Our 2 Cents

How big are Payments for Ecosystem Services?

Wednesday, June 12, 2019
ByJim Salzman
Jim Salzman headshot

Jim Salzman, emLab Fellow, is a Professor of Environmental Law with joint appointments at the UCLA School of Law and at the Bren School at UC Santa Barbara.

I’ve been speaking and writing about payments for ecosystem services (PES) for two decades. As many readers will already know, PES refers to schemes where the beneficiaries of clean water, habitat conservation, flood protection, and other ecosystem services pay for land management practices that support service provision.

When I first started writing about PES, few people recognized the term, much less understood it. Interest in PES has exploded in recent years, however, with hundreds of programs now established worldwide and thousands of cites in the literature.

Proponents of PES have made bold claims – a unique market-based policy approach that has the potential to drive much-needed conservation action across some of the world’s most threatened ecosystems; it holds the power to make trees worth more standing than cut down. And while its conservation potential is undeniable, no one has really known just how important it is on the ground. Despite the many case studies that have been done, it’s been hard to find comprehensive and reliable data on PES, and frustrating to track the growth of programs over time and quantify their economic value.

In order to better assess the status of global PES programs, I set out in 2014 to move beyond case study “anecdata” and developed a research project to measure empirically PES programs over time and across sectors. To gather far-flung global transactional data, I partnered with the staff at Forest Trend’s Ecosystem Marketplace, the leading source of information on PES. We published our results in Nature Sustainability in 2018. This paper represents the first peer-reviewed, global assessment of the trends and current status of PES mechanisms for water, biodiversity, and forest-use and land-use carbon.

Our analysis revealed that the global market for ecosystem services is large, and growing larger. Today there are more than 550 PES programs active worldwide. They exist in developed and developing countries, and their combined transactions total US$36-42 billion annually. The following is a summary of our most compelling results.

Watershed PES
Watershed-based PES is the largest and most rapidly growing sector, with programs in 62 countries valued at a total of $24.7 billion in 2015 (compared to $6.7 billion in 2009). Much of these programs’ success is attributed to the fact that the beneficiaries of flood protection and clean water can easily observe the connection between land management in watersheds and the availability of ecosystem services. Furthermore, another critical feature of the watershed sector is the valuable role existing institutions—like water utilities or government tax programs—can play in collecting the funds that support PES programs.

China’s “eco-compensation scheme” is the world’s largest PES program. In response to a series of major floods and droughts in the late 1990s, China distributed over US$100 billion from 2001-2010 for tree planting, logging bans, and converting croplands to forests.

PES watershed schemes are also on the rise in Latin America, where at least 57 funds have been created in the last decade. The Latin American Water Funds Partnership, led by The Nature Conservancy, accounts for 16 operating funds, and the Brazilian National Water Agency runs 19 programs that protect drinking water for people in major cities like São Paulo and Rio de Janeiro.

Forest carbon PES
The forest carbon market has received the most attention of any PES sector due to growing global concern around climate change. Our study indicates that market-based payments for forestry and land use practices that sequester carbon have topped $2.8 billion. Despite its growth, the sector has been volatile, and its future growth depends largely on how countries implement their climate commitments from the Paris Agreement. The European Union’s Emissions Trading Scheme, for example, has not directed investment flows to forest conservation, and California’s trading scheme puts a cap on the amount of forestry offsets polluters can use for compliance. It’s also unclear whether national or subnational programs will accept forest-based emissions reductions from developing countries in the context of the UN program Reducing Emissions from Deforestation and Forest Degradation (REDD+).

Biodiversity PES
The biodiversity PES sector is the least developed and most challenging, with only 36 programs worldwide. Unlike the local communities that directly benefit from watershed PES programs, the beneficiaries of biodiversity are generally diffuse, and the benefits themselves are often indirect or nonmaterial, such as the enjoyment of knowing that California condors are flying once again in the wild. Also unlike the case of watershed PES, most countries lack the kind of institutional infrastructure needed to collect fees from the diffuse beneficiaries of biodiversity. Thus, biodiversity PES programs exist in only a small number of countries, and the most successful initiatives rely on regulatory drivers.

Regulations and government subsidies drive PES growth
We found that the largest PES programs are based on transactions mandated by regulations or government-financed subsidies.

PES transactions driven by regulations—such as those that require offsets in order to develop wetlands—are now adding tremendous value to PES markets. Regulation allows governments to create demand, organize buyers, and prevent free-riding on ecosystems that are public goods. Yet at the moment, regulations for PES are restricted to a small number of developed countries that have the governance capacity to ensure compliance.

Government subsidy programs, in which landowners are paid from public funds, is another PES mechanism that is on the rise. China has already developed a number of such programs, and the United States and Europe have also established programs that pay farmers to fallow lands that can serve as wildlife habitat or prevent erosion.

This research has proven helpful in providing solid data to assess just how far PES has come. In my view, PES is still a young policy approach with great potential. But it is not a one-size-fits-all approach. The performance of PES varies significantly across sectors and payment mechanisms. Looking forward, watershed PES programs will likely continue to see the greatest growth, and biodiversity the least.

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