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Barriers and Opportunities to the Use of Payments for

Ecosystem Services

Stakeholder workshop, 8 April 2011

Today’s agenda

� Introduction to PES

� Barriers and opportunities

� PES in practice

� Study recommendations

� Facilitating future PES

� 3 x breakout sessions

Payments for Ecosystem Services: A brief

introduction

Ecosystem services� “the benefits that people obtain from

ecosystems”

(Millennium Ecosystem Assessment, 2005)

� Ecosystem services include:� provision of food, water, timber and

fibre (provisioning services)

� regulation of climate, water quality and flood risk (regulating services)

� opportunities for recreation, tourism and cultural development (culturalservices)

� underlying functions, e.g. photosynthesis and pollination (supporting services)

A growing agenda� International Year of Forests (2011); UN

Decade on Biodiversity (2011-20)

� The Economics of Ecosystems and Biodiversity (TEEB)

� Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services (IPBES)

� International payments for ecosystem services (IPES), e.g. REDD+

� Nagoya ‘Aichi Biodiversity Targets’,

� EU target to halt the loss of biodiversity and the degradation of ecosystem services in the EU by 2020 and restore them in so far as feasible

Including in the UK…

� Defra’s Natural Value Programme

� Defra’s Ecosystem Approach Action Plan

� UK National Ecosystem Assessment

� Countryside Survey Integrated Assessment

� Lawton Review recommended the establishment of payments for ecosystem services

� Natural Environment White Paper

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Current situation� “Since WWII increases in provisioning services,

including crops, livestock, and trees, have been achieved through both using more land and intensification, and enabled the UK to produce more food and timber in the last decade than at any time in the last century. However, the expansion of agriculture, forestry and new settlements demanded by the growing population has come at the expense of some key supporting services, especially nutrient cycling, regulating services, including soil quality, the control of pest and diseases, and possibly pollination by insects, and cultural services, for example changes in landscape”

UK National Ecosystem Assessment: Draft synthesis of current status and recent trends (2010)

Ecosystem functions

� Ecosystem services are underpinned by

ecosystem functions, for example:

� primary production

� nutrient cycling

� soil formation

� water retention

� The Millennium Ecosystem Assessment argued

that biodiversity underpins ecosystem function

(although this is the subject of continued

investigation)

Ecosystem functions

� For example, woodlands within a catchment may have the function of slowing the passage of surface water, thereby attenuating flood risk

� Whether this function is regarded as a service depends on whether or not ‘flood control’is considered a benefit (since communities will value this function differently in different places at different times)

Making the connections

Adapted from Haines-Young, R., Potschin, M. and Cheshire, D. (2006). Defining and identifying Environmental Limits for Sustainable Development. A Scoping Study. Final Full Technical Report

to Defra, 103 pp + appendix 77 pp, Project Code NR0102.

Ecosystem markets

� The Lawton Review argued that as our understanding of the links between biodiversity, ecosystem function, ecosystem services and the values people place on these services continues to improve:

“The urgent and logical next step is to develop markets that enable these values to be realised for services such as water quality, flood risk management, climate regulation and other benefits”

Ecosystem markets

� In particular, the Lawton Review argued that

“There is an urgent need to develop market mechanisms through which landowners can

realise the value of the ecosystem services that

their land provides to society”

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PES

� Payments for ecosystem services (PES) is often

used as an umbrella term for a wide variety of

schemes in which the beneficiaries, or users, of

ecosystem services provide payment to the

stewards, or providers, of ecosystem services

Definition

� A PES is:

� a voluntary transaction where

� a well-defined ES (or a land-use likely to secure that service)

� is being ‘bought’ by an (minimum one) ES buyer

� from a (minimum one) ES provider

� if and only if the ES provider secures ES provision (conditionality)

Wunder S. (2005). Payments for environmental services: Some nuts and

bolts. CIFOR Occasional Paper No. 42, Centre for International Forestry

Research, Bogor, Indonesia

Two key types

� Public payment schemes for private land

owners to maintain or enhance ecosystem

services

� Self-organised private deals in which

individual beneficiaries of ecosystem services

contract directly with providers of those services

Agri-environment schemes

� Environmental Stewardship delivers over £400

million a year to farmers and landowners in

return for more environmentally sensitive

farming

Private PES� “Of particular interest is in

understanding the opportunities for new financing streams and considering the potential for private PES schemes to emerge”

� “PES provides some key opportunities to link up those involved in ‘supplying’ ecosystem services more closely to those benefiting from the same ecosystem services and in doing so, potentially provide cost-effective ways of developing new streams of financing”

What does PES look like?

