Can nature's services be bought and sold?
By Meine van Noordwijk
Over the past decade, governments in several developing countries, along with hydropower and drinking water companies and wetlands managers, have adopted ‘payments for environmental services’ schemes. What are they? Are they working? What are the pitfalls such schemes need to avoid? Can they adapt to local circumstances? The Centre’s chief science adviser, Meine van Noordwijk, provides some answers. And asks some more questions.
The 1972 Stockholm conference (20 years before Rio 1992, 40 years before Rio +20), declared that natural resources must be safeguarded and that the Earth’s capacity to produce renewable resources must be maintained.
It also stated that developing countries needed reasonable prices for exports in order to carry out environmental management. A number of economists around that time, including the first Nobel laureate in economics, Jan Tinbergen, started to analyze the relationship between natural capital, environmental services and development. Putting a value on nature’s services was seen as a way to get the attention of policymakers rather than necessarily implying that nature’s services can be bought.
Economists analyzing the issue fell into two broad types: 1) ‘environmental economists’, who dreamed of a world where all services provided by the environment—such as clean and plentiful water, storage of carbon, protection of soil and provision of food and other materials—had a market-based price tag so that decision makers in the private sector and government could take full account of all the environmental—and fiscal—effects of all actions that had an effect on the natural environment; and 2) ‘ecological economists’, who dreamed of a world where economic decisions were subservient to the ecology of the planet and the needs of future generations.
Is it possible to put a value on nature in a way that reconciles the two approaches? Does it help to pay farmers to adopt practices that increase the levels of environmental services in the landscape they farm?
Photo 1. In Kenya the Water Act of 2002 regulated the upstream–downstream relationships, including financial transfers, but in practice money does not flow to those who effectively protect the resources (http://presa.worldagroforestry.org/)
Redefining the concept
The result of this research on the ground and national discussions about how the concept relates to existing government policies, programs and laws, has been a redefinition of the field of ‘payments for environmental services’, questioning the basic foundations upon which are built the institutions that set out to enhance environmental services.
Ten years ago, the World Agroforestry Centre and the International Fund for Agricultural Development jointly set out to explore if these questions could be answered through two projects. One, which operated in five countries in Asia, was called, ‘Rewarding upland poor for the environmental services they provide’ (RUPES); the other, in five countries in Africa, was called, ‘Pro-poor environmental services in Africa’ (PRESA). Both projects used ‘action research’, or ‘research through practice’, with local partners to address the questions.
Photo 2. Watershed services are provided by protected forests (Aberdare National Park in Central Kenya in the background) as well as farmland mosaics, but require different types of economic incentives to achieve a common goal
The redefinition has been highlighted in a recent review article (see below) by myself and colleagues that identified and compared three basic paradigms of payments for environmental services: commodification, compensation and co-investment.
The first type of scheme, which is exemplified by the paradigm, ‘commodification’, aims to make a marketable commodity out of an environmental service. The review argues that this, first, requires clear property rights; second, easy ways to measure the service; and, third, a service that can be divided into tradable units.
In practice, this isn’t as easy as it might seem at first glance. ‘Cap and trade’ systems establish an overall allowable amount of pollution allocated among polluters in the form of permits. Those that reduce beyond their permitted amount can trade that with those who exceed their limits. These schemes imply tradable rights to reduce environmental services in one place in exchange for boosting them in another. The ‘carbon market’, which sets out to reduce greenhouse gas emissions, allows trading between countries, with polluting nations theoretically able to offset their emissions by buying carbon sequestration in other countries, such as tree-planting projects, which remain popular but, if financed by offsets of emissions, have no net positive effect on mitigation of climate change. This is the closest type of scheme to date that meets the commodification goals but it has so far failed to make even the start of a dent in net greenhouse gas emissions.
The second paradigm, ‘compensation’, encompasses many schemes. This paradigm features economic incentives that partially offset the ‘opportunity costs’ of foregone actions (voluntarily or not) that couple environmental decline to private economic benefits. For example, compensating people for not degrading or removing forests. In these cases, compensation is linked to the right to choose actions that reduce environmental services. The issue to be considered here is that as long as such rights exist, compensation will have to continue.
The third paradigm, ‘co-investment’, is about shifting to a type of development that becomes economically viable after an initial investment period. For example, planting trees typically requires investment before net benefits are generated because the planters and buyers must wait for the trees to grow before they can be harvested for timber, fruit or other products or are able to sequester substantial amounts of carbon.
A winning feature of this paradigm is that co-investment can involve groups or entire communities and doesn’t need privatized property rights at the start. Indeed, the investment can lead to actually clarifying ambiguous property rights and help evolve new institutional arrangements.
In the review, we also identified that the most common and successful of the schemes that involved payments for environmental services were essentially co-investment schemes, where social and human capitals were enhanced and risks and benefits shared, rather than situations where financial payments were made subject to the recurrent delivery of an environmental service.
We also noticed that language matters. That is, what a scheme is called affects how people understand it. We preferred the term ‘co-Investment in stewardship’ rather than ‘payments for environmental services’, arguing that the concepts embodied in the former pointed to the reconciliation of ‘environmental’ and ‘ecological’ economics.
Ultimately, the various timeframes and discount rates that are relevant to any type of scheme that sets out to value nature cannot be reconciled in a single concept of value or price. But sharing risk, benefits and the various assets (land, labour, knowledge, market access) is an important change from the ‘business as usual’ notion of purely financial transactions.
Where to from here?
A number of open questions remain, one of the more important of which is whether, and how, to combine the different paradigms across political as well as physical landscapes. For example, what sort of interaction could be possible between tradable carbon emission rights as commodities between countries, compensation programs in provinces and districts, and co-investment in local communities? For a start, the concepts of ‘fairness’ and ‘efficiency’ change when dealing between nations rather than between neighbours in a village. We expect such schemes can, and need to, further evolve and adapt to the multiple pressures and opportunities of reducing emissions, securing food supply, maintaining environmental services and improving livelihoods.
Edited by Robert Finlayson
Read the review article: Van Noordwijk M, Leimona B, Jindal R, Villamor GB, Vardhan M, Namirembe S, Catacutan D, Kerr J, Minang PA, Tomich TP. 2012. Payments for Environmental Services: evolution towards efficient and fair incentives for multifunctional landscapes. Annual Review of Environment and Resources 37:18.
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