CIFOR Presentation: OECD Paris 2010

Center for International Forestry Research

Payments for

Environmental

Services:

Achieving

Efficiency in

Practice

Sven Wunder

Principal Economist

Our PES definition

1. a voluntary transaction where

2. a well-defined environmental service (ES) - or a land-use likely to secure that ES -

3. is being “bought” by a (min. one) ES buyer

4. from a (min. one) ES provider

5. if and only if the ES provider continuously secures ES provision (conditionality).

- Four areas of application: carbon, watershed, biodiversity, landscape beauty

- User vs. gov‟t financed PES

• Baselines

• Additionality

• Leakage

• Permanence

Vital concepts from theory

A) Static Baseline: ex forestry CDM

With payment

Without payment

Time PES

Additionality

Forest Carbon Stock

b) Deteriorating baseline: ex REDD

Time

REDD Implementation

Additionality

Forest Carbon Stock

With payment

Without payment

C) Improving baseline: ex C. Rica PSA

Time PES

Additionality Forest Carbon Stock

With payment

Without payment

Leakage:

-Def: Effectiveness loss due to threat displacement in space

- When target and intervention areas coincide, no leakage

- On-farm leakage - Leakage belt - GE effects (price)

Permanence: -The option of maintaining a service beyond of the temporal payment horizon

- Cannot normally be expected in PES implementation: you tend to get what you pay for, as long as you pay… externality persists

Design Lessons:

1. Focus on threat/ leverage areas

2. Pay acc. to customized cost levels

3. Focus on high-service areas

4. Strengthen conditionality

Threat very unequally distributed in space!

1. Variable threat – leverage

=>Watch out for adverse selection bias!

=>…especially in “conservation PES”

Of 1000 forest plots, only 5 go (0.5%)

2. Customize payments to costs

REDD Conservation Opportunity Costs

Brazilian Amazon, 2007-16

REDD Conservation Opportunity Costs

Brazilian Amazon, 2007-16

0

5

10

15

20

25

30

0 5000000 10000000 15000000 20000000

Deforestacion evitada (ha)

Co

sto

s d

e o

po

rtu

nid

ad

CCX temporario CCX permanente

Precious

timbers

Soy

Remotest

areas

Oil

palm Intensive

cattle

Annual

crops Extensive

cattle

Costs with a uniform payment rate

0

5

10

15

20

25

30

0 5000000 10000000 15000000 20000000

Deforestacion evitada (ha)

Co

sto

s d

e o

po

rtu

nid

ad

CCX temporario CCX permanente

Costs with differentiated payments

0

5

10

15

20

25

30

0 5000000 10000000 15000000 20000000

Deforestacion evitada (ha)

Co

sto

s d

e o

po

rtu

nid

ad

CCX temporario CCX permanente

3. Pay according to service levels

- What we want eventually is not just “additional forest cover” (=proxy), but “additional forest environmental services” (=output)

Costa Rica study (ZEF, CIFOR)

T. Wünscher: Targeting potential in PSA (ES

delivery, threat, opp costs (Nicoya Peninsula)

a) Nicoya: watershed protection

Criteria: a) water consumers b) slopes

b) Nicoya – forest carbon

Criterion: tCO2/ha

c) Nicoya – 4 services aggregated

Equal weights assigned

24

Can we combine three spatial targeting criteria?

1. Benefits

2. Threat

3. Costs

Problem Concept Results Data & Methodology PES in Costa Rica Conclusions

“Yes we can!”

25

Delivered Services

(quantified)

Site 1

Site 3

Site 2

Site 4

Service provision at plot level

Problem Concept Results Data & Methodology PES in Costa Rica Conclusions

26

Threat / leverage of plots

Delivered Services

Site 1

Site 3

Site 2

Site 4

x 0.4

Risk

x 0.1

x 1.0

x 0.0

Additionality

Additionality

Site 1

Site 3

Site 2

Site 4

Services

…e.g. risk of deforestation

Problem Concept Results Data & Methodology PES in Costa Rica Conclusions

27

Costs of plots

Site 1

Site 2

Site 3

Site 4

Site 5

64$

Participation

Costs

• Participation/social costs (opportunity + transaction + conservation costs)

• Program costs (social costs + rents)

