Managing Sustainability?Proceedings of the 12th Management International ConferencePortorož, Slovenia, 23–26 November 20112011

PAYMENTS FOR ENVIRONMENTAL SERVICES: AMBITIOUS

TOOLS FOR THE SUSTAINABLE USE OF NATURAL CAPITAL

Prof. Giovanni LAGIOIA, Dr. Annarita PAIANO Faculty of Economics- Department of Geographical and Commodity Science

University of Bari Aldo Moro Largo Abbazia Santa Scolastica, 53-70124 Bari (Italy)

g.lagioia@dgm.uniba.it, a.paiano@dgm.uniba.it

ABSTRACT

The flows of natural resources, goods and services (air quality, soil fertility etc.) from

ecosystems are the natural capital of the economies. Among these flows the ecosystem

services are critic and in decline. It has been underlined the need for ecosystem accounting

techniques to study the relationship between economic sectors and their dependence from

ecosystem goods and services, as well as the impacts on the last ones.

Many countries are being developed payment programmes for ecosystem services (PES). This

paper analyses definitions, scope, schemes and the main actors of the PES as tool to protect

the natural capital.

Keywords: payments for ecosystem services (PES), sustainability, natural capital,

biodiversity.

INTRODUCTION

The flows of natural resources, goods (food, fibre, fuel, medicines) and services (air quality,

water flow and quality, soil fertility and cycling of nutrients, climate regulation, pollination

and others) from natural ecosystems are a vital necessity for humanity’s economic and social

development. These flows represent the material basis, or the natural capital, of economy. The

main criticism is concerning the services from nature and the significant reason is that there

are not alternative methods to obtain those services. In summary, if pollutants affect the

natural ecosystems, these are not capable of flowing services to economy and it is not possible

to search for alternative options. Today around two-thirds of ecosystem services worldwide

are in decline. This is a heavy threat, probably greater than climate change and it often

concerns the developing countries, where the most of the world’s biodiversity lies.

Biodiversity conservation is the key factor to maintain the global ecosystems and their

services.

275

The need of knowing and assess these services to realize a suitable management it is clear by

trends of health of the biodiversity of biomes, which has been and actually is heavily under

pressure, as Figure 1 illustrates.

Figure 1. Past and future trends of the main impacts on Earth’s biodiversity per biome

Source: Millennium Ecosystem Assessment, 2005

A policy framework has accomplished since several years, at European and international

level, to face the deterioration of ecosystem.

The first step was the Convention on Biological Diversity (CBD), signed by 168 countries

under the aegis of the United Nations (today the total countries are 190), and it entered into

force on 29 December 1993. The world public growing commitment to sustainable

development inspired the CBD and the European Union (EU) is actively promoting its

effective implementation, so the EU new policy should enhance treatment of biodiversity in

international development programmes.

276

Some years later, the EU launched a new EU Biodiversity Action Plan (the previous was in

the 2001), annex I to EU Council conclusions “Halting the loss of biodiversity by 2010 and

beyond”, adopted in the 2006 (Commission of the European Communities, 2006; European

Commission. 2010).

This Action Plan underlines the importance of biodiversity and ecosystem protection as a

prerequisite for sustainable development and protecting the natural capital. It provides a

strategic European response to tackle biodiversity loss to undertake to halt the loss of

biodiversity by the year 2010. The four key policy areas of the EU action plan are the

following:

biodiversity in the EU,

the EU and global biodiversity,

biodiversity and climate change,

the knowledge base.

These four policy areas are backed up by a range of supporting measures, as ensuring

adequate funding for biodiversity conservation, strengthening EU decision-making, building

partnerships with key stakeholder groups and encouraging greater public awareness and

participation in biodiversity conservation.

Yet, whilst important progress has been made, the change has been too slow to meet the 2010

target. Overall, biodiversity in Europe continues to decline.

Another important step was the initiated preparatory work for a global and independent study,

which is named “The Economics of Ecosystems & Biodiversity” (TEEB). It is hosted and

organized by UNEP. Several countries and organisations have joined TEEB.

