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Introduction to Payments for Ecosystem Services _PES_

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

USAID-CIFOR-ICRAF Project
Assessing the Implications of Climate Change for USAID Forestry Programs (2009)
                     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




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                      Overview

    1. Logic of PES
    2. Definition and scope
    3. Bundling approaches
    4. PES and carbon finance
    5. Lessons from PES for carbon finance
      (REDD)


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                       1. The logic of PES
                         Conversion
                                                          Forest conservation
                          to pasture

    Benefits to
    ecosystem
     managers




                        Reduced H2O
                        services            Problem: costs > benefits,
       Costs to
    downstream          Loss of             and forest conservation not profitable !
     population         biodiversity
     and others         Carbon
                        emissions

    Source: Engel, Pagiola & Wunder, 2008

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                        1. The logic of PES
                           Conversion                          Forest conservation
                            to pasture                          with ES payments

    Benefits to
    ecosystem                                                      Payments
                                            Min. payment
     managers




                         Reduced H2O                  Payment for service
                         services
       Costs to
                         Loss of            Max.
    downstream
                         biodiversity       payment
     population
     and others          Carbon
                         emissions

    Source: Engel, Pagiola & Wunder, 2008

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               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

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    Example from Costa Rica




    Source: http://eltucan.co.cr


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     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



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    PES definitions – between
     hard core and periphery
      Other Economic                                    PES Core
         Incentives                                      5 criteria
                                                Theory & some private PES


     “PES-like” Schemes                                “PES-like” Schemes:
     “PES-like” Schemes
                                                        Some of 5 criteria
                                                    Public agro-environmental
                                                       schemes; eco-labels
          PES Core
           PES Core                                   (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)
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       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




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                     Types of PES schemes
                   (categories of ES buyers)
              User-financed                                   Government-financed
Features      - Mostly small-scale                            - large-scale (nation-wide)
              - mostly single service/few buyers              - many services
              - focused (seldom side-objectives)              - State acts as ES buyer
                                                              - less focused (multiple side-objectives /
                                                              politics)
Pros          - Targeted to high-service, high-threat, &      - Adequate for ES buy-in with stated WTP, but
              low cost areas                                  free-riding prevails
              - often close to 5 PES principles (efficient)   - administrative economies of scale

Cons          - hard to mobilize voluntary payments for       - Often non-targeted, uniform payments (low
              multi-user externalities (biodiversity)         additionality)
              - often high start-up costs                     - max 4-5 PES principles (less efficient
Examples      - Vittel, France                                - PSA, Costa Rica & Mexico
              - Pimampiro, Ecuador                            - Vietnam 5MHP


Source: adapted from Wunder et al. 2008, SI Ecol Econ.

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                    Costs of PES
  Opportunity costs (+ land owner’s protection costs)
  Transaction costs




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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




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     Selling few ES may not cover
     OC of forest conservation
      scope for bundling?




                     Source: USAID 2007, PES Sourcebook

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




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     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




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            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)



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                         International buyers of carbon services
                          (compliance/voluntary markets, aid)




              $
                                          $    ER
              $    ER                     $


                     $     ER
                     $




     Deal with projects (CDM)           Deal with countries        Deal with countries
     or sub-national entities (REDD?)   (REDD?)                    and projects (REDD?)


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     “ideal REDD” = multi-level PES




             Source: Angelsen and Wertz-Kanounnikoff, 2008ˆ
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      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




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     Selected PES and CBNRM programs




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     Characteristics of Amazon cases




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             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


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             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


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 Regional distribution of PES schemes
                in 2007
              In total 145 PES schemes, 15 with unclear status (excluded in graph)
     50
     45
                   planned       ongoing
     40
     35
     30
     25
     20
     15
     10
     5
     0
                   Asia                    Africa             Latin America

     Source: adapted from USAID 2007, PES Sourcebook

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                     Preconditions for PES
     Preconditions
     Economic                - ES = externality AND value of the ES (user’s WTP) > providers
                             opportunity costs (WTA) & transaction costs (TC)
     Cultural                - PES need social acceptance; where non-economic value systems
                             are important and functioning, resistance to PES is likely (e.g.
                             perception of water access as human right hinders ‘water PES’)
                             - most cultural contexts seem to accept PES
     Institutional           - Need de-facto rights over ES-producing asset
                             - in weak governance context, enforcement could be enhanced by
                             contracts with independent provisions in case of non-compliance
                             (e.g. reduced/suspended/stopped payments) rather than only
                             reliance on local juridical system
     Informational           - Transaction costs of implementing PES schemes (negotiations,
                             baseline setting, system design) need to remain affordable.
                             - can be real challenge in small schemes, when buyers and sellers
                             are highly diverse, or when ES is biophysically complex

     Source: Wunder 2008, RFF paper

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         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

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         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
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                   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)

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…but possible trade-offs poverty vs environment




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                       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

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                       Further reading
      USAID PES Sourcebook
         http://www.oired.vt.edu/sanremcrsp/menu_research/PES.Sourceboo
         k.Contents.php
        World Bank - Introduction to PES
         http://siteresources.worldbank.org/EXTEEI/Resources/IntroToPES.p
         df?&resourceurlname=IntroToPES.pdf
        CIFOR – PES
         http://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 Marketplace
         http://www.ecosystemmarketplace.com/


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     Thank you for your attention!
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