October 4, 2007

1. Payments for Environmental Services:Design IssuesJohn Kerr and Rohit JindalMichigan State University October4, 2007

2. Outline • Types of payments and rewards • Individual vs. group payments/rewards • Conditionality • Important issues to consider • Transaction costs • Brief case studies to illustrate 2

3. Outline • Types of payments and rewards • Individual vs. group payments/rewards • Conditionality • Important issues to consider • Transaction costs • Brief case studies to illustrate

4. Payments/Rewards/Compensation • We treat these terms as synonymous. • To date payments mainly for: • Watershed services • Carbon sequestration • Biodiversity Conservation • Scenic Beauty

5. Types of payments • Cash • In-kind services (training, access to external markets) • Conditional land tenure security • Development support (employment opportunities, community infrastructure) 5

6. Cash • Straightforward and simple • Facilitates annual payments • Divisible and direct • Good for individual-based systems • Possible problem if group contract 6

7. Conditional land tenure security • Used on illegally settled land • Eviction if service not delivered • It’s indivisible – useful for group PES systems • Challenges to conditionality: • Land tenure may be difficult to revoke in long term even if ES not sustained 7

8. In-kind services/Development support • Could be a mechanism to reward service provider • Questions about enforcing conditionality • Ethical concerns • Hypothetical: bonuses and fines on a local development budget 8

9. Outline Types of payments and rewards Individual vs. group payments/rewards Conditionality Important issues to consider Transaction costs Brief case studies to illustrate 9

10. Group or individual contract? Individual: Simple conceptually High transaction costs for contracts with many smallholders 10

11. Group or individual contract? Group: Useful if threshold effects Reduces transaction costs for buyer Transfers transaction costs to group members: Group monitoring, administering payment Concern about elite capture Can avoid with indivisible, non-cash payments 11

12. Outline • Types of payments and rewards • Individual vs. group payments/rewards • Conditionality • Important issues to consider • Transaction costs • Brief case studies to illustrate 12

13. Conditionality • It’s the key feature of PES • Conditional on what? • Actual evidence of the service? • Evidence of changed land use? • Evidence of implementing a new management plan? 13

14. Conditionality Suggests that payment should be: • On a regular basis, not just one time. • Directly proportional to the level of environmental service provided. 14

15. Outline • Types of payments and rewards • Individual vs. group payments/rewards • Conditionality • Important issues to consider • Transaction costs • Brief case studies to illustrate 15

16. Important issues to consider • Additionality • Payment results in improved quantity/quality of service • Leakage • Securing one service at the cost of another • Shifting environmental damage from one place to another • Permanence • Long term provision of the service

17. Outline • Types of payments and rewards • Individual vs. group payments/rewards • Conditionality • Important issues to consider • Transaction costs • Brief case studies to illustrate

18. Transaction costs • Types of transaction costs: • Search, negotiation, approval, contracting, monitoring, enforcement, insurance • High fixed costs: • Total cost/ha falls with larger contracts • Monitoring and measurement are important transaction costs 18

19. Monitoring and measurement • Key impediment to environmental service markets: • Difficult to trace environmental services to land use change • Services take time to materialize • Easier to monitor land use changes than actual environmental services • Easier for some services (carbon sequestration) than others (watershed) 19

20. Ways to reduce transaction costs • Improved monitoring technology • Institutional innovations: • Group contracts • Intermediary organizations • Build on existing local institutions • Participatory monitoring • Low cost data collection systems • Sell complementary environmental services that increase revenue (bundling payments) 20

21. Outline • Types of payments and rewards • Individual vs. group payments/rewards • Conditionality • Important issues to consider • Transaction costs • Brief case studies to illustrate 21

22. Payments for Environmental Services (PSA), Costa Rica Case studies • Costa Rica • Sumberjaya, Indonesia • Working for Water, South Africa 22

23. PSA, Costa Rica… • Operated by the Ministry of Environment through National Forestry Fund (FONAFIFO) • Pays landowners for land use practices • Intended to produce four environmental services: • Carbon sequestration • Hydrological services • Biodiversity • Scenic beauty

24. PSA, Costa Rica… • Private landowners contracted for five years with payments for: • Reforestation • Sustainable forest management • Forest preservation

25. PSA, Costa Rica… • Sale of environmental services to different buyers: • Hydrological to local hydroelectric plants • Biodiversity to pharmaceutical companies • Scenic beauty to hotels • Carbon sequestration to international buyers

26. PSA, Costa Rica… • However, revenue from sale of environmental services not enough to cover FONAFIFO’s costs. • Funding also from a national fuel tax. • High transaction costs • Additionality is a big concern

27. Sumberjaya, Indonesia • Migration into govt. forest area since 1950s • Coffee farming is main land use • Concern about impact on new hydroelectric plant (~1990)

28. Sumberjaya… • Forced evictions were ineffective • Community-based forest management (HKm) (~2000)

29. Sumberjaya… • Conditional land tenure to 6,400 farmers • 5 year probation followed by 25-year extendable permit • Protection of remaining forest • Land use practices to control erosion • Impacts: • Increase in land value and local income • No info yet on actual environmental services • Efforts underway to measure them

30. Working for Water, South Africa • Employs people to remove invasive species • Focus on public lands, priority private lands • Social targeting – unemployed, rural poor • Essentially a public works program • $70 million budget • Employment to 25,000 people

31. WfW, South Africa… • ‘Not’ strictly a PES program • However, some PES-like features • Payments by municipalities and other water users to remove invasive species from catchments • Use of government infrastructure by private parties • 200,000 hectares cleared each year • Additional water flow ~250 million m3/year

33. Conclusion • PES-type arrangements take a variety of forms • Not always doable. • Conditionality is a big test • Overcoming transaction costs is another test • Much experimentation going on • Many programs too new to evaluate 33