Payments for forest ecosystem services
The basic idea behind PES is that those who maintain ecosystems in good condition and provide ecosystem services and incur in an extra cost, should be paid for doing so. PES, therefore, provides an opportunity to put a price on previously un-priced ecosystem services.
In the literature, the most widely accepted PES definition is according to Wunder (2005, 2007) who characterized PES by five criteria: (1) voluntary transaction where (2) a well-defined ecosystem service (or a land-use likely to secure that service) (3) is “bought” by a (minimum of one) ecosystem service buyer (4) from a (minimum of one) ecosystem service provider (5) if and only if the ecosystem service provider secures ecosystem service provision (conditionality).
A revised PES concept according to Wunder (2015) defines PES as voluntary transactions between service users and service providers that are conditional on agreed rules of natural resource management for generating offsite services.
PES schemes are most likely to emerge in situations where:
- specific land or resource management actions have the potential to increase the supply of a particular service(s);
- there is a clear demand for the service(s) in question, and its provision is financially valuable to one or more potential buyers;
- it is clear whose actions have the capacity to increase supply (e.g. certain land or resource managers may be in a position to enhance supply).
How PES works in practice
Understanding how PES mechanisms work in theory and in practice, and knowing their limitations, is crucial for exploiting their full potential as a policy tool for solving complex environmental problems we are confronted with. The mechanism of the PES scheme is based on the amount of the payment as shown in Figure below.
For a PES scheme to work it must represent a win-win for both buyers and sellers. PES may be positive from a buyer’s perspective if the payments are less than those associated with any alternative means of securing the desired service. PES schemes may be positive from a seller’s perspective if the level of payment received at least covers the value of any returns foregone as a result of implementing the agreed interventions.
(Adopted from Smith et al., 2013)
Classification of PES
Main PES classifications are based on the type of actors such as public, private, private non-commercial. In this regard, there are three broad types of PES schemes:
Public payment mechanisms
Public payment mechanisms through which government pays land or resource managers to enhance ecosystem condition and services on behalf of the wider public. These are based on fiscal instruments (such as taxes or subsidies), relies on user fees, a government-driven system is established in which the public entity can play either as a provider or as an intermediary. In these schemes, the buyer is a third party (often in hierarchy) acting on behalf of service users, which “acquire(s) funding to compensate service providers through allocating revenues derived from earmarked tax revenues or general budget”. These kind of schemes are of a Pigouvian nature. The participation of the end-users may not always be voluntary, as when all citizens are taxed regardless of their individual use of the service(s) provided. Such schemes are generally large in scope, provide legitimacy, and offer scale economies in transactions. On the other hand, government-financed schemes cannot always observe directly whether ESs are provided, they do not have a direct incentive to ensure that the scheme is working efficiently, and they are likely to be subject to side-objectives such as meeting political pressures or alleviating poverty.
Private payment mechanisms
Private payment mechanisms are self-organised private deals in which beneficiaries of ecosystem services contract directly with service providers. These schemes represent direct payments by service beneficiaries to service providers, in which both providers and beneficiaries are private entities (individuals, groups of individuals, private companies); the government can participate only as an intermediary. In these schemes, the buyers are the end-users of the services. These schemes can be seen as “private deals” and reflect consumer service demand. They usually operate at a small scale, and target only one or a few services.
Public-private payment mechanisms
Public-private payment mechanisms that draw on both government and private funds to pay land or other resource managers for the delivery of ecosystem services. These “acquire funding to compensate providers through allocating revenues derived from user fees or tariffs from a public utility or a regulated private utility”. Public-private schemes, a specific subset of private schemes, in principle have the same features as a private scheme, except that the buyer (or one of the principal buyers) is a public utility. The feature which distinguishes public-private schemes from local public schemes is the role of the participating public utilities in public-private schemes. This role is limited to that of providing funds to the PES schemes in the role of a service buyer, just as any other private buyer would do. This means that the utility is not involved in the administration and management of the PES contract, as in local-public schemes, but participates as a contracting party of service buyers. In public-private schemes, the PES contract is thus administered by a third-party PES-management entity in the same manner as in private schemes.
