payments for ecosystem services: an analysis of cross-cutting issues among 10 case studies

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Payments for Ecosystem Services:

An Analysis of Cross Cutting Issues in 10 Case Studies

Manager: Alexandra Varga

Deputy Manager: Judith Harwood

Team: Maha Bahamdoun, Dana Coyle, Emmanuel Flamand, Myriame Gabay, Emmanuelle Humblet,

Erika Leung, Nosisa Ndaba, Carlos Rymer, Ariani Wartenberg


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Columbia UniversitySpring 2009 Workshop

Payments for Ecosystem Services (PES)

To Forest Trends:

The Columbia University 2009 Spring Workshop group is pleased to present our work to date onpayments for ecosystems services (PES). This document is an overview of ten PES case studies from

around the world and an analysis of cross-cutting issues that impact the effective set-up of PES schemes.

Our analysis is based on three months of extensive research on specific case studies and a generalliterature review on PES. We collected information mainly through internet research and soliciting

personal contacts from sources associated with several of our case studies.

Regrettably, our current analysis lacks a community perspective on the effectiveness of PES schemes

because we were unable to establish contacts beyond the NGOs initiating the PES scheme. We feel that

conducting community member interviews would provide valuable insight and contribute to a balanced

and accurate account of the impact of the ten PES projects at a local level.

The document is a culmination of our efforts; however we consider this analysis as Phase I of a twophase process. We recommend several next steps to enhance the utility of this document as a

communication tool and a valuable source of information for PES initiators.

Phase II:

- Distribute information obtained in Phase I to its contributors and receive feedback- Direct efforts to obtain a community perspective through additional interviews- Continue to seek out information about 10 case study for status updates and new developments- Undergo a process of peer review in order to ensure that information obtained in Phase I andPhase II are as factually accurate as possible

Implementing Phase II may require close contact with members of the Columbia University Spring 2009workshop group. Any questions that you may have can be directed via email or phone to:

Judith Harwood Alex Varga510-557-9489 908-581-8548

[email protected] [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

Table of Contents.............................................................................................3

Executive Summary...........................................................................................4

A. Introduction................................................................................................5

B. Analysis Method............................................................................................7

C. Case Study Analysis: Components Affecting PES Project Design...................................91. Self-organized Private PES Deals................................................................9

Land Tenure..................................................................................10Small Spatial Scale..........................................................................10

Initial Funding and Preliminary Research...............................................11Community Involvement...................................................................12

2. Formal PES markets.............................................................................15Transaction Costs...........................................................................16Lack of Access to Credit...................................................................19Land Tenure..................................................................................19Community Empowerment................................................................20Bundled Services............................................................................21

3. Publicly-Funded PES Schemes..................................................................25Initial Funding...............................................................................25

Distribution of Funds.......................................................................27Transaction Costs............................................................................27Land Tenure..................................................................................28Monitoring....................................................................................28Community Involvement...................................................................29

D. Emerging Themes........................................................................................33

E. Looking Ahead: Other Issues to Consider.............................................................37

F. Appendices................................................................................................39

Appendix A: Locations of PES Scheme Case Studies...........................................40Appendix B: PES Scheme Case Studies...........................................................41

References....................................................................................................62

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Over the course of the last century, the need to address trends of human overuse anddegradation of global ecosystems has become increasingly pressing. Payments for eco-system services (PES) represent an emerging attempt to change resource use patterns,and increase awareness and adequate valuation of ecosystem services by integratingthem into local and global economic markets. Forest Trends, as part of the TransLinkspartnerships, has supported the development and implementation of PES systems in

communities all around the world.

In order to provide Translinks with an update on the current status of PES projects, thefollowing report draws from past literature, as well as from ten case studies of communi-ties around the world that have implemented PES schemes. Ecosystem services is still anascent concept. As a result, the majority of these projects are still in their initial phasesof design and implementation. In the following analysis of these projects, we identify aset of cross-cutting issues that are inuential in establishing well-dened PES schemes,an integral component to a projects long-term sustainability. To guide this analysis, wedecided to use Sven Wunders (2007) 5 criteria for dening PES outlined in our methodol-ogy as his denition has been well-cited in PES literature.

We dene three categories of PES projects - private, formal-market, and publicly-funded- that account for a variety of environmental services. For each of these categories, weidentify distinct issues that need to be addressed to establish a well-dened PES project.When starting up a private scheme, it is particularly important to address clear denitionof property rights and of buyers and sellers involved. Setting clear objectives within alocalized area and securing initial funding also promote subsequent project success. Fi-nally, communities should be involved in the contracting process as well as other aspectsof the project. Within formal market-based PES schemes, our analysis focuses on carbonsequestration projects. In this category, the main challenges to overcome are high trans-action costs, lack of access to credit, as well as ensuring dened land tenure. Here, too, itis necessary to involve communities in project processes, and to consider using bundled

services, which are signicant as they can provide additional incentives for participationin PES schemes. In the case of public schemes, which generally imply strong governmentinvolvement, the main components to address are securing initial funding, proper distri-bution of funds, reduction of transaction costs, monitoring, land tenure, and communityinvolvement, as discussed in detail Section C.

From the analysis of the three categories of PES schemes we were able to distinguish aset of themes that are relevant to all types of PES projects and that should to be con-sidered when designing PES schemes. These emerging themes involve property rights,transaction costs, the effects of scale, institutional frameworks, as well as the amount ofcommunity involvement in projects. This discussion is contained in Section D, EmergingThemes.

Lastly, all of the evaluated case studies incorporated an element of poverty alleviation.Section E, PES and Poverty, presents some effects of PES on the poor which are importantto consider when designing a project. While PES were not originally designed to addresspoverty, we nd that these projects can have strong impacts on the poor, and in somecases can constitute an important underlying driver of project success. We therefore sug-gest that it is necessary to integrate into PES design knowledge of the site-specic socio-economic conditions and community structure, in order to promote equitable, long-termviability, and success.

EXECUTIVE SUMMARY

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INTRODUCTION

services true economic values in thetraditional market. PES are attemptsto support positive incorporation of

environmental externalities through thetransfer of financial resources frombeneficiaries of certain environmen-tal services to those who providethese services or are the stewardsor owners of environmental resources(Commission for Environmental Co-operation of North America, 2004).While PES are relatively new, withthe support of organizations like the

Wildlife Conservation Society and For-est Trends, communities all over theworld are in beginning phases of im-plementing sustainable PES schemes.These organizations, as well as Co-lumbia University, the Land TenureCenter of the University of Wis-consin and Enterprise Works/VITA,

Ecosystems provide a number of ser-vices that contribute to human well-being, such as food, water, dis-ease management, nutrient cyclingand climate regulation. In addition,many benefit from the recreational or

aesthetic value that nature provides(MEA, 2005). While many of theseservices are integral to the survivalof life on earth, they are rarely givenvalue in the traditional market system.In a study of ecosystem services,Costanza et al. (1997) determinedthe average global value of theseservices to be approximately US$33trillion per year.

