Payments for Payments for Ecosystem Services: Ecosystem Services:

towards a more towards a more sustainable, just and sustainable, just and efficient allocation of efficient allocation of

natural capitalnatural capitalJoshua FarleyJoshua Farley

Community Development and Applied EconomicsCommunity Development and Applied EconomicsGund Institute for Ecological EconomicsGund Institute for Ecological Economics

University of VermontUniversity of Vermont

Outline of PresentationOutline of Presentation

• Economics on a finite planet• Why markets fail• Solving market failures: the role of PES• PES: the role of institutions• Ignorance, urgent decisions, high stakes

and adaptive management• Summary and conclusions

Economics on a Finite PlanetEconomics on a Finite Planet

The Laws of PhysicsThe Laws of Physics• You can't make something from nothing

– All economic production requires the transformation of resources provided by nature

• Energy is required to do work– All economic production requires energy– Fossil fuels drive our economy

(though there are exceptions to every rule)(though there are exceptions to every rule)

The Laws of PhysicsThe Laws of Physics• You can't make nothing from something,

and you can't burn the same match twice– Everything the economy uses eventually

returns to the ecosystem as waste

© Basel Action Network

The Laws of EcologyThe Laws of Ecology• The raw materials converted into economic

products are elements of ecosystem structure• Ecosystem services are provided by a special

configuration of ecosystem structure

The Laws of EcologyThe Laws of Ecology• If we deplete ecosystem structure, we

deplete ecosystem services• When we return waste to the ecosystem,

we deplete ecosystem services.• All economic activity affects ecosystem

services

The Ecosystem Sustains and The Ecosystem Sustains and Contains the Economic SystemContains the Economic System

• Ecosystem services are the limiting factor in enhancing human well being

The Economic ProblemThe Economic Problem

• 200 years ago: How do we allocate raw materials provided by nature (ecosystem structure) among different economic products?

• Markets are one effective solution

The Economic ProblemThe Economic Problem

• Today: How do we allocate finite ecosystem structure between:– Economic production– Production of life sustaining ecosystem goods

and services• Can markets achieve this?

Why Markets FailWhy Markets Fail

•Tropical forests provide:

•Erosion control •Climate regulation (local to global)•Disturbance regulation •Water purification, regulation•Many other ecosystem services

•Estimated value: $2006/ha/yr(Costanza et al., 1997)

Converted to Pasture for $20/ha/yrConverted to Pasture for $20/ha/yr

•Why?•Benefits of conservation ($2006/ha/yr) accrue to community (local to global)•Benefits of conversion ($20/ha/yr) accrue to landowner•Market forces and private property favor conversion

Non-excludable ResourcesNon-excludable Resources

Excludable resource regime One person can prevent another from using the resource Requires government enforcement of property rights Necessary for markets to exist

Non-excludable No enforceable property rights Can’t charge for use Many ecosystem services are non-excludable Cooperative management required

Some resources non-excludable by nature. None are inherently excludable.

Why Markets Fail IIWhy Markets Fail II

• Record ozone loss in 2006

• Why?• Air-conditioning

boom in India and China

• Cannot afford to pay royalties on refrigerants that do not deplete ozone

Rival ResourcesRival Resources

My use leaves less for you to use, e.g. Raw materials provided by nature

Competition for use Appropriate to use prices to ration

consumption Markets can be efficient

Non-Rival ResourcesNon-Rival Resources

My use does not affect you– Many ecosystem services– Rationing reduces benefits without reducing

costs: MARKETS INEFFICIENT – Cooperative provision appropriate

Non-rival but congestible– Non-rival, but becomes rival at high levels of

use, e.g. Beaches, hiking trails, recreation– Prices ration use, efficient when congested

Anti-Rival ResourcesAnti-Rival Resources

• My use makes you better off– e.g. alternatives to compounds that deplete the

ozone, alternatives to carbon intensive energy, cures for contagious diseases

– Knowledge improves through use– Price rationing (markets) are PERVERSE– Provision and consumption must be

cooperative– Common property solutions are essential

Solutions to Market Solutions to Market FailuresFailures

When no explicit property rights When no explicit property rights existexist

• Example: waste absorption capacity• Propertize: create common property rights• E.g. cap (assumes common property),

distribute (can be turned into private property, but bad idea) and trade mechanism for carbon emissions

• Can also tax

When Explicit Property Rights ExistWhen Explicit Property Rights Exist

• Option 1: Status quo– Let rights to ecosystem structure trump rights

to services– Unsustainable, unjust, inefficient

• Option 2: Regulate or revoke property rights– More sustainable. Is it just and efficient?

