. 17. Conclusions<br />Type of agreement<br />Purchase agreement generally used for carbon, biodiversity PES – produces measurable outcomes that can offset other ecosystem impacts<br />Services agreement may be suited to watershed PES, where certain upstream actions are almost certain to produce downstream benefits<br />PES agreement must be written<br />Basic elements of a PES contract are straightforward: (a) rights and obligations, (b) payment terms, (c) consequences of default<br />Yet, complexity arises because of:<br />Complexity of underlying project and transaction – diverse costs and risks to be allocated between the parties through agreement terms<br />Special considerations for PES projects, such as numerous participants, novelty of PES projects, and rapidly-evolving regulatory framework<br />For more information: www.katoombagroup.org/legal_contracts<br />
    18. 18. THANK YOU!<br />Slayde Hawkinsshawkins@forest-trends.org <br />

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