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Who might pay?

� Water companies: improving water quality and

hydrology

� Local residents: interest in reduced flooding

� Insurance groups: interest in reduced flooding

or storm / hazard regulation

� Recreational users: interest in enhanced

recreational opportunities

� Conservation groups: interest in enhanced

wetland habitat

Additionality

� “Payments should typically be for actions that

are additional to what is usually expected of

landholders – they should not be compensated

for obeying the law, but rather for actions that

society considers beyond the landholder’s

responsibility”

RSPB (2010). Financing nature in an age of

austerity

PES internationally� Last 10 – 15 years have witnessed a

rapid proliferation of PES schemes globally

� According to a recent OECD report, there are already more than 300 PES programmes in place at national, regional and local levels

� International payments for ecosystem services (IPES) include reforestation projects under the Clean Development Mechanism (CDM) and REDD+

� Green Development Mechanism (GDM) under discussion

Research, pilots and examples

� Defra ‘multi-objective demonstrator projects’(which seek to apply the ecosystem services approach to flood risk management schemes)

� Natural England’s ecosystem approach pilots

� SCaMP (Sustainable Catchment Management Programme)

� WATER (a partnership to take forward a market-based catchment restoration scheme based on a PES model in the South West)

� Nurture Lakeland

Our research

� URS / Scott Wilson in partnership with Macaulay

Land Use Research Institute, the University of

Aberdeen and a range of academic specialists

from across the UK commissioned by Defra to

investigate the “Barriers and Opportunities to the Use of Payments for Ecosystem Services”

Barriers to PES

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Barriers

� Lack of awareness and information

� Scientific uncertainty

� Spatial variability

� Potential leakage

� Locational issues

� Time lags and horizons

� Challenges in valuation

� Perceived risk

� Legal and policy environment

� Costs

Lack of awareness and information

� For many ecosystem services, ‘suppliers’ and ‘beneficiaries’ may not be aware of their roles

� In particular, potential buyers of ecosystem services (consumers, businesses, utilities, government agencies) are often unaware of their dependence on ecosystem services

� Limited access to information about PES, the economics of land use, and prospective PES buyers

Scientific uncertainty

� Biodiversity �? ecosystem function �?ecosystem services �? benefits to people

(values)

� A necessary condition for the design of ‘genuine’

PES is a clear relationship between the type of

land use being promoted and the provision of

ecosystem services (Defra, 2010)

Scientific uncertainty

� Scientific understanding of the complex relationships between ecological and biophysical processes and service provision is limited

� Our capacity to make linkages between biodiversity and ecosystem services “at spatial (landscape) scales relevant to the human enterprise is limited at present”*

*Balvanera et al (2006). Quantifying the evidence for biodiversity effects on ecosystem functioning and services. Ecology Letters 9:1146-1156

Scientific uncertainty

� Ultimately, how certain can we be that a particular set of management practices will result in a specific set of

ecosystem service-related outcomes?* What level of confidence is necessary for a PES scheme to be viable?

� What level of certainty does a buyer (e.g. a water company) need to have in order to show a comprehensive review of the issues (‘due diligence’)?

* Many natural resource management activities yield no saleable ecosystem services

Spatial variability

� A site’s capacity to generate ecosystem services is affected by various factors including: � biophysical characteristics (e.g. soils, topography)

� history (e.g. previous management)

� characteristics of neighbouring sites (e.g. seed banks, habitats)

� local managerial capacity (e.g. skills, access to capital)

� These factors are highly variable, meaning that the marginal costs of delivering services also vary spatially (do PES schemes have to be highly localised?)