• Option 3: Purchase existing rights, including payments for ecosystem services– Many mechanisms available

Regulation can be sustainable and efficient

•Appropriateness of PES may be determined by justice

How does PES work?How does PES work?• Generally instigated by beneficiaries• Provider must receive more than

opportunity cost (next best alternative)• Beneficiaries must pay opportunity,

transaction and implementation costs. • Benefits received in addition to what they

would have received without the payments must be greater than their costs.

How does PES work?How does PES work?• Payments are typically conditional on

management practice/service provision• Payments are typically for a specific

service, provided by specific management practice or activity

• Is this appropriate?

Ecosystems Provide a Bundle of Ecosystems Provide a Bundle of servicesservices

• Goal is to maintain life support functions and other services

• Focus on single service may undermine Others

• Markets must be adapted to ecological necessities, not vice versa

PES: the Role of PES: the Role of InstitutionsInstitutions

Importance of InstitutionsImportance of Institutions

• Must collect money from beneficiaries and disburse to service providers

• Payments for market goods and marketable goods can come from individual beneficiary– e.g. Perrier

• Payments for services should be provided by all beneficiaries– Free rider problem for public goods

• Institutions required to reduce transaction costs

Transaction costs often greatest Transaction costs often greatest obstacle to PESobstacle to PES

• Institutions (private sector, public sector, civil sector) reduce transaction costs

• Conditions of monopsony (single buyer) reduce transaction costs– Perrier – Irrigation cooperative – NY Water authority– Costa Rican government

Institutions Must be at Scale of Institutions Must be at Scale of ProblemProblem

• Local• Regional• Global: missing link

–Ecosystems are interdependent–Richest nations are free riders–Carbon offsets inadequate–Support for PES schemes should not be

grants or loans, but payments

Market Failure 1: Forest LossMarket Failure 1: Forest Loss

Forest loss: Countries sized in proportion to forest loss

Market Failure 2: Royalty FlowsMarket Failure 2: Royalty Flows

Flow of Royalties: Countries sized in proportion to royalty payments made to them

Types of PES Types of PES

Rival

Non-rival

Excludable Non-Excludable

Market Good: Purchase of waste absorption capacity CO2 (CDM); water supply (Perrier)

Congestible: Club goods: e.g. ecotourism

Pure Public Good:Government payments; Green certification

Open Access Regime:Create common property regimes; e.g. cooperatives, government payments, caps on CO2 emissions

Non-rival

Anti-rivalTragedy of the non-commons: (NOT PES) Avian flu,Ozone depleting compounds, etc.

Public provision: Public investment in and free use of technologies that protect ecosystem services.

Ignorance, urgent Ignorance, urgent decisions, high stakes decisions, high stakes

and adaptive and adaptive managementmanagement

Facts are UncertainFacts are Uncertain

• How does ecosystem provide services?• What are human impacts on services?• Thresholds of irreversibility• What is service worth?

Economic Value and Inelastic DemandEconomic Value and Inelastic Demand

Natural Capital Stocks

Mar

gina

l Val

ue

The loss of agriculture does matter even if it’s only 3% of GNP

Stakes are HighStakes are High

• Life support functions• Food security• Water security• Fuel security• Irreversible thresholds

Decisions are urgentDecisions are urgent

• When will we pass irreversible thresholds?• How long before we lose life support

functions?

Adaptive ManagementAdaptive Management

• Must act on knowledge we have• Must learn from action

– Design PES schemes to generate knowledge• Must evaluate actions• Must act again in presence of increased

information

Summary and ConclusionsSummary and Conclusions

• Must begin acting now: no time to delay• Must experiment with variety of policies,

including PES• Experiments increase knowledge• Must learn from mistakes and successes,

communicate knowledge• Conferences like this one are necessary

and will remain so until we've solved the problem