Payments for Environmental Services: Evolution

EG37CH15-vanNoordwijk

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Payments for Environmental Services: Evolution Toward Efficient and Fair Incentives for Multifunctional Landscapes ANNUAL REVIEWS

Further

Annu. Rev. Environ. Resourc. 2012.37:389-420. Downloaded from www.annualreviews.org by 139.195.226.233 on 12/20/12. For personal use only.

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Meine van Noordwijk,1 Beria Leimona,1 Rohit Jindal,2 Grace B. Villamor,1,3 Mamta Vardhan,4 Sara Namirembe,5 Delia Catacutan,6 John Kerr,7 Peter A. Minang,5 and Thomas P. Tomich8 1 World Agroforestry Centre (ICRAF), Bogor 16880, Indonesia; email: [email protected], [email protected] 2 Department of Resource Economics and Environmental Sociology, University of Alberta, Edmonton, Alberta, Canada T6G 2H1; email: [email protected] 3 Center for Development Research (ZEF), University of Bonn, Germany 53113; email: [email protected] 4 Institute for Sustainable Energy, Environment and Economy, University of Calgary, Calgary, Alberta, Canada T2N 1N4; email: [email protected] 5 World Agroforestry Centre (ICRAF), Nairobi 00100, Kenya; email: [email protected], [email protected] 6

World Agroforestry Centre (ICRAF), Hanoi, Vietnam; email: [email protected]

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Department of Community, Agriculture, Recreation and Resource Studies, Michigan State University, East Lansing, Michigan 48824; email: [email protected] 8 Agricultural Sustainability Institute, University of California, Davis, California 95616-8523; email: [email protected]

Annu. Rev. Environ. Resour. 2012. 37:389–420

Keywords

First published online as a Review in Advance on August 28, 2012

altruism, ecological economics, environmental governance, rights-based approaches, trade-off

The Annual Review of Environment and Resources is online at environ.annualreviews.org This article’s doi: 10.1146/annurev-environ-042511-150526 c 2012 by Annual Reviews. Copyright All rights reserved 1543-5938/12/1121-0389$20.00

Abstract Payments for environmental services (PES), the non-provisioning part of ecosystem services, target alignment of microeconomic incentives for land users with meso- and macroeconomic societal costs and benefits of their choices across stakeholders and scales. They can interfere with or complement social norms and rights-based approaches at generic (land-use planning) and individual (tenure, use rights) levels; they interact with macroeconomic policies influencing the drivers to which individual agents respond. In many developing country contexts, community scale factors strongly influence land users’ decisions, whereas unclear land rights complicate the use of market-based instruments. PES concepts need to adapt. Multiple paradigms have emerged within the broad PES domain. Evidence suggests that forms of “coinvestment in stewardship” (CIS) alongside rights are the preferred entry point. Commodification of environmental services (ES) and ES markets might evolve later on, but require strong government regulation to set and enforce rules of the game. We frame hypotheses for wider testing and “no-regrets” recommendations for practitioners. 389


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Contents


1. INTRODUCTION . . . . . . . . . . . 2. PAYMENT FOR ENVIRONMENTAL SERVICE DEFINITIONS AND PERFORMANCE CRITERIA . . . . . . . . . . . . . . . . . . . 3. BRIEF HISTORY OF CONCEPTS AND APPLICATION IN DEVELOPING COUNTRIES . . . . . . . . . . . . . . . . 4. MULTIFUNCTIONALITY, SEGREGATION (SPARING), OR INTEGRATION (SHARING) . . . . . . . . . . . . . . . . . . 5. CRITIQUES OF PAYMENT FOR ENVIRONMENTAL SERVICE THEORY AND PRACTICE . . . . . . . . . . . . . . . . . . 5.1. Missing Metrics for Environmental Service Performance . . . . . . . . . . . . . . . 5.2. Motivation for Buyers: A Real Business Case . . . . . . . 5.3. Motivation for Environmental Service Providers and Motivational Crowding Out . . . . . . . . . . . . . 5.4. Payment for Environmental Services in the

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Poverty-Environment Nexus . . . . . . . . . . . . . . . . . . . . . 5.5. Are Clear Property Rights a Precondition for Payment for Environmental Services? . . . . . . . . . . . . . . . . . . . 5.6. Is There Enough Payment for Environmental Service Funding for Applications at Scale? . . . . . . . . . . . . . . . . . . . . . . 5.7. Can Reducing Emissions from Deforestation and Degradation Provide International Funding for Local Payments for Environmental Service? . . . . . 6. DISCUSSION . . . . . . . . . . . . . . . . 6.1. Challenges in Bridging Across Temporal Scales and Associated Discount Rates . . . . . . . . . . . . . . . . . . . . . . 6.2. From Value to Utility and Prospects . . . . . . . . . . . . . . 6.3. A New Comprehensive Altruism Framework and Its Applications . . . . . . . . . . . . . . . . 6.4. Multiscale Framing of Incentives for Reducing Emissions from Deforestation and Degradation . . . . . . . . . . . . . . .

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1. INTRODUCTION The rise of agriculture coincided with the remarkable climatic stability of the Holocene (1), but land-use change and fossil-fuel use threaten to get us back to the wilder fluctuations of the Pleistocene and earlier periods in the geological history of our planet (2, 3). Much of agriculture and the dramatic change in human population size and social organization that it made possible (4) were based on reducing dependency on natural ecological processes for securing food by finding effective technical substitutes to se390

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cure growth and reproduction of plants and animals with the most desirable properties through domestication (5). The “culture of land,” with agriculture as its shorthand, was contrasted with wild and uncontrolled nature. Its key features apart from genetic selection were modification of the soil environment by tillage, breaking out of the constraints of the local nutrient cycle by use of fertilizers, and controlling pests and diseases by chemical means (6). Manipulation of the water balance by irrigation and drainage,



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however, involved lateral flows (7) of water that created new dependencies on the surrounding land and its watershed services. The fossil record of the Neolithic revolution that started agriculture suggests that it had mixed effects on human well-being when health and quality of life rather than demographic growth are considered (8). In terms of the human brain, it required and further strengthened the rational, reflective “system 2” that can operate at discount rates that allow investment in activities that provide yield in a few months time, balancing with the intuitive, subconscious, direct “system 1” that seeks immediate rewards (9) and dominated in our hunter-gatherer history. The “system 3” that responds to and shapes social norms coevolved with societal organization. Current economic theory reflects only part of how our brains take decisions in the face of opportunities and scarce resource (see sidebar Econs and Humans). A primary measure of the success of agriculture was a social segregation when urban development became possible, as rural labor could be freed for other activities (10). Expansion of agriculture also implied that “forest,” lands beyond the perimeter of the villages, and “nature,” land without direct human influence, declined in area (11). Urban lifestyles developed, with different norms, aspirations, and expectations. Ironically, part of these expectations nowadays relates to a return to more natural forms of farming along with fairer trade relations (12), and part is for “ecoagriculture” landscapes as targets for recreation and leisure (13). The dramatic success in increasing the goods that can be derived from agro-ecosystems came at a cost for the regulatory and supportive ecosystem services (ES∗ ) (14). Humankind may currently approach planetary boundaries of safe operating space (15): clean water, clean air, flora and fauna, and more recently the gas composition of the atmosphere that affects climate. The urban segment of the population started to attach value to the natural capital and ES∗ and regretted their loss; they even became willing to pay moderate amounts of money to have secure access to such ES∗ . By paying, some

