Posts in Water

The latest PERC Policy Series by James Salzman brings attention to a rapidly developing phenomenon—payments for ecosystem services (PES). Salzman, the Samuel F. Mordecai Professor of Law and the Nicholas Institute Professor of Environmental Policy at Duke University, explains when and where ecosystem services can be provided by voluntary markets rather than government actions.

The key to understanding how PES work is rooted in the basis of any voluntary market transaction—gains from trade. One party agrees to take action because another party offers an incentive. Both parties benefit. A beekeeper, for example, brings her hives to an orchard to provide pollination services for a fee. But Salzman explores the less obvious services such as forests at the top of a municipal watershed that act as a filter providing clean water to people below.

Salzman states that we receive many environmental benefits for “free,” which provides little or no incentive for people to pay for them or for entrepreneurs to provide them. Because price signals that alert individuals about scarce resources in traditional markets are absent, ecosystem services are taken for granted—until they stop providing benefits. Then the cost of remediation or building infrastructure, such as a water treatment plant, makes their value obvious.

For decades the solution to environmental protection has been government action. Today, knowledge about environmental processes combined with increased environmental sensitivity provides opportunities for entrepreneurs to find innovative ways of developing markets for ecosystem services.

Read the Policy Series online here.

In the fall edition of PERC Reports out this week, James Salzman, professor of law and environmental policy at Duke University, provides an overview of ecosystem services and the conditions under which markets can provide them. Look for more from Salzman on this topic in a forthcoming PERC Policy Series.

When visiting a store, one expects to find useful goods and services such as apples to eat and a refrigerator to keep them chilled. We depend on similar items in our everyday lives. In much the same way, nature also provides us valuable goods and services. When we bite into an apple, if we pause to think beyond the store where it was purchased, we may think of soil and water, but probably not the natural pollinators that fertilized the apple blossom so the fruit can set. When we drink a glass of tap water, we may think of the local reservoir, but not the source of the water quality, which lies miles upstream in the wooded watershed that filters and cleans the water as it flows downhill.

Largely taken for granted, healthy ecosystems provide a variety of critical goods and services. Created by the interactions of living organisms with their environment, “ecosystem services” provide both the conditions and processes that sustain human life. Trees provide timber; coastal marshes provide shellfish. That’s obvious. The services underpinning these goods, though less visible, are equally important. If you doubt this, consider how to grow an apple without pollination, pest control, or soil fertility.

A specific landscape creates a range of ecosystem services. A forest at the top of a watershed, for example, provides water quality by filtering contaminants from the water as it flows through roots and soil, flood control as the water slows while moving through the watershed, pollination by those pollinators living along the edge of the forest, and biodiversity conservation if endangered plants or animals live in the woods. Or consider something as simple as soil. More than a clump of dirt, soil is a complex matrix of organic and inorganic constituents transformed by numerous tiny organisms. The level of biological activity within soil is staggering. Under a square meter of pasture soil in Denmark, for example, scientists identified more than 50,000 worms, 48,000 small insects, and 10 million nematodes. This living soil provides a range of ecosystem services: buffering and moderation of the hydrological cycle, physical support for plants, retention and delivery of nutrients to plants, disposal of wastes and dead organic matter, and renewal of soil fertility.

Just as we tend not to think about everyday goods and services until the store is out of apples or the refrigerator stops working, so, too, do we fail to appreciate the importance of services until we suffer the impacts of their loss. One cannot easily appreciate the impact that widespread wetland destruction has had on the ecosystem service of water retention until after a flood. Nor does one fully appreciate water quality until recognizing how development in forested watersheds has degraded the service of water purification. The costs from degradation of these services are high, and are suffered in rich and poor countries alike.

Despite the central role ecosystem services play in the provision of important benefits, they are only rarely considered or protected by the law. Nor, in the past, have significant markets arisen that capitalize on the commercial value of these services. The reason for this neglect is threefold. First, we are often either ignorant of the sources of the ecosystem goods and services we depend on, or we lack the scientific knowledge to predict with certainty how specific actions affecting these factors will impact the local ecosystem services themselves. Second, institutional barriers such as jurisdictional boundaries and inadequate property rights often hinder the development of markets for these services. And third, the ecosystem services underpinning these goods are often treated as if they are free...

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