E n v i r o n m e n t S t r a t e g y Payments for Environmental Services Stefano Pagiola and Gunars Platais T he valuable environmental services provided by natural ecosystems are too No. often lost as a result of mismanagement and lack of incentives to preserve 3 them. Helping countries find innovative solutions to such problems--which intersect with livelihood, vulnerability, and health issues--is a key element of the M World Bank's Environment Strategy. The Bank's innovative work on payment for A environmental services (PES) is an example of these efforts. Y Natural ecosystems provide a variety of environmental services. Forests, for example, in addition to all their other functions, retain rainfall and snowmelt, filtering 2 the water and releasing it gradually. Yet these hydrological services may not be appre- 0 ciated until deforestation results in floods and degradation of water quality, increas- 0 ing the vulnerability of downstream populations and threatening their health and 2 livelihoods. It is easy to understand how, despite their value, environmental services can be lost. Land users typically receive no compensation for the services their land gener- ates for others and therefore have no economic reason to take these services into account in making decisions about land use. Responses to this problem have tended to fall into two categories: regulations that attempt to dictate particular patterns of land use, and remedial measures such as repair of the damage caused by flooding or the construction of civil works intended to protect downstream communities from floods. Neither approach has proved effective. Remedial measures are often imperfect and expensive--often far more expensive than preventive measures. Regulations are extremely difficult to enforce because of the spatial dispersion of land users, and they may impose high costs on poor land users by preventing them from undertaking privately profitable activities. Recognition of this problem and of the fail- BOX 1. THE SIMPLE LOGIC OF PAYMENTS FOR ure of past approaches to dealing with it ENVIRONMENTALSERVICES has led to efforts to develop systems in which land users are paid for the environ- As the figure shows, land users Conversion Conservation Conservation to pasture with service mental services they generate, thus align- receive few benefits from forest payment $/ha ing their incentives with those of society conservation--often, less than the Payment for service as a whole. The "payment for environ- benefits they would receive from Benefits to land managers mental services" (PES) approach is an ex- alternative land uses, such as con- ample.1 The central principles of PES are version to pasture. But deforesta- that those who provide environmental ser- tion can impose costs on down- Costs to vices should be compensated for doing stream populations, who no downstream populations so and that those who receive the ser- longer receive the benefits of eco- logical services such as water fil- vices should pay for their provision. (Box tration. A payment by the downstream beneficiaries can help make conservation the 1 illustrates the economics of this more attractive option for land users. The payment must obviously be more than the method.) This approach has the further additional benefit to land users of the alternative land use (or they would not change advantage of providing additional income their behavior) and less than the value of the benefit to downstream populations (or sources for poor land users, helping to they would not be willing to pay for it). improve their livelihoods. Several coun- tries are already experimenting with such systems, many with World Bank assis- tance, as described in Box 2. BOX 2. WORLD BANK SUPPORT FOR THE PAYMENT FOR ENVIRONMENTAL SERVICES APPROACH IDENTIFYING ENVIRONMENTAL The World Bank is working with several countries to develop PES systems that could SERVICES help substitute for the absence of markets and promote the maintenance of environ- Ecosystems can provide a wide variety of mental services--especially in Central and South America, where the effects of Hurri- services. The environmental services de- cane Mitch in 1998 underscored the dependence of the population, especially poor rived from forest ecosystems, for ex- people, on the environmental services and the protection provided by natural ecosys- ample, typically include (but are not lim- tems. Bank-supported operational work on PES includes: ited to): Costa Rica. The Ecomarkets Project, which supports the country's PES program, in- Hydrological benefits: controlling the cludes a US$32.6 million loan from the World Bank to help the government ensure timing and volume of water flows and current levels of environmental service contracts and a US$8 million grant from the protecting water quality Global Environment Facility (GEF) to assist the program's conservation of biodiversity. Reduced sedimentation: avoiding dam- Colombia, Costa Rica, and Nicaragua. The Regional Integrated Silvopastoral Eco- age to downstream reservoirs and system Management Project is piloting the use of PES as a means of encouraging a waterways and so safeguarding uses shift from unsustainable agricultural practices to sustainable silvopastoral practices. such as hydroelectric power genera- Dominican Republic, Ecuador, and El Salvador. Pilot PES programs are under prepa- tion, irrigation, recreation, fisheries, ration in these countries. and domestic water supplies Mexico. The World Bank is supporting a survey of land management practices in Disaster prevention: preventing floods the ejido (communal land ownership) sector, which includes most of the country's and landslides remaining forest area and most of the rural poor. The goal is to help design a Biodiversity conservation PES system and provide a baseline to monitor its implementation. Carbon sequestration.2 In addition, the World Bank Institute (WBI) has developed a training course on PES Both qualitatively and, especially, targeted to technical personnel in ministries, conservation agencies, and nongovern- quantitatively, we often know less about mental organizations involved in implementing PES programs. As of 2002, the course has been presented four times. the services generated by different land uses than we think we do. This is partly because of the diversity and DEVELOPING EFFECTIVE complexity of the conditions encountered (hydrological benefits depend on COMPENSATION SYSTEMS the rainfall regime, on the type of soil and vegetation, and on topography, PES programs will have the desired effect for example) and partly because of the diversity of objectives being sought only if they reach the land users in ways (regulating water flows to avoid flooding and dry-season deficits may re- that influence their decisions on how to quire different interventions than maximizing total water volume). use the land. Several general principles FINANCING COMPENSATION can be identified: FOR ENVIRONMENTAL SERVICES Make payments continuous and open- For PES programs to survive, they need secure sources of financing. This is ended. The benefits being sought will especially important if the payments have to be