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Designing payments for ecosystem services

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Healthy ecosystems provide a variety of such critical goods and services. Created by the interactions of living organisms with their environment, these “ecosystem services” provide both the conditions and processes that sustain human life. The awareness of ecosystem services’ importance in human life styles started more than 2500 years ago. Economists have developed different ways to measure the economic value of the nature, all of which required extrapolation or assumptions.
Ignorance, Institutions and Market Failure are the main reasons to the under-protected status of 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. If beneficiaries had to pay for explicit service provision, however, governments would think differently about their policies and property owners would think very differently about sustainable land management practices. In basic economic terms, 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 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 and thereby strengthening conservation and livelihoods are called as PES.
Wide range of potential buyers and sellers are available depending on the ecosystem service. When the market fails to reward on-site ecosystem service providers, or to compensate them for their costs (e.g. changing land use) 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. Information, technical barriers, policy and regulation and institutional barriers are the major challenges in implementing PES.
Creating economic incentives that encourage PES schemes, including environmental taxes and subsidies, transferable discharge permits and environmental labelling, developing specific PES projects with farmers, foresters and/or fisher folks in their region, or their watershed and providing incentives for the private sector to engage in PES schemes are some recommendations for a better PES system.

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Designing payments for ecosystem services

  1. 1. Designing Payments For Ecosystem Services PABASARA GUNAWARDANE
  2. 2. Ecosystem Functions “The capacity of natural processes and components to provide goods and services that satisfy human needs, directly or indirectly” (de Groot, 1992)
  3. 3. Ecosystem Services • Food • Fiber • Genetic Resources • Bio-chemicals, Natural Medicines and PharmaceuticalsProvisioning services
  4. 4. Ecosystem Services • Air Quality Regulation • Climate Regulation • Water Regulation • Erosion Regulation • Water Purification and Waste Treatment Regulating services
  5. 5. Ecosystem Services • Cultural Diversity • Spiritual And Religious Values • Knowledge Systems • Educational Values • Inspiration • Aesthetic Values • Social Relations Cultural services
  6. 6. Ecosystem Services • Soil Formation • Photosynthesis • Primary Production • Nutrient Recycling • Water Cycling Supporting services
  7. 7. Plato wrote about the service of soil retention
  8. 8. An Inquiry into the Nature and Causes of the Wealth of Nations Adam Smith, 1776
  9. 9. “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
  10. 10. of the environmental services are being degraded faster than they can recover* *Millennium Ecosystem Assessment. 2005
  11. 11. Why are Ecosystem Services Under-protected? Ignorance Institutions Market Failure
  12. 12. Limitations in valuation Most ecosystem services are not exchanged in robust markets
  13. 13. 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
  14. 14. Environment Valuation Economic 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
  15. 15. 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
  16. 16. 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)
  17. 17. 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)
  18. 18. 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)
  19. 19. 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
  20. 20. 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 Goreangab reserve raised house prices by $1980 US dollars (Humavindu, M. N. & Stage, J., 2003).
  21. 21. 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)
  22. 22. $ 16-54trillion (Costanza et al. 1997). The estimated value of nature’s services
  23. 23. $ 200Billion of world agricultural output Source: www.fao.org/nr/sustainability/ecosystem-services
  24. 24. $ 3.7trillion of climate-induced damage could be avoided By halving deforestation rates by 2030 Source: www.fao.org/nr/sustainability/ecosystem-services
  25. 25. The PES Concept Payments 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.
  26. 26. “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)
  27. 27. The logic of PES
  28. 28. 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-effectiveness PES = new paradigm for contractual conservation
  29. 29. 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
  30. 30. Uses of PES
  31. 31. 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?
  32. 32. PES Cycle
  33. 33. 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
  34. 34. 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)
  35. 35. 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.
  36. 36. 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
  37. 37. 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 who currently provide services
  38. 38. The range of PES mechanisms • Direct Payments general 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 Payments clean development mechanism wetlands mitigation banking (US) biodiversity offsets • Certification eco-labels forestry certification
  39. 39. 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
  40. 40. Trustis so fundamental to the programs’ long-term success
  41. 41. 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.
  42. 42. • 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 recent Insufficient 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
  43. 43. POLICY MAKERS CAN, * Create economic incentives that encourage PES schemes, including environmental taxes and subsidies, transferable discharge permits and environmental labeling. * Develop specific PES projects with farmers, foresters and/or fisher folks in their region, or their watershed. * Provide incentives for the private sector to engage in PES schemes
  44. 44. 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
  45. 45. 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.

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