2. Contents
2
What is PES and its logic?
Economic conceptualization of PES
Methods of valuation of environmental services
Efficiency and effectiveness of PES program
Examples of PES type of experiences worldwide
Case studies on PES
Conditions for successful PES
3. ECOSYSTEM SERVICES??
The Millennium Ecosystem Assessment (2005) defines
“ecosystem services” as those benefits that people obtain from
ecosystems.
DIRECT
BENEFITS
• Provisioning services e.g. food, water etc.
• Regulating services e.g. regulation of floods, land degradation
etc.
INDIRECT
BENEFITS
• Supporting services e.g. processes of photosynthesis, formation
and storage of organic material, nutrient cycling, soil creation etc.
NON-
MATERIAL
BENEFITS
• Cultural services e.g. aesthetic pleasure, recreational
opportunities, and spiritual and cultural sustenance etc.
3
5. ES - either undervalued or have
no financial value at all.
The most comprehensive assessment of
ecosystem services to date — the
Millennium Ecosystem Assessment,
which included over 1,300 scientists
from 95 countries —
found that over 60% of the ecosystems
studied are being degraded faster
than they can recover.
5
6. How payment for
environmental
services(PES) evolved
From an economic perspective, degradation occurs as many
ES exhibit the characteristics of public goods, resulting in
externalities. ‘‘As public goods, ecosystem services have been
traditionally underprovided due to their lack of value in the
marketplace’’ .
Thus, society fails to establish institutions that internalize the
value of services provided by intact ecosystems.
Payments for Environmental Services (PES) are discussed as a
novel conservation approach and ‘‘probably the most
promising innovation in conservation since Rio 1992’’ as it
attempts to overcome the problem of externalities.
- (Engel et al., 2008)
6
7. What is Payment for
Environmental
Services (PES)??
A market based mechanism to translate external, non-market
values of the environment into financial incentives so that
provisions for such services are ensured.
7
8. Payment for environmental
services (PES)
The central principles - those who provide environmental
services should be compensated for doing so and that those who
receive the services should pay for their provision ( Pagiola &
Platais ).
Wunder (2005) has defined PES as:
a. a voluntary transaction where
b. a well-defined environmental service (or a land-use likely to
secure that service)
c. is being ‘bought’ by a (minimum one) service buyer
d. from a (minimum one) service provider
e. if and only if the service provider secures service provision
(conditionality). 8
9. Why ‘payments’ for
environmental services??
9
Nature provides services free of charge.
Consumption of ecosystem goods (such as timber or oil) is
favored over the conservation of ecosystem services.
Market forces must be realigned to invest in the production
of both ecosystem goods and services
If market forces reward investments in ecosystem services, a
positive feedback loop will start in which there will be
increased investments in ecosystem services leads to
increased production of ecosystem goods.
This will fuel sustainable economic growth and ecological
restoration.
10. The logic of Payments for
Environmental Services
Benefits to
ecosystem
managers
Costs to
downstream
populations
and others
Reduced
water
services
Loss of
biodiversity
Carbon
emissions
Maximum
payment
Payment
for services
Minimum
payment
Conversion
to pasture
Forest
conservation
Forest conservation with
service payment(s)
Source: Adapted from Pagiola and Platais (2007). 10
Payment(s)
Reduced water
services
Loss of
biodiversity
Carbon
emissions
11. In practice not so
simple…
11
.
Land use
Hydrological
effects
Carbon
sequestration
Biodiversity
conservation
Water
services
Emission
reductions
Ecosystem
services
Welfare of
water users
Carbon
buyers
Welfare of
beneficiaries
Understanding bio
physical relationships Valuations
begins here
Payment
12. Economic conceptualizations
of PES
1. Coasean conceptualization :
• The Coase Theorem argues that – given low or no transaction costs
and clearly defined and enforceable property rights, no
governmental authority is needed to overcome the problem of
internalizing external effects.
• He restricts the task of government to the initial allocation of
property rights.