However, over the past 50 years,

humans have rapidly and extensive-ly degraded the very ecosystems onwhich we rely. Deforestation, pol-lution, and reduced biodiversity arecontinually diminishing the ability ofthe environment to provide these in-tegral services and the quality of theservices. Steps need to be takento reverse this dangerous trend andprotect valuable ecosystems and the

services they provide. These stepsinclude social and behavioral re-sponses, institutional reform, tech-nological responses, and economicincentives. Payments for ecologi-cal services (PES) is an emergingmethod that aims to incorporate all ofthese steps by assigning ecosystem

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issues based on their market, locationand other characteristics, our analysisrevealed that defined property rights,transaction costs, the effects of scale,the institutional framework and theamount of community involvement arerelevant issues across the majority ofPES schemes. Lastly, this paper dis-cusses how PES schemes affect thepoor, and suggests some areas forcontinued research.

with a five-year grant from the U.S.Agency for International Development,have formed the partnership, Trans-Links. TransLinks has focused on theissue of PES because of its potentialto both protect and maintain valuableecosystem services as well as allevi-ate poverty in rural areas where eco-system services are often richest. Assuch, ecosystem services can be amedium to equitable and participatorygovernance. The following analysisattempts to both update TransLinkson the status of PES projects andidentify a set of cross-cutting issuesthat are influential in determining thesuccessful design of a PES schemeand the implications that it has forthe sustainability of PES projects.

Specifically, this paper combines areview of PES literature as well as

research on ten independent casestudies in nine different countries.Through our research we were ableto delineate three distinct types ofPES schemes: private, public andformal market, accounting for the en-vironmental services of carbon se-questration, water filtration and theprotection of biodiversity. Becausethe projects reviewed in our casestudies are either still in or justcoming out of the design phase, thispaper focuses on the issues in-volved in establishing a well-definedPES scheme, using criteria definedby our literature review describedin our methodology. While eachtype of PES scheme faces unique

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ANALYSIS METHOD

(4) The ecosystem service mustbe provided by at least one seller

(5) Payments occur if and onlyif the seller continues to pro-vide that service (conditionality).We used these desired features of PESschemes as a framework to systemat-ically analyze what factors in the casestudies contributed to the projectsattainment of these characteristics.

Our analysis consists of two parts.First, we divided each case studyinto the three different types of PESschemes described above: (1) Self-organized private PES Deals; (2)Formal markets with open tradingschemes; and (3) Publicly funded

We based this analysis on an evalu-ation of 10 case studies, incorporatingrelevant findings from PES case studyliterature. The PES projects analyzedin these case studies were each lo-cated in disparate areas of the world,

and comprised of differing paymentframeworks and ecosystem servicemarket types. Each case study alsowas at a different stage of imple-mentation. However, generally, theprojects reviewed in our case studieswere either still in or just coming outof the design phase. Because thedata on long-term success of theseprojects are unavailable, this paperfocuses on the issues involved in es-

tablishing a well-defined PES scheme.A well-accepted definition of PES isprovided by Sven Wunder (2005)as having the following key features:

(1) Transactions must be voluntary inthat both the buyer and seller shouldvoluntarily participate in the PES scheme.

(2) The ecosystem service or

form of land use likely to securethat service must be well-defined,

(3) The ecosystem service musthave at least one buyer

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Project in China (Forest Restoration)- The Pico Bonito Project in Hondu-ras (Pico Bonito)- The Protecting the Sierra GordaBiosphere in Reserve in Queretero,Mexico (Sierra Gorda)1

3. Publicly funded PES schemes- The Joint Forest Management Agreements Project in Tanzania(JFM)

- The Mgahinga Bwindi ImpenetrableForest Conservation Trust Project inUganda (Mgahinga Bwindi)- The Working for Water Project inSouth Africa (Working for Water)- The Protecting the Sierra GordaBiosphere in Reserve in Queretero,Mexico (Sierra Gorda).

PES schemes. By subdividing thePES Case Studies in this way, ouraim was to discern trends specificto each PES market type and iden-tify some key components affectingthe design of PES schemes. Thefindings of this analysis are pre-sented in Section C, Case Study

Analysis: Components Affecting PESProject Design. Next, we lookedacross the three PES types to identifyemerging trends common to all casestudies. These cross-cutting issuesare described in Section D, Emerg-ing Trends.

The 10 case studies used for thisanalysis, grouped by PES type, areas follows:

1. Self-organized private PES Deals

- The Equitable Payments for Wa-tershed Services Project in Tanzania(CARE/WWF)

- The Fostering PES in the DanubeBasin Project (Danube)

- The Rewarding Upland Poor forEcosystem Services (RUPES) Proj-ect in Indonesia

2. Formal markets with open trad-

ing schemes- The Paying for Biodiversity Conser-vation Services in Agricultural Land-scapes in Nicaragua Project (Silvo-pastoral Project)

- The Forest Restoration for Climate,Community, and Biodiversity

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1 Note that while the SierraGorda project was primarily a public-ly-funded scheme, it has a carbon-market component. Some elements ofthis case were therefore also evalu-ated in the formal-market analysis.


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As previously discussed,meeting the 5 PES cri-teria when setting up aPES project is integral tothe ultimate success ofthe project. The compo-nents involved in meet-ing these criteria varyby type of PES scheme,as each type has dis-tinct characteristics thataffect the challengesthat must be overcome

SELF-ORGANIZED PRIVATE PES DEALS

natural landscape; companies seekingto purchase offsets rely on the carbonsequestration abilities of forests; and

water utility companies and agriculturalwater users benefit directly from secur-ing a stable water supply and improvedwater quality (Forest Trends, TheKatoomba Group, & UNEP, 2008).

Our team identified three privatePES case studies that exist out-side of the formal carbon market:Rewarding Upland Poor for Ecosys-

tem Services in Indonesia (RUPES),Fostering Ecosystem Services in theDanube Basin (Danube), and a joint CARE/WWF scheme, Equita-ble Payments for Watershed Servic-es in Tanzania (CARE/WWF). Allthree are designed primarily to im-prove water quality, with biodiversity

Self-organized private deals are onetype of PES arrangement in whichbeneficiaries contract directly withservice providers. This can takeshape in the form of a voluntarymarket-based scheme (discussed in

a later section), but can also existin the absence of a formal mar-ket system. In these cases, privatecompanies pay landowners for landuse changes or management prac-tices that result in an improved eco-system service (Forest Trends, TheKatoomba Group, & UNEP, 2008).Motivating factors for private compa-nies vary, but there are three primaryreasons why they participate in pri-

vate PES deals. Companies can bemotivated to enter into PES deals by(1) new or pending regulations, (2)the promise of a business opportunity(i.e. reduced costs, improved greenimage, return-on-investment, etc),or (3) a charitable or philanthrop-ic purpose (Forest Trends, 2006).

The ecosystem services most of-

ten involved in private PES dealsare biodiversity conservation, carbonemission offsets, and watershed pro-tection. Direct beneficiaries can existfor each of these services. For ex-ample, conservation agencies or thetourist industry benefit from protect-ing key species and preserving the

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going directly from the buyer to theseller for the provision of a particularenvironmental benefit or improvement.Furthermore, established propertyrights then make the development ofa formal contract a more straightfor-ward process. For example, in theCARE/WWF project, by knowing whoowned the property rights of landupstream, Dar es Salaam Water andSewage Corporation and Coca Cola

Kwanza (the buyers) were able toenter into an appropriate contract andpay the correct parties for the supplyof the ecosystem service. Once initialresearch was completed, the Dar esSalaam Water and Sewage Corpora-tion and Coca Cola Kwanza (thebuyers) entered into a Memorandumof Understanding with the KibungoJuu community (critical upstream

land-users and the sellers). Now,as the PES progresses, the proj-ect can be monitored to ensure thatthe sellers are providing an additionalenvironmental benefit to the buyers.In the future, if environmental and/or social conditions change, the par-ties can renegotiate their agreementas necessary.

SMALL SPATIAL SCALE

The ecosystem services most oftenincluded in private PES deals (biodi-versity, watershed protection) are toospatially specific for global markets.Instead, they are usually confined toa more localized region, such as aspecific watershed. Watersheds for

and landscape aesthetic as second-ary goals.