Besides that, there is a wide range of financial mechanisms for the provision of forest ecosystem services that can be differentiated by the degree of government intervention, the nature of the transaction and the characteristics of the buyers and sellers:
Subsidies or subventions are government payments to individuals or legal entities without being directly conditional on any defined output. The payments are connected to certain requirements and aim to reward desirable behaviour. Subsidies are paid to all subjects who fulfil the set requirements. The forms of subsidies are manifold, including direct payments, low-interest rate credits, state guarantees or tax exemptions (indirect subsidies). They may be justified to correct market failure e.g. to encourage socially beneficial behaviour. Subsidies can be environmentally friendly or environmentally harmful depending on what activity they are designed to support and the environmental impacts of that activity. In forestry, they are used to support forest holdings economically (e.g. subsidising the construction of forest roads or other investments for rationalisation of forest production or innovation) or to guarantee the provision of forest ecosystem services. In Europe, subsidies are often given for measures of “multi-functional” or “close-to-nature” forest management. Specific purposes also include the protection of biodiversity, soil, air, water and recreational uses of the forest, as well as climate regulation, protection against natural hazards, landscape amenities, and historical and cultural sites. Subsidies may be granted by local, provincial, national governments or supranational/international levels.
Public duties or taxes
Public duties or taxes are financial charges imposed on individuals or legal entities by the state. Besides of the financing function for the state, taxes also have the function to control certain behaviours by putting a price on resource use. A special case is the use of environmental taxes (eco-taxes, ecological taxation) which promote ecologically sustainable activities. Eco-taxes aim to correct negative market externalities by discouraging people from overusing resources. There are two main aims for environmental taxes. The primary goal is to use taxes to increase the price of products which are considered to be undesired products, in favour of more environmentally friendly alternatives that become more competitive in comparison, as a result of the tax increase on other products. The second goal is to finance the costs of collection and treatment systems or other compensation measures. This is a relevant measure in forestry because the collected funds may be invested back into forests in order to manage them for multiple / social benefits; thus, such charges, known as earmarked charges would finance specific purposes. Special forms represent tax exemptions. They differentiate according to environmental impacts and honour environmentally friendly behaviour. Exemptions from tax duties can also be regarded a subsidy as some entities or behaviours are favoured. They are often used in forestry to compensate for legal restrictions on the use of forests, e.g. in protected areas.
Credit programmes may be implemented as “bubble” scheme (a number of stationary emission sources are assigned a certain limit together), an “offset” scheme (firms buy pollution allowances from other firms that abate their emissions), or a “banking” scheme (where firms may store earned emission credits for future uses).
Cap-and-trade scheme is established for the use of a certain resource or the release of certain pollutants. The cap is the aggregate maximum amount of subtracted material or of pollution that can be released by participating entities. Tradable permits or credits are then allocated by dividing up the allowable overall total among those who participate in the established market. Industries or companies can sell permits that they do not need to other participants who need more than their allocation. These rewards companies which cut their pollutant discharge while it penalises those who pollute more heavily, and thus, creating an incentive for them to invest in pollution control. Trading increases the economic efficiency of resource management, by enabling companies or landholders to buy permits from those able to comply in a cheaper way.
A typical forest-relevant application is a trade in greenhouse gases/carbon or emissions permits. Emissions may be reduced by cleaner technologies or other abatement measures. In the case of carbon emissions compensation is possible through carbon sinks or carbon sequestration. Forests act as carbon sinks as the carbon is stored in the woody biomass and other elements of the ecosystem (as long as they remain intact and are not destroyed by fire, or decay releasing the carbon stored back into the atmosphere, e.g. due to pests and diseases). The Kyoto Protocol has paved the way for governments and private companies to earn carbon credits which can be traded on a marketplace (carbon offsets).
An example that works on the basis of legal obligations for compensation of adverse impacts of development projects are conservation banks, in which projects with negative effects on the landscape or biodiversity pay banks for credits associated with new projects created by the banks in order to compensate for their unmitigated adverse impacts. The bank holds/purchases land on which projects are realised to balance the adverse effects to the environment. Sites are chosen and managed for their natural resource values and special-status species or sensitive habitats. Sites may be natural (preservation) and/or include restoration, and/or creation of habitat (White 2008; Carroll et al. 2008).
Direct acquisition of goods or services
Direct acquisition of goods (such as timber, fuel wood, forest fruits, mushrooms, greenery, etc.) or services (such as catering, accommodation, education services or adventure, the right of access to the land or sport facilities, hunting and fishing rights, etc.) is the simplest pure market mechanism for financing of forest benefits. The list of goods or services that can be traded on markets is long; however, the trade is not always well developed and the goods and services are partly defined as public goods by law or according to their nature. Purchase of goods and services is an important category that depends strongly on the innovation and marketing activities of land owners.
