5.2. Introduction to Payments for Ecosystem Services (PES)

1. 5.2. Introduction to Payments for Ecosystem Services (PES) Sheila Wertz-Kanounnikoff, CIFOR

2. Overview To introduce central concepts of PES and show how carbon finance fits into that framework • PES design features (contingent payments, performance-based, voluntariness) • PES concepts and experience relevant for performance-based carbon financing

3. Overview • Logic of PES • Definition and scope • Bundling approaches • PES and carbon finance • Lessons from PES for carbon finance (REDD)

4. 1. The logic of PES Conversion to pasture Forest conservation Benefits to ecosystem managers Reduced H2O services Problem: costs > benefits, and forest conservation not profitable ! Costs to downstream populationand others Loss of biodiversity Carbon emissions Source: Engel, Pagiola & Wunder, 2008

5. 1. The logic of PES Conversion to pasture Forest conservationwith ES payments Benefits to ecosystem managers Payments Min. payment Payment for service Reduced H2O services Costs to downstream populationand others Max. payment Loss of biodiversity Carbon emissions Source: Engel, Pagiola & Wunder, 2008

6. 1. The logic of PES • Idea: • Those who provide ES get paid for doing so (provider gets) • Those who benefit from ES pay for provision (user pays) • PES are popular for perceived simplicity and cost-effectiveness • PES = new paradigm for contractual conservation

7. Example from Costa Rica Source: http://eltucan.co.cr

8. 2. Definition and scope of PES At CIFOR, PES are defined as • voluntary transactions in which • a well-defined ES (or a land use likely to secure that service) • is bought by a (minimum of one) buyer • from a (minimum of one) provider • if and only if the provider continuously secures the provision of the service (conditionality). Source: Wunder (CIFOR), 2005  Four areas of application: carbon, watershed, biodiversity and landscape beauty

9. PES definitions – betweenhard core and periphery Other Economic Incentives PES Core 5 criteria Theory & some private PES “PES-like” Schemes “PES-like” Schemes PES Core PES Core PES Core “PES-like” Schemes: Some of 5 criteria Public agro-environmental schemes; eco-labels(e.g. ecotourism), etc. Other Economic Incentives: Any “payment” for any “environmental service” by “anybody” ICDPs, park-ranger salaries, reforestation subsidies, etc. Source: Wunder 2008 (CIFOR)

10. Economic precondition of PES PES only useful for strategic sub-spectrum of ES types and ES producing areas: Environmental services (ES) ES = externality(water quality, carbon emissions) ES = truly threatened WTP > WTA + TC

11. Types of PES schemes(categories of ES buyers) Source: adapted from Wunder et al. 2008, SI Ecol Econ.

12. Costs of PES • Opportunity costs (+ land owner’s protection costs) • Transaction costs

13. 3. Direct and “bundled” payments Direct payments: • Payments are targeted specifically to ES of interest • Has potential to tap new funds (private sector) • Exist for water and carbon services, less for biodiversity

14. Selling few ES may not cover OC of forest conservation  scope for bundling? Source: USAID 2007, PES Sourcebook

15. (1) BUNDLING: A bundle of services is sold to the same single buyer (e.g. government-financed scheme)

16. Direct and “bundled” payments “Bundled” payments: • Three variants: bundling, layering, piggy-backing • Coordination and free-riding challenges • Despite attractiveness, few examples in practice • New opportunities with carbon markets, notably REDD (e.g. joint carbon-biodiversity payments)? Source: Wunder and Wertz-Kanounnikoff (forth.), Journ. f Sust. Forestry

17. 4. PES and carbon finance • Carbon = ES • Biological carbon sequestration (A/R CDM) • Reduced C emissions from land use and forestry (REDD) • Carbon investors = buyers of carbon service • PES & carbon finance seek output-based performance contracts (voluntary, conditional deals) • Carbon finance adds international dimension: international PES (I-PES)

18. International buyers of carbon services(compliance/voluntary markets, aid) $$ $$ $$ ER ER ER $$ ER $$ ER Deal with projects (CDM)or sub-national entities (REDD?) Deal with countries (REDD?) Deal with countries and projects (REDD?)

19. “ideal REDD” = multi-level PES Source: Angelsen and Wertz-Kanounnikoff, 2008ˆ

20. 5. Lessons from PES for REDD • Study by IIED-WRI-CIFOR, conducted in 2008, commissioned by the Government of Norway (Bond et al. 2009) • Review of 13 PES schemes with features relevant to REDD

21. Selected PES and CBNRM programs

22. Characteristics of Amazon cases

23. Finding: Design features • Payments • Theory: at minimum, payments need to meet opportunity costs (plus transaction costs) • Our study finds: great diversity in payment levels (negotiated, administratively set) and forms (e.g. conditional land tenure) • Conditionality • Theory: key criterion for performance-based schemes • Our review finds: except for 1 case (Pimampiro, Ecuador), little evidence that fully applied

24. a. Can PES be effective? • Promising tool, with regional differences (PES mainly in LA, emerging in SEA and Africa) • 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 DD drivers, PES = promising, but not sufficient  need governance investments & extra-sectoral transfers

25. Regional distribution of PES schemes in 2007 In total 145 PES schemes, 15 with unclear status (excluded in graph) Source: adapted from USAID 2007, PES Sourcebook

27. Preconditions for PES Source: Wunder 2008, RFF paper

28. b. Can PES improve livelihoods? Concerns: • Weakening of land and resource rights of indigenous and forest dependent communities • Equity in opportunities to participate as sellers of carbon • Equity in payment levels and terms – vulnerable communities may be subjective to exploitative contracts • Local economy impacts which affect non-participants

29. Can PES improve livelihoods? Study findings: • PES schemes have not led to weakening of land tenure, and in some cases have strengthened it • Direct evidence from our case studies on the impact on livelihoods is limited • Even if initially access constraints for poor, subsequent corrections occurred (e.g. Costa Rica) • Despite seemingly low payment levels, PES is popular with farmers (Costa Rica, Mexico) • Little evidence of local economy impact on prices and employment

30. PES and poverty To enhance livelihood/equity outcomes: • “no-harm” approach • Narrow focus on environmental goal • Undesired livelihood/equity side-effects are mitigated (e.g. ‘collective contracting’-provision in Costa Rica PSA) • “pro-poor” approach • Poverty reduction objectives are explicit side-objectives (e.g. in areas where rural poverty is pervasive) • participation of the poor is actively pursued (e.g. RUPES – rewarding upland rural poor for ES)

31. …but possible trade-offs poverty vs environment

32. Summary • Carbon finance (CDM, REDD) = I-PES • PES = new contractual conservation paradigm, can provide important lessons for notably REDD scheme design incl, accompanying policies • Poverty alleviation is important side-objective, but should not become primary goal • Payments for REDD provides new opportunities for securing other ES via ‘bundling’, notably biodiversity

33. Further reading • USAID PES Sourcebookhttp://www.oired.vt.edu/sanremcrsp/menu_research/PES.Sourcebook.Contents.php • World Bank - Introduction to PES http://siteresources.worldbank.org/EXTEEI/Resources/IntroToPES.pdf?&resourceurlname=IntroToPES.pdf • CIFOR – PEShttp://www.cifor.cgiar.org/pes/_ref/home/index.htm • Rewarding Upland Poor for Environmental Services http://www.worldagroforestrycentre.org/sea/Networks/RUPES/index.asp • The Katoomba Group (Regional Network for China and East-Asia)http://www.katoombagroup.org/ • Ecosystem Marketplacehttp://www.ecosystemmarketplace.com/

34. Thank you for your attention!