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Spatial variability

� PES often criticised for making fixed uniform payments on a per hectare basis whereas ecosystem service

provision tends to vary from one location to another

� Accounting for spatial variation in ecosystem service benefits via economic valuation, benefit scoring, and mapping tools, allows payments to be prioritised to those areas that provide the highest benefits (OECD)

� European Commission has suggested that farmers in

areas with specific natural constraints receive additional income support, in the form of an area-based payment

Potential leakage

� Buyers need to be assured that a PES deal will

not shift unsustainable land management

practices to other areas (known in the carbon

arena as “leakage”)

Locational issues

� The diffuse nature of some ecosystem services

makes it difficult to locate precisely who is

responsible for their provision (e.g. for water

quality and carbon sequestration)

� Can lead to different payment systems with

taxpayers tending to fund diffuse services (e.g.

through agri-environment schemes)

Locational issues

� The value of services is often contingent on

location

� For example, an accessible forest is worth more

than that same forest in a remote location with

respect to use values; benefits (values) may

therefore be shaped by population distribution

(contrast one tonne of carbon which has the

same value everywhere)

Time lags and horizons

� The provision of ecosystem services in response

to a change in management regime may take

some time to materialise and compromise the

uptake of ‘results-based’ schemes

� Upfront funding for start up and transaction costs

may be necessary (who bears the risk?)

Time lags and horizons

� Tensions between commercial and ecological time horizons

� For example, Ten Year HLS agreements are long-term in relation to European and domestic funding streams, but ten years is not long in terms of many farm businesses and it is very short when considering the long-term aims of a resilient and coherent ecological network (Lawton Review)

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Challenges in valuation

� Many services are generated

jointly (e.g. multifunctional

agriculture) and are delivered

and utilised as bundles of

services; pricing individual

components can be therefore

be difficult

Perceived risk

� High perceived risks amongst both buyers (who may have low confidence in providers delivering) and sellers (who may not be insured against the risk of external factors, e.g. weather and disease, affecting their ability to meet the PES agreement)

� Payment reliability is key since landowners will assess the potential risk against the equivalent characteristics of market returns, i.e. trend over time versus inflation, sudden peaks and troughs, etc.

Perceived risk

� Loss of flexibility for sellers; poorly-designed

long-term contracts can limit land management

activities to a narrow range of alternatives

� Need for insurance; where payments are

dependent upon delivery of specific ecosystem

service outcomes, factors outside producers’

control may result in failure to achieve

contractual obligations and, subsequently, non-

payment

Perceived risk

� Different ecosystem services display different

degrees of non-excludability; for services such

as enhanced biodiversity and attractive

landscapes it is difficult to exclude ‘free riders’

Legal and policy environment

� English proprietary rights to land are complex

� The capacity of private individuals or bodies to

contract

� Lack of effective enforcement mechanisms if the

‘seller’ fails to deliver the required service

� The need to consider the burden of proving that

failure is the ‘seller’s’ responsibility rather than,

for example, another upstream water proprietor

Legal and policy environment

� Numerous EU directives (Water Framework,

Nitrates, Habitats)

� CAP reform

� Localism and ‘Big Society’ agenda

� New Community Infrastructure Levy (CIL)

� New marine planning framework

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Costs

� High initial investment costs

� PES schemes may require high investment

costs in order to carry out the land use changes

required under PES agreements; these costs

may be prohibitive particularly for payment-by-

results schemes where there is a considerable

time lag between management change and

service delivery

Costs� High transaction costs

� Establishing a PES scheme can be costly and involve:� Identifying ecosystem service(s)

� Establishing appropriate land use / management techniques

� Identifying, recruiting and organising buyers and sellers

� Holding negotiations and establishing protocols

� Demonstrating management practices

� Monitoring, evaluation and review (e.g. value of ES may vary over time)

� For example existing HLS agreements can be quite complicated to set up and require considerable and ongoing advice (is cost-benefit analysis necessary?)

Breakout session 1: Addressing barriers to PES

Barriers

� Lack of awareness and information

� Scientific uncertainty

� Spatial variability

� Potential leakage

� Locational issues

� Time lags and horizons

� Challenges in valuation

� Perceived risk

� Legal and policy environment

� Costs

Opportunities for PES

Ideal conditions for PES� Demand for ecosystem services is clear

and financially valuable to one or more players

� Supply is threatened

� Specific resource management actions have the potential to address supply constraints

� Effective brokers or intermediaries exist (who can suggest resource management alternatives, engage and negotiate with prospective buyers etc.)

