Stefano PagiolaWorld Bank1818 H Str NWWashington DC [email protected]
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 appropriatecredit to the author and the World Bank.
Stefano PagiolaLatin America and Caribbean Sustainable Development DepartmentWorld Bank
Market-based instruments and Payments for Environmental Services in forestryBarcelona, Spain – 17 December 2009
Lessons learnt from existing Payments for Environmental Services schemes
Stefano Pagiola, World Bank, 2009 2
World Bank support to Payments for Environmental Services
Completed projects:Costa Rica: EcomarketsColombia/Costa Rica/Nicaragua: Regional Integrated Silvopastoral Ecosystem Management
Projects under implementation:Brazil: Sao Paulo Riparian ZonesBrazil: Espírito Santo Biodiversity and Watershed RestorationCosta Rica: Mainstreaming Market-Based Instruments for Environmental ManagementMexico: Environmental ServicesPanama: Consolidation of the Atlantic Mesoamerican Biological CorridorWorldwide: LULUCF carbon projects
Projects under preparation:Colombia: Mainstreaming Sustainable Cattle RanchingBrazil: Sao Paulo Sustainable Rural DevelopmentKenya: Agricultural Productivity and Sustainable Land Management
Capacity building: Courses in Colombia, Dominican Republic, Ecuador, El Salvador, Mexico, Panama, Peru, Venezuela
Research: Case studies; Hydrological aspects; Poverty links; Valuation
Stefano Pagiola, World Bank, 2009 3
2. Charging service users
… and the economics1. Understanding the science…
From theory to practice
3. Paying service providers
Payment
Irrigation
Land users
Hydrological effects
Farmers
Hydropowerproduction
Domestic water supply
Electricity users
Water users
Water usersassociation
Hydropowerproducer
Water company
4. Establishing the institutional framework
Stefano Pagiola, World Bank, 2009 5
What services are needed?
Data source: CESAN
Carapina Water Treatment Station, Vitória, Espírito Santo, Brazil
Stefano Pagiola, World Bank, 2009 7
High potential payments
Low potential payments
Irrigation
Hydroelectricproduction
98MW
52MW
64MWPotable water
6 m3/sec
Río Nizao
Río Ocoa
Dominican Republic
Water services vary substantially
Stefano Pagiola, World Bank, 2009 8
Guatemala: Watersheds with hydroelectric power plantsGuatemala: Watersheds with large-scale irrigationGuatemala: Watersheds with domestic water use (>1000 hhs)
Where are the services?
Source: Pagiola, Zhang, and Colom, 2007
Guatemala: Watersheds with significant potential for water PES
1.9 million ha
Stefano Pagiola, World Bank, 2009 9
Targeting within a watershed
HRU18
HRU02
0609
12
2203
19
Eros
ion
(t/h
a/ye
ar)
0 5 10 15 20 25Area (ha)
130
50
0
100
Erosion in critical areas of Mishquiyacu watershed, Peru
Source: Quintero, Wunder, and Estrada, 2009
Others
• 23 Hydrological Response Units (3% of the watershed) produce 26% of total sediment
• 1 HRU(1% of the watershed) produces 17% of total sediment
Stefano Pagiola, World Bank, 2009 10
Links between forests and water services: Myths and reality
Myth: Forests increase precipitationReality: Minor effect, except at continental scale
Myth: Forests slow runoffReality: True
Myth: Forests increase total annual water flowReality: Because of increased evapotranspiration, forests usually reduce total
annual water flow. Exception: Cloud forests
Myth: Forests increase water flow in the dry seasonReality: Unclear
Myth: Forests reduce floodingReality: True at small scales, not at large scales
Myth: Forests reduce erosionReality: Depends on use that is made of deforested areas
Stefano Pagiola, World Bank, 2009 11
Links between land use and water services: How much do we know?
ServiceQualitative
understanding Ability to quantify
Total water quantity Good Medium
Dry season water flow Poor Poor
Flood risk Medium Poor
Water quality Good Poor
Sediment loads Good Medium/high
Stefano Pagiola, World Bank, 2009 13
Financing requirements
Up-front costs of creating the mechanismIdentifying and quantifying services
Creating payment arrangements
Payments to service providersPayments usually need to be long-term
Transaction costs of running the mechanismContracting, monitoring, administration, etc
Must be paid by service users
Stefano Pagiola, World Bank, 2009 14
Charging service users
Easiest when beneficiariesAre easy to identifyAre already organized
Easier to negotiate agreementsAlready have payment mechanisms
Are fewReceive well-defined benefits
Stefano Pagiola, World Bank, 2009 15
Why should service users pay?
Data source: CESAN
• Paying for conservation must be cheaper than the best alternative
• Users must think so
Additional investment
Additional operating costs+ Cost of interruptions
Carapina Water Treatment Station, Vitória, Espírito Santo, Brazil
Stefano Pagiola, World Bank, 2009 16
Water users do pay
Hydropower producer
Domestic water supplyBottler
Irrigated agricultureHotel
10
15/30
40
45+22
45
(US$/ha/yr): Total 18,000haca US$500,000/year
40
40
45
45
Energía Global
Platanar S.A.
CNFL/Río Aranjuez
CNFL/Río Balsa
CNFL/Río Laguna Cote
Florida Ice & Farm y Heredia ESPH
Azucarera El Viejo
Hidroeléctrica Agua Zarcas
Misc
0ha 2,000 ha 4,000 ha 6,000 ha
Renewed 2002
Renewed 2004
Stefano Pagiola, World Bank, 2009 17
Country CaseCharged a
new fee?