Purchase of land or land lease
Purchase of land is an expensive way to secure the provision of desired products, but it is also very simple. It is an appropriate organisational solution if the production requires a specific way of management of the land and if the management know-how is on the side of the user. The characteristic of this mechanism is that the property rights lie in the hand of one person or legal entity. As the owner can freely and flexibly decide on the management of the land he/she may choose the management strategy, may change this strategy in future, may manage for multiple benefits, and may change the management goals at any point in time. Furthermore, the future provision of the goods and services from the land is not dependent on markets or the will of providers. In many cases a certain piece of land is required for the provision of the desired service (e.g. recreation forest or water reserve) and only one party is interested (e.g. nearby municipality); in this case there is a double monopoly and no competitive market exists. The parties have then to agree on the basis of negotiations which strongly depend on the urge of need on both sides (wish to sell on the side of the land owner or political mandate to buy on the side of the interested user). Another possibility represents land lease. In a lease one person pays a rent for the right to possess a property that belongs to another person for a certain time period. The rent may be paid in one off but is typically given in yearly payments. Lease of forests is not as common as lease of agricultural land. Examples from forestry refer to specific uses of the land such as, for instance, for recreational purposes, sports facilities, use of drinking water sources, nature conservation or burial sites. Similar to land purchase, leasing is particularly suited for complex services or when the know-how of the production/land management is on the side of the interested party. These mechanisms are of importance in cases when the users have a high interest in a specific type of land management, e.g. in recreational forests, water reserves, or nature reserves under total protection.
Sponsorship is a business relationship between a sponsor who provides financing, resources or services and a party which offers certain benefits in return. It is a contractual agreement with mutual benefit and the value of the provided financing can usually be deducted from the company’s tax dues. Usually the commercial advantage is to establish an association between the sponsor’s image, brands or products and the sponsorship investment. The sponsoring of cultural or ethical projects, such as in case of eco-sponsoring, usually works in the way that the money is used for charity and for projects in the public interest, such as biodiversity conservation or the preservation of beautiful landscapes. Eco-sponsoring is usually done by enterprises in order to illustrate their care for the environment and for sustainable development. Typical projects are afforestation, maintenance of natural monuments, nature conservation or restoration projects, nature-related sports or cultural events, environmental education, etc. There should be a connection to public benefits and an appropriate audience.
Donations are gifts given voluntarily and without return consideration. They are typically given for charitable purposes. Donations take various forms, including cash or other funds, goods and services including voluntary work. They may be given by organisations or private persons, including commercial organisations. In contrast to sponsoring, the firms donate without expecting direct benefits in return. In the case of donations, the charity purpose would be in focus. Forest-related donations are often given for the preservation of rare or beautiful trees or sites, recreational facilities, environmental organisations, or projects in development cooperation. Similar to sponsoring, it is not easy for forest holdings to attract donations. Projects that gain high importance on local level or are connected with specific purposes are still promising. Examples for donations for forestry projects are often found on local level (e.g. sponsorship of extraordinary trees or stands by private persons, or funding of educational activities by local companies) or in cooperation with environmental NGOs that raise funds for the purchase or lease of areas of specific interest for nature conservation (e.g. purchase of natural forests that are at risk to be developed for commercial purposes). The most commonly used is the symbolic sponsorship of one tree, one hectare, one species, etc.
Auctioning is an innovative financing tool for nature conservation and landscape preservation. Elements of a certain landscape are offered by the land-owners and their maintenance can be secured by organisations or citizens for a certain time.
Certification is the process of indicating through labelling that a commodity complies with a set of regulations governing the production process. As a market tool it creates niches, increases product recognition and/or secures market access. It can also be used to achieve social or environmental efficiency by defining minimum performance requirements. It is defined as the confirmation of a certain property or quality of a person, organisation, product or process by an authority or an independent party. The basic idea of ecolabels or sustainability labels is that consumers support through their responsible choices environmentally friendly and sustainably produced products. It means that consumers buy certified sustainable supplies and pay a premium for promised ecosystem benefits. The most important certification schemes in forestry refer to timber from sustainable forest management. The certification is an instrument for integrated nature conservation because ecological and social standards are requested by the certification systems. The certification should provide market benefits to the producer/trader in terms of higher prices or increased market shares. In Europe, two main certification schemes are particularly relevant: the FSC (Forest Stewardship Council, with around 100 000 ha certified forests worldwide) and the PEFC (Pan-European Forest Certification, since 2003: Programme for the Endorsement of Forest Certification Schemes (around 200 000 ha) standards. For other forest goods, especially food, the certification of organic production may be considered. Organic standards do also exist for food production in the agricultural sector. Certificates of origin guarantee that a product has been produced in a defined region. In regional certification, often also certain quality standards are included, e.g. the sustainable management of the regional resources or the use of particularly ecologically valuable tree species.