The study is evaluating the costs of the loss of biodiversity and the associated decline in

ecosystem services worldwide, and comparing them with the costs of effective conservation

and sustainable use. The estimate of benefits of ecosystem goods and services is a key point.

The conventional economics has failed to recognise the economic values of natural capital

and the ecosystem services it provides. The European Environmental Agency (EEA) has

underlined the need for ecosystem accounting techniques to study the relationship between

economic sectors and their dependence from ecosystem goods and services, as well as the

impacts on the last ones. These data should converge into policy-making and local

management of natural resources.

Worldwide in many countries there are being developed payment programmes for ecosystem

services (PES programmes). They are very important in providing adequate rewards to

landowners who protect ecosystem services that are useful to society. PES are part of a new

277

and more direct conservation pattern that makes clear the linkage between the interests of

landowners and outsiders.

This paper will analyse definitions, scope, schemes and the main actors of the PES. Moreover

some of PES programmes put into practise, both in developed and in the developing and poor

countries, will be reviewed.

The aim is to highlight the main aspects of this new tool, underlining its several drawbacks

and perspectives for managing the sustainability of economies.

PAYMENTS FOR ECOSYSTEM SERVICES

Definition and scope

The implicit idea of PES is those who benefit from ecosystem services (ES), like climate

regulation, water quality, protection against natural and human made hazards, soil formation,

biodiversity conservation, natural recreation, and so on should pay those who provide these

services. But many definitions exist for the PES, for instance one commonly used defines

them as voluntary transactions in which a well-defined environmental service is bought by a

(minimum of one) buyer from a (minimum of one) provider if and only if the provider

continuously secures the provision of the service (Farley and Costanza, 2010; Werz-

Kanounnikoff and Wunder, 2010). This is a restrictive definition for PES.

In the PES scheme it is possible to delineate many steps for their implementation. The first

one is to choose and clearly define the environmental goods and service and the second one

has to be the identification of stakeholders involved in this programme. The following step is

the economic evaluation of the specific ecosystem service and finally it has to carry out the

relative “payment”, according to the type of economic and/or financial tools chosen. Each of

these steps shows several issues and controversial aspects, due to many reasons so as it has

illustrated in the following sections.

The identification of ecosystem goods and services

Ecosystem services derive from interactions between the organisms and their function within

the ecosystems. The purification of air and water, carbon sequestration and soil fertility are

services that result from interaction, rather than organisms themselves. Each ecosystem

(forest, wetland, grassland, coral etc.) has different functions and services, which in turn

depend on the health of the ecosystem, the pressures weighing upon it and the way they are

used by society in a given bio-geographical and geo-economical context (such as local,

regional and global). This issue of ecosystems in connection with social wellbeing was

278

underlined by the Millennium Ecosystem Assessment (MEA, 2005), a study published in

2005 that involved over 1,000 experts from 95 countries, which defined the concept of

“ecosystem services” as the multiplied benefits provided to human beings by ecosystems and,

then, ecosystem services are the end products of nature that yield human wellbeing. The basic

concept is that generally our wellbeing strongly depends on services (material and not-

material) provided by nature. The Figure 2 shows the identification of the main ecosystem

services provided by Hearth’s biomes.

Figure 2. Main ecosystem services provided by Hearth’s biomes

Source: Ministero dell’Ambiente della Tutela del Territorio e del Mare, 2009

It is possible to consider several classifications of ecosystem services, narrow or broad ones.

In the first case only the environmental services, such as carbon sequestration, biodiversity,

water quality and erosion control (Wunder, 2005), can be included. Instead the broader

interpretation include four macro-categories, which are extracted from Millennium Ecosystem

Assessment and illustrated in Figure 1:

279

- Supporting services, e.g. services necessary for the production of all other ecosystem

services, like soil formation, nutrient cycling and primary production.

- Provisioning services, e.g. products obtained from ecosystem, like food, fresh water,

fuelwood, fiber, biochemicals and genetic resources.