A literature review on PES provid-ed consistent findings on criteria thatcontribute to the success of self-or-ganized private deals: land tenure, asmall spatial scale, and initial fundingand research. Our cases supportthese findings and also present otherthemes, including the importance of

community engagement.

LAND TENURE

Southgate and Wunder (in press)have found that one key to the suc-cess of private PES deals in Lat-in America has been well-definedproperty rights. Well-defined propertyrights help identify service providers(sellers) and service beneficiaries

(buyers), which in turn helps ensurecooperation and adequate compensa-tion. Pagiola and Platais (as citedin Engel, S., Pagiola, S., Wunder,S., 2003) concur, noting that pri-vate deals are likely to be more ef-ficient than other PES schemes sincethe buyer and seller are directly in-volved, have an incentive to ensurethe system is functioning properly,and have the ability to renegoti-

ate the agreement. In all three ofthe private PES cases we investi-gated, land owners and users wereidentified upfront before further pro-gram development proceeded. Landtenure is important to self-organizedPES deals because the payments are

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land tenure is integral to initiating a

PES program. These steps ensurethe buyers and sellers of the ecosys-tem service(s) are properly identi-fied, which increases the potential forthe projects long-term success.

INITIAL FUNDING ANDPRELIMINARY RESEARCH

A commonly cited challenge to PESsuccess is that of unproven environ-mental benefits (Southgate and Wun-der, in press). Preliminary researchis an integral part of setting up asuccessful PES deal to determine theactuality of environmental services.The ability to conduct preliminary re-search is often determined by theavailability of a large initial investment.The RUPES case and the CARE/WWF provide an excellent contrastin the level of preparatory research.

Phase one of the CARE/WWF proj-ect focused on extensive hydro-logical studies that identified variousupstream conservation hot spots(areas of high biodiversity), that,if properly managed, could signifi-cantly improve water quality down-stream. This project is currentlymoving into phase two; where theywill work further to establish clear and

measurable relationships between up-stream land use changes and down-stream water quality improvements.

In contrast, the RUPES project did nothave initial funding to conduct researchlinking land use with environmental

large rivers can be quite extensive

(like the Danube River watershed forexample), but these can be brokendown into smaller watershed areas forthe purpose of a PES deal. TheDanube River is the longest river inthe European Union and its water-shed covers 817,000 square kilo-meters. However, the Danube caseanalyzed by our team focused ona pilot project located in the Mara-mures region of Romania, a smaller

Danube catchment area. This pi-lot, in the town of Baia Mare, hasa considerably smaller spatial scalethan the entire Danube River Basin.Because this project is focused on asmaller catchment area, it is easierto define upstream service provid-ers and downstream service benefi-ciaries. Conversely, defining buyersand sellers for a one-size-fits-all

PES covering the entire Danube RiverBasin would be challenging, time-consuming and expensive.

Spatial scale and land tenure are mu-tually reinforcing as the scale of theproject is often determined by landowners in the area. In the RUPESProject in Indonesia, the project areawas defined by the border of villagesupstream of Lake Singkarak. TheCARE/WWF project in Tanzania fo-cused on one critical upstream landuser, the Kibungo Juu community inthe Ruvu River watershed, to definethe projects spatial scale. Bothdetermining the appropriate spatialscale and subsequently determining

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to funding. In this project, initialenvironmental studies were performedas part of other projects already oc-curring in the Maramures region (Dr.Yanka Kazakova, personal communi-cation, February 26, 2009). Financ-ing for WWFs on-site project teamwas also obtained as part of otherprojects already in the area. At thetime this report was written, WWFwas resubmitting a proposal to theGlobal Environment Facility (GEF) toobtain funds to implement the pay-ment scheme. In this case, WWFtook advantage of existing funding,research and organizing capacity toobtain the information they needed toset up the PES properly. Fundingis still an issue, however, since theystill need financial resources to beginimplementation.

COMMUNITY INVOLVEMENTCommunity involvement has been animportant component of overall projectsuccess in at least two of the privatePES deals: RUPES and Danube. Inboth cases, the communities provid-ing the ecosystem service were theones promoting the idea of payments.While the concept of a PES may nothave been clearly identified initially, it

developed as a result of involving thecommunity. In the RUPES project,local villages were entitled to royaltiesfrom the hydroelectric power com-pany, but were not receiving them.The PES scheme developed after lo-cal villages began demanding the

benefits prior to setting up a paymentscheme. A regulatory framework al-ready existed that required the hydro-electric power company to pay roy-alties to upstream villages, althoughthese payments were not being made.Upstream communities became moreinvolved and PES was used as amechanism to receive payments onthe presumption that certain land

use changes would improve hydro-logic flow into Lake Singkarak, whichwould in turn benefit the hydroelec-tric power plant. It was only afterthe PES system was established thathydrologic studies showed land usechanges had very little to do with theincreased water flow. The studiesdetermined instead that climate vari-ability was the cause of the improvedhydrology. This finding caused the

PES scheme to be revised, wherepayments are now being made forpreservation of landscape aestheticrather than for improving hydrologicconditions. While the PES schemewas able to be adapted for a differ-ent environmental service, it illustrateshow important the initial research is forproject design. PES deals may notbe structured appropriately, creatinga higher potential for eventual failure.In addition, there may not alwaysbe an appropriate secondary objec-tive for the PES to fall back upon.

The Danube case has taken a differ-ent and somewhat creative approach

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SELF-ORGANIZED PRIVATE PES DEALS KEY ISSUES AFFECTING PROJECT DESIGN

Land tenure

Local property rights and usage rights issues should be addressed in project design. It is important to work with exist-

ing national and local institutions to transfer incentives and responsibilities to local land owners or land users. This

helps dene buyers and sellers and thus aids in contract negotiation, a critical aspect of self-organized private PES deals.

Small Spatial Scale

Spatial scale and land tenure are closely related. It is generally simpler to identify land tenure and usage rights in

a limited area. In addition, a scientic link between land use changes and environmental benet will be easier to

establish within a smaller area.

Initial funding & Preliminary Research

Project goals and objectives should be clearly dened at the initial stages of project design. Funding is necessary

to support preliminary research to dene a link between land use change and environmental benet. This link is

necessary to ensure adequate distribution of funds, which also keeps the stakeholders engaged in the project a key

component of self-organized private deals.

Community involvement

Ensure community involvement in all phases of the process to encourage community empowerment over time. Thisshould take into account the local social and cultural norms. Community involvement also ensures a continued will-

ingness to participate, which is critical to the long-term viability of self-organized private PES deals.

royalties to which they were entitled. In the Danube project, the idea of developinga payment scheme for ecosystem services stemmed from a local workshop to educatethe community about the relationships between land use, water quality, and biodiver-sity. Local residents chose PES as a way to improve their water quality and protectlocal biodiversity. This is important because it shows the communitys willingness toparticipate as engaged stakeholders in the process, which should make developing acontract smoother and increases the potential for long-term success of the project.

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FORMAL PES MARKETS

methodologies that can be used tomeet this cap. Buyers and sellers ofthe PES projects are defined with-

in the legislation, and often buy-ers (regulated entities) can onlyuse PES projects to meet a cer-tain percentage of their cap. Regu-lated entities can develop and fi-nance these PES projects directly tomeet their cap, or purchase creditsfrom brokers and project developers.Examples of formal trading schemesinclude the Kyoto Protocol Market,

European Union Emission Trad-ing Scheme (EU ETS), New Zea-land Emission Trading Scheme, andRegional Greenhouse Gas Initiative(RGGI) in the U.S. (Forest Trendset al., 2008; Dannecker, 2008).

