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.

1. Designing Payments For
Ecosystem Services
PABASARA GUNAWARDANE

5. Ecosystem Functions
“The capacity of natural processes and
components to provide goods and services
that satisfy human needs, directly or
indirectly”
(de Groot, 1992)

6. Ecosystem
Services
• Food
• Fiber
• Genetic Resources
• Bio-chemicals,
Natural Medicines
and
PharmaceuticalsProvisioning
services

7. Ecosystem
Services
• Air Quality
Regulation
• Climate
Regulation
• Water Regulation
• Erosion
Regulation
• Water Purification
and Waste
Treatment
Regulating
services

8. Ecosystem
Services
• Cultural Diversity
• Spiritual And
Religious Values
• Knowledge
Systems
• Educational
Values
• Inspiration
• Aesthetic Values
• Social Relations
Cultural
services

9. Ecosystem
Services
• Soil Formation
• Photosynthesis
• Primary
Production
• Nutrient Recycling
• Water Cycling
Supporting
services

10. Plato
wrote about the service of soil retention

11. An Inquiry into the Nature and Causes of the Wealth of Nations
Adam Smith, 1776

12. “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

14. of the environmental services are being
degraded faster than they can recover*
*Millennium Ecosystem Assessment. 2005

15. Why are Ecosystem Services
Under-protected?
Ignorance
Institutions
Market Failure

16. Limitations in valuation
Most ecosystem services are not exchanged in
robust markets

17. 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

18. 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

19. 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

20. 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)

21. 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)

22. 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)

23. 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

24. 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).

25. 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)

26. $ 16-54trillion
(Costanza et al. 1997).
The estimated value of nature’s services

27. $ 200Billion
of world agricultural output
Source: www.fao.org/nr/sustainability/ecosystem-services

28. $ 3.7trillion
of climate-induced damage could be avoided
By halving
deforestation rates by 2030
Source: www.fao.org/nr/sustainability/ecosystem-services

29. 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.

30. “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)

31. The logic of PES

33. 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

34. 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

35. Uses of PES

36. 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?

37. PES Cycle

38. 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

39. 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)

40. 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.

41. 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

42. 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

43. 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

44. 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

45. Trustis so
fundamental to the programs’
long-term success

46. 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.

47. • 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

48. 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

49. 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

50. 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.