Payments for Environmental Services

by

Sven Wunder

• LAST REVIEWED: 23 June 2023
• LAST MODIFIED: 23 June 2023
• DOI: 10.1093/obo/9780199363445-0140

Introduction

Payments for environmental services (PES), also sometimes called payments for ecosystem services, emerged from the perceived need of conservation practitioners around the world for more cost-effective and equitable ways of using scarce funds. Also sometimes referred to as ecocompensation, rewards, or cash transfers, PES consist of direct conditional payments from the users of environmental services (or their collective representatives) to landowners or stewards who provide them by adopting environmentally friendlier practices of protection or restoration. Environmental service (ES) users effectively rent out certain partial land rights from landholders (e.g., limiting their rights to deforest). This only works when ES provision can be well-monitored and enforced and when landholders can flexibly and legitimately change their preferred modes of production. Otherwise, ES users might prefer to buy out environmentally sensitive lands entirely (e.g., creating municipal reserves for spring protection in a watershed), although becoming responsible for land stewardship may over time be costly. While some PES started as long-term public environmental subsidy programs (e.g., the US Conservation Reserve Program), the big push for PES in this millennium came from economists arguing for more direct, performance-based incentives. The PES approach has become more popular among both scholars and conservation practitioners over the last few decades, with the majority of PES programs focused on forest conservation. Geographically, PES have been most popular in the Americas (North, South, Central) and in China. PES can predominantly be seen as a private lands counterpart to public protected areas, although in most countries PES are far less extensive. Increasingly, PES are applied alongside a mix of policy approaches, as a tool in a toolbox of conservation mechanisms, with the aim of incentivizing landholders to engage in sustainable practices, and promising potential long-term provenance of ES while also supporting livelihoods. PES contracts can range from short term to the indefinite duration of perpetual conservation easements. With more application of PES globally, and a font of new experiences to study, a growing body of research has emerged, seeking to evaluate the environmental and poverty reduction impacts of PES. These studies assess the successes and limitations of PES schemes, and promote best practices in preconditions, design, and implementation, as well as contextual backdrops that can affect the effectiveness and efficiency of PES schemes. Some obstacles and conditions may not be designed away, such as land-tenure insecurity and organizational capacity to pay for ES: these jeopardize the emergence and expansion of PES schemes, especially in tropical forest frontiers. However, despite the worrying record of government-led PES schemes in terms of design and implementation errors, their ability to organize collective payments at scale and to intelligently bundle them into complex policy mixes may be important future arguments in their favor.

General Overview

PES are becoming a standard tool in the field of environmental economics—see Oxford Bibliographies in Environmental Science article “Environmental Economics” by Roger Perman. PES attempt to align private land- and resource-use decisions with broader societal interests. Unlike the “polluter pays” principle of environmental taxation, PES build on a “provider gets” approach (Coase 1960). Their potential to act in direct, performance-based, yet potentially negotiated, flexible, and fair ways has been attractive to scholars and practitioners alike, resulting in a burgeoning field of study and experience. Proponents of PES have reasoned that direct incentives are more cost-efficient than indirect approaches (Simpson and Sedjo 1996, Ferraro and Kiss 2002); while providers of ES can choose voluntarily whether or not they want to join a PES scheme, in turn ES users and funders, in principle, only pay for what they get (Ferraro and Kiss 2002). There are several types of PES. First and foremost, in so-called user-financed PES, the ES users pay directly, while in government-financed PES a public body pays on their behalf (Engel, et al. 2008, cited under Design and Implementation). User-financed PES may often be more effective in directly overseeing contractual delivery and customizing design to local preconditions (e.g., in a watershed). On the other hand, government-financed PES have less space for customization, but may more effectively address imminent ES free-rider problems by taxing multiple users (e.g., for biodiversity protection) and be more cost-efficient in organizing payment programs at scale. Agrienvironmental payments are one form of public PES (Hanley and White 2014). Some PES initiatives are environmentally asset-building (e.g., planting trees for forest restoration), while others are activity-reducing (e.g., avoiding deforestation for conversion to alternative land uses), having different implications for local livelihoods (Wunder 2005). The former imply fresh investments in local economic activity, while the latter may have negative multiplier effects on the local economy—although perhaps making that economy more sustainable. Beyond pure economic arguments, and the attraction of a win-win approaches created through compensation (Muradian, et al. 2013), PES may be perceived as a growing penetration of commodity fetishism (Kosoy and Corbera 2010). Certainly PES depend in its functionality on a certain institutional setting, where the so-called ‘market-based incentive’ interacts with policy- and community-led factors (Vatn 2010). PES can also have important social effects, including on equity. Beyond important livelihoods and welfare outcomes, highly inequitable impacts can also potentially undermine the sustainability of PES programs.

