Stefano PagiolaEnvironment DepartmentWorld Bank1818 H Str NWWashington DC 20433USAspagiola@worldbank.org

The opinions expressed in this presentation are the author’s own and do notnecessarily represent those of the World Bank Group.

The materials in this presentation may be freely reproduced with appropriate credit to the author and the World Bank.

Introduction to payment for environmental services

Stefano PagiolaEnvironment Department, World BankUSAID Policy Seminar: Pro-Poor Payments for Ecosystem ServicesVirginia Tech, Northern Virginia Center, October 4, 2007

Sasumua water treatment plant, Kenya

Sasumua water treatment plant, Kenya

What’s the problem?

Clearing siltfrom water intakes:

$50,000/year

Treating forcontamination:$100,000/year

The problem

Benefits to land users

Costs to downstream populations

Deforestation and use for

pasture

Conservation

Past responses have largely failed

Direct government intervention ‘Demonstration’ approaches Regulatory approaches Short-term subsidies (in cash or in kind)

Low adoption rates Adoption followed by abandonment

The logic of payments for environmental services

Benefits to land users

Costs to downstream populations

Deforestation and use for

pasture

Conservation

Payment

Conservation with

payment for service

Important!This logic is repeated

every year

» Need annual payments» Need sustained financing

Definition of PES

A mechanism to improve the provision of indirect environmental services in which

Those who provide environmental services get paid for doing so (‘provider gets’)

Those who benefit from environmental services pay for their provision (‘user pays’)

Payments are conditional Participation is voluntary

Service providers Service users

Service

Payment

What makes payments for environmental services attractive?

Generates it’s own financing: Brings new financing not previously available for conservation

Efficient: Focuses efforts where benefits of conservation highest and costs lowest

Potentially very sustainable: Not based on whims of donors, NGOs, but self-interest of service users

and providers

For this to work, need to: Base payments to providers on payments by users

Actually deliver services: getting the science right is critical

Tailor mechanism to specific local conditions

Special case: ‘Supply-side PES’

A mechanism to improve the provision of indirect environmental services in which

Those who provide environmental services get paid for doing so (‘provider gets’)

The government (or another third party) pays for their provision

Payments are conditional Participation is voluntary

Service providers

Service usersService

PaymentGovernment

Generates it’s own financing: Brings new financing not previously available for

conservationEfficient:

Focuses efforts where benefits of conservation highest and costs lowest

Potentially very sustainable: Not based on whims of governments, donors,

NGOs, but self-interest of service users and providers

For this to work, need to: Base payments to providers on payments by users Actually deliver services: getting the science right is

critical Tailor mechanism to specific local conditions

What makes supply-side PES attractive?

?

Colombia Cauca Valley water user associations

Costa Rica FONAFIFO/Pagos por Servicios Ambientales (PSA)

Heredia: Environmentally adjusted water tariff

Ecuador Quito: FONAG Cuenca: ETAPA Pimampiro

El Salvador Tacuba, San Francisco de Menéndez, Yamabal

Mexico Pago por Servicios Ambientales del Bosque (PSAB)

Coatepec

Venezuela CVG-Edelca payments for conservation of Río Caroní

South Africa

Working for Water Program: payments from Hermanus and George

Examples of PES mechanisms

Capital cityMid-size townSmall rural town

Costa Rica: Payments by water users

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!

Renewed!

World Bank support to PESCompleted projects: Costa Rica: Ecomarkets Project (US$33 million WB + US$8 million GEF)

Projects under implementation: Colombia/Costa Rica/Nicaragua: Regional Integrated Silvopastoral Ecosystem Management Project

(US$4.5 million GEF) South Africa: Cape Action Plan for the Environment (US$9 million GEF) Mexico: Environmental Services Project (US$83 million WB + US$15 million GEF) Costa Rica: Mainstreaming Market-Based Instruments for Environmental Management Project

(US$30 million WB + US$10 million GEF)

