Introduction to payment for environmental services

1. Stefano Pagiola Environment Department World Bank 1818 H Str NW Washington DC 20433 USA spagiola@worldbank.org The opinions expressed in this presentation are the author’s own and do not necessarily represent those of the World Bank Group. The materials in this presentation may be freely reproduced with appropriate credit to the author and the World Bank. Introduction to payment for environmental services Stefano Pagiola Environment Department, World Bank USAID Policy Seminar: Pro-Poor Payments for Ecosystem Services Virginia Tech, Northern Virginia Center, October 4, 2007

2. Sasumua water treatment plant, Kenya

3. Sasumua water treatment plant, Kenya

4. What’s the problem? Clearing silt from water intakes: $50,000/year Treating for contamination: $100,000/year

5. The problem Deforestation and use for pasture Costs to downstream populations Conservation Benefits to land users

6. Past responses have largely failed • Direct government intervention • ‘Demonstration’ approaches • Regulatory approaches • Short-term subsidies (in cash or in kind) • Low adoption rates • Adoption followed by abandonment

7. The logic of payments for environmental services Deforestation and use for pasture Conservation with payment for service Payment Costs to downstream populations Conservation Benefits to land users Important! This logic is repeated every year » Need annual payments » Need sustained financing

8. Definition of PES Service Service providers Service users Payment A mechanism to improve the provision of indirect environmental services in which • Those who provide environmental services get paid for doing so (‘provider gets’) • Those who benefit from environmental services pay for their provision (‘user pays’) • Payments are conditional • Participation is voluntary

9. What makes payments for environmental services attractive? • Generates it’s own financing: • Brings new financing not previously available for conservation • Efficient: • Focuses efforts where benefits of conservation highest and costs lowest • Potentially very sustainable: • Not based on whims of donors, NGOs, but self-interest of service users and providers • For this to work, need to: • Base payments to providers on payments by users • Actually deliver services: getting the science right is critical • Tailor mechanism to specific local conditions

10. Special case: ‘Supply-side PES’ A mechanism to improve the provision of indirect environmental services in which • Those who provide environmental services get paid for doing so (‘provider gets’) • The government (or another third party) pays for their provision • Payments are conditional • Participation is voluntary Service Service users Service providers Government Payment

11. What makes supply-side PES attractive? ? • Generates it’s own financing: • Brings new financing not previously available for conservation • Efficient: • Focuses efforts where benefits of conservation highest and costs lowest • Potentially very sustainable: • Not based on whims of governments, donors, NGOs, but self-interest of service users and providers • For this to work, need to: • Base payments to providers on payments by users • Actually deliver services: getting the science right is critical • Tailor mechanism to specific local conditions

12. Examples of PES mechanisms Capital city Mid-size town Small rural town

13. Costa Rica: Payments by water users Hydropower producer Domestic water supply Bottler Renewed! Irrigated agriculture Renewed! Hotel 0ha 2,000 ha 4,000 ha 6,000 ha Total 18,000ha ca US$500,000/year (US$/ha/yr): 10 Energía Global 15/30 Platanar S.A. 40 CNFL/Río Aranjuez 40 CNFL/Río Balsa 40 CNFL/Río Laguna Cote 45+22 Florida Ice & Farm y Heredia ESPH 45 Azucarera El Viejo 45 Hidroeléctrica Agua Zarcas 45 Misc

14. World Bank support to PES Completed projects: • Costa Rica: Ecomarkets Project (US$33 million WB + US$8 million GEF) Projects under implementation: • Colombia/Costa Rica/Nicaragua: Regional Integrated Silvopastoral Ecosystem Management Project (US$4.5 million GEF) • South Africa: Cape Action Plan for the Environment (US$9 million GEF) • Mexico: Environmental Services Project (US$83 million WB + US$15 million GEF) • Costa Rica: Mainstreaming Market-Based Instruments for Environmental Management Project (US$30 million WB + US$10 million GEF) Projects under preparation: • Brazil: Forests for Life Project • Colombia: Sustainable Livestock Management Project • Ecuador: Management of Chimborazo’s Natural Resources Project • Venezuela: Canaima National Park Project • Kenya: Agricultural Productivity and Sustainable Land Management Project • Worldwide: LULUCF carbon projects (US$30 million BioCarbon Fund) Capacity building: Courses in Colombia, Dominican Republic, Ecuador, El Salvador, Kenya, Mexico, Panama, Peru, Senegal, South Africa, Venezuela Research: Case studies; Hydrological aspects; Poverty links; Valuation

15. From theory to practice 1. Understanding the science… … and the economics Water users association Farmers Irrigation Land users Hydrological effects Hydropower production Hydropower producer Electricity users Domestic water supply Water company Water users Payment 2. Charging service users 3. Paying service providers 4. Establishing the institutional framework