ECONS OR HUMANS Thaler & Sunstein (16) posited that we deal with two “species”: econs and humans. Economics, as the term suggests, is good at predicting the decisions made by econs, but the science of decision making by humans remains largely unexplored territory and needs to build on the advances in psychology, neuroscience, and behavioral economics of the past two decades. Econs are the efficient calculators imagined in economic theory, able to weigh multiple options, forecast all the consequences of each, and choose rationally. Humans are ordinary people who fall well short of Homo economicus: They are neither fully rational (as most analyses of economic downturns and crashes imply) nor completely selfish, and their tastes are anything but stable. Calling ourselves Homo sapiens, however, stretches the concept of wisdom beyond how it is currently understood and may well reflect the cognitive illusion and overconfidence that is hardwired in our brains. The literature on PES was initially focused on bringing environmental issues into the framework of efficiencyoriented econs but has gradually incorporated more realistic perspectives on human behavior and its ability to deal collectively with threats and pressures.

might even feel less guilty about their patterns of consumption and the global consequences of their consumption. The social, cultural, political, and economic differences between those able to provide or enhance environmental services (ES) and those interested in supporting such activities have become substantial, and the interaction has required a framing that referred to both fairness (a system 3 concept) and efficiency (a system 2 concept) to bridge that gap. Analysis of system 2 (micro)economics suggested that the discount rates used were too high to justify investments in environmental qualities that operate on decadal rather than annual timescales. Lowering the apparent discount rates might nudge decision makers toward decisions enhancing health, wealth, and happiness with greater public cobenefits, and as such justified public coinvestments (16). Dealing with intergenerational equity and expected scarcity of global ecosystem functions requires system 3 brain functions that operate at zero or negative discount rates, complementing the www.annualreviews.org • Payments for Environmental Services

System 1: brain function that is rapid, intuitive, subconscious, and synthetic and that leads the primary response of humans to opportunities and choices System 2: brain function that is slow, rational, conscious, and analytical and that leads problem analysis and rationalization of choices made System 3: brain function complementing systems 1 and 2 and reflecting social norms to which an individual complies

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Ecosystem services (ES∗ ): the benefits humans derive from ecosystems; usually categorized as provisioning, regulating, cultural, and supportive functions PES∗ : payments for ecosystem services PES: payments for environmental service(s) (a subset of ecosystem services) Environmental service(s) (ES): ecosystem service(s) minus the provisioning services for which markets can be expected to balance supply and demand Rights-based approach: balancing private and public interests within legal pluralism through bundles of resource use rights for individuals and communities

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system 1 and system 2 functions, which had much more time to evolve (9). Low or even negative discount rates may seem surprising to conventionally trained economists, but the conventional discounted cash flow analysis assumes complete markets (including markets for insurance and risk) as well as reversibility of asset transactions. Yet, missing and imperfect markets, prospects of extinctions, other essentially irreversible contingencies, and prospects for only limited (if any) substitution among major asset classes—say between some forms of natural and financial capital—mean that some important resources really will be scarcer in the future, entailing very costly adjustments. Where markets have been generally acclaimed for linking demand and supply of goods and nudging producer decisions toward efficient use of resources, threats to ES∗ (14, 17) became associated with “market failure” and “externalities” (18–20). Two types of solutions have been tried to address this imbalance: (a) The first was to restrict market functions on goods provision by regulation of resource access to secure conservation of natural capital and ES∗ , and (b) the second was to bring market efficiency to the supply of ES∗ by making increased provision of such services pay at a level such that the trade-offs between goods and services can be managed at the level of farmer or land manager. The latter approach is conventionally, but not very accurately as we describe below, described as payments for ecosystem services (PES∗ ) or payments for environmental services (PES). Although the regulatory approach is associated with “sticks,” the incentive-based approaches are referred to as “carrots,” with “sermons” as the third policy instrument referring to suasion and the hope that internalization of values will lead to self-limitation (system 3). Started some three decades ago in Europe and North America (21), the PES approach has been advocated and tested in the tropics for over a decade now. ES in the tropics are considerably diminished by the development and spread of land-use practices that profit the land user but reduce the regularity and quality of water flows, habitat quality of the van Noordwijk et al.

landscape for globally threatened biota, carbon storage capacity, and landscape beauty (22, 23). Market-based instruments that make the continued provision of ES more profitable have become an active area of experimentation and learning over the past two decades (24–26), as purely regulatory approaches that exclude rural populations from forests have a negative impact by perpetuating forest-related poverty (27, 28). PES is one of multiple feedback mechanisms by which stakeholders affected by changes in land use can try to influence the agents/actors directly deciding on transformations of the landscape and/or the underlying driving forces to which they respond (29). A broad categorization (Figure 1) distinguishes rules/rights-based approaches from economic incentive approaches, each with entry points at two scales. A further distinction can be the degree to which the response and feedback options are channeled through public- and/or private-sector entities. In this classification and figure, PES stands for B2 approaches targeting the microeconomic level of decision making. Its effectiveness is contingent on the way it interacts with macroeconomic incentive structures (B1) and rights to use land (A1, A2). The language of PES refers primarily to the efficiency of quid pro quo (in this case, money for services), but as we discuss in this review, the fairness side deserves at least equal attention, as is gradually rediscovered for the rest of the economy (30). The nature of both the quid and the quo is often not as clear as it appears to be, with additionality, leakage, and permanence concerns (31, 32) that straddle temporal and spatial scales and require complementary types of economic analysis. The emerging PES literature deals with the five following scales of economic analysis, only two of which (microand macroanalysis) have been conventionally studied:

Picoeconomics (33) (or neuroeconomics underpinning behavioral economics), including individuals and their brain synapses (pico), which involve decision making, interpretation of observations,



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Figure 1 Payments for environmental services (PES) represent one (B2) of four categories of response and feedback mechanisms that allow those who experience the environmental service (ES) consequences of changes in land cover and land use to influence the generic drivers (A1 and B1) or actors/agents (A2 and B2) of land-use change in specific places to modify behavior and decisions via spatial regulation and rights (A, sticks) or economic incentive structures (B, carrots). The suasion (sermon) category modifies the response of actors/agents to drivers (modified from Reference 28). Abbreviations: ES, environmental services; GHG, greenhouse gas; LU, land use; mngmnt, management.

and construction of perceived causal mechanisms; Microeconomics, including household and farm enterprises with the cash flows and investment issues at that scale, as influenced by market function and the totality of taxes, subsidies, and regulations; Mesoeconomics (34), including landscape, community, and local governance scales as well as private-sector actors, where determinants of ES∗ interact with the paradigms of integrated rural development; Macroeconomics, including nation-states as part of regional cooperation arrangements at the interface of world markets, political ambitions for development, and the economic decisions of subnational actors, which respond to taxes, subsidies, regulations, and public investment in physical infrastructure; and Gigaeconomics, including earth system management and the rediscovery that humans can care about their broader context if appropriately primed and motivated by concepts such as “footprint” (35).