This section focuses on the challengesfaced in setting up PES projects wherethe purchase of ecosystem services isconducted within the framework of aformal market. Although formal tradingschemes are being set up for a va-

riety of environmental services, suchas water and wetland mitigation, thissection focuses on carbon seques-tration, the most robust internationalmarket. Benefits of carbon sequestra-tion are global, thereby creating aninternational pool of potential buy-ers for carbon sequestration services.

Forest Trends et al. (2008) and Dan-necker (2008) distinguish two types offormal market trading schemes: com-pliance markets and voluntary markets.

(1) Compliance Markets are regula-tory ecosystem service markets thatare created by legislation, in whicha conglomerate, spanning from acertain type of industry (i.e. powerplants) to a coalition of countries(i.e. Kyoto Protocol Annex I coun-tries), are subject to a cap, or a

limit on their carbon emissions. Reg-ulated entities can then meet this capthrough direct mitigation and reduc-tion efforts, or by trading with oth-ers who are able to meet their capat a lower cost. Legislation oftenhas certain provisions and limitationsfor the types of PES schemes and

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As previously discussed,meeting the 5 PES cri-teria when setting up aPES project is integral tothe ultimate success ofthe project. The compo-nents involved in meet-ing these criteria vary

by type of PES scheme,as each type has dis-tinct characteristics thataffect the challengesthat must be overcome

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Most PES schemes that involve car-bon market financing focus on for-estry projects, with a handful arisingfrom land use changes in agricul-tural landscapes. Three of the fourcase studies assessed in this sec-tion, namely the Forest RestorationProject in Tengchong, China (ForestRestoration); Watershed Managementand Carbon Offsetting in Pico Bo-nito, Honduras (Pico Bonito); and

the Sierra Gorda Biosphere Reservein Queretaro, Mexico (Sierra Gorda)are forestry projects; with one of ourcase studies, the Silvopastoral Proj-ect in Fatigues-Ro Blanco, Nicaragua(Silvopastoral Project), focusing onthe novel concept of using carbonmarket financing to encourage bet-ter land use management practices inagriculture. The following sections ad-

dress common issues observed in ourcase studies as hurdles in developingcarbon sequestration PES schemes,namely, these issues are transactioncosts, lack of access to credit, landtenure, community empowerment, andbundled services.

TRANSACTION COSTSIn all of the carbon sequestrationcase studies, transaction costs pre-

sented a significant challenge to set-ting up the PES scheme. Carbonsequestration PES schemes requiretechnically-approved measurementmethods in order to demonstrate realcarbon savings, thus PES projectsthat wish to obtain carbon financing

(2) Voluntary Markets are ecosys-tem service markets in which par-ticipation is voluntary, and not man-dated by legislation. Some voluntarytrading schemes require members tomeet caps and function like compli-ance markets, with the only differencebeing that members join voluntarilyand caps are usually non-binding.Voluntary trading schemes are lessstructured, with buyers ranging fromindividuals to organizations seeking toreduce their carbon footprint. In thistype of scheme, credit aggregatorsare able to provide credits at a costthat individuals can afford. Moreover,in a voluntary scheme there are noclear or universal PES methodologiesin place. The market is infused withvarious, equally legitimate certificationsystems, and it is left to the buyers

discretion and preference as to whichcertification system they prefer. Of-tentimes however, buyers are not ableto distinguish between the differentcertification systems (Forest Trendset al., 2008; Dannecker, 2008).

Voluntary markets function due tohigh consumer demand, as comparedto compliance markets where demand

is created by legislation. The volun-tary ecosystem markets in existencedeal primarily with the provision ofcarbon sequestration benefits, as itis the most highly demanded eco-system service due in large part tothe current focus on climate change.

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Moreover, due to the variety of cer-tification processes, and lack of auniversal certifying body or carbonsequestration methodology, transac-tions costs are made more expen-sive, as PES projects often attemptto obtain various certifications to maketheir credits more attractive and com-petitive. Although a premium is givento PES projects with higher qual-ity credits, i.e. gold rating, the lag

time between the project set-up andcertification, and when the paymentis made is significant, requiring largeupfront financing for these projects.

The Silvopastoral Project in Nicaraguadeveloped their own EnvironmentalServices Index (ESI) to accuratelycompensate participating landownersfor the ecosystem services they pro-

vide. Another case study, the For-est Restoration Project in China, hasreceived the highest possible rating,a gold rating, from CCBA for theirreforestation efforts. This project hasfor sometime also been attemptingto obtain approval through the CDM,but has not been successful to date.

In all cases assessed, consultants,often international, were hired to pro-

vide assistance in the certification andmonitoring process. In two of the fourcases, a profit sharing system wasestablished. The Sierra Gorda Bio-sphere Reserve in Queretaro, Mexicoestablished that 60% of the payments

face a significant barri-er to entry into carbon markets.Transaction costs include two basiccosts affecting the set-up of the project:

1) Costs of certification and en-try into the carbon market;2) Costs of verification or thecost of monitoring that environ-mental services are being delivered.Both of these costs are required to en-sure PES programs are providing realcarbon savings that would not haveoccurred without carbon financing (aconcept referred to as additionality2). This is especially important in aformal market, where often the buyerhas little interaction with the seller.

Each case required initial funding toset up the PES scheme. Pagiola etal. (2007) described these as thepayments required to tip the bal-ance and start the permanent incor-poration of these desired ecosystemservices. For PES projects to ob-tain carbon financing, they need toverify their PES programs are andwill provide tangible carbon seques-tration. Most projects achieve this

through the approval of their carbonsequestration methodologies underthe Kyoto Protocols Clean Develop-ment Mechanism (CDM), or throughcertification by third-party auditors,such as the Climate, Conservation,and Biodiversity Alliance (CCBA).

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2 Additionality is the concept that a project receiving carbon financing is reducing emissions beyond business asusual practices and that the project would not have proceeded without carbon financing. The Clean Development Mecha-nism (CDM) requires that carbon sequestration projects demonstrate additionality (CDM Executive Board, Version 05.2).


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under the CDM, however, they facedsignificant barriers to certification dueto high transaction costs. The CDMrequires that carbon credits must becaptured and verified first, rather thanbeing sold before certification (ex-ante), which limits the amount offunding the project can obtain to be-come certified. Also, the CDM in-directly imposes a minimum parcelsize, as carbon sequestration projects

need to be relatively large and con-tiguous to offset the high certificationand verification costs. Most of thelandholders within the Sierra GordaBiosphere Reserve operated on anaverage plantation size of one hect-are. Thus, for a carbon sequestra-tion project of 400 hectares, whichby international standards is small,approximately 400 landholders need-

ed to participate. Moreover, the arealacked telephone service, the landparcels were not contiguous, and theland parcels were accessible onlythrough a large network of unpavedroads, which significantly increasedthe per unit costs3. The projecteventually obtained funding for theircarbon sequestration services in thevoluntary carbon markets, and en-tered private deals directly with Euro-

pean, American and Mexican buyersin which they are compensated forthe carbon sequestration benefits theyprovide (Ross & Corzo, 2007).

go directly to landowners and 40% ofpayments to pay experts who providetechnical service and monitoring. It wasalso often the case that an interna-tional organization, government agency,or private developer brokered the PESdeals between the buyers and sellers.