2. Pigouvian conceptualization:
• Here the government is considered as a ‘‘third party acting on
behalf of service buyers’’ (Engel et al., 2008: 666).
• The Pigouvian conceptualization is based on the ‘‘Pigouvian
philosophy of taxing negative or subsidizing positive externalities ’’ .
12
13. Differences
Coasean conceptualization Pigouvian conceptualization
User financed PES programs Government financed PES programs
More efficient (observe directly whether
the service is being delivered or not,
possibility of re-negotiation)
Less efficient
Implementation – local monopsony or
oligopsony
Where beneficiaries cannot be
excluded at all or at reasonable costs
Service users are the payers Service users and payers are different
Focus on the provision of club goods Public goods
Example - In the French Vosges
Mountains the water bottler Vittel
Costa Rica’s PSA program, Mexico’s
PSA-H program etc.
13
15. Revealed preference
methods
Market price method: are most often used to obtain the value of
provisioning services, since the commodities produced by provisioning
services are often sold on. It is done with the help of market prices.
Productivity approach: used to value those ecosystem services
(e.g., regulating service) that contribute to the production of
commercially marketed goods.
Surrogate market approaches:
1. Travel cost: used to value recreational sites on the basis of the
amount of time and money people spend while travelling to the site.
2. Hedonic pricing: utilizes information about the implicit demand for
an environmental attribute of marketed commodities.
15
16. Cost-based methods
Replacement cost: estimates the costs incurred by
replacing ecosystem services with artificial technologies.
Mitigation or restoration cost: refers to the cost of
mitigating the effects caused by to the loss of ecosystem
services or the cost of getting those services restored.
Avoided cost: relates to the costs that would have been
incurred in the absence of ecosystem services.
16
17. Stated preference
approaches
Contingent valuation method (CV): Uses questionnaires
to ask people how much they would be willing to pay to increase the
provision of an ecosystem service, or alternatively, how much they
would be willing to accept for its loss or degradation.
Choice modeling (CM): here we ask respondents to
rank/rate/choose alternative choice sets which have different
combination of price attribute and ecosystem attributes.
Group valuation: is a way to tackle shortcomings of traditional
monetary valuation methods. Main methods within this approach are
Deliberative Monetary Valuation (DMV), which aims to express values
for environmental change in monetary terms, and Mediated Modeling.
17
18. What are the options
for
payment types?
Direct financial payments
Financial support for specific community goals, such as
building of a school or clinic to remunerate for ES.
In-kind payments, such as the beehive and training of bee-
keeping for improved water management in Bolivia
Recognition of rights, such as increased land rights and
increased participation in decision-making processes.
18
19. Effectiveness and efficiency
of PES programs
Win-winTrade-off
Lose-lose Trade-off
On site
profits
Value of environmental services
A
B
C
D
PES
PES PES
PES
A framework to analyze the efficiency of PES :
Source: Adapted from Pagiola (2005)
19
B,C = social
inefficiency
D = lack of
additionality
or money for
nothing
20. Some problems
Leakage : Leakage (spillage) refers to the displacement of
activities damaging environmental service provision to areas
outside the geographical zone of PES intervention (Robertson and
Wunder, 2005).
Lack of permanence: Permanence refers to the ability of PES to
achieve long-run improvements in environmental service
provision, including beyond the period of the payment.
caused by changes in external conditions (e.g., increases in market
prices of agricultural crops competing with forest conservation) or
by lack of long-run funding for PES (e.g., due to limited project
durations).
20
21. Examples of PES Type of Experiences
Worldwide
Scheme Country Service land uses
Paid for
Buyer level Spatial
extent
RISEMP
2002
Colombia,
Costa
Rica,
Nicaragua
Biodiversity,
carbon
Restoration
(silvopasture)
NGOs,
IO, states
Internati
onal (3
countrie
s)
3500
ha
Pimampiro
2000
Ecuador Watershed Conservatio
n/ minor
restoration
Municipal
govern-
ment
Local 496 ha
Conservati
on reserve
program
(CRP)
1985
USA Watersheds,
bio diversity,
soil
Restoration
( ag.