PES discussions usually focus on the role of positive incentives (carrots) at the interface of meso- and microeconomics, but the involvement of other scales is increasingly recognized, as is the close link with sticks and sermons (or suasion) targeting picoeconomics and the putative system 3. Yet, the macroeconomic context of national development and, increasingly, the gigaeconomic scale of global issues are of direct relevance as well. PES is usually framed within an environmental economics framework that accepts the status quo of macro- and microeconomic analyses and associated policies but aims at internalizing the environmental externalities of current decision making. In contrast, the ecological economics tradition has articulated more fundamental critiques of the status quo and has been more open to the emerging pico-, meso- and gigaeconomic scales, which may set normative (sustainability) and pragmatic constraints to micro- and macroeconomic scales. Within the environmental economics framing, the ups and downs of the global economy (at gigascales) with more than proportional impacts on “carbon markets” have been a major concern. www.annualreviews.org • Payments for Environmental Services

Picoeconomics: the study of the way the human brain (at synapse level) processes newly acquired information, memory, and accumulated value judgments Gigaeconomics: the study of management options and decision making on use and/or conservation of scarce resources at global (supranational) scale

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Compensation: government-mediated payments to offset the opportunity Commodification: derivation and definition of standardized units of ES for trade within regulated markets and/or association of verifiable ES with branded commodities costs for (voluntarily or mandated) forgone legally allowed development options that would decrease ES functions Commodification of environmental services (CES): CES1, ES as such; CES2, ES packaged with branded commodities COS: compensation for opportunities skipped Coinvestment in stewardship (CIS): investment by local plus external stakeholders across asset types (capitals) in land-use trajectories that enhance ecosystem services

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As PES praxis has evolved, its relation with theory has changed. Although most of PES is still perceived in a decision support system mode of natural resource management, where better informed managers can take better decisions and PES can involve negotiations of prices and contract details but not of its fundamentals, the more complex reality may be better understood if approached from a “negotiation support” perspective (36, 37), where multiple knowledge and value systems interact in shaping a negotiation platform and its outcomes. Further complications derive from the way temporal scales are included in the analysis: Beyond a sustainability timescale that emphasizes persistence, a “sustainagility” timescale (38) may be needed that balances this with a continued-change perspective (39). As a broad delineation of the topics for this review, we discuss emerging PES praxis in the context of these five scales of economic analysis, the five capitals (assets) of the livelihoods’ approach (40) [although alternative formulations (41) also have found followers], and three aspects of human brain function (systems 1, 2, and 3). In our view, these all need to be reconciled to understand how individual behaviors and choices interact with local actions, their global consequences, and the opportunities for effective feedback mechanisms (Figure 2). PES can be conceived and implemented by a government-mediated institution without explicit reference to markets. Adjustments of levels of compensation to what taxpayers are willing to pay will, over time, provide a coarse feedback mechanism adjusting supply to demand. Much of the PES literature, however, suggests that market-based schemes to enhance ES will be more efficient and require monetizing or commoditizing biodiversity conservation, watershed protection, and carbon sequestration (42). PES schemes depend on funds derived from direct beneficiaries of such services (in the case of commodification), and/or an increased public interest in supporting conservation (in the case of compensation). In the latter case, funds are used to compensate for involuntary or voluntary restrictions on van Noordwijk et al.

land use. They aim to be sufficient to offset the opportunity costs of forgoing private benefits from legal activities with negative environmental effects (43). In a market-based approach to enhancing environmental quality through freely negotiated forms of PES, one’s bargaining position is crucially important (44). Where potential supply of ES delivery contracts is less than demand, ES providers can negotiate for price levels beyond the compensation for opportunity costs; if demand for such contracts is less than potential supply, the market may settle on a price that is just about at a breakeven level for ES providers. Commodification with price levels reflecting current supply and demand can work where the time lags for increasing supply are less than the timescales at which demand varies and where production decisions are reversible. Few, if any, ES meet these requirements, and the mechanisms to set price levels must reflect longer-term societal values, rather than the economic mood of the day. Although this may generally point toward a government-mediated compensation approach rather than market-based commodification, a third paradigm (coinvestment) has been recognized in PES literature and praxis. Primarily on the basis of the conditionality of contracts, a distinction has been suggested (45) between commodification of ES (CES), compensation for opportunities skipped (COS) and coinvestment in environmental stewardship (CIS). Much of the literature on PES focuses on identifying the payment level needed to change land use (46), targeting land users, structuring payments and contracts (25), creating effective public-sector and private-sector arrangements (47), and designing public policy (48). Few empirical studies so far have described the medium-term impact of PES on (a) the land managers, (b) the social system they are part of, and (c) the ES targeted (49). Some of the first PES efforts in Southeast Asia and Africa are now reaching a point where these issues can be studied empirically, and most of the authors of this review are directly involved in such studies.



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We focus this review on various types of PES applications in the context of developing countries, but also explore the way paradigms, concepts, and approaches have been influenced by the experience in countries with different histories of land-use patterns, land ownership and tenure regimes, rural population densities, and degree of market integration. Financial incentives can both support and undermine social norms compatible with ES enhancement. External coinvestment, e.g., through incentives from programs to reduce emissions from deforestation and degradation (REDD) and ecocertification, needs to synergize with local efforts by understanding local dynamics and conditions for free and prior informed consent. In this review of recent literature, we 1. Analyze the different interpretations of PES in segregation perspectives on landscape functions and those based on integration in multifunctional landscapes; 2. Discuss PES definitions and their relationship to realistic, conditional, voluntary and pro-poor performance criteria and evolving paradigms; 3. Provide a brief history of PES concepts and their application in developing countries; 4. Position PES in the debate about the multifunctionality of landscapes; and 5. Summarize the following critiques of PES theory and the questions arising from emerging PES practice:

What are the missing metrics for ES performance? Is there a real business case? What are the motivations for buyers and for ES providers? How does motivational crowding out apply? How can PES improve the povertyenvironment nexus? Are clear property rights a precondition for PES? Is there enough PES funding for applications at scale? Can international funding for reducing emissions from deforestation and

(forest) degradation plus forest stock enhancement (REDD+) support local PES? In the discussion, beyond reviewing published literature, we provide a new comprehensive altruism framework and discuss its applications. We end with a set of tentative conclusions and frame hypotheses for the interface of praxis and research.

