The Past, Present and Future of Payments for Ecosystem Services – Water

This past week, I hosted a workshop at the Rockefeller Foundation’s Bellagio Center. This is the idyllic Bellagio beside the shores of Lake Como in Italy rather than the one in Vegas with the cool fountains. For Star Wars fans, it is across the lake from the site of the wedding scene at the end of the 2nd prequel. I spent April, 2014, at the Center as a Resident working on an article entitled “The Past, Present and Future of Payments for Ecosystem Services (PES).” Last week’s workshop used my article as a springboard, bringing together PES experts from seven countries, including the former Environment Ministers from Costa Rica and Peru, as well the CEO of the world’s largest sustainable timber company.

The central idea of PES is straightforward. Many of the benefits provided by the environment are not captured by markets. If landowners received compensation from beneficiaries for the valuable ecosystem services they provide such as water purification, carbon sequestration, or storm buffering, their land management practices would be very different. At the simplest level, the goal of a PES approach would be to combat deforestation by making trees more valuable standing than cut down.

There is a wide range of PES initiatives and payment models but they fall within four basic groupings: water PES for services such as water quality and flood control; payments for the management and conservation of land for habitat and for biodiversity; carbon payments for sequestration, avoided deforestation and land degradation; and bundled payments that secure all or a combination of these services in certification of the product, such as timber.

I’ve been writing about PES since the late 1990s and interest in the concept compared to its early days, both in scholarly publications and policy debates, has been asymptotic. This has been exciting to witness but I’ve been increasingly concerned whether the enthusiasm for PES in some instances may outpace reality. We often hear about the iconic story of how New York residents pays landowners in the Catskills and Delaware watersheds to ensure the quality of their drinking water.  There are other equally exciting examples, with hundreds of PES programs around the globe in both developed and developing countries and total transactions in the billions of dollars. These achievements are impressive but risk masking as much as they reveal, for they tell us little about the details and evolution of the particular payment mechanisms. Because PES represents such a recent addition to the toolbox of environmental policy instruments with disparate practices at local, regional and national levels, consistent and reliable information has proven difficult to find – hence the reliance on popular stories such as the Catskills and other “anecdata.”

To date, there has not been any peer-reviewed publication taking a hard look at the empirical data on the adoption and performance of PES across the full range of sectors. Working with the group, Forest Trends, and the database compiled by its Ecosystem Marketplace, we sought to fill this gap, setting out the record of PES to date and the most important trends going forward. The article is currently in the revise and resubmit stage at a peer-reviewed journal. In this blog and others to follow in the next few weeks, I will set out some of the key findings from our workshop discussion. I start with water.

The PES water sector is the most mature in terms of the number of programs, the ages of programs, transaction value, and geographic distribution. Water provides the easiest context for PES because the connection between land management in an upper watershed and the direct health benefits to downstream users appear straightforward. In many cases, transaction costs are low because institutions are already in place to collect funds from diffuse beneficiaries, whether through water utilities, budgets of water agencies, or agricultural subsidy programs.

•      China Scales Up In terms of dollar value, China’s PES schemes are orders of magnitude larger than anywhere else in the world. A series of major floods and droughts in the late 1990s made clear to the Chinese government that land degradation posed major threats to water quality and flooding.  China’s unique political and centralized authority have allowed it to put in place PES strategies at a scale and speed simply not possible in other countries, dramatically reshaping the country’s policy landscape in a very short period of time.

The “Ecosystem Function Conservation Areas” strategy, for example, pays farmers for development restrictions on areas deemed to be important ecological or agricultural zone. The scheme’s coverage is vast, spanning roughly 40% of China’s land area. Eighty percent of China’s watershed PES programs have been established since 2005 and expenditures are estimated to exceed $43 billion by 2020. Beyond water services, these programs equally serve the purpose of rural development.\

•      Collective Action Funds in Latin America Spurred primarily by Latin American Water Funds Partnership (Nature Conservancy partnerships with local parties and development banks), collective action funds have experienced rapid growth in South America, where 35 funds have been created in the last decade. LAWFP has directed an estimated $27 million in leveraged start-up capital and now has 16 operating funds.  The Brazilian National Water Agency has also been active, expanding its Water Producer program to 19 programs across Brazil since 2007. These water funds are strikingly diverse. Driven by local needs and concerns, the wide range of approaches in program size, participants, goals, funding sources, forms of compensation, and management activities all bears witness to the adaptability key to this mechanism’s success.

•      Instream Water and Quality Trading Remain Limited While the legal authority for instream flow purchases and quality trading markets is in place in many countries around the world, they only operate in the United States and Australia.  Despite a constitutional provision and enabling legislation, for example, South Africa has not been able to create a functioning system. These mechanisms need robust institutions to provide clear and enforceable property rights, an accurate and accessible recording system, and monitoring capability to track flows as well as regulatory drivers creating a solid demand for trades. These are absent in many countries around the world, making it likely that these mechanisms will remain restricted to just a few countries.

•      A Master Plan for Green Infrastructure? Some of the most interesting discussions at the workshop involved the head of Peru’s water agency (SUNASS).  The department recently completed a 30-year master plan for built infrastructure to provide water to Lima, where roughly one-third of the country’s population lives and continues to grow. SUNASS is interested in working with Forest Trends and others to develop a similar master plan for green infrastructure, relying on PES appoaches. There are already funds in place for such investments, provided by tariffs previously approved for water security and ecosystem services. The key question is how to spend most effectively. If successful, this project could provide a blueprint for similar initiatives in other important Latin American watersheds.