1.4.1 Conceptual and Theoretical Foundations of PES
PES are economic strategies aimed at capturing external benefits from the environment through ‘quasi-markets’ and transforming them into real financial incentives for local actors stewarding those services (Wunder 2005; Engel et al. 2008; Sommerville et al. 2009). It has been described as the inverse of the ‘polluter pays’ principle to control negative externalities to the ‘supplier gets paid’ for providing positive externalities (Engel et al. 2008). The theoretical foundations for a PES scheme are defined by Wunder (2005:3) as: 1) a voluntary transaction where 2) a well-defined environmental service (ES), or a land use likely to secure that service, is 3) being ‘bought’ by at least one ES buyer 4) from at least one ES provider 5) if, and only if, the ES provider secures ES provisions (i.e. meets the conditions agreed upon). Costa Rica’s Pagos por Servicios Ambientes (PSA) scheme has received a great deal of attention as a PES, most notably with an increase in areas designated for biodiversity conservation (Thacher et al. 1996; Rojas and Aylward 2003; Zbinden and Lee 2005; Pfaff et al. 2006; Pagiola 2008). Its success has been partially attributed to the numerous support mechanisms in place, e.g. local NGOs, coupled with political stability and quality of infrastructure in the country (Wunder et al. 2008). In addition, it has a relatively long history for PES in a developing country context and has been extensively studied (Rojas and Aylward 2003; Miranda et al. 2003; Zbinden and Lee 2005; Pagiola 2008; Morse et al. 2009). Another important factor to consider is that most forested land in Costa Rica is privately owned12 (Arriagada et al. 2009).
Other nations have also begun to show some progress through newly established PES schemes, although they differ substantially in objectives and institutional design (Brouwer et al. 2011). The Chinese government has launched perhaps the most ambitious ‘PES’ through its Sloping Lands Conversion Program (SLCP) by retiring and re/afforesting millions of hectares over the past decade (Bennett 2008; Bullock and King 2011; Yin and Zhao 2012). A review of the PES schemes from around the world has shown that user-financed programs
Chapter 1 Introduction
had more effective outcomes in both design and additionality than those that were government-financed (Wunder et al. 2008). However, governments are more likely to accept schemes with high transaction costs than private entities, whether buyers or users of ES (pers. comm. S. Wunder, Apr. 2013).
1.4.2 Common Property Problems with PES
PES schemes are favoured in situations where property rights are well-defined, e.g. private/individual landowners or strong local regimes/institutions (Pattanayak et al. 2010; Rode et al. 2013). While PES has also been used to improve community-based conservation projects, fair distribution of benefits can be a contentious issue (Sommerville et al. 2010). In some cases, PES schemes geared towards wildlife protection may require collective participation efforts on common-property, as is the case with conserving large mammals in sub-Saharan Africa (e.g. Nelson et al. 2010). In addition, PES or other policies (e.g. subsidies) may crowd out already existing institutional arrangements or introduce perverse incentives if it replaces cooperation with competition (Kerr et al. 2012). In case where PES is targeted for restoration projects (e.g. re/afforestation), there might be the risk of undermining collective action processes that helped to secure access and ownership rights in the first place (Agrawal and Ostrom 2001). There is also the additional risk that destabilising socially- embedded institutions, making property rights less secure, would result in increased transaction costs (Ménard et al. 2005; Swallow and Meinzen-Dick 2009).
1.4.3 Principal-Agent Problems with PES
Principal-Agent dilemmas are common economic problems relating to conflicts of interest, moral hazard, and asymmetrical (incomplete or imperfect) information (Holmstrom and Milgrom 1991; Bolton and Dewatripont 2005). They occur in both the marketplace and political arena, generally between a ‘principal’ who hires (or delegates a task for) an ‘agent’. From a political perspective, bureaucrats can be seen as the agent while voters are their principals. In the free market, the objectives of land managers and contracted agents, for example, might be conflicting since both parties intend to maximize their own utility (Shogren et al. 2010). Moreover, cases where private information, e.g. costs of land, labour and capital, is withheld lead to either moral hazards (or hidden action) or adverse selection (or hidden information). Optimal institutional designs (or contracts) are intended to minimise principal-agent dilemmas through revealing the incentives of each party (Grossman and Hart
theory, therefore, helps frame issues related to principals and agents within the context of incentive-based mechanisms (e.g. PES) used to internalise benefits from the environment. In the context of PES, the ‘service buyer’ can be considered as the contracting ‘principal’ and the ‘service seller’ the contracted ‘agent’ (Grossman and Hart 1983). In such contractual arrangements, a conditional agreement is reached between both parties with the expectation of increasing or enhancing a clearly defined environmental (or ecosystem) service (ES). This includes alternative land-use practices, where payments may be based on estimating the opportunity costs of foregoing to land conversion, e.g. avoided deforestation (Wunder 2007). While some PES schemes (e.g. REDD/REDD+) are strictly aimed at reducing net carbon emissions from land-use changes (e.g. deforestation) by conserving existing forests, wetlands, and other natural ecosystems, there are concerns that such narrowly focussed PES could lead to the planting of monocultures of faster-growing exotics (Murray 2000; Sayer et al. 2004; Pagiola et al. 2004a; Bäckstrand and Lövbrand 2006; Montagnini and Finney 2011). This issue arises partly because of difficulties in specifying and quantifying non-commodity ecosystem (or environmental) goods or services (Ferraro 2008). North (1992) illustrates the complexities involved in estimating the costs of difficult goods and services for principals:
The costs of transacting arise because information is costly and asymmetrically held by the parties to exchange. The costs of measuring the multiple valuable dimensions of the goods or services exchanged or of the performance of agents, and the costs of enforcing agreements determine transaction costs.