REDD+: reducing emissions from deforestation and (forest) degradation plus forest stock enhancement

2. PAYMENT FOR ENVIRONMENTAL SERVICE DEFINITIONS AND PERFORMANCE CRITERIA Early work on the interface of giga- and macroeconomics (50) tried to quantify the sustainable part of national and global economic systems (roughly 50%) (47) by focusing on the loss of ES associated with economic growth as conventionally measured (51). ES functions were defined as the possible human uses of their natural and biophysical surroundings. For national accounting, the concept of flows (services) was linked to stocks (capital). Analyses in the 1990s thus emphasized natural capital as essential for development (52). In 2000, its derivative in the form of services (53) became the key concept for the Millennium Ecosystem Assessment, but was relabeled as ES∗ (14). It expanded the domain of environmental concerns to all benefits that humans gain from ecosystems, ranging from provisioning services supplying tangible value to people (such as food, fuel, and other consumable goods) to regulating services (such as air and water purification, climate buffering), other habitat or supporting services (e.g., breeding grounds for fish, regeneration of soil fertility), and cultural and amenity services that give intangible benefits to human well-being (54). Originally intended to focus on the value of nature (53), there was no logical demarcation along the natural-managed-system continuum, and the concept came to include all of managed forests and agricultural landscapes. By including the provisioning services that support commodity production and market function, the concept www.annualreviews.org • Payments for Environmental Services

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of ES∗ gained public attention; however, the “externality” argument and market failure do not apply to these provisioning services, although the clarification of property rights may be an issue. We use ES for all ES∗ except for provisioning, following References 18, 21, 24, 26, and 41. Current literature, however, is split over ES∗ or ES as part of the PES acronym. The most highly cited definition of a PES remains (24, p. 3) “a voluntary, conditional transaction where at least one buyer pays at least one seller for maintaining or adopting sustainable land management practices that favor the provision of well-defined environmental services.” The definition applies binary, qualitative standards to the concepts of conditionality, welldefined ES, and voluntarily agreed contracts at the level of individual buyers and sellers. Strict application of the definition may lead to the conclusion that PES does not currently exist in pure form but that there are PES-like approaches that approximate the ideal to various degrees. The same may be true for the majority of economic concepts (16), but the binary definitions can also be replaced (55) by sliding scales of the degree to which realistic, conditional, and voluntary contracts of the provision of welldefined ES are negotiated and implemented, with additional attention for the fairness dimension of “pro-poor” approaches. On the basis of variations in the way the criteria are met, three complementary paradigms can coexist within a broad PES framework (45), with (a) commodification of well-defined ES so that buyers and sellers can negotiate prices [closest to Wunder’s (24) definition], (b) compensation for opportunities forgone voluntarily or by command and control decisions, and (c) coinvestment in environmental stewardship as key features. In the basic PES concept, payments (flows of financial capital) are the primary vehicle through which the buyers can express their appreciation for the ES. As long as the sellers keep producing the ES, it is up to them how they use this financial capital: to invest in natural capital, quality of houses, means of transport, or savings accounts or to pay for schooling of children, healthcare, amenities,



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and luxuries of life or any other expenditure. In practice, however, buyers may be disappointed if they don’t see the sellers invest a considerable share of payments into direct enhancements of natural capital; they expect a “multiplier effect” (56). Buyers of ES are not willing to forgo their control, at least partly, because indeed the production function of ES as emergent properties of complex landscape systems remains poorly understood. Efficiency can be considered from the perspective of the buyer, the seller, or the process as a whole, including its intermediaries and longer-term dynamics (sustainability). A key economic concept here is that of Pareto efficiency, where an equilibrium has been found when no further transactions can increase the well-being of any actor without making anyone else worse off (57). Like laws of physics that ignore friction, Pareto efficiency can be most easily be perceived in a world with perfect information to all, fully rational decision making about the true interests of all agents, and in the absence of transaction costs. In the real world, however, transaction costs exist, as do intermediaries who serve as brokers to provide information and influence decisions. These third-party brokers also have their own longer-term interests and business models that need to be understood. Efficiency considerations for the buyer consist of effectiveness and costs, weighed against alternative opportunities to satisfy their ES demand. Efficiency considerations for the seller require understanding of the production function for ES, as well as how the provision of the ES fits into the production function for agricultural and other goods of the farm or local economy. Wunder’s PES definition (24) referred to at least one buyer and seller exchanging ES for money (Figure 3a), with Pareto efficiency determined by the relative shortage of ES and surplus of financial capital on the buyer side, and reverse endowments on the seller side. In practice, most of the currently known PES applications in the tropics (58–62) involve linkages of complex systems in buyer and seller communities, involving exchanges


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of multiple asset types (Figure 3b). Contracts involve investments and linkages in social capital and individual human capital. The initial currency may be recognition and respect as social capital exchanges, rather than money (63). When taken to its full consequences, this implies that the buyers and sellers become coinvestors in cross-linked systems.

3. BRIEF HISTORY OF CONCEPTS AND APPLICATION IN DEVELOPING COUNTRIES After the initial excitement of PES approaching the “silver bullet” status (21), the promise and perils of PES formed the title of reviews in both 2005 (64) and 2011 (20). Both reviews asserted that PES experiences had already demonstrated that investing in natural capital rather than built capital can make both economic and policy sense but that markets for ES or ES∗ create challenges, including moral hazards, rent-seeking behavior, free riders, and perverse incentives. Lack of market reflection of the full social cost of ES production can lead to incorrect measures of the scarcity of some ES and no measures for the rest. Early literature on PES classified the forms of PES in practice and recognized at least four types of PES schemes, differentiated by the degree of government intervention in administration of the schemes, by the characteristics of the buyers and sellers, and by the source of payments (65, 66). By pointing out the weaknesses of indirect environmental interventions, such as integrated conservation and development programs (ICDPs), others (67) argued that PES can create a direct incentive scheme between ES sellers and buyers and thus might better achieve both conservation and development objectives by improved targeting and lowering transaction costs. PES concepts were tested as a possible way to increase effectiveness in environmental protection and reduced (public) conservation budgets in Latin America, the United States, and Europe (21, 46, 68). It appears that the coinvestment paradigm seeks a middle ground

between ICDP and PES concepts, with partial conditionality and escape from a project cycle. Costa Rica became a pioneer in PES in developing countries on the basis of its 1996 forest legislation, which provided a publicly funded incentive scheme for private landowners to maintain or enhance forests as providers of valuable ES. Payments to Costa Rican landowners are made for the provision of four types of ES: (a) carbon sequestration and storage (mitigation of greenhouse gas emissions), (b) watershed protection (hydrological services), (c) biodiversity protection (conservation), and (d ) landscape beautification (for recreation and ecotourism). Landowners receive direct payments for the ES their lands are assumed to produce by adopting sustainable forest management techniques that do not have negative impacts on the forest cover and that maintain quality of life (69). The Government of Costa Rica acted as the buyer/investor, seeking international stakeholder buyers for carbon sequestration services and domestic ones for expected hydrologic services. This combination of domestic and international sales together with tax revenue, international loans, and donations was used to finance ES provision (70). The country made substantial progress in (involuntarily) charging the captive audience of water users and more limited progress in charging beneficiaries of the biodiversity and carbon sequestration users (71). Strong “path dependency” in the way payments to service providers originated in previous forest subsidy schemes, however, involved considerable room for improvement in the efficiency with which it generated ES (71). Although the initial success and visibility of the Costa Rican program have encouraged experimentation elsewhere (72), a more critical literature on the Costa Rican case (73) and its followers (28, 74–77) is now emerging that suggests a reframing of the way incentive-based mechanisms are perceived as well as a deeper analysis of the social and psychological dimensions of human decision making in response to external signals (45, 68, 78). Approaches that support collective action at local community levels and address issues of www.annualreviews.org • Payments for Environmental Services

