Lessons learnt from existing Payments for Environmental Services schemes

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Lessons learnt from existing Payments for Environmental Services schemes Stefano Pagiola World Bank 1818 H Str NW Washington DC 20433 USA

The materials in this presentation may be freely reproduced with appropriate credit to the author and the World Bank.

1 Lessons learnt from existing Payments for Environmental Services schemes Stefano Pagiola World Bank 1818 H Str NW Washington DC USA spagiola@worldbank.org The opinions expressed in this presentation are the author s own and do not necessarily represent those of the World Bank Group. The materials in this presentation may be freely reproduced with appropriate credit to the author and the World Bank. Stefano Pagiola Latin America and Caribbean Sustainable Development Department World Bank Market-based instruments and Payments for Environmental Services in forestry Barcelona, Spain 17 December 2009

2 World Bank support to Payments for Environmental Services Completed projects: Costa Rica: Ecomarkets Colombia/Costa Rica/Nicaragua: Regional Integrated Silvopastoral Ecosystem Management Projects under implementation: Brazil: Sao Paulo Riparian Zones Brazil: Espírito Santo Biodiversity and Watershed Restoration Costa Rica: Mainstreaming Market-Based Instruments for Environmental Management Mexico: Environmental Services Panama: Consolidation of the Atlantic Mesoamerican Biological Corridor Worldwide: LULUCF carbon projects Projects under preparation: Colombia: Mainstreaming Sustainable Cattle Ranching Brazil: Sao Paulo Sustainable Rural Development Kenya: Agricultural Productivity and Sustainable Land Management Capacity building: Courses in Colombia, Dominican Republic, Ecuador, El Salvador, Mexico, Panama, Peru, Venezuela Research: Case studies; Hydrological aspects; Poverty links; Valuation Stefano Pagiola, World Bank,

3 From theory to practice 1. Understanding the science and the economics Irrigation Water users association Farmers Land users Hydrological effects Hydropower production Hydropower producer Electricity users Domestic water supply Water company Water users Payment 2. Charging service users 3. Paying service providers 4. Establishing the institutional framework Stefano Pagiola, World Bank,

4 1. Identifying and valuing environmental services Stefano Pagiola, World Bank,

5 What services are needed? Carapina Water Treatment Station, Vitória, Espírito Santo, Brazil Data source: CESAN Stefano Pagiola, World Bank,

6 Water services: key characteristic Water flows downhill Stefano Pagiola, World Bank,

Hydroelectric production Potable water 6 m 3 /sec

7 Water services vary substantially High potential payments 98MW Low potential payments Río Ocoa Río Nizao 52MW 64MW Hydroelectric production Potable water 6 m 3 /sec Dominican Republic Irrigation Stefano Pagiola, World Bank,

8 Where are the services? Guatemala: Watersheds with domestic large-scale significant hydroelectric water potential irrigation power use (>1000 for plants water hhs)pes 1.9 million ha Source: Pagiola, Zhang, and Colom, 2007 Stefano Pagiola, World Bank,

9 Targeting within a watershed Erosion in critical areas of Mishquiyacu watershed, Peru Erosion (t/ha/year) HRU Hydrological Response Units (3% of the watershed) produce 26% of total sediment 1 HRU(1% of the watershed) produces 17% of total sediment HRU Others Area (ha) Source: Quintero, Wunder, and Estrada, Stefano Pagiola, World Bank,

10 Links between forests and water services: Myths and reality Myth: Reality: Myth: Reality: Myth: Reality: Myth: Reality: Myth: Reality: Myth: Reality: Forests increase precipitation Minor effect, except at continental scale Forests slow runoff True Forests increase total annual water flow Because of increased evapotranspiration, forests usually reduce total annual water flow. Exception: Cloud forests Forests increase water flow in the dry season Unclear Forests reduce flooding True at small scales, not at large scales Forests reduce erosion Depends on use that is made of deforested areas Stefano Pagiola, World Bank,

11 Links between land use and water services: How much do we know? Service Qualitative understanding Ability to quantify Total water quantity Good Medium Dry season water flow Poor Poor Flood risk Medium Poor Water quality Good Poor Sediment loads Good Medium/high Stefano Pagiola, World Bank,

12 2. Charging service users Stefano Pagiola, World Bank,

13 Financing requirements Up-front costs of creating the mechanism Identifying and quantifying services Creating payment arrangements Payments to service providers Payments usually need to be long-term Transaction costs of running the mechanism Contracting, monitoring, administration, etc Must be paid by service users Stefano Pagiola, World Bank,

14 Charging service users Easiest when beneficiaries Are easy to identify Are already organized Easier to negotiate agreements Already have payment mechanisms Are few Receive well-defined benefits Stefano Pagiola, World Bank,

15 Why should service users pay? Carapina Water Treatment Station, Vitória, Espírito Santo, Brazil Paying for conservation must be cheaper than the best alternative Users must think so Additional investment Data source: CESAN Additional operating costs + Cost of interruptions Stefano Pagiola, World Bank,

16 Water users do pay (US$/ha/yr): 10 15/ Energía Global Renewed 2002 Platanar S.A. Renewed 2004 CNFL/Río Aranjuez CNFL/Río Balsa Total 18,000ha ca US$500,000/year CNFL/Río Laguna Cote Florida Ice & Farm y Heredia ESPH Azucarera El Viejo Hidroeléctrica Agua Zarcas Misc Hydropower producer Bottler Domestic water supply Irrigated agriculture Hotel 0ha 2,000 ha 4,000 ha 6,000 ha Stefano Pagiola, World Bank,