• Coase, R. H. 1960. The problem of social cost. Journal of Law and Economics. 3:1–44.

  DOI: 10.1086/466560

  A classical theoretical piece in environmental economics that argues under which conditions environmental subsidies, a family to which PES belongs, can welfare-wise be preferable to environmental taxes (i.e., a “provider gets” instead of “polluter pays” principle).

• Ferraro, P. J., and A. Kiss. 2002. Direct payments to conserve biodiversity. Science 298.5599: 1718–1719.

  DOI: 10.1126/science.1078104

  High-level article containing practical experiences, making the case that PES can be a preferable alternative to investments in environmentally more benign production modes; direct payments are likely to be more efficient than in particular investment-heavy integrated conservation and development approaches.

• Hanley, N., and B. White. 2014. Incentivizing the provision of ecosystem services. International Review of Environmental and Resource Economics 7.3–4: 299–331.

  DOI: 10.1561/101.00000064

  Looks at in particular agrienvironmental payments in the Global North in a PES perspective, including to what extent it is more efficient to pay landowners for direct ES delivery (e.g., additional biodiversity observed), rather than applying land-use proxies that presumably correlate with the ES provided (e.g. biodiversity-relevant management actions).

• Kosoy, N., and E. Corbera. 2010. Payments for ecosystem services as commodity fetishism. Ecological Economics 69.6: 1228–1236.

  DOI: 10.1016/j.ecolecon.2009.11.002

  Challenges the use of PES and other “market-based instruments” and their ideological roots while criticizing the reductionist approach of paying for one service when there is a multiplicity of values derived from complex ecosystems.

• Muradian, R., M. Arsel, L. Pellegrini, et al. 2013. Payments for ecosystem services and the fatal attraction of win-win solutions. Conservation Letters 6.4: 274–279.

  DOI: 10.1111/j.1755-263X.2012.00309.x

  Highlights critical aspects of PES implementation as an alleged neoliberal solution to natural resource problems. Identifies “traps of the compensation logic” (ibid:277), including the danger of crowding out altruistic motives for conservation.

• Pascual, U., J. Phelps, E. Garmendia, et al. 2014. Social equity matters in payments for ecosystem services. BioScience 64.11: 1027–1036.

  DOI: 10.1093/biosci/biu146

  Challenges pure economic approaches to PES, arguing that fairness and equity are both preconditions for successfully initiating and sustaining PES schemes, while also being important impacts from PES in their own right.

• Simpson, R., and R. A. Sedjo. 1996. Paying for the conservation of endangered ecosystems: A comparison of direct and indirect approaches. Enviroment and Development Economics 1.2: 241–257.

  DOI: 10.1017/S1355770X00000607

  Sets out some of the first theoretical axioms for describing under which conditions direct conservation tools can be expected to have a superior performance in cost efficiency. Makes a call for greater experiments with direct payments.

• Vatn, A. 2010. An institutional analysis of payments for environmental services. Ecological Economics 69.6: 1245–1252.

  DOI: 10.1016/j.ecolecon.2009.11.018

  Analysis of the basic institutional context that PES operates in, including amid the three basic institutional dimensions: market, community, and policy. Argues that PES is not just ‘market-based’ in isolation, as commonly believed, but can only work well in practice when the three fundamental dimensions of governance are aligned.

• Wunder, S. 2005. Payments for environmental services: Some nuts and bolts. Occasional Papers 42, CIFOR, Bogor, Indonesia.

  Compendium of PES-related concepts, providing the later most widely used definition of PES in the literature, and discussing various applied implementation factors in the light of experiences observed in a series of PES pilot initiatives.