FOR SERVICES RENDERED

The current status and future potential of marketsfor the ecosystem services provided by tropical forests

JULY 2004

I N T E R N A T I O N A L T R O P I C A L T I M B E R O R G A N I Z A T I O NInternational Organizations Center, 5th Floor, Pacifico-Yokohama, 1-1-1, Minato-Mirai, Nishi-ku, Yokohama, 220-0012, Japan

Tel 81-45-223-1110 Fax 81-45-223-1111 Email itto@itto.or.jp Web www.itto.or.jp© ITTO 2004

INTERNATIONAL TROPICAL TIMBER ORGANIZATION

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For services renderedThe current status and future potential of markets

for the ecosystem services provided by tropical forests

Sara Scherr, Andy White and Arvind Khare, with

contributions from Mira Inbar and Augusta Molar

ITTO Technical Series No 21

International Tropical Timber Organization

2004

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For services rendered

The current status and future potential of marketsfor the ecosystem services provided by tropical forests

ITTO Technical Series No 21

by Sara Scherr, Andy White and Arvind Khare, withcontributions from Mira Inbar and Augusta Molnar

The International Tropical Timber Organization(ITTO) is an intergovernmental organizationpromoting the conservation and sustainablemanagement, use and trade of tropical forestresources. Its 59 members represent more than75% of the world’s tropical forests and 90% of the global tropical timber trade. ITTO developsinternationally agreed policy documents to promotesustainable forest management and forest conservationand assists tropical member countries to adapt suchpolicies to local circumstances and to implementthem in the field through projects. In addition,ITTO collects, analyses and disseminates data on theproduction and trade of tropical timber and funds arange of projects and other action aimed at developingindustries at both community and industrial scales.All projects are funded by voluntary contributions,mostly from consuming member countries. Since itbecame operational in 1987, ITTO has funded morethan 700 projects, pre-projects and activities valuedat more than US$250 million. The major donorsare the governments of Japan, Switzerland and theUSA. ITTO contact details can be found on theback cover.

This document is a revised version of InternationalTropical Timber Council (ITTC) document ITTC(XXXV)/6, which was reviewed by the ITTC in

November 2003. It is made available by ITTO aspart of its policy of contributing in a timely mannerto public debate on issues related to the conservationand sustainable management, use and trade oftropical forest resources. See the ITTO website(www.itto.or.jp) for original translations in Frenchand Spanish, or contact the ITTO office.

The authors of this paper are affiliates of a non-governmental organization, Forest Trends, themission of which is to maintain and restore forestecosystems by promoting incentives that diversifytrade in the forest sector, moving beyond exclusivefocus on lumber and fibre to a broader range ofproducts and services. www.forest-trends.org

Cover photos

Left: Iwokrama International Centre for Forest Conservation

Top right: Getty Images

Middle right: E. Müller

Bottom right: A. Compost

Back cover: A. Compost

© International Tropical Timber Organization 2004

This work is copyright. Except for the ITTO logo,graphical and textual information in this publicationmay be reproduced in whole or in part providedthat it is not sold or put to commercial use and itssource is acknowledged. Although this report wascommissioned by ITTO, ITTO does not necessarilyendorse or support the findings or recommendationspresented herein.

ISBN 4 902045 10 9

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ForewordForest ecosystems perform many services on ourbehalf. They deliver clean water to rivers, lakes anddams, hold soils together, store carbon, and providehabitat for a large part of the planet’s terrestrialbiodiversity.

Why, then, do we deforest so readily? We haveknocked over hundreds of millions of hectares ofthe world’s forests in the last few centuries, anddeforestation – particularly in the tropics – continuesat a substantial rate today. If forests are so valuable,why do we do this?

The answer is that despite their many acknowledgedservices, forests are perceived to have less economicvalue than the land on which they stand; in manyplaces, agriculture simply out-competes forest as a land-use. Such agriculture may not always besustainable, but immediate economic and financialimperatives commonly override concern for the moredistant future.