- Regulating services, e.g. benefits obtained from regulation of ecosystem processes, as

climate protection, disease regulation, water regulation and water purification.

- Cultural services, e.g. non material benefits obtained from ecosystems, as spiritual and

religious, recreation and ecotourism, cultural heritage.

The exact identification of the main ecosystem services it is important to focus the analysis

that is carrying out, besides to limit the bio-geographical scale and territory which must be

considered.

Identification of stakeholders involved

The identification of stakeholders involved is very important and, at the same time, sometimes

difficult.

It is possible to divide them in beneficiaries or end users of ecosystem services and buyers of

the same. Almost always, in fact, the actual purchaser of an environmental service is often not

the same as the beneficiary. This is due to the difficulty to exactly identify the spatial-

temporal scale of service delivery: establishing where (at local, regional or global level) and

when (at present or into the future) the benefits from ecosystem services occur are essential

elements for evaluating the potential demand for them and identifying as many buyers as

possible from the longer list of potential beneficiaries (FAO, 2007).

But since these services are public goods and beneficiaries are frequently diffuse (e.g. local or

global community), buyers tend to be public organizations.

However there is a growth in demand and willingness to pay for ecosystem services at the

global or local scale mainly driven by environmental regulations. So, private and public firms

and individuals are ready to pay for such services when they provide a low-cost way of

complying with a regulation. Carbon sequestration payments, for instance, are driven by

international regulation limiting carbon emissions and creating a market for offsets (Gutman,

Davidson, 2007).

The economic evaluation of ecosystem services: the main issues

The defining of ecosystem services and their spatial and temporal scale are essential to

identify buyers and beneficiaries of these services but the core problem is the economic

280

evaluation of ecosystem services. The conventional economics has failed to recognise the

economic values of natural capital and the ecosystem services it provides (Gomez-Baggethun

et al, 2010).

It is therefore important not to limit assessments to monetary values, but to include qualitative

analysis and physical indicators as well, like Figure 3 illustrates. Measurement approaches

vary depending on what it should be measured. For provisioning services (fuel, fibre, food,

medicinal plants, etc.), measuring economic values is relatively straightforward, as these

services are largely traded on markets. The market prices of commodities such as timber,

agricultural crops or fish provide a tangible basis for economic valuation, even though they

may be significantly distorted by externalities or government interventions and may require

some adjustments when making international comparisons. For regulating and cultural

services, which generally do not have any market price (with exceptions such as carbon

sequestration) economic valuation is more difficult. However, a set of techniques has been

used for decades to estimate non-market values of environmental goods, based either on some

market information that is indirectly related to the service (revealed preference methods) or on

simulated markets (stated preference methods). These methods have been stated by the MEA

in 2005 and they have been applied to many components of biodiversity and ecosystem

services.

Fig 3: Valuing ecosystem services

Source: TEEB, 2008

281

The TEEB study, that continues the work of the MEA, made a preliminary attempt to evaluate

the loss of ecosystem services. Particularly the loss of biodiversity that would have produced

ecosystem services is about € 50 billion per year, only for land based ecosystem alone. Taking

2000 as the baseline, within three years this loss amount to € 150 billion so, by 2010 the loss

will be to over € 500 billion, equal to 1% of world GDP. It forecasts that the loss in the value

of flow of services, in case that any conservation action shall not be made, could cost about €

14 trillion, around the 7% of total GDP by 2050 (Table 1). It is necessary to highlight that the

loss of services from natural ecosystems will require costly alternative options or simply no

alternatives. This analysis suggests that without halting biodiversity loss, the world in 2050

shall benefit much less from the flow of ecosystem services than in 2000.

Figure 4: Annual Flow of benefits from forest from selected countries.

Source: Millennium Ecosystem Assessment, 2005

The relevant lack of balance between the economic value commonly used for resources and

the economic value of the entire flow of services of specified ecosystem is underlined by

282

Figure 4. In most countries, in fact, the marketed values of ecosystem, for example, associated

with timber and fuelwood production are less than one third of the total economic value,

including non marketed values such as carbon sequestration, watershed protection and

recreation. Among these countries Italy, the author’s country, has a very marked difference.

