Payment for Ecosystem Services: A financial incentive to save nature

Ecosystems of the world provide a multitude of services to human society. Any benefit we derive from ecosystems comprise of these services. They are categorized under different names like provisioning services (photosynthesis, soil formation), supporting services (agriculture, timber and any other product that is natural derived), cultural services (education, tourism) and regulating services (clean water, fresh air). If you think about it, you will realize that our lives cannot exist without these benefits.

Rivers in India are given enormous cultural value.

Do we pay for these services?

You may argue that we already pay for some or most of these services. Every product that is derived from the ecosystem is sold and bought in the market and therefore, has an economic value attached to them. Tourist pleasures derived from nature, also has a price attached to it. Processes like photosynthesis and soil formation are paid for by the price we pay for food and water.

But do these payments account for all the service ecosystem provides us? For example, are we paying the farmer for the food he grows, or are we also paying him for the health of the soil in which he grows the food?

Image result for payment for ecosystem services
Source: Google Images (IUCN).

The concept of payment for ecosystem services (PES) was developed because of the rampant degradation of the ecosystem for human development. Every year, we face an Earth Overshoot Day. This is the day when we run out of ecosystem services that all the ecosystems of the world can generate to meet human needs. It is alarming to note that this annual Overshoot Day is moving closer and closer to January, meaning that we are finishing up year’s worth of resources before the year ends!

Many believe that this over-exploitation has been because of the consistent failure to assign an economic value to the service that the ecosystems provide us (source). While we do pay for food and other direct ecosystem services, intangible benefits like climate regulation of forests are overlooked.

In order to ensure that the value of these ecosystem services were not overlooked, a market-based payment system was conceptualized (because everyone understands “markets”, don’t they?). By assigning an economic value to ecosystem services, we are highlighting the importance of that service and also giving people an incentive to protect and conserve the ecosystem service. This incentive is in the form of a payment that these “sellers” get to protect and ensure continuous flow of the ecosystem service.

In a PES system, there are four essential characteristics, which also form the definition of PES:

  1. A buyer: The people who access these ecosystem services
  2. A seller: The people who connect the service with the buyer, and therefore are the main stewards of this service
  3. A clear ecosystem service: like clean water, which is the most common form of service under the successful PES models of the world; and
  4. A conditionality where the payment from the buyer to the seller will continue for as long as the ecosystem service is secure.
  5. This payment is a completely voluntary transaction.

For example…

One of the most common PES models around the world involves clean water as an ecosystem service. To secure access to clean water that forest ecosystems provide, downstream communities would pay the upstream communities to protect forests in the river catchment. In the absence of such a payment, upstream communities are forced to cut down forests and convert land for agriculture. This causes problems like soil erosion and water pollution, which eventually harms the communities downstream who depend on the river for water.

One of the principle examples of this PES model was the New York City Watershed Program. New York was contemplating on building massive water purification plants to ensure clean water to the nine million people dependent on the New York Municipal Water Supply. It was a tried and tested approach to ensuring clean water, given that the upstream areas were rapidly urbanizing or being subject to very intensive agricultural practices. However, the cost of setting up these filtration plants as enormous and was dismissed as an unviable option. Thus, the City made what was, at the time, a revolutionary decision about protecting the purity of its drinking water. Instead of paying to clean up the results of polluting and degrading the pure water producing Catskill watershed, the City would pay to protect the rural Catskill environment that was providing it with the world’s best urban drinking water.

How are payments made?

Climate finance

Payments to the buyers can be done in a variety of ways. Payments are made in-cash, in the form of subsidies, through access to infrastructure and healthcare, changing land acquisition laws, alternate livelihood options, etc. The sky is the limit and innovative approaches for payments have cropped up around the world (see here for the Vittel PES case).

The payment mechanism depends on who is paying. If it is a government body alone (in case of Public Payments), the payment is in the form of subsidies, infrastructure, land titles and alternate livelihood opportunities. If it is a private entity (in case of Private Payments), the payments can be in-cash, through technology transfers, alternate livelihoods and are largely results-based. In case of a joint partnership (public-private-partnership scheme or PPP scheme), there is generally a mix mechanism that is customized to the location.

A very small example of a PES-like model was demonstrated in India in the city of Chandigarh. In this case, the payments were in the form of infrastructure alone. The city is famous for Sukhna Lake, which was a recreational site in the city. In the 1970s, the lake began to silt up due to soil erosion from the upstream catchments, where forests were being cut down for agriculture. Most of this activity was traced back to one village, called Sukhomajri. Over 68.5% of the storage capacity of the lake had already been filled with silt and faced imminent extinction. Farmers upstream were intensely bringing land under grazing or agriculture because every monsoon, their existing lands would get washed away.

To prevent this, earthen dams were created which blocked the rapid flow of water in the monsoon. This gave the farmers an alternate irrigation source and also protected their fields. They were incentivized to not bring more land under cultivation, preventing deforestation and subsequent soil erosion (see Kerr, 2002 for more).

An important criteria: Willingness

It is absolutely important to understand that a PES model cannot work without the cooperation of both buyers and sellers. The buyers have to first accept that ecosystem services need to be given an economic value, and they should also accept the value that is proposed. One of the major challenges to a successful PES model is the very high values given to ecosystem services. This is possible in most cases, because it is very difficult to isolate co-benefits and therefore, the economic value gets compounded.

The other challenge, faced at the seller end, is to show that the alternatives suggested by the PES model would lead to better lives as compared to their current business-as-usual approaches. They need to be incentivized to adopt the new, environmentally sound practices because they are the ones who need to sustain them.

Many a times, these barriers prevent PES models from functioning. Every PES case is different because of different landscapes, different people, different incentives, different ways of thinking and different types of value assigned to ecosystem services.

Such challenges were faced during the New York Watershed Program. As the City
made clear its intentions to address non-point source pollution seriously, and began a
program of serious regulatory enforcement against the worst polluters (initially out of
control developers), farmers and other rural landowners reacted angrily and, animated by memories of ham-handed environmental regulation in the past, denounced the City and vowed all out resistance to the urban invaders who intended to undermine their livelihoods and destroy the value of their land. These issues were resolved through extensive consultations and educational sessions in which both upstream and city officials participated actively. Thus, stakeholder engagements are critical to bring about a successful PES model into play.

In conclusion…

PES is a very versatile model that seeks to promote environmental protection by economically incentivizing people. Many, including me, believe that this is a novel way to approach sustainable development and can be very successful if implemented properly.

There is a lot more to PES, and cannot be covered in one article. Stay tuned for more posts on the subject, where I will cover PES methodolgies, PES successes and failures around the world and what we can expect in the future.

Author: Saurab Babu

Usually found sitting with a good book, nibbling on a piece of dark chocolate. Always ready for a good story.

7 thoughts

    1. It is a great idea! It’s being implemented in various ways around the world, but it hasn’t been gaining as much traction as was initially expected.
      Let’s hope for the best!


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