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.
Why Are Services Ignored?
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.
Take the example of wetlands and their role as a nursery for young fish. The wetlands owner provides a benefit to anglers and those who like to eat fish by providing habitat for minnows to grow and reach maturity. But these benefits are uncompensated. The market value of the wetlands depends on its location, the pressure for coastal development, and the scarcity of alternative development sites. The service benefits it provides are simply not part of the current calculation. If the wetland is developed, the nursery’s benefits will be lost; yet there are no market signals to suggest they should be considered in the transaction. Because we can easily value ecosystem goods such as timber or fish, we tend to invest in extracting these goods even if it means degrading certain services related to their production.
How can the problem be remedied? Why not simply recognize this situation for what it is—the provision of valuable services to consumers—and realize this through an explicit arrangement of payments for services rendered? Put another way, why not treat the landowner’s provision of the wetland as no different from his or her provision of other marketable goods? The wetland’s nursery habitat and water filtration services may also be treated as a business transaction, where wetland owners manage their land to grow the crop of fish habitat and water quality much the same as dairy and potato farmers do for their cash crops. This is the concept behind payments for ecosystem services.
Payments for Services
Payments for ecosystem services (PES) refers to voluntary transactions where a service provider is paid by, or on behalf of, service beneficiaries for land, coastal, or marine management practices that are expected to result in continued or improved service provisions. This type of scheme occurs over different scales—from pollination of local farms and erosion control in a watershed to “shade grown” coffee beans sold half a world from where they were grown. PES also spans a wide range of transaction types, from one-off payments for a biodiversity offset to arm’s-length market transactions for carbon credits
While the principle of PES is simple—those who benefit from service provision should pay the providers— there are challenges to implementing them successfully. It is difficult, for example, to prevent someone who did not pay for an ecosystem service from benefiting from it; it is equally difficult to get people to agree now to pay for provision of these services. Why pay for something when you have always gotten it for free? As a result, a key challenge in designing a PES scheme lies in creating a market that does not now exist—in capturing the value of the service by compensating the providers for the benefits they provide. This approach, notably unlike that of traditional regulatory or tax instruments, views environmental protection much like a business transaction between willing parties.
Despite these challenges, people are finding ways to engage in PES agreements. For example, Energía Global, a private hydropower company located in the Sarapiqui watershed in Costa Rica, provides electricity for about 400,000 consumers. The company wanted to protect the watershed in order to increase the reliability of streamflow throughout the year and to reduce sedimentation. Energía Global pays owners of upstream private land to reforest their land, engage in sustainable forestry, or conserve forest cover. Landowners who have recently cleared their land or landowners planning to replace natural forest with plantations are not eligible for compensation. A local NGO oversees the implementation of the conservation activities, carries out technical studies, and administers the scheme (for more information see PERC Policy Series #48).
Payments for ecosystem services represent a promising development not only in terms of conservation mechanisms but, more generally, in how we think about conservation. By identifying the critical role that landscape management plays in providing valued services, PES frames environmental protection explicitly as a matter of private ordering—as a transaction between suppliers and beneficiaries. In some cases, this can create an attractive and more effective alternative to traditional regulations.
This arrangement also encourages landowners to view their property in a different way. With PES in mind landowners can identify new streams of income that may not have been recognized or optimized before, creating incentives to manage their properties specifically for the provision of clean water, biodiversity, or other amenities.
Payments for ecosystem services, of course, are not a silver bullet. Absent the perceived scarcity of the service, discrete buyers and sellers, secure property rights, and other conditions, it is unlikely that PES schemes will emerge. That said, PES represents a promising development of voluntary exchanges through markets that enhance environmental asset development. As we learn more about the values of the complex resources provided by an ecosystem, we become more willing to invest in husbanding those resources.