The Scale of Ecosystem Payments

Credit: National Geographic

Credit: National Geographic

Payments for Ecosystem Services (PES) programs are touted by some as the solution to destruction of the environment in the name of development. These programs offer the opportunity to pay for the protection of an environmental resource that provides value in its current state but is threatened by the need of people living around the resource to generate income. PES programs tick all the necessary boxes to be in vogue: they rely primarily on market principles, rather than legal restrictions; they recognize that the environment provides valuable services that would have to be replaced, at a cost, if that ecosystem was destroyed; and they frame development and environmental protection as complementary rather than competitive. If not for the fact that they may not fix things, they are a perfect solution.

The increasing popularity of PES programs has resulted in the creation of a number of projects around the world. Sven Wunder and his co-authors provide a description of the implementation of projects in two popular categories — water and forest protection — in Ecuador that demonstrates their utility as tools for development. The particular strength of PES programs in development is that they provide a natural way to harmonize what have historically been mutually exclusive goals: environmental protection and economic development.

This harmonization is particularly evident in the example of REDD+ — perhaps the largest proposed PES scheme in the world. In many tropical countries, the need for farmers to expand agricultural land in order to increase production and income drives deforestation. This expansion comes at the expense of the surrounding forest’s ability to absorb carbon, an environmental service that is valuable to the rest of the world. A natural solution then is for the rest of the world to pay the farmers not to expand their fields. The farmers receive their increased income, and the rest of the world gets its carbon absorption.

But this is a textbook example — it only works on paper. The question is whether PES programs work in the real world. Unfortunately, as several authors have pointed out, there is little systematic analysis of their effectiveness. Whether they work or not remains a question without an answer.

Two recent papers have made an attempt to find that answer but their results are somewhat mixed. In the first paper, the authors find that the transaction costs associated with certain types of PES programs can be prohibitively high; while in the second, they find that economic benefits often only materialized in certain circumstances that may require project designs that are not conducive to lower transaction costs.

Both of these papers hit on the greatest challenge of PES programs: that they bring services that have historically been provided outside of a market into a market setting and must find some mechanism for monetizing the services provided. This integration is a major theoretical strength of the programs but in some cases, it can be an implementation nightmare. Program developers, in effect, must create a brand new market with newly defined commodities, trading rules, and means of measurement. This challenge is clearly apparent in the debate surrounding how carbon sequestration rates should be measured — how do you commoditize something that you can’t see, hold, or directly measure? The solutions that currently exist are expensive, technical, and time-consuming.

The costs associated with this commoditization are generally termed transaction costs and vary depending on the particular ecosystem service being incorporated into the market. In some cases — water in particular — the costs may be low enough relative to the size of the market that the creation of beneficial PES programs is feasible. In other cases — the authors highlight REDD+ in particular — it may not be feasible to generate a private PES program. Rather, it may require government involvement or country-wide projects to generate the necessary economies of scale. These results are certainly not the last word on the subject, but they do serve to reinforce the tensions between the need to have community level projects to generate buy-in and the need for scale sufficient to offset the transaction costs.

The second recent paper deals more directly with how economic benefits of PES programs reach communities. Focusing specifically on community managed resources in Nambia the authors examine the question of why people choose to participate in a community resource conservancy project. They find that these programs do in fact improve the welfare of people who choose to participate directly vis-à-vis those who do not. However, this finding is dependent on several specific program characteristics. Namely that the project provide “wage employment or large dividend shares,” without which “benefits cannot compete with income generate opportunities such as livestock farming” that are mutually exclusive with the conservancy project. These results suggest another source of tension between large and small projects: while large projects help offset transaction costs, they also increase the number of participants, which increases competition for available wage paying jobs in the project and dilutes dividend payments.

Despite the challenges outlined in these papers, PES programs are here to stay. They may not be the perfect solution but ultimately they are fixing things. They are a solution. This far outweighs the current issues that plague the programs. The challenge then, is to develop projects at the proper scale so that they benefit all of the involved parties without excessive transaction costs. This can be done. It will require creative project design, innovations in ecosystem measurement, and, ultimately, trial and error. But success will mean a way out of poverty for millions of people that does not sacrifice their environmental heritage.

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