Table 1. Annual monetary estimate of loss of ecosystem services in 2050

Value of loss of ecosystem services per year in billion of Euros (109)

Relating to 2000 Relating to 2010 Relating to 2000 Relating to 2010

Area Billion of Euros Billion of Euros % GDP in 2050 % GDP in 2050

Natural areas - 15,568 -12,703 -7.96 -6.50 Denuded natural areas -10 -6 -0.01 0.00 Managed forest 1,852 1,691 0.95 0.87 Extensive agriculture -1,109 -819 -0.57 -0.2 Intensive agriculture 1,303 736 0.67 0.38 Ligneous biofuels 381 348 0.19 0.18 Cultivated pasture -786 -1,181 -0.40 -0.60 Artificial surfaces 0 0 0.00 0.00 Global total (terrestrial ecosystems) -13,938 -11,933 -7.1 -6.1

Source: (Braat, and ten Brink, 2008; Chevassus-au-Louis et al, 2009)

SOME EXAMPLES OF WORLDWIDE PES TRANSACTIONS

It should underline there are many tools for managing environmental resources and their

services and they can classified according the voluntary of their. So, PES can be included in

public provision, direct regulation or voluntary and educational approaches and they utilize

many mechanisms, like subsidies, incentives and others, or in the latter case, information and

communication, green labelling and green marketing. In this frame, through eco-labels and

certification programmes for sustainable production, consumers pay for environmental

services with their purchases.

The private sector is increasingly involved in paying to promote environmental service

provision, for example in the case of voluntary carbon sequestration and biodiversity

conservation. But, as already mentioned, most PES programs are led by the public sector.

Frequently International public sector funding is also very important for PES programmes: for

instance the World Bank and the Global Environment Facility (GEF) have been the main

contributors in developing countries, regarding large scale projects, and often they have led to

development of national level of PES programmes, as in Costa Rica and Mexico (Kosoy et

al., 2008). In Costa Rica, for instance, where, from 1997 to 2004, US$ 200 million in PES

283

programmes have been invested (funding by World Bank and GEF, co-financing by national

governments), protecting around 460,000 hectares of forests and forestry plantations and

indirectly contributing to the well being of more than 8,000 people (TEEB, 2008; UNEP,

2010).

Several examples of PES since many years have been fulfilled also in the developed

countries, like the US and one of them regards the water services management in New York.

An agreement between the municipal company for water supplying of the city and the forest

owners of the catchment basin has been signed. The last ones have undertaken to manage

their forests according suitable practises to assure the steady water run-off to reduce water

pollution impact. The off-set for these ecosystem services is paid by the end-users, through an

additional rate of water services. The program implementation, by cost of 1.5 US$ billion,

allowed savings expense of 6-9 US$ billion, equal to a amount necessary to build a filtration

system to comply with more stringent regulation on drinking water quality.

PES schemes have also been used to achieve quality standards beyond those required by law.

Vittel-Evian in France has been paying farmers to adopt more environmentally sound

practices to reduce agricultural run-off (pesticides and nitrates) and improve soil natural

filtration capacity. Investment reached 980 Euros per hectare per year, equivalent to 1.52 euro

per m3 of bottled water produced and the French National Agronomic Institute demonstrated

that under the assumption that one hectare of well-managed pasture produced 3000 m3 of

mineral water every year (Branca et al, 2009).

Other common PES example, more simply than the previous ones and widespread in the

world, could be considered the payments for guided tours of marine protected areas or the

management of fishing licenses, in the same areas. A share of these revenues is used to

preservation and conservation of these areas (Ministero dell’Ambiente della Tutela del

Territorio e del Mare, 2009).