� Resource tenure is clear

Katoomba Group, UNEP and Forest Trends (2008). Payments

for Ecosystem Services: Getting Started – A Primer

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Flood risk

� 5.2 million properties in England at risk from flooding with 3.8 million from surface water flooding

� Average annual cost of flood damage in England exceeds £1 billion

� Costs borne by householders, businesses, central and local government and insurance companies

Flood risk� The Government has recently

completed a consultation on future funding for flood and coastal erosion risk management

� Consultation argues that since costs currently fall almost entirely to the general taxpayer, this artificially constrains how much can be achieved, as well as creating potential for inequity in the system

Flood risk

� Government would like to encourage additional localinvestment in flood and coastal erosion risk management, and give areas at risk a bigger say in the action taken

� Consultation proposes a new ‘payment for outcomes’ approach to determining funding for all capital

maintenance and defence projects from 1 April 2012

Flood risk

� According to the consultation, “Greater local choice and

discretion over what projects can proceed, and when, based on local willingness to contribute towards the benefits that would be

delivered”

� Does this provide the framework for locally designed PES

schemes?

� Buyers might also include insurance groups interested in

reduced flooding

Water quality

� “Businesses can benefit by establishing privately financed payments for ecosystem service schemes. The

promise for new schemes is greatest in water quality

management; outside of this area the potential remains limited”

RSPB (2010). Financing nature in an age of austerity

SCaMP

� Partnership between United Utilities (UU) and RSPB to

improve the upland land owned by UU (2005 – 10)

� Funding from UU and agri-

environment schemes

� Meet targets for SSSI condition and improve water quality

(reduction in suspended solids, pathogens, nutrients and water colour)

� Based on whole farm plans

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SCaMP

� 12,322 ha of blanket bog within SSSIs into management toward

favourable condition

� 19.9ha of upland heath restored

� Improved water quality (colour and suspended solids)

� Decrease in the levels of carbon

in dissolved form year on year

� Socio-economic benefits (e.g. tenant farming viability)

� SCaMP2 underway supported by Ofwat and DWI

Carbon

� Science of carbon and land use continues to improve

� May one day be an increase in habitat restoration and creation as a form of carbon PES (RSPB, 2010)

� Peatlands cover 11% of England’s land area and provide an important terrestrial store of organic carbon; 70% of peatlands are degraded in some way

Carbon� “However, research is still needed to establish the

relationships between peatland restoration and GHG emissions for UK peatlands, to enable the emissions benefits to be valued confidently” (Natural England, 2010)

� Accurate metrics needed for measuring carbon stores under different management (RSPB, 2010)

� Recent studies suggest that saltmarsh store a mean 1.51 tonnes of carbon per hectare*

* GRID-Arendal and UNEP (2009). Blue carbon – the role of healthy oceans in binding carbon

Urban (green infrastructure)

� Green infrastructure (GI) can provide regulating services (e.g.

urban cooling and removal of pollutant particles) and significant cultural services (e.g. improved mental and physical health)

� Continuing increase in the demand for land for development, with particular

pressures in the South East (Foresight Report on Land Use Futures)

Urban (green infrastructure)� Local authority managed green

space usually funded from the authority’s general revenue budget

� Community Infrastructure Levy (CIL) widens the scope of Section 106 agreements to allow a more strategicapproach to the use of developer contributions and could see money channelled into local priorities, including GI

Urban (green infrastructure)� “…survey reveals that the

private sector is more than willing to invest in open spaces if the right vehicle for investment is made available, and their investment is managed properly”

� 95% of respondents not only believe good open space adds value to commercial property, but are prepared to pay at least 3% more to be in close proximity to it

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Urban (green infrastructure)

� In London this could equate to an additional £1.3

billion of additional capital that could be invested

in open spaces

� Report recommends that appropriate investment

models need to be identified

Source: Natural England

Tourism PES

� Nurture Lakeland: registered charity with over

275 business members representing more than

1200 tourism businesses and holiday cottage

owners

� Fundraising donations channelled into

conservation and local community projects

� Projects on water quality, carbon and

sustainable transport

Agriculture

� Ongoing discussions on CAP reform

� European Commission argues that “Targeting

support exclusively to active farmers and

remunerating the collective services they

provide to society would increase the

effectiveness and efficiency of support and

further legitimize the CAP”