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conflict over land-use rights are now seen as essential to achieve success (see Section 5.4). Proponents of fairness dimensions as elements that need to be added to effectiveness and efficiency prefer the use of the broader concept of rewards for ES (RES) rather than PES (32, 45, 79). The notion of RES focuses on the “multiple goals of ecological sustainability, just distribution and economic efficiency and favors a variety of payment mechanisms to achieve these goals, both market and nonmarket” (80, p. 2060). RES further involves the integration of pro-poor elements into economic instruments to enhance ES with the basic argument that poverty alleviation has to be included into any portfolio to protect the environment, especially in developing countries (81, 82). This contrasts with the view that poverty alleviation can be a positive side effect, which can be included as long as it does not imply efficiency losses (83). PES schemes are likely to change (and sometimes reinforce) existing power structures, inequalities in decision making, and access to resources, with significant equity implications (82, 84). While the primary decision-making power may be in the hands of the buyers, their lack of knowledge of local conditions and opportunity costs is a disadvantage. Procurement auctions were

designed to reduce the incentive for sellers to inflate their contract prices (85). Swallow et al. (43) introduced “compensation and rewards” for ES to refer to a range of mechanisms linking ecosystem stewards and environmental service beneficiaries, including the mechanisms normally included under PES∗ . They noted that the relationships between ecosystem stewards, ES beneficiaries, and intermediaries may be more complex than a simple transaction, with agreements that are not wholly voluntary and payments that are not wholly conditional. On the basis of these enriched concepts, recent studies of PES (86) tested multiple paradigms and hypotheses. Many of the conclusions of the past decade support the earlier assertion that environmental functions do not lend themselves to market transactions (87).

4. MULTIFUNCTIONALITY, SEGREGATION (SPARING), OR INTEGRATION (SHARING) Other interpretations of the term PES exist (88), however, and inform part of the literature (Figure 4a). They relate to alternative views on how multifunctionality of land can be achieved by spatial segregation or integration.

Figure 4 Two ways the term environmental services is understood in the payments for ecosystem services literature: (a) Environmental services are the sustenance or enhancement of natural capital linked to land use and are the basis for ecosystem services of all types (88). (b) Environmental services are ecosystem services beyond provisioning and are influenced by land use that primarily targets provisioning services (18, 21, 24, 26, 41). Abbreviation: MA, Millennium Ecosystem Assessment. 398




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In the use of market-based instruments to increase ES∗ , as applied in Australia (Figure 4a) (88), the ES∗ production function is dominated by the natural capital of an area and is best served by a segregation approach in which agricultural intensification on the best land can lead to “land sparing,” aided by incentives to take marginally productive land out of production. In contrast, the integration and land-sharing perspective of Figure 4b suggest that the various services can be obtained within a land-use system, with PES incentives modifying the internal trade-offs between provisioning and other ES∗ . The contrasting definition and perception of ecosystem and ES of (Figure 4a,b) can be understood in response to the types of landscape in which they apply and the perspective on the sparing versus sharing debate that reframed the segregation versus integration issue (89, 90). Land sparing by reduction of the area needed for food, feed, and fiber production through forms of agricultural and silvicultural intensification (the Borlaug hypothesis) is associated in a paradigm that remains popular in the conservation world as well as in the agricultural industry, with expectations of high levels of ES that can be provided on the land taken out or not needed for agricultural or forestry production. In the land-sparing paradigm, the primary trade-offs are between how much land can be taken out of production, at what cost, and what quantity of services this land will then provide. Land sharing, by contrast, is based on the concept of optimizing land productivity in terms of provisioning, regulating, and supporting cultural functions in integrated systems, rather than for provisioning alone. In the landsharing paradigm, the primary trade-off in this perspective is internal to the land use: What level of services can be coproduced with tradable goods, and how do economic incentives for ES modify the optimum point for the local decision maker. The land-sparing approach may focus on generic instruments A1 and B1 of Figure 1, and the sparing approach requires the more specific targeting of instruments A2 and B2.

Part of the PES literature is about taking land out of production (91), ecological restoration, and nature management. Another part is about marginal changes in intensity of agriculture and use of inputs, where ES are coproduced with tradable goods. In terms of decision making, the first case deals with discrete options and a drastic shift in the primary function of parcels of land with relatively simple compliance checks; the second deals with continua with thresholds and the need to create sufficient performance criteria for contracts. The first situation refers to a segregation of landscape functions, and the second to integration in multifunctional landscapes (56, 57). The Tinbergen principle (92–94), first formulated in 1952, follows the basic matrix algebra principle whereby the number of equations has to match the number of unknowns for a problem to be solvable. Accordingly, the number of policy objectives and number of policy instruments also have to match. As attractive as multipurpose policies may seem, they require strong correlations in the real world between the targets. As carbon stocks and biodiversity in tropical forest margins are only partially related, optimization for reduced carbon emissions does not give the same results as optimization for biodiversity conservation, and an additional, corrective policy instrument may be needed. Similarly, poverty and environmental issues can be correlated over part of the space-time domain, but they are not sufficiently causally linked to expect pro-poor PES to maximize efficiency of (short-term) ES enhancement (94). The EU agri-environment scheme has only partially achieved its goals (95), as additional goals were added in its design beyond enhancement of ES. The fully segregated and fully integrated landscape function options are extremes of a wide range of partial integration solutions (Table 1). In the upper part of the table, a highly reduced matrix shows that each policy-relevant objective has its own part of the landscape. Synergy between objectives in such a configuration is minimal, but policy makers can rapidly switch land-use allocations if www.annualreviews.org • Payments for Environmental Services

