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��Payments for Environmental Services (PES)

Samuel Rivera Reyes and Eric Hyman�

Climate Economics, Finance, and Trade Training

January 31 - February 2, 2024

Washington, DC

This presentation was made possible by the support of the American people through the United States Agency for International Development (USAID).

The authors’ views expressed in this presentation do not necessarily reflect the views of USAID or the United States Government.

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Key Concepts: How do payments for environmental (or ecosystem) services (PES) work?
What is needed for their success?
How can they be used for climate change mitigation and adaptation?
Examples from the field:

Ecuador
Peru
Philippines
Vietnam
Honduras
Dominican Republic

Important points in PES implementation

Learning Objectives

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Why are natural resources managers not being able to stop the environmental degradation?

Key Questions

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What Services do Ecosystems Provide?

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Category	Service
Provisioning	Food; fiber; timber; fuel; bio chemicals; natural medicines; pharmaceuticals; plants and fruits; fresh water supply
Regulating	Air-quality; climate; water; natural hazard; carbon storage; nutrient cycling; micro-climate functions; sediment retention; watershed protection
Cultural	Cultural heritage; recreation and tourism; landscape scenery
Habitat / Supporting	Primary production; nutrient cycling; soil formation

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Beneficiaries of environmental services (buyers) pay individuals or groups who agree to adopt sustainable practices (sellers)
Payments can be

Cost-based or results-based
Upfront or continuing
Voluntary or mandated

Financial incentive to reduce environmental harm or increase environmental benefits
Internalisation of environmental externalities - polluter pays principle (Noordwijk et al, 2023)

What are Payments for Environmental Services (PES)?

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Why Reward Pro-Climate Behaviors

Connecting distant beneficiaries of ecosystems with those who conserve them is Payment for Ecosystem Services “PES”

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PES rewards performance by generating revenue for landowners or communities who adopt practices that reduce emissions, sequester carbon or increase resilience – typically, forest conservation, sustainable agriculture, or good watershed management practices.

PES rewards good stewardship.

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Opportunity to scale up finance and impact
550 active PES examples worldwide with annual payments totaling $36-43 billion (Salzman, 2018)
Over half supported watershed management:

Protecting water supplies
Preventing flooding
Increasing resilience of ecosystems and communities

Increasing interest in PES to reduce deforestation

PES Has Achieved Important Scale and Scope

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Creates a system that rewards good stewardship and improves landscapes
Advances key targets

Climate finance (REDD+ is a type of results-based PES)
Land conservation
GHG mitigation
Climate adaptation and resilience
Inclusive development for indigenous populations and local communities

How Can PES Advance USAID Climate Goals?

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Quito Water Fund (FONAG)

USAID helped to establish
Collecting $2.4 million/year in additional fees from water utility customers for watershed conservation of the upper - paramo ecosystem watershed
$20 million in 80-year trust fund
Approach replicated in other parts of Ecuador and elsewhere in Latin America

Ecuador: What Does PES Look Like in Practice?

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2015 law enabled 40 water utilities to add surcharge on user tariffs to invest in water-related ecosystem services.
In early 2020, the water utilities had a $40 million fund but no investments.
Only in 2021 we helped water utilities to invest $1 million and to design new ways to invest the money and to develop a portfolio.
Challenges remain but USAID has supported the development of a $342 million pipeline.

Peru: What Does PES Look Like in Practice?

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The law was called MERESE, a word that sounds like “to deserve”, I think because we believed the ecosystems deserved to be treated as assets that required investment in maintenance and improvement. The ecosystem services that the law considered to invest were conservation and erosion control, and the activities included reforestation, grassland restoration, traditional practices for capturing water runoff and reducing soil erosion.
We were happy in early 2020 because in Peru we had a lot of money to invest.
Well, the reality was that we didn’t know how to spend this money. This is why in early 2020 we hadn't spent a single dollar. We accumulated money, but we had not built the process, procedures, capacities and culture to design high quality projects in natural infrastructure.

It is necessary to say that in early 2020 began the pandemic and the Government authorized the investment of these funds to provide water to the people, but sooner or later this fund will be recovered.