So it is in the humid tropics. The globalcommunity may champion tropical rainforests fortheir extraordinary biological riches, but people atthe forest frontier – small-scale farmers as well aslarger agri-industrial enterprises –are clearing thosesame forests to plant crops and raise animals.

If we want to slow and reverse this process, we needto find ways of making forest a more competitiveland-use. At ITTO we believe that the sustainablemanagement of natural tropical forests can makegood economic sense – if certain conditions prevail.In particular, the timber and non-timber forestproducts thus produced must be marketable,and the prices must be the best obtainable onthe open market.

In many forests, though, this still won’t be enough:additional financial inputs will be needed to makesustainable forest management financially viableand competitive with alternative land-uses.

Where will these inputs come from? The internationaldonor community, of which ITTO is a part, hasfunded a wide range of forest management projects,with limited success in raising standards to a pointwhere the long-term future of the forests concernedmight be secure. But such donor support isdiminishing, and export markets for tropicaltimber products are becoming harder to penetrate.

In recent years people have begun talking aboutpayments for the ecosystem services that forestsprovide. Clean water, for example, is an increasinglyvaluable commodity, but the forests have been givingit to us for free for millennia. If forest-clearing leadsto a reduction in water quality, will downstream usersbe prepared to help meet the cost of retaining theforest upstream? A similar question can be posed forcarbon: the clearing and burning of forests releasepotent greenhouse gases into the atmosphere; couldpolluters in developed countries pay to help stop this?Ditto for biodiversity: will those of us who deplorethe loss of biodiversity caused by deforestation beprepared to pay landowners and land-users to keepthe forest intact?

This report, which ITTO commissioned from a teamat Forest Trends, looks into these questions and otherissues surrounding payments for the services renderedby tropical forests. It is the first study of its kind tofocus on tropical forests and as such we hope it willmake a valuable contribution to debate and policydevelopment in this field.

One of the conclusions reached by the authors isthat while international buyers currently dominatemarkets for ecosystem services in tropical countries(small though they are), in the long run the mostimportant markets will be focused domestically.This may well be true, but it would be unfortunateif we, the international community, were unableto contribute to the growth of markets for servicesof global importance, such as carbon storage andbiodiversity conservation.

Perhaps some tropical countries will continue togive us these services for free. But in the absenceof payments, we would have few grounds forcomplaint if the level of service diminishes.

Manoel Sobral FilhoExecutive DirectorInternational Tropical Timber Organization

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AcronymsCER certified emission reduction

CCX Chicago Climate Exchange

CDCF Community Development Carbon Fund

CDM Clean Development Mechanism

ERT Environmental Resources Trust

ITTO International Tropical Timber Organization

NPV net present value

NGO non-governmental organization

NTFP non-timber forest product

PCF Prototype Carbon Fund

SFM sustainable forest management

AcknowledgementsThe authors would like to acknowledge the materialsand insights of members of the Katoomba Group,particularly Josh Bishop, Stefano Pagiola, NatashaLandell-Mills and Nels Johnson. We are also gratefulfor comments from Matt Arnold, Josh Bishop, DavidCassells, Michael Jenkins, Peter May, John Spears,Steve Johnson and Alastair Sarre.

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ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Résumé analytique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Resumen analítico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2 Reasons for interest in ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Lack of financial incentives to provide ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The search for sustainable incomes in the tropical timber industry . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Need for new means to finance forest conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Potential contribution to economic development and poverty reduction . . . . . . . . . . . . . . . . . . . . . . 25

3 Status of main ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Types of ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Watershed protection services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Biodiversity protection services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Carbon sequestration and storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Scale of ecosystem market potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

4 Benefits and risks to forest owners and producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Potential benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Benefits for different types of producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Potential risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Linking ecosystem services markets to rural development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

5 Strategic issues for tropical countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

International competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Legal and regulatory frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Property rights and the politics of protecting ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Domestic equity concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Institutions to reduce transaction costs and financial risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

6 Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Current status of ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Issues to consider when engaging in ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Principal gaps in knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

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References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Annex 1 ITTO terms of reference for environmental services study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Annex 2 Tropical cities that manage forests for water services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Annex 3 Additional resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