Project scale is important to spreadout transaction costs. Economies ofscale follows for certification costs, as

these costs are somewhat fixed. Withfixed and often high certification costs,a large-scale PES project will receivemore ecosystem service paymentsthan a smaller-scale project, whichwill help the project offset the costsof certification. On the other hand,monitoring costs follow a step-func-tion fixed cost, where they are fixedor increase marginally for a certainrange. The scale of the projects varied

in the cases assessed, from 467 to100,000 hectares; however, they allcovered significant land area to man-age the associated transaction costs.Generally, it was found that smallerprojects had a relatively more expen-sive per unit cost (Skutsch, 2004).

Due to the more bureaucratic andrigorous requirements demanded bythe compliance markets, it is sig-

nificantly more difficult and expen-sive to enter these markets despitethe greater income and security theyprovide. To date, none of the casestudies assessed have obtained ap-proval through the CDM. The SierraGorda in Mexico has also attemptedfor several years to be approved

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3 Another difficulty the project encountered was prov-ing their carbon sequestration project met the CDM additionalitycriteria. Since the Sierra Gorda Biosphere Reserve is a nation-ally protected area (NPA), it was very difficult to prove underCDM methodology that the project would have not provided car-bon sequestration services without CDM certification and verification.


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years; they relied on the parks natu-ral resources and were still allowedthe right to do so upon the creationof the park. With recognized tenureof the land, the indigenous com-munities were able to hire a privatecorporation to manage the funds fromthe PES schemes implemented in thepark. In the Forest Restoration Proj-ect in Tengchong, China, most of theland was owned by the government

and long-term contracts were createdbetween the government and par-ticipants to establish land use rights.The Sierra Gorda Biosphere Re-serve in Queretaro, Mexico, for whichsome carbon sequestration serviceswere sold on the carbon market, didencounter issues with land tenure.Alongside transaction costs, this wasanother barrier they faced to become

certified under the CDM. Ninety per-cent of the Sierra Gorda BiosphereReserve is privately owned, with themajority of the land titles in a differ-ent name as the current landholder,and often in the name of a deceasedrelative. Although in these casespossession is not in dispute, the no-tary fees and other legal costs pre-vent current landholders from updatingthe titles (Ross & Corzo, 2007).

LACK OF ACCESS TO CREDITMost of the participating communi-ties in the case studies assessed areslightly below the international povertyline set by the World Bank at U.S.$1.25 a day and do not have accessto well-developed credit markets

LAND TENURELand tenure is equally important inmarket-based PES schemes in de-fining a clear seller of the carbonoffsets. Secure land tenure is espe-cially important due to the long-termnature of investments in carbon se-questration projects; insecure prop-erty rights may deter buyers frominvesting in certain projects (Pagiolaet al., 2004; Meinzen-Dick et al.,

2002). Often, transactions conductedwithin the compliance and voluntarymarkets require some form of docu-mentation proving sellers have landownership. Additionally, land tenureis found to help mitigate mismanage-ment of the land, ensure the lon-gevity of practices incorporated, andsolve issues with fund distribution. Inthe past, communities that do not

have legal rights over forests or landwere often subject to mismanagementbecause of the lack of incentive tomaintain services when compensa-tion is insecure due to undefinedproperty rights (Skutsch, 2004).

In most of the case studies assessed,participants had secure land tenure.Participants either owned the landor entered into long-term contracts

with the government (Pagiola et al.,2007). In the Watershed Manage-ment and Carbon Offsetting Projectin Pico Bonito, Honduras, the in-digenous communities surrounding thePico Bonito National Park had someform of land tenure over the park for

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proposed ESI created a perverse in-centive since participants were notbeing compensated for environmentalservices already being provided, thusencouraging participants to cut existingtrees and plants. The ESI was thenenhanced to incorporate payments forbase environmental services provided.The Watershed Management and Car-bon Offsetting Project in Pico Bonito,Honduras created a private compa-

ny whose shareholders are membersof the local indigenous community.This company, Bosques Pico Bonitois responsible for the management ofthe project and distribution of funds.Community involvement also includescommunity education. Although someof the practices incorporated into thecarbon sequestration programs werealready being practiced, other tech-

niques to improve carbon seques-tration were known, but were notbeing utilized because local commu-nities were not aware of the on-siteecosystem services provided by thesepractices and feared utilizing thesepractices would reduce their profits. Allcase studies incorporated some formof community education with regardsto these techniques. The Silvopasto-ral Project in Matigus-Ro Blanco,

Nicaragua, used a control group todetermine the effect of communityeducation. One group received adviceand support from technical experts,whereas another group did not. Thegroup that received technical advicewas more effective in incorporating

(Chen & Ravallion, 2008). For in-stance in the Silvopastoral Project inMatigus-Ro Blanco, Nicaragua, theaverage per capita income of par-ticipating households was about U.S.$340, which is less than $1 a day.Even as an aggregate, it would bedifficult for these communities to findthe disposable income or financingrequired to obtain carbon sequestra-tion certification and verification whenmany do not even have enough incometo formally change the title of theirland to secure basic property rights.This makes formal market projectsin poor rural areas highly dependenton initial grants and funding in or-der to overcome obstacles to entry.

COMMUNITY EMPOWERMENT

The concept of payments for carbonsequestration is recent, especially inmost areas of the world where PEScarbon sequestration projects are beingimplemented. Community involvementensures providers of the environmentalservices, the sellers are on board,and voluntarily agree to enter a trans-action with buyers (Wunder, 2005).

Community involvement is necessaryto obtain buy-in from the community,

and ensure the quality and longevityof the environmental services. Whenthe Silvopastoral Project in Matigus-Ro Blanco, Nicaragua obtained feed-back from participating landownerson the Environmental Services Index(ESI), they discovered their original

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in a formal market PES scheme.Most of the case studies analyzed arestill in the preliminary phases of theircarbon sequestration schemes. Boththe Silvopastoral Project in Matigus-Ro Blanco, Nicaragua and WatershedManagement and Carbon Offsetting inPico Bonito, Honduras, are in theirpilot phases and are being financedby international institutions such as theGlobal Environmental Facility and the

World Bank. There is already aware-ness, however, that payments fromcarbon sequestration services providedare not in themselves sufficient toovercome the income generated fromformer practices of clear-cutting anddeforestation. The Silvopastoral Proj-ect in Matigus-Ro Blanco, Nicara-gua is looking further into biodiversityservices due to the projects proximity

to national bird sanctuaries, and theWatershed Management and CarbonOffsetting in Pico Bonito, Honduras,has also focused on watershed ser-vices to provide additional income.The Sierra Gorda Biosphere Reservein Queretaro, Mexico is providingpayments for biodiversity, landscapeand hydrological services as well aslivelihood programs such as beekeep-ing in addition to carbon sequestration

credits. These additional services arehelping to develop a local ecotourismindustry that can provide additionalcommunity income and employment.

Additionally, to augment the income gen-erated from carbon sequestration PES

carbon sequestration practices, thusaccumulating more environmental ser-vice points, and more payment. More-over, participants were educated aboutthe on-site benefits of silvopastoralpractices such as increased shade thatcan enhance livestock milk production.Community empowerment is especiallynecessary in areas lacking devel-oped institutional and organizationalstructures that ensure the fairness

and effectiveness of these ecosys-tem management programs. To date,only a handful of countries have ro-bust forestry management regulations,making community empowerment allthe more important (Brown & Cobe-ra, 2003; Skutsch, 2004; Pagiolaet al., 2004; Pagiola et al., 2007).

