Payments for Ecosystem Services explained: financing the planet’s regeneration

More than half of the world’s total GDP is dependent on Nature [1]. There is an intrinsic and commonly recognizable value to the natural world, that is reflected, economically, in the concept of ecosystem services. So, how do these services work?

Some of the services delivered by Nature — the provisioning ecosystem services — were always bought and sold in markets, such as food, medicinal products, fibres, or timber. Most of the services provided by ecosystems, however, were not recognized economically until very recently. The regulating, supporting, and cultural ecosystem services encompass the multifunctional role of the natural world, providing us with soil fertility, clean air and water, risk regulation of climate-related events, regulation of plagues and overall ecosystem health, as well as cultural identities, social wellbeing, and spirituality.

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Throughout history, societies shaped the natural world to maximize the production of those services that did have a market expression. Forests and grasslands were destroyed to produce cereals and graze cattle, continuously depleting the safety net allowing for the sustained provision of this broader set of services: biodiversity. The process of global landscape simplification, that happened mostly through industrial agriculture, has degraded drastically our soils and water cycles, decreased abruptly genetic resources and harmed almost irreparably the resilience of the natural systems. Today, coupled with climate change, these risks are rapidly becoming unmanageable [2],[3].

Payments for Ecosystem Services (PES) are policy and market instruments that reward ecosystem managers for the benefits the ecosystems they manage provide[4]. The concept emerged as a tool to measure and label these contributions of Nature to people and quantify them economically. Several methodologies for assessing this value have been created and there is a myriad of different governance and financial models associated with these instruments. In 2018 there were over 550 programs around the world mobilizing over US$36 billion in annual transactions [5]. Most of these projects revolved around watershed protection, forests/carbon capture, and habitat/ biodiversity conservation.

The financing models can be of three main types:

1) Direct beneficiaries of the ecosystem services paying to landowners (e.g.: hydroelectric companies and cities benefiting from the erosion control forests provide to watersheds, thus allowing for water availability and quality and flood control). The example of the Catskills watershed PES, in upstate New York, that started in the 90s is a good case study of this type of financing.

2) Direct government funding, that generally addresses ecosystem service provision as a public good, that benefits society as a whole (monitoring all types of bioindicators and social and economic outcomes). The program Pago de Servicios Ambientales in Costa Rica is one of the main examples of successful government implemented programs, from 1997 to 2005 the national forest cover increased 42% with over US$110 million in transactions to land managers.

3) Compliance investment that pays for ecosystem services to comply with CO2 offsetting/ credit requirements. The Biodiversity Offset and Banking Scheme, implemented by the New South Wales government in Australia is a good example of compliance investment in Ecosystem Services.

Two independent studies [5][6], analyzed over 50 successful applications of PES schemes, in Latin America and Germany respectively, in both cases the comparative analysis revealed some critical success factors for the deployment of PES instruments:

  • Ecosystem Services being traded and what is their importance for the local community.

Programs that address the provision and quality of a critical resource for the livelihoods of the local community show success. The local community involvement is of critical importance for the maintenance of beneficial practices for the ecosystem, that allows for continued service provision. Also, there is the probability of positive externalities, such as the improvement of aesthetic value and improvement in the social and economic conditions of populations that benefit from PES programs.

  • Spatial and temporal scale.

Local and regional geographical scales are the most widely used and indicate several advantages, such as a stronger license to operate, coordination of collective action, and cost-efficiency. Regarding the temporal scale mid- to long-term commitments (10–30 years) improve success, this has to do with the exponential aspect of ecosystem regeneration and with the risk of ecosystem managers exiting the programs before maturity.

  • Transaction types.

There is evidence that in-kind contributions such as infrastructure, tools, seeds and seedlings, and capacity building training programs improve the level of success. The shortcoming is their inability to ensure conditionality on outcomes as these contributions should happen rather early in the process. In that sense, outcomes-based payments, tied to the actual measurement of the ecosystem services being provided, warrant higher trust between all stakeholders and align the incentives for service provision.

  • Actors involved.

Programs that involved private landowners, such as farmers, correlate positively with higher levels of success. Government involvement also brings many advantages such as lower transaction costs and contracts enforcement. The involvement of intermediaries, such as civil society organizations, brings trust into the schemes, these ‘honest brokers’ can integrate and engage actors with different levels of authority and can more easily mobilize private funding.

The complexity of the pressures the natural world is suffering can be discouraging and paralyzing. There is an established cultural epistemology that constrains the deployment of effective solutions. Although PES programs are not a one-size-fits-all solution for the environmental breakdown they can show a significant impact on context-specific challenges. The European Union Biodiversity strategy for 2030 is shedding new light into ecosystem conservation and regeneration, namely through the compensation of ecosystem services, it is a beginning, but still, the negative effects on our environment clearly overcome the efforts to protect it.

At MAZE, a big part of or work is finding innovative financing and governance mechanisms for impact-focused projects. This implies understanding the systems behind the challenges and establishing collaborative relationships with our stakeholders. We believe that by creating the right incentives for action we can overcome the big social and environmental challenges ahead. If you share our belief reach out and let’s act together. There is an urgent need for all of us, as a global community, to stop trying to prove that problems really do exist, and start deploying solutions, regardless of the level of uncertainty.

1 — Nature Risk Rising: Why the Crisis Engulfing Nature Matters for Business and the Economy. World Economic Forum in collaboration with PwC.

2 — IPBES (2019): Summary for policymakers of the global assessment report on biodiversity and ecosystem services of the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services. S. Díaz, J. Settele, E. S. Brondízio E.S., H. T. Ngo, M. Guèze, J. Agard, A. Arneth, P. Balvanera, K. A. Brauman, S. H. M. Butchart, K. M. A. Chan, L. A. Garibaldi, K. Ichii, J. Liu, S. M. Subramanian, G. F. Midgley, P. Miloslavich, Z. Molnár, D. Obura, A. Pfaff, S. Polasky, A. Purvis, J. Razzaque, B. Reyers, R. Roy Chowdhury, Y. J. Shin,I. J. Visseren-Hamakers, K. J. Willis, and C. N. Zayas (eds.). IPBES secretariat, Bonn, Germany. 56 pages.

3 — WEF (2019), Global Risks Report 2019.

4 — Salzman, J. et al. 2018. The global status and trends of Payments for Ecosystem Services

5 — Sattler, C. et al. 2013. Multi-classification of payments for ecosystem services: How do classification characteristics relate to overall PES success?

6 — Grima et al. 2016. Payment for Ecosystem Services (PES) in Latin America: Analysing the performance of 40 case studies

Photo by veeterzy on Unsplash

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