Payments for Ecosystem Services, or PES, is an innovative approach to public-private partnerships (PPPs) in natural resources whereby managers of natural resources are paid for environmental services. PES has been defined several different ways, but it’s known most widely as “a voluntary transaction where a well-defined environmental service (or a land-use likely to secure that service) is being ‘bought’ by a service buyer from a service provider if and only if the service provider secures service provision (conditionality).” (Wunder, 2005 and Pagiola and Platais, 2007)

The services financed by PES programs have positive externalities, benefiting people other than the direct users, managers, or owners of natural resources. Paying for these externalities through PES schemes can help to strengthen environmental, physical, human, and financial capital.

Tracking transactions

The use of PES has been growing rapidly since Costa Rica launched the first explicit PES program in 1997. There are now hundreds of PES programs at a variety of scales, ranging from small local to large national programs. However, an accurate global overview of the total area covered by PES contracts does not exist. This is partly due to the lack of a comprehensive listing of PES contracts at the national level, and partly due to differences in reporting standards that impair the reliability of most aggregated numbers.

Establishing a reliable and up-to-date global database for PES contracts with consistent definitions would be highly valuable for international policymakers. It would enable them to determine the areas with the biggest opportunities for PES and to better focus their efforts in cultivating PES contracts.

Despite the lack of aggregated data, there is ample qualitative documentation on PES. Three prominent trends emerge from a review of this documentation.

PES schemes are predominantly used in Latin America, but are spreading to the rest of the world.

In 1997 Costa Rica was the first country to set up an institutionalized PES program. Costa Rica’s forests were a major source of income for the tourist industry, which urged the government to pay landholders for preserving forest on their land. In other words, economic and environmental incentives were strongly aligned. The apparent success of Costa Rica’s PES program prompted many other Latin American countries to follow its example. In the late 2000s, over 80 PES programs were active in 18 countries in Latin America and the Caribbean.

Today, Latin America is still the center of gravity for PES, but governments elsewhere have started to use PES contracts as well. High opportunity costs remain a major obstacle for PES in Asia, but countries like Vietnam, Indonesia, and China are now using PES contracts on a significant scale for forestry and watershed services. In many forest areas in Africa, further progress is needed to define land rights and strengthen institutional and government capacity. Nevertheless, some African countries (such as Kenya) have started to initiate PES contracts, and more are considering ways to do the same.

PES initiatives are increasingly user-financed, shifting course from large government financed programs.

In the beginning of PES, government-financed schemes dominated the conversation. For example, Costa Rica’s PES program was made possible by a fuel tax. Large scale PES schemes saw multilateral institutions such as the United Nations Development Programme/Global Environment Facility (GEF) or Global Carbon Fund as buyers. The GEF, for example, has been involved in 42 projects since 1991, investing more than $222 million.
In recent years, user-financed PES projects have grown relatively faster than government-financed schemes. User-financed PES doesn’t impose a burden on government budgets and better allows for small PES projects in places with weak institutional capacity to monitor services. Hybrid approaches, partly funded by the government and partly by users, also exist.

Multinational corporations are increasingly funding PES projects, albeit often on a more local scale. Examples include Coca-Cola’s projects in the Mekong Delta, Vietnam, and United Breweries in Lake Victoria, Uganda. Likewise, smaller companies and individual citizens are also paying for environmental services. Local PES schemes for watershed services in Brazil are a good example.

PES is expanding beyond traditional boundaries into natural resource PPPs that include oceans and coastal areas.

Building on the experience with PES schemes elsewhere, the scope of the concept is being expanded into new areas. Most prominent are new PPP initiatives around ocean conservation. The seafood industry, for example, has teamed up with the World Bank/GEF and Food and Agriculture Organization of the United Nations in the ALLFISH PPP for sustainable fisheries. The recent Global Ocean Action Summit, hosted by the Government of the Netherlands, and the “Our Ocean” conference, hosted by the U.S. Department of State, have stimulated these new types of PPPs, with alliances announced at each.

The idea of “blue carbon” is another a recent development. Blue carbon refers to the process of reducing atmospheric CO2 and mitigating global climate change by conserving mangroves, sea grasses, and coastal vegetation. Marine Ecosystem Services (MARES) programs aim to expand PES to coastal and marine ecosystems. Projects such as the Abu Dhabi Blue Carbon Demonstration project rode this wave ahead of most others. “Blue Bonds,” which are analogous to the existing “Green Bonds” market, may prove critical to this effort.

A closer look

The expansion and proliferation of these trends does not mean that PES is always the best instrument. In some cases, PES has failed to achieve the intended outcomes. In areas where institutional arrangements are weak, the implementation of PES is especially likely to be ineffective. In addition, inefficiency arises if PES agreements compensate individuals who would have delivered the services otherwise.

However, examination of the trends shows that these examples are exceptions. With a proper enabling environment for PES, it is usually possible to design efficient transactions. Its recent record promises that PES is expected to spread across the world, become increasingly user-financed, and expand to new areas like oceans and coasts.