long term and open ended-- generally be enjoyed year after year, as is usually necessary if land users are to have a continuing incentive to as long as appropriate land uses are maintain the environmental services. This entails identifying not only the maintained. Land users therefore must beneficiaries but also the specific services they receive. Beneficiaries do receive payments as long as they keep not receive generic "ecosystem services"; they are interested in very spe- up the desired land use. cific ones. Even within specific service categories, there are differences. Target payments. An undifferentiated Domestic water supply systems require a constant flow and high quality, payment system that pays everyone but hydroelectric power producers with reservoirs usually prize total vol- the same will be much more expen- ume and care little about water quality except for the absence of sedimen- sive than a targeted scheme. It will also tation. The willingness to pay of a given group of beneficiaries will depend make it difficult to tailor interventions on the specific service they receive, on the value of that service to them to the particular requirements of given (compared with the cost of alternatives), and on the size of the group. situations. A targeted payment scheme Once the beneficiaries of a service are known, a means must be de- may, however, be more expensive to vised to capture part of their willingness to pay. This is obviously easiest implement than a nontargeted one. A when the beneficiaries are easily identifiable and are already organized, balance needs to be found between the making it relatively simple to negotiate with them and to collect payments. efficiency advantages and the higher For example, an additional fee can easily be added to water bills paid by costs of better targeting. municipal and industrial water users. In contrast, populations in flood- Avoid perverse incentives. For example, payments for reforestation can encour- prone areas are not organized as such, although they may be included in age land users to cut down standing other beneficiary groups, and there is no preexisting mechanism for col- trees so as to qualify. lecting payments from them. ESTABLISHING THE INSTITUTIONAL FRAMEWORK Figure 1 PES programs require a supporting insti- The Flow of Compensation from Beneficiaries to Land Users tutional infrastructure. As Figure 1 illus- trates, a portion of the benefits received Governance structure by environmental service beneficiaries must be captured and channeled to land Beneficiary Land user Beneficiary Land user users to provide incentives to protect eco- Beneficiary Financing Payment Land user systems. These systems depend on sev- Beneficiary mechanism mechanism Land user Beneficiary Land user eral prerequisites. Market participants Beneficiary Land user must have access to information on the Environmental services value and volume of the services being exchanged. Participants must have oppor- tunities to negotiate payments. Property FURTHER READING than the regulator hav- rights to service commodities need to be Chomitz, Kenneth M., and Kanta Kumari. ing to prove that land clearly defined, and ownership has to be as- 1998. "The Domestic Benefits of Tropi- users have violated regu- signed. Monitoring and enforcement mecha- cal Forests: A Critical Review Empha- lations, land users can nisms are required.3 A network of support- sizing Hydrological Functions." World be made to prove that ingregulatoryandinstitutionalarrangements Bank Research Observer 13 (1): 13­35. they are providing the may be necessary if markets are to function Pagiola, Stefano, and Gunars Platais. desired services in order effectively. Establishing such market infra- 2002. "Payments for Environmental to qualify for payments. structure is not easy and is rarely cheap. Services." World Bank, Washington, EFFECTS ON POVERTY D.C. ALLEVIATION Pagiola, Stefano, Joshua Bishop, and Authors Natasha Landell-Mills, eds. 2002. Sell- Many of the potential suppliers of envi- Stefano Pagiola and Gunars ing Forest Environmental Services: Mar- ronmental services are likely to be poor. Platais are senior environmental ket-Based Mechanisms for Conservation The upper watersheds that are critical economists in the World Bank's and Development. London: Earthscan, Environment Department. sources of water services, for example, London. are often inhabited by poor subsistence farmers, and payments for environmental The Environment Strategy Notes series aims to provide a forum for dis- services could be an important addition NOTES cussion on a range of issues related to their incomes. This will not happen au- 1. Payment for environmental services is to the Environment Strategy, to help the transfer of good practices across tomatically, however. Working with many a relatively new approach, and there countries and regions, and to seek small, dispersed farmers imposes high is not yet a settled definition of the term. effective ways of improving the Bank's environmental performance. transaction costs, and special efforts are It can be used very broadly to include, needed to ensure that the poor have ac- for example, pollution charges. Here The views herein are those of the cess to the new opportunities created by author(s) and should not be consid- we use it more narrowly to focus on ered official policy of, nor attributed PES programs. In Costa Rica a system of mechanisms under which those who to, the World Bank Group. collective contracting has been developed provide positive externalities are com- T through which groups of small farmers pensated for doing so, usually through Executive Editor can join the PES program collectively payments from the beneficiaries. Pol- Magda Lovei rather than individually. lution charges are in a sense the mir- Managing Editor Poonam Pillai THE WORLD BANK AND ror image of this approach; they make PES INITIATIVES those responsible for negative exter- Editor Nancy Levine nalities pay for the damage they cause. The PES concept ties in with many of the Designer / 2. It should be noted that at present the themes of the Bank's Environment Strat- Production Manager eligibility of land-use based carbon Jim Cantrell egy. The environmental services provided sequestration under the Kyoto by many ecosystems, such as regulation Protocol's Clean Development Mecha- of water flows by forests, are a key di- nism is limited. mension of the link between environment 3. Monitoring is much simpler under a and the livelihoods, health, and vulner- PES system than under a regulatory T H E W O R L D B A N K ability to natural disasters of the poor. Environment Department approach. Regulations penalize land Ensuring that such services are not lost is 1818 H Street, N.W. users, creating incentives for them to Washington, D.C. 20433 USA also critical to ensuring the long-term Tel: 202 477 1234 conceal their actions; PES rewards quality of growth. Box 2 highlights some Fax: 202 477 0565 them. Indeed, under a PES system the E-mail: eadvisor@worldbank.org recent World Bank initiatives to assist Web: www.worldbank.org/eadvisor burden of proof can be inverted: rather countries with implementing PES.