Payments for Environmental Services Design Issues John Kerr

Payments for Environmental Services: Design Issues John Kerr and Rohit Jindal Michigan State University October 4, 2007

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 16

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

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

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

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

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

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

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 23

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

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

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 26

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

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

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 29

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 30

Wf. W, 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 m 3/year 31

Costa Rica Indonesia South Africa Multiple Watershed/ Forest consv Watershed Payment type Cash Tenure security Salary Individual or group? Individual Group Contractor Conditionality Land use - Low High → low Service Transaction costs High

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