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

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)

1. The logic of PES

Conversion
to pasture

Forest conservation

Benefits to
ecosystem
managers

Costs to
downstream
population
and others

Reduced H2O
services
Loss of
biodiversity
Carbon
emissions

Source: Engel, Pagiola & Wunder, 2008

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Problem: costs > benefits,

and forest conservation not profitable !

1. The logic of PES

Conversion
to pasture
Benefits to
ecosystem
managers

Costs to
downstream
population
and others

Min. payment

Loss of
biodiversity
Carbon
emissions

Payments

Payment for service

Reduced H2O
services

Source: Engel, Pagiola & Wunder, 2008

5

Forest conservation
with ES payments

Max.
payment

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
7

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

PES definitions between

hard core and periphery
Other
Economic
Incentives

PES Core
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
(e.g. ecotourism), etc.

PES
PES Core
Core

Other Economic
Incentives:
Any payment for any
environmental service
by anybody
ICDPs, park-ranger
salaries, reforestation
subsidies, etc.

Source: Wunder 2008 (CIFOR)

9

Economic precondition of PES

PES only useful for strategic sub-spectrum of
ES types and ES producing areas:

Environmen
tal services
(ES)

10

ES =
externality
(water
quality,
carbon
emissions)

ES = truly
threatene
d

WTP > WTA

+ TC

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 sideobjectives / politics)
Pros

- Targeted to high-service, highthreat, & low cost areas

- often close to 5 PES principles
(efficient)

- Adequate for ES buy-in with stated

WTP, but free-riding prevails
- administrative economies of scale

Cons

- hard to mobilize voluntary

payments for multi-user
externalities (biodiversity)
- often high start-up costs

- Often non-targeted, uniform

payments (low additionality)
- max 4-5 PES principles (less
efficient

Example - Vittel, France

s
- Pimampiro, Ecuador

- PSA, Costa Rica & Mexico

- Vietnam 5MHP

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

11

Costs of PES
Opportunity costs (+ land owners 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

13

Selling few ES may not cover

OC of forest conservation
scope for bundling?

Source: USAID 2007, PES Sourcebook

14

(1) BUNDLING: A bundle of services is sold to the same single buyer

(e.g. government-financed scheme)

15

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

16

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

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

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Source: Angelsen and Wertz-Kanounnikoff,

2008

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

21

Characteristics of Amazon cases

22

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

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Theory: key criterion for performance-based schemes

Our review finds: except for 1 case (Pimampiro,
Ecuador), little evidence that fully applied

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)

Source: adapted from USAID 2007, PES Sourcebook

25

26

Preconditions for PES

Preconditions
Economic

- ES = externality AND value of the ES (users 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

27

- Transaction costs of implementing PES schemes

(negotiations, baseline setting, system design) need
toRFF
remain
affordable.
Source: Wunder 2008,
paper
- can be real challenge in small schemes, when
buyers and sellers are highly diverse, or when ES is

b. Can PES improve livelihoods?

Concerns:

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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

Can PES improve livelihoods?

Study findings:

29

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

PES and poverty

To enhance livelihood/equity outcomes:

no-harm approach

30

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)

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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