Practices
and land
retirement)
Centre,
state
national 14,500,
000 ha
21
22. Examples of PES Type of Experiences
Worldwide
Scheme Count
ry
Service land uses
paid for
Buyer level Spatial
extent
PROFAFO
R
1993
Ecuador Carbon Restoration
(plantation)
Private
company
Regional
(selecte
d
provinc
es)
22,300
ha
PSA
program
1996
Costa
Rica
Carbon,
watersheds,
biodiversity,
landscape
Conservation
/minor
restoration
Public
sector
national 270,000
ha
Vittel
1993
France Watershed Conservation
/restoration
Private
company
local 5100 ha
22
Source: Adapted from Wunder et al. 2008
23. Payments for different
schemes
Scheme Service
buyers
PES
decision
organisati
on
Revenue
sources
Selection
of
participant
s
PES rates
Pimampiro Pimampiro
1350
families
with water
meters
Pimampiro
Municipality
committee
for
environmen
tal services
Water fee,
interest on the
capital fund,
seed capital
donation(IAF+FAO)
municipality
support,
CEDERENA support
Nueva
America
community
US$6-12/ha/
year
PROFAFOR FACE (
Forests
Absorbing
CO2
Emissions
consortium)
foundation,
PROFAFOR DUTCH electricity
generating board
Biophysical
conditions
(slopes, soil,
altitude ),
economic
criteria(
locally
marketability
of timber)
US$ 100-200/ha
fees,
70-100% value
of harvested
wood,
100% non-wood
and sub-
products
24. Payments for different schemes
Sche
me
Funding Selection of sellers payment
Conserv
ation
reserve
progra
m (CRP)
FSA (farm
service
agency) via
the
commodity
credit
corporatio
n(CCC)
• Producer must have
owned or operated the land
for at least 12 months prior
to CRP,
• Land must be either crop
land or marginal pasture
land
Rental payments:
• Maintenance incentive payments –
5$/acre/year
• Cost share assistance – not more
than 50% of participants ‘ costs
• Other incentives – 20% of the
annual payments for continuous
sign-up practices
Vittel Nestlé
Waters,
through its
intermedia
ry ‘Agrivair’
farmers must:
• Give up maize cultivation
for animal feed
• Only one cattle head per
hectare
• Lower agrochemical use
• Improve waste
management
• land debt is abolished and farmers
have additional land to farm
• Farmers receive a subsidy (on
average about 200 Euros /ha/year
for five years)
• 150,000 euros per farm to cover
the cost of all new farm equipment
24
26. Payment for environmental
services in Costa Rica
Costa Rica pioneered the use of payments for environmental
services (PES) in developing countries by establishing a formal,
country-wide program of payments ( Pago por Servicios
Ambientales, PSA).
It has helped the country, once known as having one of the
world's highest deforestation rates, to achieve negative net
deforestation in the early 2000s.
In 1996, Costa Rica developed PES for hydrologic, aesthetic/
landscape beauty, biodiversity conservation, and carbon
sequestration.
26
27. Timeline of Costa Rican
Forestry Policy
27
When the PSA program was created, therefore, Costa Rica already
had in place a system of payments for reforestation and forest
management, and the institutions to manage it.