16. Key problems • Getting the science right • Getting the institutions right

17. Poverty and PES • PES is not intended as a poverty reduction mechanism • Hope that it will help the poor • Spatial correlation between poor areas and areas that provide environmental services • Payments to poor land users provide them with additional income • But maybe it won’t • Can the poor participate? • Fears that it may do some harm • Exacerbate tenure problems • Impact on non-participants

18. Factors that affect household participation in PES programs PES program characteristics Household characteristics In target watershed? Degree of targeting Location of plots Yes In target part of the watershed? Yes Eligible to participate Source: Pagiola et al., 2005

19. Factors that affect household participation in PES programs Eligible to participate PES program characteristics Household characteristics Yes Payment offered PES practice profitable? (with payment) Opportunity cost of land Transaction costs imposed on participants Yes Household strategy Fits in farming system? Characteristics of PES practice Size of holding Current land use practices Yes Want to participate Source: Pagiola et al., 2005

20. Factors that affect household participation in PES programs Want to participate PES program characteristics Household characteristics Yes Security of tenure Time horizon of PES practices Has secure tenure? Yes Investment requirements of PES practices Assets, savings, other income, remittances Able to invest? No Land title, other collateral Yes Access to credit? Yes Technical difficulty of PES practices Able to undertake PES practices? Experience Education No Access to TA? Yes Yes Able to participate Source: Pagiola et al., 2005

21. Can the poor participate in PES?Key questions • Are the poor potentially eligible to participate? • Are potential service suppliers poor? • How many of the poor are potential service suppliers? • Are eligible poor households able to participate?

22. Guatemala:Watersheds with significant potential for PES Source: Pagiola, Zhang, and Colom, 2007

23. Guatemala:Poverty rate in water supply areas High poverty rate in water supply area Low poverty rate in water supply area Source: Pagiola, Zhang, and Colom, 2007

24. Guatemala:Poverty rate in water supply areas Average poverty rate 44% (sd 21%) Source: Pagiola, Zhang, and Colom, 2007

25. Relationship between poverty rate and importance of water supply areas Source: Pagiola, Zhang, and Colom, 2007

26. Guatemala:Poverty density in water supply areas Many poor in water supply area Few poor in water supply area Source: Pagiola, Zhang, and Colom, 2007, based on Nelson and Chomitz, 2002

27. Guatemala:Poverty density in water supply areas Average poverty density 0.95/ha (sd 1.1) Source: Pagiola, Zhang, and Colom, 2007

28. Guatemala:Poverty density in water supply areas Total number of poor: 1.7 million Share of country’s poor*: 27% (* excluding Petén)

29. PES and poverty • Potential for local impact varies • Some areas with significant PES potential have high poverty rates, but not all • Potential for national impact is significant but limited • Max 27% of country’s poor may be able to participate

30. Can eligible poor households participate in a PES program? • Regional Integrated Silvopastoral Management Project • Matiguás-Río Blanco, Nicaragua Piloting use of PES to promote silvopastoral practices in degraded pastures, to improve biodiversity and carbon sequestration

31. A tough test:Most participants are poor... Income level of program participants, Matiguás-Río Blanco, Nicaragua • Participating households: • 20% poor • 46% extremely poor • (national poverty line) Source: Pagiola, Rios, and Arcenas, 2007

32. A tough test:… and participation requires expensive investments Establishment costs of selected silvopastoral practices Matiguás-Río Blanco, Nicaragua Source: Gobbi, 2005

33. Were the poor able to participate? Yes! Land use change in Matiguás-Río Blanco, Nicaragua Source: Pagiola, Rios, and Arcenas, 2007

34. Were the poor able to participate? Yes! Source: Pagiola, Rios, and Arcenas, 2007

35. Can the poor participate in PES? • Important: PES are not poverty reduction programs • Trying to make them be poverty reduction programs can undermine them • But can try to maximize positive impacts/minimize adverse impacts • A small but significant portion of the poor are potential participants in PES • When the poor are eligible to participate, their ability to participate may be greater than assumed • Transaction costs a bigger obstacle than household characteristics • Appropriate PES design can help • Appropriate contract design • Low transaction costs • Support to participants

36. Guidelines for Pro-poor PES • PES is not a poverty reduction mechanism • Poverty cannot be used as a criterion for participation • A pro-poor PES program is one that maximizes its potential positive impact and minimizes its potential negative impact. • Keep transaction costs low • Devise specific mechanisms to counter high transaction costs. • Ensure that the social context is well understood • Avoid implementing PES programs in areas of insecure land tenure • Provide targeted assistance to overcome problems that impede the participation of poorer households • Seek external funding for additional costs of pro-poor programs

37. For more information www.worldbank.org/environmentaleconomics