Instrument Overview
In this payment for ecosystem service (PES) modality, the scheme is implemented and coordinated at the national level. They are frequently designed to enforce ecosystem protection and rely on support from other groups and NGOs, and international partners for funding and technical assistance in implementation [1].
Why it matters for cities
Municipalities can use Payment for Ecosystem Services programs to encourage landowners to implement practices that go above and beyond land use regulations to enhance the ecosystem services benefiting the entire municipality. Municipalities can partner with private businesses and non-profits to help fund and/or deliver the programs [2].
Key features [3]
- Voluntary: stakeholders enter into PES agreements on a voluntary basis;
- Beneficiary pays: payments are made by the beneficiaries of ecosystem services (individuals, communities and businesses or governments acting on behalf of various parties);
- Direct payment: payments are made directly to ecosystem service providers (in practice, often via an intermediary or broker);
- Additionality: payments are made for actions over-and-above those which land or resource managers would generally be expected to undertake (note that precisely what constitutes additionality will vary from case-to-case but the actions paid for must at the very least go beyond regulatory compliance);
- Conditionality: payments are dependent on the delivery of ecosystem service benefits. In practice, payments are more often based on the implementation of management practices which the contracting parties agree are likely to give rise to these benefits;
- Ensuring permanence: management interventions paid for by beneficiaries should not be readily reversible, thus providing continued service provision; and
- Avoiding leakage: PES schemes should be set up to avoid leakage, whereby securing an ecosystem service in one location leads to the loss or degradation of ecosystem services elsewhere.
How It Works
Government-financed PES systems operate at large scales, are more efficient due to economies of scale and can provide benefits across the landscape. These national schemes allow for the internalization of ecosystem services into national economies, which will continue to be the largest source of funds in many biodiversity-rich developing countries [3].
For the national PES schemes and large-scale projects that include the protected areas system as well as productive landscapes, the projects have been executed by ministries, government research and extension agencies and the protected area authorities [3].
Financial sustainability has been easier to secure in national PES schemes, which have taxes and fees as the main source of funding for paying land owners [3].
Benefits & Challenges for Cities [1]
Benefits
- PES enables local communities to become stewards of critical environmental assets that can play both carbon sequestration and a resilience role.
- PES can stimulate local economic development and environmental protection, helping local inhabitants gain a regular income, which can be invested in other businesses or development needs such as education or improved housing.
Challenges
- PES schemes which threaten existing power structures or land rights arrangements are often likely to fail.
Use Cases
Integrated PES in Costa Rica [4]
Costa Rica, one of the earliest adopters of the PES policy approach, has been the most successful in nationallevel implementation of PES, and has structured the system to be notably more financially sustainable than most systems. While there are a number of case studies that can be reviewed for projector local level results, the policy framework in Costa Rica is one of the few that can be studied to determine how multiple national and regional-level PES policies can be structured to address crucial environmental externalities.
Forest cover in Costa Rica declined from 70% in 1950 to 20% in 1987. It has since recovered to 52%. The PES program was introduced by the new Forestry Law 7575 in 1996, which banned all conversion of existing forests and introduced the payments for reforesting, conserving and managing forests on private properties. Costa Rica’s PES program has helped to conserve nearly one million hectares of forest by payments for protection (90%), reforestation (6%), sustainable management (3%) and more recently regeneration (1%).42 The program covers all three common types of PES projects (carbon sequestration and storage, biodiversity conservation, watershed protection) as well as landscape beauty by providing payments for each.
Costa Rica has pursued a form of PES where the mechanism takes the form of a private transaction between suppliers and users, where the government designs the system by creating the rules, capacities, and framework. The National Forestry Financing Fund (FONAFIFO) is the primary intermediary administering the PES program. It signs land use contracts with forest owners and monitors compliance through local forestry technicians and forestry organizations. Landowners give over the rights to the ecosystem services to FONAFIFO, which then sells these credits to buyers. Private sector buyers purchase Certificates of Ecosystem Services and are able to choose which ecosystem they are investing in. Between 1997 and 2012, FONAFIFO distributed approximately US$340 million.
The program was established using a loan from the World Bank for forest protection (Ecomarkets 2000-2006), which was co-funded by the GEF and the national government. The initial government funding came in part from a tax on fossil fuels and forestry trust funding. Current funding includes tax revenues (mainly through water tariffs, fossil fuel taxes, and conservation trusts), voluntary deals with private companies (particularly hydroelectric companies who would benefit from sustained water supplies) and loans and agreements through international banks and bilateral donors. FONAFIFO has also diversified funding sources by developing financial mechanisms to promote matching funds from individuals, public, and private actors.
As an example of how the system works, in its watershed PES, Costa Rica started a water market payment system to regulate water flow for hydro electricity generation. Payments to landowners were made by a utility company through a local NGO; these payments were supplied by government funds. Landowners who protect their forests receive $45/ha/yr; those who sustainably manage their forests receive $70/ha/yr, and those who reforest their land receive $116/ha/yr.
Costa Rica’s PES program has been carried out through a mix of policies rather than a single mechanism. In addition to the 1996 Forestry Law, the policy-institutional process has included annual presidential decrees, regulatory plans, and determination of buffer and conservation areas.44 The government of Costa Rica has also developed a number of complementary regulations that provide rules regarding protection of forests, wildlife, water, topsoil, and mangroves. The Framework Environmental Law (Ley Orgánica del Ambiente) Law No. 7554, established a National Environmental Council as a deliberative body to enact regulations, coordinate environmental policies, and promote their integration in sustainable development. The Council includes members from the Ministry of Health, Education, National Planning and Economic Policy, Agriculture, Science and Technology, and Environment and Energy to facilitate integration of environmental issues across the national government structure.45 This mix of policies and frameworks, when done intentionally and with an eye to increasing coordination and outreach to a variety of stakeholders, can make PES policy more sustainable with fewer administrative costs and can adapt to new priorities or national circumstances.
Since 1997, the PES program in Costa Rica has promoted conservation on an average of 60,000 hectares of private lands per year.46 Hectares of land have been a proxy measurement for individual ecosystem services such as water or carbon, as it’s a more straightforward indicator to track and quantify. Co-benefits of this program have included increased participation of indigenous and local communities and female-headed households and standardizing property ownership.
When to Use It
National PES schemes are most useful to cities when ecosystem services cross jurisdictions, urban areas depend on surrounding ecosystems for benefits like air quality, water regulation, and climate resilience, and cities need support to manage and finance conservation effectively.
References
[2] https://www.municipal-ecotoolkit.ca/tools/paymentsforecosystemservices
[3] Payments for ecosystem services: A best practice guide
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