28. PSA
Land
owner
Land
owner
Land
owner
Land use practices:
• forest conservation
• Agroforestry/sustainable forest management
• Forest plantations
• Natural regeneration
adopt
FONAFIFOFONAFIFO Side objective:
Poverty alleviation
Environmental services:
• Biodiversity conservation
• Carbon mitigation
• Hydrological services
• Scenic beauty
Society
( local, national, international)
International donors
( CEF, CI, KFW)
Carbon buyers
National fuel tax
Planned water tariff
Local industry
(e.g. hydroelectric plant)
$
$
Source: Engel,
Wünscher, and Wunder
29. PSA contracts
29
MODALITY STATUS CRITERIA CURRENT
PAYMENTS
Forest
protection
Dates from forest
law 7575 to
present
2 to 300 ha enrolled, up to 600
ha within indigenous areas
$64/ha/year for
5 year period;
renewable
Reforestation Dates from forest
law 7575 to
present
between 1 to 300 ha enrolled;
maximum 50 ha enrolled;
minimum 50 ha enrolled
$16/ha over 10
year period
Natural
forest
regeneration
Dates from 1st
mention in 2005
to present
Minimum of 2 ha $41/ha/year for
5 year period;
renewable
Agro forestry
systems
Dates from 2003
to present
350 to 3500 trees per
participants; up to 336000
trees per joint project,
cooperative or indigenous
reserve; specific requirements
per ha
$1.30 per tree;
over 3 year
period
Forest
management
Dates from forest
law 7575 until
2002
Criteria determined by
conservation area
$343 per ha over
5 year period
.
30. Impact of the PSA
program
30
This fig shows the area enrolled under each contract type since 1998. At the
end of 2005, about 270,000 ha were enrolled in the program. Forest
conservation has consistently been the most popular contract, accounting for
91% of the area covered since 1998, and for 95% of enrolled area at the end
of 2005.
Total area contracted in the PSA program, by modality
31. Impact of payment on
household budget
Income
(US$ PER YEAR)
Proportion of PES
budget within HB
Payments Income
Proportion of
PES within HB
Main Second third
Less than 10 ha 882 22000 4% 2% 5%
11 to 30 ha 931 22000 4% 5% 1%
31 to 80 ha 1900 19557 9% 9%
81 to 130 ha 2022 15200 18% 37% 6% 14%
More than 131 ha 11252 20663 34% 41% 30%
Total 4243 19787 16% 37% 12% 18%
31
Proportion of income from PES by property size
Analysis of Virilla watershed by Miranda M. et al
(2003)
32. Proportion of job creation
by property size
More than 131
ha
81 to 130 ha
31 to 80 ha
More
Same
11 to 30 ha
Themselves
Less than 10 ha
0% 5% 10% 15% 20% 25% 30%
32Analysis of Virilla watershed by Miranda M. et al (2003)
33. Effect of PSA on
forest cover by propensity
score matching(PSM)
33
Common support graph of propensity scores for PSA participants (treated) and non-
participants (untreated)
34. Effect of PSA on mature
forest cover change (ha)
34
- Study of Sarapiquí region of north eastern Costa Rica By Arriagada R.A. et al
36. Continued…
Tattenbach et al. (2006), found that 644 million m3/year of
water for consumptive uses and 7224 million m3/year of water
for hydropower production are being protected from a
deterioration in quality.
He also found that about 65% of PSA conservation contracts were
in biodiversity priority areas.
The 21,000 ha of plantation under the PSA program sequestered
a cumulative total of about 1 million t C during 1998-2005.
36
37. Continued…
The evidence on the impact of the PSA Program on the poverty
has been mixed. Several studies (Miranda et al., 2003) have
found that the bulk of program benefits tend to go to larger
and relatively better-off farmers. Conversely, Muñoz (2004)
finds that the PSA Program plays an important role in the
livelihood of poor land holders in the Osa Peninsula.
Costa Rica's PSA program offers a relatively low (causing B type
problem), undifferentiated, and mostly un-targeted payment (D
problem).
37
39. 39
Crop production
increased 6 times with
the available irrigation
Problem – silt coming
from grazing land of
Ooch village (winrock
international)
Both villages
reached a formal
agreement
( coasian bargaining)
Ooch banned grazing
for 8 years and
planted
saplings of fruits,
trees, bamboo etc.
Kuhan paid for the
saplings and
provided irrigation
water to them
silt load in the nullah
reduced and the
villagers rejoiced
again
Kuhan village in
Kangra district of
H.P.
In 2003 constructed a
checkdam on Gulana
Khad, a nullah (creek).
