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PES has also been touted as a tool for rural development. In 2007, the World Bank released a document outlining the place of PES in development. But the link between the environment and development had been officially recognized long before with the 1972 Stockholm Conference on the Human Environment and later reaffirmed by the Rio Conference on Environment and Development. However, it is important to note PES programs are usually not designed to be primarily poverty alleviation schemes, although they may incorporate development mechanisms.

Theoretical perspectives on payment for ecosystem services

There are three main theoretical perspectives concerning PES. The first is that of environmental economics, the second of ecological economics, and the third of those who reject the very idea of ecosystem services.

Environmental economics

The basic conceptualization of nature from the perspective of environmental economics is that manufactured capital can be used as a substitute for natural capital. The definition of PES provided by environmental economics is the most popular: a voluntary transaction between a service buyer and service seller that takes place on the condition that either a specific ecosystem service is provided or land is used in a way to secure that service. This definition is directly related to the Coase theorem, upon which PES is strongly based from the environmental economics perspective, which states that in a competitive market, in the absence of transaction costs and in the presence of clear property rights, direct negotiation between private parties can lead to efficient outcomes. However, in reality, transaction costs are virtually always present and private parties cannot always reach agreements on their own. One of the main reasons is lack of sustained financing, which often leads governments to provide some type of funding assistance. The environmental economics theorists acknowledge that PES systems can resemble an environmental subsidy, complicating the strict Coasian backing.

Ecological economics

The conceptualization of nature as understood by ecological economics is that manufactured capital and natural capital are not exclusive or substitutable, but rather complementary. PES as understood by ecological economics comprises three schematic components. The first surrounds the importance of the economic incentive. This idea concerns the relative weight an economic incentive may carry when understood in relation to social, moral, or other non-economic incentives. The second component is directness of the transfer, referring to the extent of interaction between ultimate buyers and sellers. The most direct program would occur between one buyer and one seller, with no intermediaries. A relatively indirect program would remove the buyers and sellers from each other, placing intermediaries between them, commonly in the form of NGOs and governments. The third and final component is the degree of commodification. This addresses the extent to which the environmental service (ES) being provided can be specifically and clearly assessed and measured. Some ES may be relatively easy to assess, such as tons of carbon sequestered, while others may prove difficult.

Rejection of ecosystem services

Those who reject the idea of valuation of ecosystem services argue that nature should be conserved and valued for nature's sake, and that nature's value is impossible to quantify because its value is inherently infinite. They posit that the attempt to force the idea of ecosystem services into the market system leads to conservation only when it is deemed useful for human life, abandoning ideals environmental conservation when nature conflicts with human interest or simply does not affect human activity. There are also those who support the valuation of nature from a purely practical standpoint, expressed in the idea that "something is better than nothing." They realize and acknowledge the problematic nature of the quantitative valuation of nature but at the same time argue that practically, in a highly commodified society, it is a necessary measure.

Structure of PES programs

There are two main frameworks upon which to structure PES programs. One is a user-financed framework in which the buyers of the ecosystem service are also the end users of that service. The other is a government-financed framework in which a government, NGO, or other third party entity buys the ecosystem service on behalf of the end user. In general, user-financed schemes are the more efficient of the two because the relevant actors are directly invested in ensuring the success of the program. This type of program also most closely approximates a Coasian outcome. Government programs are likely to be less efficient, but more likely to be cost-effective because of governments' ability to take advantage of economies of scale regarding transaction costs. Within PES programs of any kind there are three common and necessary components, namely the type of land use, performance measures, and payment amount and mode.

Type of land use

The first of these is crucial to establishing a specific practice or set of practices for the service provider to carry out. Costs can be expected to be much higher when changing land use (i.e. planting forest cover on cropland or pasture) than when maintaining a land use (i.e. maintaining forest cover). Many PES programs are designed around the provision of watershed services for a downstream user population by an upstream watershed landowner.

Performance measures

Performance measures are a crucial component of PES programs. In a PES program, payment is contingent upon provision of an ecosystem service or a particular land use. This conditionality is fundamental to any PES program and is monitored and enforced through performance measures. Ideally, a program would distribute payments based on precise verification of provision of the desired service. However, it is difficult for landowners to see for themselves if an ecosystem service is indeed being provided and manage their land accordingly. More often programs are instead structured around land use associated with a specific ecosystem service.

Payment

Payments can be made in cash, in kind, or through a combination of the two. Generally, in order to incentivize participation in a PES program, the payment value must be greater than the value a landowner would receive for alternative land uses. However, this condition is not present in all programs which can disincentivize participation by landowners of ecologically valuable land.