Thus, more narrowly focussed PES (e.g. carbon-only) would likely have lower transaction costs than broader-based PES (e.g. bundled or layered ES) or those focussed on ES that are harder to define and estimate, like biodiversity.
1.4.4 Carbon Markets, Climate Change & the Biodiversity Paradox
International market-based policies have emerged to boost forest protection and restoration efforts under the United Nations’ Reduced Emissions from Deforestation and Degradation (REDD/REDD+) and the Clean Development Mechanism (CDM). Meanwhile, governments have begun adopting large-scale tree planting (re/afforestation) driven by these and other objectives, motives and incentives (Edwards et al. 2010). Current net gains of global forest cover are partially due to large-scale afforestation efforts, particularly in India, the US and China (Houghton 2003). In fact, China was the biggest contributor of ‘new forests’ in the last
Chapter 1 Introduction
achievements have also had negative social and ecological impacts (e.g. Cao et al. 2011) in spite of increases in carbon storage from afforestation (Fang et al. 2001). Despite the general trends of marginal expansion of forest cover, conversion of species-rich areas (e.g. primary forests13 and wetlands) has continued to increase in many parts of the world contributing to both carbon emission and biodiversity loss (Hansen et al. 2010; FAO 2011). As a result, the expanding of the new “carbon markets” could contribute to biodiversity loss (or exacerbate it) if there are no institutional mechanisms for integrating biodiversity as a co-benefit (Busch et al. 2011). In turn, these efforts could result in moral hazard, displacement, and “leakage” issues for forests and biodiversity outside protected areas or under these schemes (Wunder and Albán 2008; Edwards et al. 2010; Busch et al. 2011; Harrison and Paoli 2012).
1.4.5 Challenges and Constraints with PES as a Policy Instrument
PES has been conventionally applied as a mechanism for preventing deforestation, but is also being increasingly applied to incentivise restoration efforts for enhancing different kinds of ES, also referred to as asset-building PES (chapter 3). Many studies have emphasised adopting ecologically-sound restoration practices through selecting the right native tree and shrub species and prioritising degraded areas (Mansourian et al. 2005; Chazdon 2008; Rey- Benayas et al. 2009; Hall et al. 2011a). Some have also advocated targeting ecologically important areas for restoration, such as riparian systems (e.g. Rodrigues et al. 2011). Yet, there are numerous challenges when attempting to enhance biodiversity simultaneously with other ecosystem services, particularly under private property regimes. For instance, restoration efforts that emphasise attaining broad-based ES in multifunctional landscapes can theoretically enhance biodiversity, yet are likely to face higher transaction costs, e.g. compliance monitoring. Hence, PES schemes that are designed for compensating land managers for ‘inputs’ that are ‘action-based’, such as number of trees planted, may or may not produce the same effects as PES that are ‘performance- (or results-) based and focussed on ‘outputs’ (Ferraro 2011; Gibbons et al. 2011; Montagnini and Finney 2011). Institutional designs are therefore of considerable importance to ensure the ES buyer(s) obtain the expected additionality being paid for since conditions and objectives are agreed upon through contracts14. (Paoli et al. 2010; Bullock et al. 2011; Busch 2013).
13 Classified as forests with no previous signs of human interference by FAO (2010) 14 Issues of PES contract design for biodiversity are examined in more detail in chapter 3.
It is necessary to view PES as one of many kinds of environmental policy options, particularly for correcting market failures through addressing the ‘free rider’ problem, or society’s failure to pay for the external benefits from the environment (Salzman 2005). As opposed to other environmental policy mechanisms such as regulations, e.g. restriction on cutting trees or protected areas forbidding entry, which also require strong public institutions able to cover the transaction costs, PES relies on incentives and voluntary participation, similar to new institutions being introduced in private markets (e.g. carbon trading or government tax breaks). As a voluntary policy option, use-restricting PES are considered to be more efficient and equitable than ‘command-and-control’ policies for regulating deforestation. However, asset-building PES often requires incentivising people to plant trees they normally would not plant and quite often rely on social and institutional factors ensuring effective outcomes, such as secured property rights (chapter 2). These are important aspects to consider when designing PES schemes in contexts where they have not been fully introduced or experimented with, such as in Lebanon.