In 2005 reservoir
collected silt and
capacity got halved
Example of PES in INDIA
40. PES models in India
WWF ( World Wide Fund for nature )- India initiated a project in
2008 to examine the potential PES models for selected forest
ecosystem services in Gangtok (Sikkim), Shimla (Himachal
Pradesh) and Munnar (Kerala) in collaboration with the Institute
of Economic Growth and supported by the World Bank (WWF,
2008).
40
41. PES Model for Recreation
Services in Gangtok,
Munnar and Shimla
.
41
HOTELS AND
RESORTS LOCAL INSTITUTIONS
CITY RESIDENTS
IMPROVED URBAN
ENVIRONMENTAL
MANAGEMENT
ECO CHARGE
Enhanced
management of
infrastructure and
tourism facilities
(water, solid waste)
Sustained flow
of high-end
tourists
Source: WWF (2008)
Cleaner environment and better
livelihood opportunities
42. The PES model for landscape
beauty in Sikkim
.
42
Local communities
and their institutions
Trekking and tour
service providers
Payment
Sustained
flow of high-
end tourists
Also benefits
State Forest
Department
Tourism
Department
For
maintenance
tasks
increased
tourist
flow
For maintenance of
trekking trails and the
management of
natural areas
43. The PES model for water supply
services in Sikkim,
Munnar and Shimla
.
43
hydro power
corporations
upstream land
owners and
managers
payment
For sustained
water flows
and low silt
level
consumers
adequate and
uninterrupted
electricity
supply
rationalized
electricity
tariffs
44. Study 1
Estimating economic value of irrigation water through
Contingent Valuation method: results from Bhavani River
Basin, Tamil Nadu
L. Venkatachalam and A. Narayanamoorthy studied farmer’s
preferences measured in terms willingness to pay (WTP) and
willingness to accept (WTA) compensation for voluntary
exchange of irrigation water.
Old canal system established in 1855 and the new canal
system in was operationalised in 1955.
They selected a sample of 310 farmers across all the canal
systems in the Bhivani basin.
Using field surveys they identified 125 potential buyers and
129 potential sellers, remaining 54 farmers were not willing to
participate in water exchange. 44
45. Findings
Elicitatio
n round
No. of
farmers
Mean
value
(Rs.)
Median
value
(Rs.)
Minim
um
value
(Rs.)
Maximu
m value
(Rs.)
Std.
deviatio
n
WTP1 125 272.44 250 75 560 156.80
WTAC1 129 318.44 260 100 960 195.31
WTP2 125 (110
farmers
revised)
308.12 250 100 600 169.53
WTAC2 129 (42 farmers
revised)
301.97 250 75 960 190.51
WTP3 125 (24 farmers
revised)
312.64 250 100 600 170.14
WTAC3 129 (10 farmers
revised)
300.03 250 75 960 190.25
45
46. Result
They found that out of all the buyers, 64% of them are willing
to pay the equilibrium price of Rs.300 and 63% of sellers are
willing to accept this amount as compensation. This means
that water trade will take place among 63% of the farmers
who are willing to participate in water trade.
Therefore diverting water from the willing sellers to willing
buyers would generate larger net benefits in the Bhavani
basin.
46
47. Study 2
Willingness to pay for restoration of natural ecosystem: a study
of Sundarban mangroves by contingent valuation approach
A.Ekka and Arun Pandit analyzed the willingness to pay of people
of Gosaba islands of Sundarban Mangroves for its conservation
and also analyzed the effect of covariates on WTP.
Stratified random sampling method was used and sub groups
were made on the basis of occupational status.
WTP was the dependent variable and explanatory variables are
divided into- quantitative, binary and categorical variables.
Step-wise logistic regression was used to determine which
independent variable were predictor of people’s WTP.