BUNDLED SERVICES

The case studies analyzed often bun-dled carbon sequestration with otherPES schemes, such as biodiversityand watershed services. This practiceprovides sellers with additional sourc-es of income that compliment theircarbon sequestration efforts. Sincecarbon sequestration projects requirea significant initial investment and ex-perience a lag time between projectset-up and payment for services, in-

come from other PES schemes allowsthe projects to overcome the oppor-tunity cost of participating in anotherenvironmentally damaging activity orresorting to old practices. Bundlingservices could help tip the balance fora community considering participation

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schemes, carbon sequestration projects are rotated with other sourc-es of income and participation in other markets, such as markets for non-timber products. In other cases, a portion of the land is devoted to theseother sources of income, such as sustainable forestry (Skutsch, 2004).

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FORMAL MARKET PES DEALS KEY ISSUES AFFECTING PROJECT DESIGN

Transaction Costs

Transaction costs presented a signicant challenge to setting up the carbon sequestration PES schemes in the casestudies assessed. Carbon sequestration PES schemes require technically-approved measurement methods in order to

demonstrate real carbon savings, thus PES projects that wish to obtain carbon nancing face a signicant barrier to

entry into carbon markets.

Lack of Access to Credit

Most of the participating communities in the case studies assessed were slightly below the international poverty line

set by the World Bank at U.S. $1.25 a day and do not have access to well-developed credit markets (Chen & Ravallion,

2008). Most communities received nancial and technical support from an outside, mostly international, agency to

overcome high transaction costs to gain access to these markets.

Land Tenure

In the majority of case studies assessed, participants had secure land tenure either through direct ownership or long-

term contracts with the government. Secure land tenure was shown to be especially important due to the long-term

nature of investments in carbon sequestration projects.


Community involvement is necessary to obtain buy-in from the community, and ensure the quality and longevity of the

ecosystem services. All of the case studies assessed demonstrated that actively involving the local community led to a

more successful project set-up, which will impact future success in ensuring equitable compensation and preservation

of ecosystem services.

Bundled Services

Since all of the carbon sequestration case studies assessed were in their pilot phases, payments from carbon seques -

tration services proved to be insufcient in overcoming the opportunity costs of participating in another less environ-

mentally benecial activity or resorting to old practices, such as clear-cutting and deforestation. In order to overcome

this issue many projects have bundled carbon credits with biodiversity or watershed services credits in order to

provide additional sources of revenue.

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THE FUTURE OF CARBON MARKET-BASED PES SCHEMES

PES schemes that use carbon markets for payment face a unique future relative to other PES markets,

due to their integration into the international climate change negotiations. Indeed, the growth of carbon

markets and the wide acceptance of reforestation and land-use management techniques as legitimate

carbon sequestration methods has increased the potential viability of this market. Much of the specu-

lation regarding the growth of the carbon markets hinges on the agreements to be made at the United

Nations Climate Change Conference of Parties in Copenhagen, Denmark scheduled for the end of 2009.

Many also see a huge potential in a nationwide U.S. market with the proposal of Congressman WaxmansClimate Change bill this March 2009. There is hope that the existing voluntary market structures, such as

the Chicago Climate Exchange (CCX) and the Regional Greenhouse Gas Initiative (RGGI), will be grandfa-

thered into a regulatory framework, thus increasing the current demand for carbon sequestration services.

However, there are some who remain skeptical about allowing more reforestation, land-use manage -

ment, and avoided deforestation carbon credits to enter the market. They argue that allowing more

of these services will lead to an oversupply of carbon sequestration services, thus driving the price

of carbon down. Moreover, despite the hopes that post-Kyoto climate agreements will include more

types of forestry projects, namely avoided deforestation - reduced emissions from deforestation

and degradation in developing countries (REDD), the current Kyoto Protocol has only registered three

CDM forestry projects as of March 2009 (Carbon Positive, 2009). Additionally, forestry methodologies

under the Kyoto Protocol are highly disputed and relatively undeveloped. In fact, forestry method-

ologies under the Kyoto Protocol were only nalized in 2006, putting forest carbon sequestration

projects well behind their industrialized carbon offset project counterparts (Carbon Positive, 2008).

Nonetheless, there is potential for the carbon market to greatly increase the demand for PES proj-

ects that supply carbon sequestration services. Efforts should be made to streamline and unify cer-

tication processes, reduce transaction costs through the use of local labor and knowledge and rely

on a bundled service approach to support the further development of carbon sequestration projects.

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PUBLICLY-FUNDED PES SCHEMES

These include projects initial funding,the distribution of funds, transactioncosts, monitoring, land tenure, and

community involvement. The followingsection explores the interplay of thesefactors in designing four publicly-funded PES schemes: the Joint ForestManagement Agreements in Tanzania(JFM), the Mgahinga Bwindi Im-penetrable Forest Conservation Trustin Uganda (Mgahinga Bwindi), theProtecting the Sierra Gorda BiosphereReserve in Queretero, Mexico (Si-

erra Gorda), and the Working forWater Project in South Africa (Work-ing for Water).

INITIAL FUNDINGIn order to perform an accurate as-sessment of the factors that affect

A third category of PES schemes thatcan be identified consists of projectsthat receive funding through publicsources, generally in the form ofgrants, donations, or subsidies. Pub-licly-funded PES schemes are chan-

nel money from government agencies,multinational organizations or founda-tions. In some instances, includingthe Pico Bonito and Sierra Gordaprojects examined in the scope of ouranalysis, funding was obtained throughpublic-private partnerships (Powell,White and Landell-Mills, 2002). Inpublicly-funded schemes, initial fundsare transferred from the buyer, i.e.funding agency, to land-owners and

managers that are providing targetedecosystem services. Often, these PESschemes are country-specific andpart of governments national agen-das (Forest Trends et al., 2008;Powell et al. 2002). Additionally, inthe case of national public fundingsources, the projects are integratedin national frameworks and are de-pendent on structures and regula-tions that are applied on a nationalscale (Forest Trends et al., 2008).

From the case studies of public-ly-funded PES schemes emergeda number of factors that affectedthe establishment of PES schemes.

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As previously discussed,meeting the 5 PES cri-teria when setting up aPES project is integral tothe ultimate success ofthe project. The compo-nents involved in meet-ing these criteria vary

by type of PES scheme,as each type has dis-tinct characteristics thataffect the challengesthat must be overcome

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In order to adjust for this difference,it is crucial to make sure that there isalignment between local interests andfunder intent. Such collaboration be-tween the actors involved will ensurethat the nature of the transaction re-mains voluntary as well as conditional(Forest Trends et al., 2008; Wun-der, 2008). This requires a par-ticular effort to keep high levels oftransparency and efficiency throughoutall aspects of the project.

One of the recurring issues tied topublicly-funded schemes, particularlythose that depend on funds frominternational bodies, is that fundsare often available for limited periodsof time and depend on internationalpolicies (Cordero, 2008). Typicallyprojects will receive funding for one

to three years, after which contractshave to be renewed. Since this isnot necessarily guaranteed, it can beproblematic for projects that are de-signed to function over an extendedperiod of time.