I have to recognize that the quality of the projects still very low, you know, any project that had a couple of trees is called green infrastructure. However we are improving the project design, not only technically, but socially, because the local population have to be involved in these projects, and women have to play an important role.
Challenges remain converting funds to implemented projects, however, as of today, USAID has supported the development of a $342 million pipeline of investments in Natural Infrastructure of water security and disaster risk reduction, via MERESE and other mechanisms

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MRSE Law 30215→ funds generated through a percent of the tariff paid by water users.
40 water utilities in Peru, including SEDAPAL (Lima), have the MRSE tariff and has collected around USD 36M.
Total funds accumulated in SEDAPAL’s MRSE account, as of January 2021: Approx. USD 29.8 M

Peru: Water Utility Context

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Peru: Water Utility Context

In 2015, Peru passed a tariff-based financing mechanism in Lima, which has been replicated in 40 water utilities across the country to raise over $130M for:

Natural Infrastructure: tree planting, contoured barriers and other green measures

Climate Change Adaptation: flood barriers, early warning systems for extreme events, new communications systems and government policies.
Disaster Risk Management: regulation, research, and development of new technologies, conservation and increase of public awareness.

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Peru: Water Utility Context

Despite significant advances in policy and financing commitments, a series of barriers had prevented funds from reaching the ground:

Long, bureaucratic process for public investment
Lack of shovel-ready projects and widespread capacities to develop them
Lack of clear quantification of water benefits
Lack of explicit gender focus
Lack of coordination across sectors to address key governance issues and secure benefits at the landscape scale

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Philippines: What Does PES Look Like in Practice?

USAID/Philippines assisted multiple PES pilots that increased funding for watershed management, forest protection, and park management through user fees and national government sharing of revenues

Bago City water users (rice and sugar farmer associations and water districts) funded community-based organizations to reduce illegal tree cutting
Water utilities in several Palawan cities collected fees to fund watershed management councils
Zamboanga City Water District budgeted funds for watershed protection in a natural park
National government allowed entry fees to several park and protected areas normally turned over to the Treasury to be retained by local governments or a protected area management board for conservation and management

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Vietnam: What Does PES Look Like in Practice?

Hydropower, water utility, and ecotourism company payments to households -at the deforestation front- in upland watersheds for maintaining and expanding tree cover
Mobilized $1.028 billion to protect 6.6 million ha of forest since 2010
Payments to 540,000 households
2020: Revised legal framework expanded PES from Forest Environmental Services (PFES) to cover CO2 emissions
2022: Start to prepare for piloting payment for carbon sequestration services, the target sectors include cement and coal-fired power plants

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Honduras: Typical Water Supply System With PES Mechanism

There are about 30,000 water supply systems at the rural community level

PES example: watershed protection tax is included in the water utility bill

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Honduras: Typical Water Catchment Infrastructure

The government has set up around 900 water supply watersheds under a national protection plan.

PES Example:

A portion of the water utility bill is used to pay conservation practices to protect water quality and quantity.
Beneficiaries are selected on the premise that they are in the proximity of the water catchment area.
Example Conservation practice: shade-grown organic coffee

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Dominican Republic: What Does PES Look Like in Practice?

In 2011, Government began pilot in one watershed to reduce deforestation by farmers and encourage tree planting for shade-grown coffee
Voluntary payments from water utility and hydropower company
To date, 15,000 ha of reduced deforestation and pilot continuing

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Yaque Norte river watershed:

Deforested areas from 2000-2019 (in red)

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Dominican Republic: What Measures Have Been Done in Practice?

PES contracts have been established and have reduced deforestation pilot continuing
Government developed policy framework for expansion
USAID supporting improved monitoring and reporting and valuation of environmental services

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Yaque Norte river watershed: PES contracts (in green)

Yaque Norte river watershed: Government Scheme to allocate PSE funds to beneficiaries

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Important Issues in Design and Implementation

Would the environmental benefits have occurred in the absence of the payments (additionality)?
Will environmental problems such as logging or charcoal production simply shift elsewhere? (leakage or displacement)
Risks of tree losses from fires, illegal logging, pests and diseases, and climate stresses

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USAID-funded Proland study noted critical issues of additionality, leakage, and permanence as well as common risks:

● Disincentivizing continued supply of the environmental services if the payments stop;

● External threats from migration, conflicts, wars, land grabbing, and illegal activities;

● The general public may not perceive or value the environmental services;

● A requirement for demonstrated additionality could penalize producers who were previously

following sustainable practices and reward those with unsustainable practices;

● Availability of funding for PES may decrease with general macroeconomic activity, the financial

health of specific companies, government fiscal space, or policy and regulatory changes;

● High administrative costs for developing and administering transactions; and

● Displacement of negative environmental impacts to other areas outside the PES area. (Miller and Winsten 2020)

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What is Needed for Success?