Problem Concept Results Data & Methodology PES in Costa Rica Conclusions

28

GIS as Data Facilitating Framework

Biodiversity

Watershed

Carbon

Landscape

8

3 6 2

8 7

6

3 5

4 1 7

4

5

0.4

0.5 0.1

0.9 0.4

0.7

0.6

0.4 0.8

0.3 0.8

0.1

0.8

0.2 0.3

0.4 0.5

0.2

0.5

0.4 0.7

0.3 0.5

0.2

0.7

0.3 0.6

0.3 0.2

0.5

0.4

0.1 0.6

0.2 0.3

0.3

43$

53$ 221$

94$ 24$

17$

16$

45$ 81$

34$ 38$

13$

88$

22$ 33$

40$ 57$

20$

55$

42$ 70$

32$ 15$

12$

75$

23$ 62$

32$ 24$

25$

14$

10$ 6$

20$ 30$

33$

Threat

Provision

Cost

4

5 1

9 4

7

6

4 8

3 8

1

8

2 3

4 5

2

5

4 7

3 5

2

7

3 6

3 2

5

4

1 6

2 3

3 4

5 1

9 4

7

6

4 8

3 8

1

8

2 3

4 5

2

5

4 7

3 5

2

7

3 6

3 2

5

4

1 6

2 3

3 3

6 2

9 4

7

5

8 7

3 8

1

4

8 6

4 5

2

6

4 6

3 5

2

8

6 1

3 2

5

5

9 7

2 3

3 4

5 1

9 4

7

6

4 8

3 8

1

8

2 3

4 5

2

5

4 7

3 5

2

7

3 6

3 2

5

4

1 6

2 3

3

Selected Sites

Problem Concept Results Data & Methodology PES in Costa Rica Conclusions

4. Enforce conditionality

•Best of all worlds for PES recipients: cash in payments , while making little or no adjustments to „business as usual‟ (=e.g. deforest)

•Monitoring : probability of detecting non-compliance

•Sanctions : low sanctions => low expected penalty => low probability of losing payment

•Timing payments, ex ante vs ex post: keep leverage vs. frontloading

Conclusions & perspectives

1. PES have good preconditions for being effective and efficient: performance-based (=direct), voluntary, customizable => desirable „market-based‟ features

2. PES are also institutionally demanding (e.g. secure land tenure) and sometimes costly (e.g. negotiation)

3. Concerns about leakage and permanence can be valid, but don‟t over-emphasize them!

4. Heterogeneities in space (services, leverage, cost) are usually much more important efficiency drivers!

5. Conditionality is the key to PES – enforce it!

www.cifor.cgiar.org/pes/_ref/home/index.htm

Ex: Costa Rican gov’t PES –

what lessons? (+A.Pfaff)

•Pioneer showcase, learning by doing

•Uniform prices, self-selection, low targeting

•Little forest cover additionality of PES:

•A) Other factors had already slowed defor.

•B) Self-selection of low-threat areas, but…

•C) PES supplemented other policies (c & c)

•D) Forest quality outcome

I. User-financed schemes

- Examples: many watershed (Vittel, Catskills, Pimampiro…) and carbon schemes (Scolel Te, FACE…)

- Characteristics: mostly small-scale, single service - single buyer, seldom side objectives; focused

- Pros: targeting to high-service, high-threat & low-cost areas (e.g. differentiated payments), often close to „pure PES „; => effective

- Cons: a) hard to get voluntary buy-in for multiple-user externalities (biodiversity) – free–riding; b) tend to have large start-up costs => maybe not cost-effective?

challenge to make them cheaper to install (=cost-efficient)!

II. Gov’t-financed schemes

- Ex: PSA Costa Rica, Mexico, agri-envir (EU,US, China)

- Characteristics: large scale (nation-wide), many services, state acts as ES buyer, multiple side-objectives (politics), less focused

- Cons: often flat uniform payments, non-targeted, widespread “money for nothing” (low additionality) => often less effective in ES delivery

- Pros: a) adequate for ES with free–riding dominance (biodiv, multi-service layering); b) admin economies of scale => low-cost potential

challenge to make them more targeted and effective!

PES & legality: theory vs. practice

Source: Adapted from TEEB (2009)

No ES

(or increase forest cover, biodiv…) Service values,

provision costs