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Table 1 Relationship between land-use category and policy objectives under fully segregated (only diagonal cells are nonzero) and fully integrated (no cells are zero) extremesa ; a multifunctionality advantage exists if there is a set of f (i ) for which Σf (i ) < [f (a) + f (b) + f (c) + f (d) + f (e)] Policy objective a Resource extractionb

b Economic growth

A B C D E

f (a) 0 0 0 0

0 f (b) 0 0 0

1 2 3 4 5 Total

f (1,a) f (2,a) f (3,a) f (4,a) f (5,a) Σf (i,a)

f (1,b) f (2,b) f (3,b) f (4,b) f (5,b) Σf (i,b)

Σf (i,a) = f (a)

Σf (i,b) = f (b)

Land-use category

c Center-based welfare

d Decentralized welfare

e Environmental integrity

0 0 0 f (d ) 0

0 0 0 0 f (e)

f (1,c) f (2,c) f (3,c) f (4,c) f (5,c) Σf (i,c)

f (1,d ) f (2,d ) f (3,d ) f (4,d ) f (5,d ) Σf (i,d )

f (1,e) f (2,e) f (3,e) f (4,e) f (5,e) Σf (i,e)

Σf (i,c) = f (c)

Σf (i,d ) = f (d )

Σf (i,e) = f (e)


Segregated land-use plan 0 0 f (c) 0 0

Integrated land-use plan

Equivalence requirement a b

Modified from Reference 90. f , fraction of land area.

objectives change in weight. In the lower half of the table, all land-use types potentially contribute to all objectives, and land-use planning has to find a solution that satisfies the minimum requirements for each function and that maximizes the aggregate benefit beyond this minimum condition. Under certain parameter conditions, a multifunctional approach, as in the lower part of the table, can achieve more overall functionality on the same land area; the table provides a formal criterion for such an outcome. Configurations in the lower half of the table can be strongly interlinked; in this case all functions may be buffered, but the flip side of this may be that the status quo is too resilient. As posited by various authors independently (55, 96), the conditions where segregation or integration is superior and/or where sparing or sharing would work best depend on the convex or concave shape of the trade-off curve between multiple functions. In reality, however, such trade-off curves as the one between productivity and biodiversity may have convex as well as 400


concave parts. Regardless of the detailed shape of the curve, a graphic representation can explore under what conditions mixed systems can be superior, depending on the level of rewards for ES. Figure 5 explores the plausible relations between flows (e.g., provisioning services) and stocks of an (agro)ecosystem. If all the utility for users depends on the flow, the system will be driven toward the maximum flow, regardless of the shape of the curve, as long as it is monotone. However, if economic value can be assigned to the secondary function (y-axis) relative to the primary function (x-axis) before optimization, mixed systems may be superior. For concave curves, there is no such solution, and optimality implies a choice between the two functions; for convex curves, intermediate solutions exist for any nonzero value of the value ratio. Adding income value to landscape-level, carbon and/or biodiversity stocks effectively means tilting the y-axis of the biplot (income = flow + P∗ stock) and may shift the point of maximum economic return to a higher carbon stock trajectory.



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Figure 5 (a) Concave and convex shapes of trade-off curves between flow (harvestable yield and other services) and stock (e.g., biodiversity, land health, or carbon stock) of land-use systems. (b) Total income based on the flows plus P times the stock, for concave and convex trade-off curves; arrows indicate income-maximizing solutions and the upward shift of stocks at income-maximizing land-use choices.

Depending on the ratio between stock and derived income stream and the shape of the stock-flow trade-off curve, reward systems for ES related to carbon or biodiversity stocks can be expected to shift farmer decisions only where convex trade-off curves are involved.

5. CRITIQUES OF PAYMENT FOR ENVIRONMENTAL SERVICE THEORY AND PRACTICE 5.1. Missing Metrics for Environmental Service Performance In order to get ES into the domain of market functions, the spatial and temporal scales at which performance can be measured are important for the way conditionality can be included in contracts (23, 24, 45, 97). For goods, there typically is a value chain in which the price per unit substance shifts with processing, transport, quality control, and branding, but there is a clear relationship between the units in which end users buy or consume goods and the way they are produced. For most ES, such a relationship is lacking (98). What is one unit of watershed function apart from water quality (99, 100)? What is one unit of biodiversity apart from the populations of specific, flagship

species (101)? Carbon stocks and greenhouse gas emissions are relatively easy to quantify, as they scale with area, in contrast to watershed functions and biodiversity, which have fractal dimensions on a length scale other than the 2.0 of area-based scaling (7). Most PES arrangements cannot deal with the actual services but have to accept proxies, such as the condition of land cover that is supposed to enhance ES; in other cases, they have to go a step further back toward the human actions taken that affect the condition of the land (45). In many cases, trees and forests are associated with perceptions of ES, but the evidence on which this is based may be relatively weak when held to scientific scrutiny (102, 103). Also, the contrast between forest and nonforest agricultural lands in terms of tree cover is less than often perceived (104). However, the type of trees and lack of the “right tree at the right place” concepts may be a limitation to actual ES enhancement where tree cover is used as proxy (105–107). An interesting alternative to direct commoditizing of ES [the CES paradigm (45) may be split into CES1 and CES2, accordingly] is to tie ES to existing commodity flows. Ecocertification in its various forms is doing just that (108). It usually implies an aggregated ES concept rather than sharply defined separate www.annualreviews.org • Payments for Environmental Services

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ES and leaves the details to interactions between producers (farmers) and the design and quality control agency of the certification process, but multiple standards tend to compete for consumer attention and introduce a market element in the shaping of operational rules for certification. Even for carbon, performance metrics remain contested. Concerns over global climate change have resulted in the creation of partial markets for “carbon credits,” but their exchange between trading systems (such as the European and American markets) has been constrained by lack of political agreement on how to tackle the issue at a global scale. Partial successes in emission reductions within Annex B countries of the Kyoto protocol may well have been negated by the shift of high-emission production sectors to countries outside the reach of the agreements. Emissions embodied in trade have not yet been addressed by agreements and are a rapidly rising share of the total anthropogenic emissions. Credibility of national-scale accounting of land-use and land-cover change in industrialized countries is still so low that this sector [currently about 9% of global CO2 emissions (3) but a larger share for nitrous oxides and methane] is excluded from the Kyoto protocol. To create credible results, the voluntary Verified Carbon Standard and similar approaches have created protocols that are so heavy in data requirements that transaction costs may take up a major share of market value of the resulting credits. This is the case even when local communities are involved in data collection and management (109) and even with the types of public funding subsidies that have characterized the field so far. An interesting aspect of the CES2 approach is that it links area-based ES concepts to product-based markets and value chains. Productivity links these two modes of expression, and some of the newer ecocertification approaches, such as those for cacao (110), indeed have minimum standards for production per hectare to reduce the leakage risk that locally ES-friendly but low-productivity land uses may otherwise have.