Projects under preparation: Brazil: Forests for Life Project Colombia: Sustainable Livestock Management Project Ecuador: Management of Chimborazo’s Natural Resources Project Venezuela: Canaima National Park Project Kenya: Agricultural Productivity and Sustainable Land Management Project Worldwide: LULUCF carbon projects (US$30 million BioCarbon Fund)

Capacity building: Courses in Colombia, Dominican Republic, Ecuador, El Salvador, Kenya, Mexico, Panama, Peru, Senegal, South Africa, Venezuela

Research: Case studies; Hydrological aspects; Poverty links; Valuation

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

Key problems

Getting the science right

Getting the institutions right

Poverty and PES

1. PES is not intended as a poverty reduction mechanism

2. Hope that it will help the poor Spatial correlation between poor areas and areas that provide

environmental services Payments to poor land users provide them with additional

income

3. But maybe it won’t Can the poor participate?

4. Fears that it may do some harm Exacerbate tenure problems Impact on non-participants

Factors that affect household participation in PES programs

Eligible to participate

Yes

PES programcharacteristics

Householdcharacteristics

Degree oftargeting

Locationof plots

In target part of the watershed?

Yes

In target watershed?

Source: Pagiola et al., 2005

Factors that affect household participation in PES programs

PES programcharacteristics

Householdcharacteristics

PES practice profitable?(with payment)

Fits in farming system?

Yes

Yes

Eligible to participate

Paymentoffered

Opportunitycost of landTransaction

costs imposedon participants

Characteristicsof PES practice

Current landuse practices

Size of holding

Householdstrategy

Want to participate

Yes

Source: Pagiola et al., 2005

Factors that affect household participation in PES programs

PES programcharacteristics

HouseholdcharacteristicsYes

Want to participate

Security oftenure

Time horizon ofPES practices

Assets, savings, other income,remittances

Investmentrequirements of

PES practices

ExperienceEducation

Technicaldifficulty of

PES practices

Land title, othercollateral

Able to participate

Yes

Yes

Access to TA?

No

Yes

Able to undertakePES practices?

Yes

Access to credit?

No

Yes

Able to invest?

Has secure tenure?

Source: Pagiola et al., 2005

Can the poor participate in PES?Key questions

1. Are the poor potentially eligible to participate?

a. Are potential service suppliers poor?

b. How many of the poor are potential service suppliers?

2. Are eligible poor households able to participate?

Guatemala:Watersheds with significant potential for PES

Source: Pagiola, Zhang, and Colom, 2007

Guatemala:Poverty rate in water supply areas

Source: Pagiola, Zhang, and Colom, 2007

High poverty rate in water supply area

Low poverty rate in water supply area

Guatemala:Poverty rate in water supply areas

Source: Pagiola, Zhang, and Colom, 2007

0

5

10

15

20

25

300

-10

10

-20

20

-30

30

-40

40

-50

50

-60

60

-70

70

-80

80

-90

90

-10

0

Poverty rate (%)

Nu

mb

er

of w

ate

rsh

ed

s

Average poverty rate 44% (sd 21%)

Relationship between poverty rate and importance of water supply areas

Source: Pagiola, Zhang, and Colom, 2007

0

20

40

60

80

100

0 5 10 15 20Importance for HEP generation (kW/ha)

Po

vert

y ra

te (

%)

0

20

40

60

80

100

0 1 2 3 4 5 6 7

Importance for domestic water supply (hhs/ha)

Po

vert

y ra

te (

%)

0

20

40

60

80

100

0.00 0.20 0.40 0.60 0.80

Importance for irrigation (irrig ha/ha)

Po

vert

y ra

te (

%)

0

20

40

60

80

100

0 5 10 15 20

Importance for coffee production (quintals/ha)

Po

vert

y ra

te (

%)

Guatemala:Poverty density in water supply areas

Source: Pagiola, Zhang, and Colom, 2007, based on Nelson and Chomitz, 2002

Many poor in water supply

area

Few poor in water supply

area

0

10

20

30

40

50

60

70

80

0-1 1-2 2-3 3-4 4-5 >5

Poverty density (poor/ha)