However, direct involvement of thedomestic, national government cancircumvent this problem. Governmentagencies are able to provide a more

consistent source of funding becausethe PES schemes become part oftheir long-term planning horizon, aswas the case in the JFM project inTanzania and the Machakos and Kituiproject in Mexico.

the outcome of PES schemes, it isnecessary to identify sources of funding.This is important because independentof the political, social and economicstructures that exist in a particularlocation, external funding resourcesand mechanisms are the underlyingdrivers, at least initially, of most PESprojects. Securing initial funding iscrucial in getting a PES project start-

ed, and additionally will affect furtherdevelopment over time and contributeto the process of incorporating PESschemes into an area permanently

In order to acquire funding, orga-nizations or community groups arerequired to have a well-developedplan for the initial phases of theprogram. When designing contractsunder publicly-funded PES schemes,it is necessary to have clearly de-fined objectives from the start, whichincludes clearly defining ecosystemservices and evaluating transactioncosts. Unlike in private schemes, inpublicly-funded schemes, donors arenot also customers and their inter-ests are therefore likely to be differ-ent from those of a private investor.Instead of having direct transactions

between buyers and recipients, inpublicly-funded schemes, the trans-action goes directly from donor torecipient, with lack of a conventionalbuyer. This differs slightly from thewidely accepted definition of a PESsuccess forward by Wunder (2005).

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scales (Wunder, 2008), overalltransaction costs for government proj-ects are comparatively lower (Engelet al., 2008; Cases). These lowercosts are due to economies of scaleat national levels, with governmentsoften already having access to na-tional data and data collection sys-tems. This reduces the costs associ-ated with initial funding and continuingdata collection, which is necessary to

ensure ecosystem services are clearlydefined and are providing the desiredbenefits to the buyer. This informa-tion can be used directly, and thereis no need for external verificationprocesses, like in the case of theKyoto Protocol, which eliminates thecosts of private international certifi-cation bodies or other kinds of pri-vate intermediaries. Potentially, local

NGOs can be hired to carry-out on-the-ground audits in localized areas,which is relatively inexpensive. Ad-ditionally, governments can use legal,economic and social structures thatare already established and do notneed to invest time and resources tocreate new structures (Engel et al.,2008). On the other hand, pub-licly-funded PES schemes are oftencomplex, involving large numbers of

stakeholders, which can significantlydrive up the transaction costs. Asa result, the influence of transac-tion costs on publicly-funded PESschemes will depend on the natureof the project and the country-spe-cific framework in which it operates.

DISTRIBUTION OF FUNDS

Once the funds have been obtained,it is necessary to channel the mon-ey to those that continue to provideand maintain the ecosystem services.From governmental or internationalbodies, the money trickles down tocommunities and can be managedin different ways. In some cases, itcan be directly given to land own-

ers, as in the Sierra Gorda Project.In other cases, such as Pico Bo-nito, a local body is used to chan-nel and redistribute the funds. LocalNGOs often have an integral rolein ensuring equitable fund distribution.They are often the direct recipientsor channel the money to communi-ties on whose behalf they are act-ing. Such intermediary NGOs mustwork in close cooperation with com-

munity members in order to ensureequitable distribution of PES profits.

TRANSACTION COSTS

Transaction costs associated withpublicly-funded PES schemes are af-fected by two opposing forces, anissue that is specific to this type ofPES scheme. Specifically, the preex-isting institutional framework can help

lower transaction costs, while thecomplexity of these publicly-fundedprojects concurrently drives the pricehigher. Indeed, we have found thatwhile start-up costs can still be high,particularly for small-scale projectsthat are not implemented at national

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instead of receiving monetary com-pensation for participation the PESscheme, they are granted user rightsfrom the governments.In the Working for Water project inSouth Africa, the situation differedfrom the other two cases. Land iseither privately owned or classifiedas communal land, as governmentland available for public use. Inorder to circumvent equity issues onprivate lands and to deal with bothpublic and private lands efficiently,the South African government usescontractors to conduct the invasiveplant clearing required to maintain theecosystem service. The advantage ofcontractors is mainly that they haveexpertise and access to heavy equip-ment and organizational skills. De-fined land tenure is not necessary in

such a case as long as the govern-ment comes to an agreement withmunicipal councils, often made up ofvillage elders in order to decide whathappens to the communal lands foreach village and which contractorsget hired.

MONITORINGIf governments are funding or support-ing a project outside of market inter-

actions, then the governments directgoal probably includes environmentalaction, so monitoring is likely to beincluded on its agenda. This canbecome an issue when governmentsare motivated by underlying politicalconsiderations or other side-objectives

LAND TENUREIntegrating a PES scheme into a na-tional program requires thorough re-search and understanding of existingpolicies, addressing for example landtenure and usage rights for communi-ty members, from the part of fundingbodies (Engel et al., 2008; Cordero,2008). Making sure that new PESschemes fit into already existing na-

tional structures is not only necessaryin order to channel funds more effi-ciently, but also to transfer long-termresponsibilities of the project to thecommunities themselves, so that theprojects continue to provide benefits,even when the original funders areno longer involved directly (Cordero,2008). In terms of land tenure,this is important because in manycountries, funds from public sources

are not directed towards the govern-ment, but directly to people managingthe land. Overall, no matter whatthe specifics are, it is necessary forthe person working on land to be(a) the land-owner or (b) some-one with long-term official contractthat formalizes land ownership anduser rights. In the Sierra Gordaproject, doing this established a directincentive for sellers to participate inPES schemes and guaranteed thatabsent land owners would not beable to claim credit and money oncethe scheme has been established. Inthe case of the JFM project, landownership rights are actually usedas the incentive itself for villagers:

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COMMUNITY INVOLVEMENTA successful PES-project requires theinvolvement of the community in allphases of the contracting process,from initial planning to the evaluationof targeted ecosystem services andpayment settlements (Forest Trendset al., 2008, Alban et al. 2007).It empowers communities by recog-nizing their rights to self-govern andparticipate in issues that involve theirenvironment. Community involvementis also important to avoid simplifi-cation and to make sure local is-sues are being addressed, particu-larly in instances where funding andplanning is done on a large scaleas is typical in publicly funded PESschemes (Pagiola et al., 2004).Ideally, the best scheme for localcommunities themselves is to avoid

middle-men. This not only decreasestransaction costs, as mentioned ear-lier, but can also serve to decreasethe occurrence of corruption. Involv-ing communities in the decision pro-cess also allows projects to be inline with cultural and social norms inan area (Wunder, 2008). Depend-ing on the kind of social structurein the community where the PESis being established, community in-

volvement can take different forms.

In the examined cases, the levelof community involvement varies fromone project to the next. In severalof the examined case studies, in-cluding the JFM project in Tanzania,

(Wunder, 2008). Overall, govern-ments have an advantage in termsof monitoring and enforcement of theclauses established under the PEScontract, because legal and infra-structure instruments already exist atleast partially, and only need to beadapted in order to be applied toa particular PES scheme (Engel etal., 2008). Overall, it is neces-

sary for publicly-funded schemes toensure that monitoring tools are in-cluded into the structure of the PESscheme. It is also necessary to al-low for adjustments and adaptationin the program over time accord-ing to results, both from socio-eco-nomic and environmental perspectives,to ensure that ecosystem servic-es are valued properly over time.

For the Sierra Gorda project in Mexico,spatial monitoring of forest cover hasbeen included into the initial contract.The government is able to use exist-ing infrastructure and scientific data-bases to make annual GIS-analysesof vegetation cover. This providesa precise and concrete measure-ment of the environmental situationon the ground and enables project

coordinators to monitor the progressand potential success of the PESscheme from an environmental per-spective. In the Tanzania and Hon-duras projects, village committees arecreated in order to ensure monitoring

and enforcement at community-level.

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process. Village councils had fi-nal authority to approve contractorsand were involved in the negotia-tion process to determine payments.

