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

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

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

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

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

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

77 Conditional land tenure security Used on illegally settled land Eviction if service not delivered It’s indivisible – useful for group PES systems Challenges to conditionality: - Land tenure may be difficult to revoke in long term even if ES not sustained

88 In-kind services/Development support Could be a mechanism to reward service provider Questions about enforcing conditionality –Ethical concerns Hypothetical: bonuses and fines on a local development budget

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

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

11 Group or individual contract? Group: –Useful if threshold effects –Reduces transaction costs for buyer –Transfers transaction costs to group members: Group monitoring, administering payment –Concern about elite capture Can avoid with indivisible, non-cash payments

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

13 Conditionality It’s the key feature of PES Conditional on what? –Actual evidence of the service? –Evidence of changed land use? –Evidence of implementing a new management plan?

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

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

16 Important issues to consider Additionality –Payment results in improved quantity/quality of service Leakage –Securing one service at the cost of another –Shifting environmental damage from one place to another Permanence –Long term provision of the service

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

18 Transaction costs Types of transaction costs: –Search, negotiation, approval, contracting, monitoring, enforcement, insurance High fixed costs: –Total cost/ha falls with larger contracts Monitoring and measurement are important transaction costs

19 Monitoring and measurement Key impediment to environmental service markets: –Difficult to trace environmental services to land use change –Services take time to materialize –Easier to monitor land use changes than actual environmental services –Easier for some services (carbon sequestration) than others (watershed)

20 Ways to reduce transaction costs Improved monitoring technology Institutional innovations: –Group contracts –Intermediary organizations –Build on existing local institutions –Participatory monitoring –Low cost data collection systems –Sell complementary environmental services that increase revenue (bundling payments)

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

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

23 Operated by the Ministry of Environment through National Forestry Fund (FONAFIFO) Pays landowners for land use practices Intended to produce four environmental services: –Carbon sequestration –Hydrological services –Biodiversity –Scenic beauty PSA, Costa Rica…

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

Sale of environmental services to different buyers: –Hydrological to local hydroelectric plants –Biodiversity to pharmaceutical companies –Scenic beauty to hotels –Carbon sequestration to international buyers

26 However, revenue from sale of environmental services not enough to cover FONAFIFO’s costs. Funding also from a national fuel tax. High transaction costs Additionality is a big concern PSA, Costa Rica…

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

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

29 Conditional land tenure to 6,400 farmers –5 year probation followed by 25-year extendable permit –Protection of remaining forest –Land use practices to control erosion Impacts: –Increase in land value and local income –No info yet on actual environmental services Efforts underway to measure them Sumberjaya…

30 Working for Water, South Africa Employs people to remove invasive species Focus on public lands, priority private lands Social targeting – unemployed, rural poor Essentially a public works program –$70 million budget –Employment to 25,000 people

31 ‘Not’ strictly a PES program However, some PES-like features –Payments by municipalities and other water users to remove invasive species from catchments –Use of government infrastructure by private parties –200,000 hectares cleared each year –Additional water flow ~250 million m 3 /year WfW, South Africa…

Costa RicaIndonesiaSouth Africa ServiceMultiple Watershed/ Forest consv Watershed Payment typeCash Tenure security Salary Individual or group? IndividualGroupContractor ConditionalityLand use - Transaction costs HighLow High → low

33 Conclusion PES-type arrangements take a variety of forms Not always doable. Conditionality is a big test Overcoming transaction costs is another test Much experimentation going on Many programs too new to evaluate