Nu

mb

er

of w

ate

rsh

ed

s

Guatemala:Poverty density in water supply areas

Source: Pagiola, Zhang, and Colom, 2007

Average poverty density 0.95/ha (sd 1.1)

Guatemala:Poverty density in water supply areas

Total number of poor: 1.7 million

Share of country’s poor*: 27% (* excluding Petén)

PES and poverty

Potential for local impact varies

Some areas with significant PES potential have high poverty rates, but not all

Potential for national impact is significant but limited

Max 27% of country’s poor may be able to participate

Can eligible poor households participate in a PES program?

Regional Integrated Silvopastoral Management ProjectMatiguás-Río Blanco, Nicaragua

Piloting use of PES to promote silvopastoral practices in degraded pastures, to improve biodiversity and carbon sequestration

A tough test:Most participants are poor...

Income level of program participants, Matiguás-Río Blanco, Nicaragua

0

5

10

15

20

25

30

35

40

< 0 0 - 2,950 2,950 -5,650

5,650 -9,000

9,000 -12,000

12,000 -15,000

15,000 -18,000

18,000 -21,000

21,000 -24,000

24,000 -27,000

27,000 -30,000

30,000 -33,000

> 50,000

Reported annual household income / per person (C$)

Nu

mb

er

of h

ou

seh

old

s

Non-poorExtremely

poor Poor

Source: Pagiola, Rios, and Arcenas, 2007

Participating households:

• 20% poor

• 46% extremely poor(national poverty line)

A tough test:… and participation requires expensive investments

Establishment costs of selected silvopastoral practicesMatiguás-Río Blanco, Nicaragua

Source: Gobbi, 2005

0 100 200 300 400 500 600 700 800 900

Improved pasturewithout trees

Improved pasture withlow tree density

Improved pasture withhigh tree density

Fodder bank withwoody species

Fodder bank withleguminous species

(C$/ha)

Land use only

+ live fence

-480 -400 -320 -240 -160 -80 0 80 160

Annual crops

Degraded pasture

Natural pasture without trees

Improved pasture without trees

Semi-permanent crops

Natural pasture with low tree density

Fodder banks

Improved pasture with low tree density

Natural pasture with high tree density

Diversified fruit crops

Monoculture timber plantation

Improved pasture with high tree density

Scrub habitats (tacotales)

Secondary and riparian forest

Net land use change (ha)

Extremely poor households

Poor households

Non-poor households

Were the poor able to participate? Yes!Land use change in Matiguás-Río Blanco, Nicaragua

Source: Pagiola, Rios, and Arcenas, 2007

Were the poor able to participate? Yes!

Source: Pagiola, Rios, and Arcenas, 2007

0 10 20 30 40

Extremely poor

Poor

Non-poor

Change in land use (% of farm)

0 10 20 30 40

Extremely poor

Poor

Non-poor

Change in environmental services/ha (%)

Can the poor participate in PES? Important: PES are not poverty reduction programs

Trying to make them be poverty reduction programs can undermine them But can try to maximize positive impacts/minimize adverse impacts

A small but significant portion of the poor are potential participants in PES

When the poor are eligible to participate, their ability to participate may be greater than assumed Transaction costs a bigger obstacle than household characteristics

Appropriate PES design can help Appropriate contract design Low transaction costs Support to participants

Guidelines for Pro-poor PES PES is not a poverty reduction mechanism

Poverty cannot be used as a criterion for participation A pro-poor PES program is one that maximizes its potential

positive impact and minimizes its potential negative impact. Keep transaction costs low

Devise specific mechanisms to counter high transaction costs. Ensure that the social context is well understood Avoid implementing PES programs in areas of insecure

land tenure Provide targeted assistance to overcome problems that

impede the participation of poorer households Seek external funding for additional costs of pro-poor

programs

For more information

www.worldbank.org/environmentaleconomics