� Commission has stated that a wide range of

tools will remain useful under Pillar 2, including

PES

Agriculture

� Defra’s response to the Commission emphasises that the

UK favours a very substantially reduced CAP budget focused on enhanced Pillar 2 measures and the delivery of environmental public goods

� Determined switch away from direct support payments to targeted payments for environmental public goods could mean more funding for

AES in the longer-term

Agriculture

� “sustainable intensification a necessity” (Foresight Global Food and Farming Futures Project)

� “We currently lack knowledge of how best to optimise

agricultural land management for multiple outcomes, how to address the scale dependencies of such optimisations, assess the impact of land management on some services, or the impact of some services on

agricultural production. Sustainable land management at regional scales will be difficult to deliver without influencing decision making through the creation of new patterns of knowledge generation and exchange, market

mechanisms, incentives and regulation” (NEA)

Role of business

� Could business act as a buyer of ecosystem

services in order to generally offset its activities?

� “There is much current interest in enabling the

private sector to invest in peatland restoration to

help meet their own voluntary carbon targets

while contributing to national carbon

commitments” (Natural England, 2010)

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Breakout session 2: Capitalising on

opportunities for PES

Opportunities

� Local flood management PES

� Water quality PES

� Habitat creation / restoration and carbon PES

� Urban green infrastructure PES

� Tourism PES

� Refined agri-environment schemes

� General business engagement in PES

Study recommendations

Study recommendations

� Capacity building

� Evidence gathering

� Improved valuation

� Spatial planning / targeting

� Identify brokers

� Explore innovative ideas

� Recommendations not aimed specifically at Government but a wide range of stakeholders

Capacity building

� In relation to:� Awareness of buyer / seller roles and dependencies

on ecosystem services

� Recruiting and organising buyers and sellers

� Negotiation of complex agreements and financial management

� Implementation of appropriate land use / management techniques

� Assurance, monitoring, evaluation, verification and review

� Guidance and case studies

Capacity building

� “Due to the amount of specialized information

needed to get PES deals off the ground, support

institutions may be a cost-effective – and

perhaps unavoidable – investment”

Katoomba Group, UNEP and Forest Trends (2008). Payments for

Ecosystem Services: Getting Started – A Primer

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Evidence gathering

� In relation to:

� Links between biodiversity, ecosystem function and ecosystem services

� Links between land management practices and

ecosystem service outcomes

� Metrics to measure services (e.g. measuring carbon stores under different management regimes,

biodiversity benefit indices)

� Benefit scoring and mapping tools

� Data availability is key

Evidence gathering

� “For example, when scientific understanding of

the causes of the loss of bees is further

advanced, it is possible to envisage a private

PES where landholders that rely on pollination

pay for a reduction in damaging actions

elsewhere”

RSPB (2010). Financing nature in an age of austerity

Improved valuation

� Develop agreed valuation methods (e.g. for

carbon storage, flood risk attenuation)

� Agree a margin of error (+/- 10 – 20%?)

� Further research on services of value to the

public – gain consensus

Spatial planning / targeting

� “…biodiversity and ecosystem benefits tend to

vary from one location to another… The greater

the spatial variation in costs and benefits, the

larger the potential cost-effectiveness gains are

when PES programmes are designed to take

these differences into account”

OECD (2010). Paying for Biodiversity: Enhancing the Cost-Effectiveness of Payments for Ecosystem Services (PES)

Identify brokers

� Facilitate the development independent and

scientifically credible brokers

� Brokers can:

� Help sellers assess an ecosystem service ‘product’and its value to prospective buyers

� Assist sellers with establishing relationships and rapport with potential buyers

� Enable sellers get to know potential buyer(s)

� Assist with proposal development

Explore innovative ideas

� For example:

� Inverse auctions (where potential sellers submit bids indicating the minimum payment they are willing to accept for the provision of an ecosystem service)

� Government provision of part funding for benefits that do not accrue to business (RSPB, 2010)

� Trust fund repositories for payments that can then be

channelled into landscape restoration etc.

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Thank you

Steven Smith

URS / Scott Wilson

6 – 8 Greencoat Place

London SW1P 1PL

T: 020 7798 5121

E: steve.smith@scottwilson.com