CONCLUSION

Payments for Ecosystem Services are surely new feasible tools to manage the natural capital

to prevent further loss and damage in its goods and services. In this paper frequently it has

been underlined that the knowledge of natural ecosystem and its services is a priority for

suited managing them. In this direction the studies and analysis concerning the material base

of economy are very critical. It should be stressed the importance to know the material and

energy flows of the production cycle to obtain goods, services and others so as to use some

284

indicators, such as Ecological Footprint, Environmental Input-Output analysis (EIOA),

Material/Substance Flows Accounting (M/SFA), to create specific and physical databases

concerning this subject. This would to account and monitor the true consumption of natural

resources and to obtain a better comprehension concerning how much natural capital is

necessary to support human economy and in particular how many ecosystem services have

been used for.

The issue of ecosystem services and their relationship to human activities that oppose or

enhance them falls within the large field of the externalities, related to taking out of alignment

of the benefits (or costs) between individuals and community. In the past, most of the

ecosystem services, those are externalities, are not adequately remunerated by the market, so

frequently PES have been implemented through regulatory instruments, particularly in the

European countries. At present, instead, the attention focuses on other incentives based tools

and market mechanisms, so through voluntary transactions. The suited solution would be an

appropriate mix of instruments that have to be used by decision makers. In this context, the

implementation of the PES may involve the transformation of public goods and services into

new products of market, with the expected consequence and potential distortions.

REFERENCES

Branca, G., Lipper, L., Neves, B., Lopa, D., Mwanyoka, I. 2009. New Tools for Old

Problems: Can Payments for Watershed Services Support Sustainable Agricultural

Development in Africa?, ESA working paper no.09-10.

Braat, L., and ten Brink, P. (eds). 2008. The Cost of Policy Inaction: The Case of not Meeting

the 2010 Biodiversity Target, Study for the European Commission, DG Environment in

support to the TEEB First phase. Http://ec.europa.eu/environment/nature/bio-

diversity/economics/pdf/copi.zip, last access June 2011.

Chevassus-au-Louis, B., Salles, J.M., Pujol, J.L. 2009. An economic approach to biodiversity

and ecosystems services. Contribution to public decision-making. Centre d’analyse

Strategique, Paris.

Commission of the European Communities. 2006. Halting the Loss of Biodiversity by 2010-

and beyond. Sustaining Ecosystem Services for Human well-being, Commission Staff

Working Document, Annexes to the Communication from the Commission,

285

COM(2006)216 final, Technical annex. Http://ec.europa.eu/environment/nature/bio-

diversity/comm2006/pdf/sec_2006_621.pdf, last access May 2011.

European Commission. 2010. EU Biodiversity Action Plan: 2010 Assessment.

Http://ec.europa.eu/environment/nature/info/pubs/docs/2010_bap.pdf, last access July

2011.

FAO. 2007. The state of food and agriculture. Paying farmers for environmental service,

Food And Agriculture Organization of The United Nations, Rome.

Ftp://ftp.fao.org/docrep/fao/010/a1200e/a1200e00.pdf, last access June 2011.

Farley, J., and Costanza, R. 2010. Payments for ecosystem services: from local to global,

Ecological Economics. 69: 2060-2068.

Gomez-Baggethun, E., de Groot R., Lomas, P.,L., Montes C. 2010. The history of ecosystem

services in economic theory and practise : from early notions to markets and payments

schemes. Ecological Economics. 69: 1209-1218.

Gutman, P. and Davidson, S. 2007. The Global Environmental Facility and Payments for

Ecosystem Services, FAO, PESAL paper series no.1, WWF Macroeconomic for

Sustainable Development Program Office – WWF-MPO.

Kosoy, N., Corbera E., Brown K. 2008. Participation in payments for ecosystem services:

case studies from the Lacandon rainforest, Mexico. Geoforum. 39: 2073-2083.

MEA (Millennium Ecosystem Assessment). 2005. Ecosystem and human well-being:

synthesis. Island Press, Washington DC. Http://www.millenniumassessment.org/docu-

ments/document.356.aspx.pdf, last access July 2011.