All cases illustrate that PES schemesnot only have environmental impactsbut have also led to improvements inthe livelihoods of involved communi-ties. The level of community involve-ment can perhaps be an indicatorof how sustainable these improve-ments will be, because as mentionedearlier, close work with communitiespromotes long-term funding viabil-ity and maintains sellers incentivesfor participation (Cordero, 2008).

the Pico Bonito Project in Hondu-ras, as well as the Sierra Gor-da project in Mexico, communitieswere heavily involved through sur-veys, interviews, and education out-reach in order to inform the PESscheme and draft the final contract.In all of these cases, the involvementof local NGOs, or direct coopera-tion between government officials and

communities, ensured that communityrights and needs were representedand addressed in the PES contracts.

In the Sierra Gorda project in Mexi-co, each land-owner has a separatecontract with the government. Thisis possible because this agreementis relatively straightforward: the gov-ernment pays farmers according tochanges in forest cover as appar-ent on GIS satellite imagery. Whilethe amount of compensation is basedon a fixed rate, land-owners stillparticipated in the development oftheir own contracts. The system hasshown considerable success never-theless, as the monetary incentiveis high enough for farmers to par-ticipate. Overall, farmers are able tomake more money through PES than

through farming. However, this projecthas been established on a nationalscale, which differentiates from local-ized projects (Alban et al., 2007).In the case of South Africa, the com-munity was more directly involved inthe contract design and implementation

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PUBLICLY FUNDED PES SCHEMES KEY ISSUES AFFECTING PROJECT DESIGN

Initial funding

Clearly dened project objectives and parameters facilitate securing adequate initial funding. Cooperation with govern-

ments is helpful in promoting the alignment of funder and community intents, and securing continuous funds, which in

turn increases project long-term viability.

Distribution of funds

Close cooperation between funder and targeted communities, either through direct contact or via a representing NGO,

contributes to long-term viability.

Transaction costs

Integration of PES programs into already existing national structures, and avoiding private intermediaries both serve

to lower transaction costs.

Land tenure

Addressing local land tenure and usage rights issues and working with already existing national and local structurestransfers incentives and responsibilities to local land owners or land users, and contributes to community empower-

ment.

Monitoring

Including monitoring and enforcement mechanisms in the initial contract ensures ecosystem services are provided.

Promoting community participation in these mechanisms further contributes to long-term community empowerment

and project success.


Community involvement is necessary in all phases of the process to encourage community equitable contracts. Com-

munity participation should operate within the framework of existing local social/cultural structures.

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EMERGING THEMES

In formal market schemes, strong in-stitutional frameworks are also neces-sary to support the often cumbersome

certification process. In the publicly-funded PES case studies we evaluat-ed, having an established institutionalframework reduced the transactioncosts associated with the initial re-search and evaluation phase, as dataor the means to collect it was alreadyin place. Further, projects takingplace in countries with strong regu-latory frameworks often have stron-

ger land use tenure and enforcementsystems that the PES schemes canutilize. In all projects, the presenceor lack of a strong institutional frame-work was integral in the distributionof funds. Projects that lacked prop-er channels to distribute compensa-tion were less successful in the early

Each of the three funding mechanismsfor PES schemes provides a frame-work for analyzing the componentsof our case studies that affected thedesign each of PES project. Havingused the 5 criteria of PES projects

to guide our analysis, we now stepback to look at what major themesemerge in PES set-up across allthree types of projects. Althougheach projects funding mechanismshave distinct characteristics based ontheir ecological, social, and politi-cal contexts (Powell et al., 2002),some themes consistently emergeas challenges that affect the designof all PES schemes (Figure 1):

- Strong institutional frameworks

- Transaction Costs

- Land Tenure

- Community involvement

- Effects of Scale

Often cited as an integral compo-nent of efficient, effective, and equi-

table functioning of markets (Powellet al., 2002), a strong institutionalframework emerged from our casestudies as a key theme in suc-cessfully establishing PES schemes.The institutional framework is howwell existing social structures sup-port the development of PES projects.

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However, it is important to note thatstrong land tenure can also existin areas without these institutionalframeworks: social norms can of-ten dictate land use practices, act-ing independently of formal regula-tory regimes (Sethi and Somanathan,1996). Engaging the community andunderstanding the dynamics of landtenure is therefore an important as-pect of PES design.

Our case studies have shown thatcommunity involvement is an impor-tant element to establishing equitablepayments, contracts, and a schemecongruent with local social practices.In some cases, involving the commu-nity resulted in community membersdriving the idea of payments for eco-system services. Especially in car-

bon sequestration schemes, where theunderlying concepts of carbon marketscan be difficult to grasp, communityeducation can benefit the long-termviability of the project. Lastly, ourcase studies showed that engagingmembers of the community often re-sulted in a sense of empowerment,where the community was proactiveand engaged in the process. This en-gagement is particularly important for

establishing equitable payment dealsin cases with little regulatory struc-ture or in private PES deals wherethere is no government presence andensuring the long-term success ofprojects.

phases of the project.

In the majority of our case stud-ies, establishing PES schemes re-quired high transaction costs. Thesehigh transaction costs can potentiallyimpede proper establishment of thePES scheme, as limited funding mayreduce the ability to collect data onthe environmental service to be pro-

vided and take fewer steps to involvethe community. These steps, how-ever, are integral in establishing afunctioning PES scheme. Reducingthe costs associated with each stepwill likely facilitate the establishmentof PES schemes. Organizations whichwork to disseminate information andlessons learned from projects acrossgeographic areas, will help reducethese costs for future PES projects.

Monitoring PES schemes to ensurethe project is functioning as plannedand meeting its goals also increasestransaction costs. There is potential,however, to involve and possibly em-ploy the community in this monitoringprocess, which would increase theirmonetary benefits, having the dueleffect of supporting the long-term vi-ability of the project and increasing

the communitys livelihood.

Our case studies indicated that strongland tenure was important in identi-fying a seller of ecosystem services.Often, strong institutional frameworksand regulatory frameworks enable

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scheme connects the buyer and sellerof the ecosystem service, which hasthe potential of increasing each par-tys accountability, potentially reduc-ing the projects reliance on moni-toring and enforcement. There is atradeoff, however, between small andlarge-scale projects. While large-scale projects can have economies ofscale and widespread environmentalimprovements, with size PES projects

become more complex to set up,include more stakeholders, rely moreheavily on third parties, and increasethe transaction costs associated withmonitoring and enforcement.

Lastly, the scale of a project is im-portant to consider when establishingany PES scheme. Specifically, thereexist economies of scale that can beoptimized for certain projects, suchas for carbon sequestration, wherecertification costs are high and rela-tively fixed regardless of the size ofthe project. With private PES deals,on the other hand, we found that amore localized scale is advantageous,as it enables a clearer link betweenthe land use changes and resultingenvironmental improvement, which inturn reduces costs associated withmonitoring the environmental benefitsof the project. A more localized PES

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Figure 1. Themes that Emerged from the Case Study

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EMERGING THEMES SUMMARY AND RECOMMENDATIONS

Payments for Ecosystems Services are complex; there is no one size fits all approach

to designing an effective set-up. PES schemes differ by location, funding mechanism, services

provided and primary goals; these distinct characteristics must be acknowledged when

attempting to initiate any PES scheme. However, consideration of the cross-cutting issues

identified in this report, and the interactions between them, is crucial for an effective PES

design and long-term sustainability of all PES schemes.

INSTITUTIONAL FRAMEWORK

In order for a PES scheme to function properly, initiators must examine the existinginstitutional and social frameworks in the project area. Before a PES scheme can begin, proper

channels for fund distribution must be developed if not already in place. These channels must

then be observed as the project goes forwar

payments for ecosystem services: an analysis of cross-cutting issues among 10 case studies

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