17 Who is actually paying? Country Costa Rica: Ecuador: Case Water users with contracts with FONAFIFO Heredia ESPH EMAAP-Q and EEQ: contributions to FONAG ETAPA: Management of Cajas NP Pimampiro Charged a new fee? No Yes No Yes No El Salvador: San Francisco de Menéndez, Yamabal No México: México PSAH Coatepec No Yes Venezuela: CVG-Edelca: payments for conservation of Río Caroní No In most cases, existing revenues are used to make payments Stefano Pagiola, World Bank,

18 How much should service users pay? Maximum: value of the benefit Deforestation and use for pasture Conservation Conservation with payment for service Benefits to land users Payment Costs to downstream populations Maximum payment (including transaction costs) Stefano Pagiola, World Bank,

19 3. Paying service providers Stefano Pagiola, World Bank,

20 Who should be paid? Mapping of critical areas in the Río Blanco watershed, Ecuador Río Chambo Quimiag Río Blanco-Quimiag irrigated area 2400ha El Toldo Infiltration Avoid contamination Río Blanco HEP Plant 98MW Río Collanes Diversion dam Regularity of flow Avoid sedimentation Río Blanco Stefano Pagiola, World Bank,

21 Paying service providers: Principles Payments should be continuous and open-ended Payments should be targeted Avoid perverse incentives Stefano Pagiola, World Bank,

22 Paying service providers: Contract design issues Require additionality? More benefits per dollar spent Risk of perverse incentives Costa Rica PSA: No additionality requirement Nicaragua/Costa Rica/Colombia Silvopastoral Project: Baseline payment + payment for incremental service provision Mexico PSAH: High deforestation risk increases likelihood of selection Stefano Pagiola, World Bank,

23 Paying service providers: Contract design issues Types of contracts: Fixed price Procurement auctions All developing country PES mechanisms are fixed-price Fear of complexity of auction approach Perceived potential for manipulation Trade-off with social concerns Improving the efficiency of fixed-price approaches: Limits on eligible areas (usually benefit-based) Point systems for ranking applications (benefit and cost-based) Differentiating payments (benefit and cost-based) Stefano Pagiola, World Bank,

24 How much should service providers be paid? Minimum: their opportunity costs Deforestation and use for pasture Conservation Conservation with payment for service Benefits to land users Minimum payment Payment Costs to downstream populations Maximum payment Stefano Pagiola, World Bank,

25 4. Establishing the institutional framework Stefano Pagiola, World Bank,

26 Components of a payment system Supervision mechanism Technical Governance Service user $ Service user $ Financing mechanism Payment mechanism $ $ Land users Service user $ Environmental services Stefano Pagiola, World Bank,

27 Components of a payment system Supervision mechanism Technical Governance Service user Service user Service user $ $ $ Financing mechanism Functions: Collects payments Manages funds Needs: MBAs Accountants Environmental services Land users Stefano Pagiola, World Bank,

28 Components of a payment system Supervision mechanism Technical Governance Functions: Promotion Contracting with land users Monitoring implementation Needs: Extension agents Payment mechanism $ Land users Environmental services Stefano Pagiola, World Bank,

29 Components of a payment system Supervision mechanism Service user $ Technical Logistically hardest task Build on existing institutions Service Trust $ user Logistics in place Financing mechanism Governance Payment mechanism $ $ Land users Service user $ Environmental services Stefano Pagiola, World Bank,

30 Components of a payment system Supervision mechanism Technical Governance Technical functions: Identifying services Identifying eligible land uses Monitoring impact on services Periodically adjusting eligible land uses Needs: Analysts (hydrologists, economists, etc) Payment mechanism $ Land users Environmental services Stefano Pagiola, World Bank,

31 Components of a payment system Supervision mechanism Technical Governance Service user Service user Service user $ $ $ Financing mechanism Governance functions: Negotiating agreements Resolving disputes Needs: Stakeholder representatives Environmental services Stefano Pagiola, World Bank,

32 Monitoring needs to be done at 3 levels Implementation Do land users undertake the contracted land use? Impact on services Do changes in land use generate the desired services? Impact on participants Is the welfare of participants improved? Stefano Pagiola, World Bank,

33 Applying PES to different services Difficulty of application Step Water services Carbon sequestration Biodiversity conservation 1. Understanding the science High Medium/Low Medium/Low 2. Charging service users Medium/Low High/Medium Very high 3. Paying providers Depends primarily on local conditions Stefano Pagiola, World Bank,

34 For national policy, yes Do you need a law? For local mechanisms, no Law imposes rigidities May need law to remove obstacles (eg allow public utilities to spend money on conservation) When have multiple actors, law can help But it can also become a cop-out Stefano Pagiola, World Bank,

35 Initial lessons Not a universal solution One size does not fit all Identify the services being provided clearly Understand and document the links between land uses and services Begin from the demand side, not the supply side Monitor effectiveness Design flexible mechanisms Mix and match with other mechanisms Ensure the poor can participate Stefano Pagiola, World Bank,

36 For more information Stefano Pagiola, World Bank,

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