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5.2. Motivation for Buyers: A Real Business Case The profile of companies on pollution prevention has been found to correlate with firm-level financial performance after controlling for variables traditionally thought to explain such performance (111). Reduction in emissions of toxic chemicals, within the legal limits, was associated with a substantial increase in market value with the magnitude of the effects varying across industries. This correlation may reflect that good management practices that reduce the environmental loading can also, independently, increase asset value. Data such as these have already led to reduced costs of borrowing for “clean” companies from banks—an indirect but potentially important aspect of the business case for environmental management in polluting industries. What about the business case for PES? A well-quoted example of the early PES literature refers to the New York drinking water company and its interactions with the Catskills catchment. Rather than spending $8–$10 billion on mandated water purification installations, the city engaged in preventive actions and negotiated with local governments in the Catskills watershed to enact land-use restrictions that would protect the water supply (112). Although in general this case demonstrated that prevention can be cheaper than cure, the business case arose in a well-regulated environment where the city could avoid costs imposed by rules that were themselves preventive. Similarly, a survey of the business case of existing PES in the Philippines (113) with in-depth interviews of public and private enterprises engaged in PES brought to light that most companies saw a clear business case for them to make such payments, but the business case consisted largely of the need to maintain relations with government authorities whose consent they needed to continue operating permits. Early investors in PES in Kenya include flower growers in the Lake Naivasha area whose business case depends on export markets and associated customer perceptions in European markets. In this sense, ES


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probably relate to customer loyalty in the same way as other service dimensions via an aggregate corporate image in the system 1 brain of customers (114).


5.3. Motivation for Environmental Service Providers and Motivational Crowding Out The roles of social motivation and persuasion as the third part of the carrot, stick, and sermon triangle (115) are only gradually entering the debate on environmental and resource management (116, 117). The interface of social motivation and monetization of ES is not trivial, and an economic ceteris paribus assumption that PES should enhance the supply of such services has been challenged both by laboratory evidence from behavioral economists (118–120) and emerging experience in the context of rural development (61, 121–123). Numerous experimental studies have found that a monetary incentive crowds out alternate sources of motivation to perform a task or engage in prosocial behavior. These studies have found that small payments can actually reduce levels of desired behavior relative to a baseline (118) and that, when payments end, the level of the desired behavior reduces to a level below its baseline before payment was introduced (124). This body of research, which is largely outside the realm of natural resource management, raises the question of how the utilitarian framing of ecological concerns and market strategies can modify the way humans perceive and relate to nature. Additional studies are needed in the realm of conservation to help gain a better understanding of the extent to which monetary incentives are more likely to have positive or counterproductive effects regarding conservation aims (125). Concerns about motivation crowding out also are relevant where collective action is required to protect natural resources that community groups manage as common property. The theoretical literature on PES cited in this review tends to ignore the challenges of

eliciting collective action in a group contract; there is an implied assumption that collective action will take care of itself if the payment is well calibrated (126). However, research on management of the commons and on the psychological foundations of motivation give strong reasons to anticipate difficulties in the use of monetary incentives for ES derived from common property. Commons literature argues that groups must build trust gradually to function (127, 128). In addition, in many cases prosocial motivations among individuals are rooted in intrinsic motivators, such as long-standing traditions or norms that favor collective action (129, 130) or concern about self image (131) or public image (132). Where collective action is driven by social, nonpecuniary norms, the introduction of monetary incentives can undermine the social norms and thus weaken instead of strengthen collective action (133). Although such studies were not undertaken specifically in the context of PES, they point to a need for more research to understand how monetary or other incentive types interact with prosocial motivation and collective action. The emerging experience with auctions of ES contracts in a developing country context suggests that these are social interactions of a rather complex nature, rather than simple experimental procedures to establish a correct price (134–136).

5.4. Payment for Environmental Services in the Poverty-Environment Nexus PES literature often highlights a potential compatibility between environmental conservation and poverty reduction, especially when poor households are contracted to receive payments in return for their conservation efforts (21, 137). An important reason behind this premise is that, in many developing countries, landscapes with high potential to provide ES are also inhabited by a high proportion of poor people. However, it would be simplistic to assume that the poor can easily participate in such PES

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projects or that they will benefit significantly once incentive payments are disbursed (138). In some projects, researchers have found that poor households are able to participate (79), whereas in others participation seems to have been limited to relatively well-off land owners (75). Indeed, there are strong barriers that may restrict the extent to which poor households can access PES projects. These include lack of clear tenure, lack of land, high transaction costs, and high up-front investments needed to adopt new land-use practices (26, 94). The poor often do not have secure land title, which may bar them from obtaining PES contracts. This is especially true for carbon sequestration services, where payments are tied to the intended permanence of the service. Without a clear land title, it may be difficult for those without title to convince buyers that they can ensure the flow of services in the future (139). Landless poor or those without title may in fact be ineligible to participate in such PES programs. Similarly, in the case of rented land, tenants cannot promise anything about long-term land use without input from the landowner. Also, if the possibility of ES payments makes the land more valuable, the landowner may either increase the rent or discontinue the lease, possibly disrupting the renter’s livelihood (140). Transaction costs (here interpreted as costs of negotiating, implementing, monitoring, and enforcing PES contracts) are generally independent of the size of the contract involved, which means PES programs that contract many smallholders face more costs per unit of land and services than those that contract with only a few large landowners. Thus, PES arrangements focused on individual landholdings may be less viable where there is a high concentration of very small farms. Service buyers may try to contract with large landholders rather than small ones, which would exclude the poor. For instance, to limit transaction costs the PROFAFOR carbon project in Ecuador signed individual carbon contracts only with farmers owning at least 50 hectares of land, thus restricting the participation of the local smallholders in project activities (104).



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Similarly, initial investment costs (buying seedlings or hiring labor), opportunity costs (loss of benefits from existing land use that needs to be replaced), and risks associated with potential benefits from new land use all affect the participation by the poor (141). It is possible to pay an additional sum to cover the additional costs for poor households to participate; empirical estimates of what such an approach would cost for a tree-planting project in Tanzania are available (142). However, it is hard to imagine that all buyers of ES would be willing to pay this premium. The second related issue is the actual impact on households once they do participate in PES projects. Evidence of economic benefits from PES is mixed. In one of the first studies on local impacts of forest carbon projects (143), the Scolel Té project in Mexico was found to have a positive effect on household incomes in the project area. In contrast, an evaluation of the Noel Kempff project in Bolivia had a mixed effect, with net benefits for the large majority of local people, but a large proportion of community members expressed dissatisfaction with the project as it had not met their expectations (144). Managing expectations is a challenge in all such efforts; an initial hype phase helps to get attention but may lead to disappointment later on. In a more comprehensive impact study (145) of PES payments in a local community in Mozambique, effective levels of per capita payment and impacts were found to be small when compared to increased employment benefits from developmental activities of the project. By contrast, provision of rewards in the form of long-term tenure security for local farmers in Indonesia has had a positive impact on the households’ livelihoods (146). The interaction of PES with poverty is therefore still far from well understood, and more empirical research is needed to understand the poverty-environment nexus. Gender dimensions of the povertyenvironment nexus have been studied in terms of gender-differentiated roles in interacting with water and land resources (147). Perspectives on relative male or female poverty depend


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on the criteria and methods of assessment (148). Where PES contracts are negotiated at the community scale, it may be hard for outsiders to challenge existing gender roles and biases without introducing an additional objective to an already complex set of social norms (149).