The proportion of cases where the respondents are WTP was
given value of 1 and 0 for those are not WTP. 47
49. The variables influencing the WTP responses for
conservation of mangroves
Dependent variable: WTP for conservation & restoration of mangroves
Model: binary logit X² = 246.07
Probability modelled; WTP = ‘1’ R² = 0.67
Optimization technique: Fisher’s scoring P = 0.05
No. of observations: 459 D.F. =13
Log. Likelihood of the model: 190.825
Log. Likelihood( only intercept): 436.89
Analysis of Maximum Likelihood Estimates
49
Parameter Estimate Standard error Wald chi-square P Sig
Intercept -1.6470 0.9273 3.1550 0.0757 *
AGE -0.00025 0.0136 0.0003 0.9855 n.s.
HH INC -0.00002 0.000027 0.6122 0.4339 n.s.
DIST 0.4632 0.3134 2.1846 0.1394 n.s.
TIME SPENT 0.1369 0.0892 2.3551 0.1249 n.s.
BID -0.0443 0.0199 4.9910 0.0255 *
GENDER(0) -0.3627 0.2581 1.9747 0.1600 n.s.
EDU 0.2490 0.2139 1.3551 0.2444 n.s.
MGR DEG -0.7215 0.2113 11.6566 0.0006 *
MODE -1.6953 0.3644 21.6397 <0.0001 *
W PAY -0.4500 0.3423 1.7288 0.1886 n.s.
OCUP(agriculturist) -0.6847 0.5702 1.4420 0.2298 n.s.
OCUP(fisherman) 0.5839 0.3713 2.4733 0.1158 n.s.
OCUP(traders) -0.5695 0.6107 0.8696 0.3511 n.s.
50. The probability to WTP for
restoration of mangroves
Odds ratio estimates
50
Effect Odds Log-odds
Age 1.0 0
Total income 1.0 0
Distance 1.589 0.589
Time spent 1.147 0.147
Bid value 1.045 0.045
Sex 1-male,0-female 0 vs 1 0.484 -0.516
Education 1-literate o vs 1 1.645 0.645
MGR degrading 1-yes 0 vs 1 0.236 -0.764
Mode of payment 0 vs 1 0.034 -0.966
To whom you want to pay 0 vs 1 0.407 -0.593
Occupation agri vs others 0.258 -0.742
Occupation fisheries vs others 0.917 -0.083
Occupation traders vs others 0.289 -0.711
51. Conditions for
successful
PES
Flexibility in the model.
Clearly defined and secure property rights over environmental
resources.
Proper assessment of environmental services generation and their
appropriate valuation .
There is always the need to substantially reduce transaction costs
so that the schemes are economically viable for both sellers and
buyers.
Multiple sources of revenue can help in reducing uncertainty in the
flow of financial resources.
A continuous provision of environmental services.
51
52. Continued…
Lack of transparency and trust between buyers and providers may
hinder the success of PES schemes.
In common lands when it is necessary to bring all the landowners
under new land-use norms, lack of consensus on the part of the
landowners may obstruct the progress of the schemes .
User-financed PES schemes are likely to perform better than
government-financed ones.
Adoption of PES is higher when NGOs and civil society institutions,
particularly community-based organizations, are present.
Environmental service providers to be provided with adequate
technical assistance.
52
53. 53
Insecure and ill-
defined property
rights
Organize large numbers
of small landholders
and alter their land-use
pattern Provision of easy access
to credit markets and
sufficient technical and
extension services to
farmers
Ensuring the
participation of all
sections of the people
from such a diversified
society.
Existing socio-economic,
religious and political
differences are likely to limit
its effectiveness
CHALLENGES
54. There is potential to introduce PES for ecosystem services in
India. In order to secure active involvement and support from
Government of India for large scale projects, more studies
need to be undertaken on relevant PES models.
FAO has identified that agriculture can provide a better mix of
ecosystem services to meet society’s changing needs if better
incentives are provided.
The rights to environmental services must be clarified.
More information is needed through research in both natural
and social sciences.
Institutions and capacity building must be strengthened.
54
CONCLUSION
THE WAY FORWARD