Ministero dell’Ambiente della Tutela del Territorio e del Mare. 2009. Definizione del metodo

per la classificazione e quantificazione dei servizi ecosistemici in Italia.

Http://www.minambiente.it/export/sites/default/archivio/allegati/biodiversita/Verso_la_

strategia/TAVOLO_7_SERVIZI_ECOSISTEMICI_completo.pdf, last access July

2011.

TEEB. 2008. The Economics of Ecosystems & Biodiversity. An interim report, European

Communities. Http://ec.europa.eu/environment/nature/biodiversity/economics/pdf/te-

eb_report.pdf, last access May 2011.

UNEP (United Nations Environment Programme), Scientific and Technical Advisory Panel

(STAP). 2010. Payments for Environmental Services and the Global Environment

Facility, revised edition 2010. Http://www.unep.org/stap/LinkCli-

ck.aspx?fileticket=N1tMo87PkA%3D&tabid=2912&language=en-US, last access May

2011.

286

Wertz-Kanounnikoff, S., and Wunder, S. 2010. How Redd+ can learn from PES, CIFOR

(Centre for International Forestry Research, Washington D.C.

Wunder, S. 2005. Payments for Environmental Services: Some nuts and bolts. CIFOR (Centre

for International Forestry Research), Occasional Paper no.42.

Http://www.cifor.cgiar.org/publications/pdf_files/OccPapers/OP-42.pdf, last access July

2011.

287

/ColorImageDict > /JPEG2000ColorACSImageDict > /JPEG2000ColorImageDict > /AntiAliasGrayImages false /CropGrayImages true /GrayImageMinResolution 300 /GrayImageMinResolutionPolicy /OK /DownsampleGrayImages true /GrayImageDownsampleType /Bicubic /GrayImageResolution 300 /GrayImageDepth -1 /GrayImageMinDownsampleDepth 2 /GrayImageDownsampleThreshold 1.50000 /EncodeGrayImages true /GrayImageFilter /DCTEncode /AutoFilterGrayImages true /GrayImageAutoFilterStrategy /JPEG /GrayACSImageDict > /GrayImageDict > /JPEG2000GrayACSImageDict > /JPEG2000GrayImageDict > /AntiAliasMonoImages false /CropMonoImages true /MonoImageMinResolution 1200 /MonoImageMinResolutionPolicy /OK /DownsampleMonoImages true /MonoImageDownsampleType /Bicubic /MonoImageResolution 1200 /MonoImageDepth -1 /MonoImageDownsampleThreshold 1.50000 /EncodeMonoImages true /MonoImageFilter /CCITTFaxEncode /MonoImageDict > /AllowPSXObjects false /CheckCompliance [ /None ] /PDFX1aCheck false /PDFX3Check false /PDFXCompliantPDFOnly false /PDFXNoTrimBoxError true /PDFXTrimBoxToMediaBoxOffset [ 0.00000 0.00000 0.00000 0.00000 ] /PDFXSetBleedBoxToMediaBox true /PDFXBleedBoxToTrimBoxOffset [ 0.00000 0.00000 0.00000 0.00000 ] /PDFXOutputIntentProfile () /PDFXOutputConditionIdentifier () /PDFXOutputCondition () /PDFXRegistryName () /PDFXTrapped /False

/SyntheticBoldness 1.000000 /Description > /Namespace [ (Adobe) (Common) (1.0) ] /OtherNamespaces [ > /FormElements false /GenerateStructure false /IncludeBookmarks false /IncludeHyperlinks false /IncludeInteractive false /IncludeLayers false /IncludeProfiles false /MultimediaHandling /UseObjectSettings /Namespace [ (Adobe) (CreativeSuite) (2.0) ] /PDFXOutputIntentProfileSelector /DocumentCMYK /PreserveEditing true /UntaggedCMYKHandling /LeaveUntagged /UntaggedRGBHandling /UseDocumentProfile /UseDocumentBleed false >> ]>> setdistillerparams> setpagedevice