5.5. Are Clear Property Rights a Precondition for Payment for Environmental Services? Skewed land distribution often compels the poor to survive by cultivating marginal land, such as erosion-prone slopes, or by using methods that cause other environmental problems. Without tenure, and often with only passing claims on the land they cultivate, the poor are less likely to make investments to protect natural resources (36). Looking back at Figure 1, the PES arrow (B2) is contingent on the right to use (A2), and the rights for individual households are constrained by overall land-use policies (A1), just as PES is constrained by overall economic policies (B1). For Indonesia, where large tracts of forest land are underperforming in terms of ES but remain claimed by the state, the forestry regulatory framework may (over some parts of the domain) have to be replaced by an agrarian one (150). Conflicting claims are the primary bottleneck to any carbon-related PES in the peat lands of central Kalimantan (151). Yet, positive examples exist where resolution of conflicts and implementation of community forest management, with certain conditionality with regard to maintenance of ES, have allowed local ES-friendly investment in land uses (152). In other cases, formal recognition was not required (153) when the generally positive perception of ES-friendly land use allowed farmers to reclaim their de facto land-use rights from the state. In other situations, resolving tenure issues has been a precursor to other forms of PES (154). The coinvestment paradigm (45) allows such steps to be discussed under the wide umbrella of PES, rather than putting tenure security as a precondition for PES efforts and disqualifying a large part of the rural poor.

5.6. Is There Enough Payment for Environmental Service Funding for Applications at Scale? Most of the PES literature so far has looked at special cases where a high local interest in ES was the starting point of PES experiments. To check how special those situations must be, a recent study (65) considered the supply/demand relationship and the relative income additions that upland people might obtain from supplying watershed services to their downstream neighbors. The per capita benefits possible in the uplands, RPu , were found to be RP u = (Ad /Au )(Id /Iu )(Pd /Pu )βd (1−T )(1−αu ). 1. Equation 1 consists of a number of dimensionless ratios of values upstream (subscript u) and downstream (subscript d ): area (A), income (I ), population density (P), the willingness to pay by downstream beneficiaries (β d ) relative to their income, transaction costs (T ), and the offsetfraction α u of what is received in upstream areas. If a tentative threshold for RPu is set as a 5% income increase before upstream land users might take notice of the opportunity and respond, the results are off by at least a factor of 4, when data for Indonesia are used. This implies that this type of financial transfer can hardly be expected to make a dent in rural poverty in the uplands, but it can be significant in a non-negligible subset of situations. Nonfinancial payment potentially opens access to critical livelihood capitals that might be lacking within the ES provider communities. This type of payment is usually considered as indirect and patronizing, whereas cash payment is frequently seen as more flexible and allows ES providers to convert it to local goods and services. Case studies in Asia (63) and Latin America (61) indicated that a nonfinancial payment was preferred by some of the local communities involved for several reasons, such as limited capability of local communities for savings, investment, and entrepreneurship. Observations in developing countries reveal that both financial and nonfinancial payments might face complex bureaucratic and highly www.annualreviews.org • Payments for Environmental Services

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contagious collusion because the PES governance is still unclear, formally and informally. However, this situation might be contextual as an Indonesian case in the Cidanau watershed (60) showed that a cash payment had been successfully transformed into an independent small-scale business and infrastructure (i.e., public access to clean water by developing a simple piping system).


5.7. Can Reducing Emissions from Deforestation and Degradation Provide International Funding for Local Payments for Environmental Service? The potential for internally generated PES funding may be limited, once expressed on a per capita basis, but the Costa Rica case presented an early example of international funds supporting a domestic policy for ES-oriented incentives. At the start of the international debate on REDD+, the focus was on nationalscale efforts. As the preceding avoided deforestation had shown, leakage cannot be contained in a piecemeal project-by-project approach. To achieve the REDD+ goals, at gigaeconomic scale, a multiscale, layered effort is needed that reaches down to micro- and picoeconomic aspects. In the international negotiations, issues of pride and sovereignty have been at least as important and hard to deal with as issues of carbon price and data collection to support realistic performance-based systems. As soon as expectations of funding for additional efforts were raised, existing norms for national forest policy appeared to be crowded out. Yet, international efforts to bring transparency to sectors known for corruption and high-level support for illegal logging seemed to require a full commoditization: If the same currencies (money and carbon stock changes) are used across the value chain, elite capture can be more easily quantified and reported. Early claims on perverse incentives with PES applications in the context of tropical forests, suggesting that direct payments for ES spell doom for sustainable forest manage406


ment in the tropics, can still be easily dismissed (155). Because of the complexity of multiscale drivers of change in forest extent and condition and in socio-ecological-economic systems (156) and because of the contested nature of tenure and ownership of large tracts of forest, the claimants for a piece of the pie are many, and the negotiations are complex. Many attempts were made to bypass local and/or national governments in linking international finance to local action to protect forests and claim emission reductions, and they may all be bound to fail. A nested, multiscale approach may well have to be polyparadigmatic, changing face between, but synergizing, CES, COS, and CIS paradigms (157). In countries with existing public-sector payment schemes for forest management, REDD+ can be added to the bundle of services rewarded at relatively low transaction costs, as long as the correlations between forest carbon stocks and other services are sufficiently tight (158–161).

6. DISCUSSION 6.1. Challenges in Bridging Across Temporal Scales and Associated Discount Rates PES was conceived as an alternative or complement to government programs, giving a greater stake to local communities and land users, with a simple way to convey the relative merit of various alternative land uses through the details of the conditionality clauses in a contract. We may have, however, come full circle back to the concept of Investing in Natural Capital: The Ecological Economics Approach to Sustainability (162). The financial transfers that have so far been effectuated (49, 163) are far below the “true value to society” that studies such as TEEB (19) are documenting (164). This might imply that the current framing of ES is less universally shared among stakeholders than assumed and that it needs to be further contextualized (165). In the meso-American countries Costa Rica and Mexico that pioneered the PES approach at national scales, the link between measurement, value, and payment is far from resolved (166).


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Table 2 Comparison across five scales of economic analysis of the apparent discount rates Economics

Discount rate for goods and human/social services

Environmental service issuesa

Brain synapse

Goods: >100%/day Social: ∼0%

Crowding out social norms Suasion efforts for internalization for ES producers Feel-good social status motivation for buyers

Microeconomics

Household

∼20%/year

Mesoeconomics

Landscape, enterprise

∼10%/year

PES operational domain, adaptation to global climate change, dealing with invasives, and biodiversity loss

Picoeconomics


Decision making

Macroeconomics

Nation

∼5%/year

Gigaeconomics

Global natural resources