List of figures

1 Tropical timber export trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

2 Carbon sequestration in the humid tropics by vegetation type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

3 Profiting from investments in ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

4 Bundling of income streams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

5 Property rights and policy instruments to promote ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . 58

List of tables

1 Major forest ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2 Instruments to promote forest ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

3 Estimated financial flows for forest conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

4 Forest Tenure in tropical producer countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

5 Examples of water market payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

6 Types of payments for biodiversity protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

7 Value of payments for biodiversity conservation: selected examples . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

8 Estimated economic value of forests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

9 Potential benefits and threats of ecosystem service markets for local livelihoods . . . . . . . . . . . . . . . . 48

List of boxes

1 The growing number of markets for ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

2 Rough estimates of forest-dependent poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3 Biophysical relationships that link forests, water and people . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

4 A new fund to finance forest ecosystem services in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

5 New York City pays for watershed management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

6 Brazil’s value-added tax for conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

7 From bioprospecting to botanicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

8 World Bank funds invest in forest carbon projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

9 Indigenous forest communities in Mexico sell services to auto federation . . . . . . . . . . . . . . . . . . . . . 43

10 Types of compensation mechanisms for environmental services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

11 Financial contributions of ecosystem services markets to household incomes . . . . . . . . . . . . . . . . . . 50

12 Rural communities in India develop equitable watershed service markets . . . . . . . . . . . . . . . . . . . . . 51

13 China’s ecological compensation scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

14 New South Wales, Australia, establishes legal framework for ecosystem service markets . . . . . . . . . 57

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Executive summary

Status of forest ecosystem markets

The past decade has seen the widespread emergenceof markets and other payment schemes for forestecosystem services – such as watershed protection,biodiversity protection and carbon sequestration –around the world. At a global scale, several recentreviews indicate that these activities are nascent andstill limited in scope and scale, but that they may havepotential to be scaled up to regional, river basin ornational levels with further development. Most ofthe activity to test such schemes to date has been indeveloped countries, where biophysical science tendsto be stronger and legal frameworks and institutionsexist that permit the development of moresophisticated markets.

The strong and growing interest in developing thesemarkets is driven by frustrations with traditionalgovernment regulatory approaches, growingrecognition of the limits of protected area approachesto conservation, societal demands for ecologicallysound products, and the forest-based industry’s needto find additional revenue sources to remain competitive.Those concerned with conservation and developmenthope that such markets can contribute to forestprotection and restoration and become a sustainablesource of new income for the forest-dependent poorwho own and administer an increasingly large shareof the world’s forests. Government officials andindustry and community leaders globally arebeginning to assess their strategic positions in thesemarkets: identifying their opportunities, the strategicrisks of action and inaction, and the implicationsfor their relative competitiveness. Those who haveexamined these options in depth find there is still aneed for policy assessment and pilot experience to testinstruments and learn jointly with local participants.

The many different types of market and paymentschemes can be organized into four categories:(1) public payment schemes to private forestowners to maintain or enhance ecosystem services;(2) open trading under a regulatory cap or floor;(3) self-organized private deals; and (4) ecolabellingof forest or farm products, an indirect form ofpayment for ecosystem services. There are numerousexamples of each type of market in both developingand developed countries.

Watershed protection services – such as flow regulation,water quality, water supply and habitat protection– are well recognized and indeed are a primarymotivation for establishing many national parksand forests. Some 30% of the world’s largest citiescurrently depend on forest areas for their water.Markets for watershed services are site- and user-specific and currently are limited to situations wherethe downstream beneficiaries – such as hydroelectricpower generators, irrigators, municipal water systemsand industry – are directly and significantly impactedby upstream land-use.

Public payment schemes predominate in scale(though not in number), and these payments canmake a significant contribution to local incomes aswell as provide sufficient incentive to maintain forestcover. In Costa Rica, for example, landholders incritical watershed areas are paid between US$30and US$50 per hectare per year and similar levelsof payment are planned in Mexico. In the US,government payments for ecosystem protectionrange from US$25–US$125 per hectare per year.Self-organized private deals appear to be limited –although information is largely proprietary andthere has never been a full assessment of these typesof transactions. Open trading schemes – such aswetland mitigation banking – are few, and limitedprimarily to developed countries.