Optimal payment rates reflect economic value of ecosystem services, but lower rates still useful as incentives
Shared vision and purpose among stakeholders
Clear and equitable land and resource governance and property or use rights
Reliable data: deforestation and forest degradation, hydrological monitoring, estimated changes in CO2 emissions
Understanding and buy-in: Ensure processes and transactions understood by stakeholders
Good public financial management: adequacy, accountability, effectiveness, efficiency, and transparency

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Possible risks/issues

Some PES programs have collected substantial amounts, but only disbursed a small share (Lima water utility)
If payments to landowners vary with weather or hydrological factors, such as water flow variation, can create tensions within communities
Revenues subject to macroeconomic recessions and pandemics and internal business financial problems (Dominican Republic) and external conflicts and illegal activities

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Potential USAID Roles in Supporting PES

TA for policy and legal framework
Needs assessments, political economy assessments, stakeholder analysis and convening
Design and start-up costs and initial implementation
Analyses of value of environmental services
Public financial management, monitoring and evaluation framework, capacity building
Monitoring, evaluation, and learning
May take long time: USAID TA to Vietnam for PES began in 2006 with USAID TA; implementation in 2010

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Help on PES Design and Implementation

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USAID/W subject matter experts:

Eric Hyman (DDI/EMD); Samuel Rivera Reyes (REFS/CNE); Noel Gurwick, Lex Hovani, Hadas Kushnir, Evan Notman, and Larisa Warhol (EEI/NCS)

Resources

An Annotated Bibliography of Payments for Ecosystem Services and document repository
More PES references
PES in Peru, Dominican Republic, and Vietnam
Fiscal Accountability and Sustainable Trade Activity
PES and Women’s Economic Empowerment and Impacts on Women Farmers
PES Meets Culture Paper
Cash for Carbon RCT for Deforestation Reduction Paper

Benjamin, Emmanuel O., Oreoluwa Ola, and Gertrud Buchenrieder. 2018. “Does an Agroforestry Scheme with Payment for Ecosystem Services (PES) Economically Empower Women in Sub-Saharan Africa?” Ecosystem Services 31 (June): 1–11. https://doi.org/10.1016/j.ecoser.2018.03.004.

Córdoba, Diana, Erin C. Pischke, Theresa Selfa, Kelly W. Jones, and Sophie Avila-Foucat. 2020. “When Payment for Ecosystem Services Meets Culture: A Culture Theory Perspective.” Society & Natural Resources 0 (0): 1–19. https://doi.org/10.1080/08941920.2020.1849482.

Dhakal, Bhubaneswor, Manohara Khadka, and Madan Gautam. 2021. “Impacts of Payment for Ecosystem Services of Mountain Agricultural Landscapes on Farming Women in Nepal.” GeoJournal 86 (3): 1389–1423. https://doi.org/10.1007/s10708-019-10116-z.

Jayachandran, Seema, Joost de Laat, Eric F. Lambin, Charlotte Y. Stanton, Robin Audy, and Nancy E. Thomas. 2017. “Cash for Carbon: A Randomized Trial of Payments for Ecosystem Services to Reduce Deforestation.” Science 357 (6348): 267–73. https://doi.org/10.1126/science.aan0568.

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Discussion Question

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Are you aware of any other USAID or non-USAID supported experiences with PES?
What have you heard about this approach?

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Eric Hyman

Economist

Center for Economics and Market Development

Bureau for Inclusive Growth, Partnerships, and Innovation

U.S. Agency for International Development

ehyman@usaid.gov

Samuel Rivera

Foreign Service Officer - Environment

REFS | CNE | NCS

U.S. Agency for International Development

sriverareyes@usaid.gov

Q&A

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