Payment for Ecosystem Services (PES): An Innovative Tool for Financing Environmental Conservation
Rising opportunity costs and population growth are resulting in land use change and declines in critical ecosystem services. The 2005 Millennium Ecosystem Assessment found that 60% of the Earth’s ecosystem services are being depleted at a very rapid rate.
Biodiversity and ecosystems provide invaluable services and products to the society. These include food, water, and protection from erosion, recreational services, medicinal products, and climate regulation. Despite this significant economic, social, and cultural value of biodiversity and the associated ecosystem services, biodiversity is lost at a rapid rate. The need for policies that promote the conservation and sustainable use of biodiversity and ecosystem services is more important than ever. Word Resource Institute (WRI) estimates the value of ecosystem services to be US$33 trillion a year, nearly twice the value of the global gross national product (GNP) of US$18 trillion.
Payment for Ecosystem Services (PES) are agreements whereby a user of an ecosystem service makes a payment to an individual or communities whose practices like land use or deforestation directly affects the use of that ecosystem services. Ecosystem beneficiaries include downstream hydroelectric utilities that use clean water for their day-to-day operations. Payment for such management practices reduces soil erosion. Soil erosion and sediment buildup have negative effects that impact the efficiency of dams and the cost of energy. Interest in PES has been rapidly increasing over the past few years and according to the Organization for Economic Co-operation and Development (OECD) these projects channel over $6.53 billion annually. Over 300 PES projects are implemented in countries like India, Indonesia, Costa Rica, Mexico, and Australia. These schemes flourish wherever private companies, public-sector agencies, and non profit organizations like Conservation International (CI) have joined hands in addressing various environmental issues.
Corporate Social Responsibility (CSR) and PES
As Corporate Social Responsibility (CSR) becomes an integral part of many organizations, PES offers an innovative solution that fits within the “Green Growth” approach of sustainable development- synergizing economic development with environmental protection. Companies that are adopting CSR practices are implementing PES projects in partnership with the government and local communities to offset the damage to the ecosystem as a result of their operation or practices.
In southwestern China’s Sichuan Province, Marriott protects the source of fresh water for more than 2 billion people by investing $500,000 over two years in a Nobility of Nature program in partnership with a nonprofit Conservation International (CI). The partnership promotes beekeeping and honey production. Nobility of Nature honey is sold in nearly all Marriott hotels throughout China, with a portion of the proceeds going back to support the program. Marriott’s investment in the Nobility of Nature project addresses several of the company’s key CSR goals including the reduction of energy and water consumption and investment in innovative conservation initiatives like rainforest protection and water conservation. Locally Marriott’s funding has helped provide equipment to monitor the condition of nearby fresh water sources and wildlife, 600 bee hives, and training in the organic bee farming business.
Growing Market for Carbon Sequestration
PES is also gaining attention because of its link to the growing mitigation efforts associated with climate change. Deforestation is responsible for up to 1/5th of global greenhouse gas emissions. Markets for carbon sequestration have facilitated payments for Reducing Emissions from Deforestation and Degradation (REDD) on a voluntary basis, and are growing rapidly. For example, the World Bank estimates that Indonesia alone could earn up to US$ 2 billion a year in such a forest carbon market.
Despite the success of PES in the past decade, the biggest criticism is their cost-effectiveness which in turn depends on the design and implementation of the program, and the region where it is implemented. Because payments are based on the quantity of services provided, PES programs must appropriately measure the ecosystem services, a rather difficult task. Measurements depend on complicated ecological relationships that are often poorly understood, especially in developing countries. For example, the contribution of a hectare of forest to aquifer recharge depends on the flora, soil, hydrology, and weather in the forest. Given the challenges involved in measuring ecosystem services, most PES programs use relatively coarse estimates and assumptions.
Tragedy of the Commons
Proponents of PES envision it as a solution to the so called “tragedy of the commons” (Hardin 1968), defined as “a dilemma in which multiple individuals acting independently in their own self-interest can ultimately destroy a shared resource even where it is clear that it is not in anyone’s long-term interest for this to happen.” A promising concept that has received considerable attention, PES has the potential to become a conventional environmental management tool. It is an essential part of the set of instruments necessary for a transition to a green economy, triple bottom line benefits, and a sustainable society.
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