Costa Rica: Water users with contracts with FONAFIFOHeredia ESPH
NoYes
Ecuador: EMAAP-Q and EEQ: contributions to FONAGETAPA: Management of Cajas NPPimampiro
NoYesNo
El Salvador: San Francisco de Menéndez, Yamabal No
México: México PSAHCoatepec
NoYes
Venezuela: CVG-Edelca: payments for conservation of Río Caroní No
Who is actually paying?
In most cases, existing revenues are used to make payments
Stefano Pagiola, World Bank, 2009 18
How much should service users pay?
Maximum: value of the benefit
Benefits to land users
Costs to downstream populations
Deforestation and use for
pasture
Conservation Conservation with payment
for service
Payment
Maximum payment(including transaction costs)
Stefano Pagiola, World Bank, 2009 20
Who should be paid?
Río Blanco-Quimiagirrigated area 2400ha
Río Chambo
Río Blanco
Río Collanes
El Toldo
Diversion dam
Río Blanco HEP Plant 98MW
Quimiag
• Infiltration• Avoid contamination
• Regularity of flow• Avoid sedimentation
Mapping of critical areas in the Río Blanco watershed, Ecuador
Stefano Pagiola, World Bank, 2009 21
Paying service providers: Principles
Payments should be continuous and open-ended
Payments should be targeted
Avoid perverse incentives
Stefano Pagiola, World Bank, 2009 22
Paying service providers: Contract design issues
Require additionality?More benefits per dollar spentRisk of perverse incentives
Costa Rica PSA: No additionality requirementNicaragua/Costa Rica/Colombia Silvopastoral Project: Baseline payment + payment for incremental service provisionMexico PSAH: High deforestation risk increases likelihood of selection
Stefano Pagiola, World Bank, 2009 23
Paying service providers: Contract design issues
Types of contracts:Fixed priceProcurement auctions
All developing country PES mechanisms are fixed-priceFear of complexity of auction approachPerceived potential for manipulationTrade-off with social concerns
Improving the efficiency of fixed-price approaches:Limits on eligible areas (usually benefit-based)Point systems for ranking applications (benefit and cost-based)Differentiating payments (benefit and cost-based)
Stefano Pagiola, World Bank, 2009 24
How much should service providers be paid?
Minimum: their opportunity costs
Minimum paymentBenefits to land users
Costs to downstream populations
Deforestation and use for
pasture
Conservation Conservation with payment
for service
Payment
Maximum payment
Stefano Pagiola, World Bank, 2009 26
Components of a payment system
Environmental services
Land users
Serviceuser
$
$
$
$ $
Supervision mechanism
Financingmechanism
Paymentmechanism
Serviceuser
Serviceuser
Technical Governance
Stefano Pagiola, World Bank, 2009 27
Environmental services
Land users
Serviceuser
$
$
$
Supervision mechanism
Financingmechanism
Serviceuser
Serviceuser
Technical Governance
Components of a payment system
Functions:• Collects payments• Manages fundsNeeds:• MBAs• Accountants
Stefano Pagiola, World Bank, 2009 28
Environmental services
Land users
$
Supervision mechanism
Paymentmechanism
Technical Governance
Components of a payment system
Functions:• Promotion• Contracting with land users• Monitoring implementationNeeds:• Extension agents
Stefano Pagiola, World Bank, 2009 29
Components of a payment system
Environmental services
Land users
Serviceuser
$
$
$
$ $
Supervision mechanism
Financingmechanism
Paymentmechanism
Serviceuser
Serviceuser
Technical Governance
Logistically hardest task• Build on existing institutions• Trust• Logistics in place
Stefano Pagiola, World Bank, 2009 30
Environmental services
Land users
$
Supervision mechanism
Paymentmechanism
Technical Governance
Components of a payment system
Technical functions:• Identifying services• Identifying eligible land uses• Monitoring impact on services• Periodically adjusting eligible land usesNeeds:• Analysts (hydrologists, economists, etc)
Stefano Pagiola, World Bank, 2009 31
Environmental services
Serviceuser
$
$
$
Supervision mechanism
Financingmechanism
Serviceuser
Serviceuser
Technical Governance
Components of a payment system
Governance functions:• Negotiating agreements• Resolving disputesNeeds:• Stakeholder representatives
Stefano Pagiola, World Bank, 2009 32
Monitoring needs to be done at 3 levels
ImplementationDo land users undertake the contracted land use?
Impact on servicesDo changes in land use generate the desired services?
Impact on participantsIs the welfare of participants improved?
Stefano Pagiola, World Bank, 2009 33
Medium/Low
Very high
Medium/Low
High/Medium
Applying PES to different services
High
Medium/Low
Depends primarily on local conditions
Biodiversity conservation
Carbon sequestration
1. Understandingthe science
2. Charging serviceusers
3. Paying providers
Difficulty of application
WaterservicesStep
Stefano Pagiola, World Bank, 2009 34
Do you need a law?
For national policy, yesFor local mechanisms, no
Law imposes rigiditiesMay need law to remove obstacles (eg allow public utilities to spend money on conservation)
When have multiple actors, law can helpBut it can also become a cop-out
Stefano Pagiola, World Bank, 2009 35
Initial lessons
Not a universal solutionOne size does not fit allIdentify the services being provided clearlyUnderstand and document the links between land uses and servicesBegin from the demand side, not the supply sideMonitor effectivenessDesign flexible mechanismsMix and match with other mechanismsEnsure the poor can participate
Stefano Pagiola, World Bank, 2009 36
For more informationwww.worldbank.org/environmentaleconomics