Case Studies

Central and South America

Costa Rica

Costa Rica

Costa Rica's PES program, Pagos por servicios ambientales (PSA) was established in 1997, and was the first PES program to be implemented on a national scale. It came on the back of Forestry Law 7575 of 1996 which prioritized environmental services over other forest activities such as timber production, and which established the national fund for forest financing (Fondo Nacional de Financiamento Forestal), FONAFIFO. The PSA follows several years of different environmental programs in Costa Rica including the Forest Credit Certificate (Certificado de Abono Forestal, CAF) of 1986 and the Forest Protection Certificate (Certificado para la Protección del Bosque, CPB) of 1995. One of the main reasons for establishing the PSA program was to reframe conservation subsidies as payments for services. During the early years of the PSA program from 2001 to 2006, it was funded by a World Bank loan and a grant from the Global Environment Facility (GEF) under the project name "Ecomarkets." From 2007 to 2014, the World Bank renewed its support for the program through a new project called "Mainstreaming Market-Based Instruments for Environmental Management." This support also generated FONAFIFO's Sustainable Biodiversity Fund (FBS), designed to target PES programs at owners of small pieces of land, indigenous communities, and communities with low development rates.

Financing of PSA activities was initially accomplished in part through a fuel tax established by Forestry Law 7575. The tax was used to flexibly target ecologically important areas. In 2006 a water tariff was introduced to provide additional funding. The water tariff has a relatively narrow application when compared to the fuel tax. Under the water tariff, holders of water concessions pay fees, a portion of which is transferred for use in the PSA exclusively within the watershed in which the revenues were generated. This removes the potential for revenues to be distributed as needed and has been criticized for concentrating funding in select areas, despite their relatively low ecological importance.

FONAFIFO acts as a semi-autonomous intermediary organization between service buyers an service sellers. As of 2004, FONAFIFO had contracted 11 different companies in agribusiness, hydropower, municipal water supply, and tourism to pay for the water services they receive. Since then, FONAFIFO has reached agreements with several more companies.

By the end of 2005, 95% of land enrolled in Costa Rica's PSA was under forest conservation contracts, covering 10% of the country. It is estimated that from the time the program began to 2005, forest cover area increased form 394,000 hectares to 2.45 million hectares. It is also estimated that the PSA prevented 11 million tons of carbon emissions between 1999 and 2005. Despite these successes, the PSA has been criticized for critical shortcomings. As it stands, the PSA payment system employs a flat rate cash payment to all participating landowners. This has resulted in large swaths of ecologically high value areas being left unenrolled in the program due to associated higher opportunity costs for land-use change not being adequately compensated for by the flat rate payment scheme.

Bolivia

Los Negros, Bolivia

The program in Los Negros, Bolivia is a small user-financed program of combined payments for watershed and biodiversity services started by local NGO Fundación Natura Bolivia in 2003. The target area of the program is the watershed in Los Negros valley servicing the town of Santa Rosa and other downhill towns. By August 2007, 2774 hectares of native vegetation were enrolled in the program under 46 landowners.

Funding for the program was initially provided by the US Fish and Wildlife Service, before the Municipality of Pampagrande began making payments for the services One of the program's most unique aspects is the landowners' specific request that they be paid in-kind with beehives. They claimed that they wanted their compensation to last beyond a simple cash transfer. Along with the beehives, payment recipients are able to receive training in apiculture. It also allowed for those who prefer cash to sell their hives.

An organizational obstacle to the program is that some farmers fear that the scheme is just a way to dispossess them of their land. This was a major factor in deciding to be paid in-kind as it is perceived as less of an attempt at land appropriation. Natura is addressing this issue by maintaing a constant presence in the community and leveraging social networks to convince farmers of the program's benefits.

Another issue regards the service buyer of the program. The Municipality of Pampagrande has received some limited support from irrigators in contributing to the program payments. This structure essentially provides the environmental services to downstream users essentially free of charge. Natura is working to implement a strategy through which beneficiaries of environmental services will directly contribute to their maintenance.

Program evaluation has been impeded by two factors, namely a lack of baseline data and insufficient data as the program develops. These are important in order to establish the additionality of the program. This issue is not unique to Los Negros, however, as many programs suffer from a lack of sufficient monitoring and evaluation mechanisms.

Africa

Uganda

Hoima and Kibaale, Uganda

The Hoima and Kibaale PES intervention took place from 2010 to 2013 and was especially unique because it was the first PES program set up specifically for a randomized control trial to empirically determine its impact on deforestation In the treatment villages, owners of forested land were paid $28 per year over the course of two years for every hectare of forest land that was left intact, with the possibility of additional payment for planting new trees. The payment scheme amounted to 5% of average annual income for the typical participating landowner.

The program evaluation found there to be significantly less deforestation in participating villages (2%-5%) than in control villages (7%-10%).

It is important to note that the program did not carry on beyond the evaluation period, and it is assumed that previous forest practice will resume once landowners stop receiving program payments.