The many different biodiversity protection services –such as habitat and species’ conservation, geneticand chemical information, and ecosystem functionssuch as pollination – are increasingly recognized ascritical to many economic sectors, such as commercialfisheries. Market mechanisms include land marketsfor high-biodiversity-value habitat, payments forprivate non-consumptive uses such as ecotourism,tradable rights and credits within a regulatory capon habitat conversion, and ecolabelled products suchas shade-grown coffee, herbal medicines and otherbotanicals from natural forests. The trade in theseproduct markets is booming, with medicinals derivedfrom compounds originally found in forests worthtens of billions of US dollars a year alone, but thesebenefits are rarely captured by forest peoples.Although the bioprospecting market is still evolving,it has not yet generated significant direct investmentor payments to local people. A recent global surveyfound 72 cases of biodiversity markets in 33 countries,of which 63 were in 28 tropical countries. Over 70%

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of these markets were international. Experts estimatethat in the US alone over US$2 billion have beeninvested in easements for habitat conservation overthe past several years.

Of all the forest ecosystem services, carbonsequestration has arguably drawn the greatestattention and enthusiasm in recent years. There isnow scientific consensus that human activities havecontributed to global warming and that forests playmajor roles in both overall global carbon emissionsand as a provider of sequestration and storage services.Market segments in which tropical forests can playa role include reforestation and afforestation withinthe Clean Development Mechanism (CDM) of theKyoto Protocol (the global cap-and-trade scheme),a range of land-use options that are attractive toinvestors through non-Kyoto trading, and voluntarypayments by emitters to achieve carbon neutrality.Given restrictions on forest carbon offsets andestimating a value of US$10 per ton of carbon, theCDM is expected to raise at most US$300 millionper year for afforestation and reforestation in thefirst commitment period (2008–2012). Estimates ofthe dollar value of forest carbon trading vary widelyand ultimately depend upon the size of the market,which in turn depends upon the final rules adoptedunder Kyoto, European trading rules, and alternativeschemes implemented by the US.

Key findings

Market characteristics

The total value of direct ecosystem servicepayments in tropical countries is presently modest,but has grown dramatically over the past decadeand is significant, particularly to low-incomeproducers: tropical ecosystem services are not yetcommodities; rather, they behave as niche marketsfor products of special value to a narrow range ofbuyers. Ecosystem service payments will generallycover only a modest share of the costs of sustainableforest management and will be sufficient to financeforests managed for protection alone only whereopportunity costs are very low – such as in remoteareas where forest production is not economicallyviable and land-use alternatives are limited.

Very roughly estimated, the annual value of directpayments for forest ecosystem markets in tropicalcountries is in the order of hundreds of millionsof US dollars. Indirect payments, via ecolabelled

products such as certified lumber, tropical tree cropproducts and other non-wood forest products, is muchlarger, generating approximately as much as severalbillion dollars per year. Together these are significantbut modest relative to the international trade inprimary tropical timber products (logs, sawnwood,veneer and plywood), which is now approximatelyUS$8 billion per year, the total trade in all woodproducts from tropical countries, some US$20 billionper year, and the far larger value of domestic woodand non-timber forest product markets. Direct andindirect payments for ecosystem services combinedare approximately the same magnitude as total annualinvestments in forest conservation by governments,philanthropic organizations and intergovernmentalorganizations, which is somewhere betweenUS$2 billion and US$2.5 billion per year.

Markets for forest ecosystem services areexpected to grow in both developed anddeveloping countries over the next 20 years:the potential for increased demand and increasedpayment for watershed services is immense. Waterdemand is projected to double, if not triple, overthe next 50 years, and much of this growth willbe in developing countries. Downstream users arelearning that investments in watershed protectioncan be far more economical than investments in newtreatment facilities. Growth in the carbon marketcould potentially be large but will depend on stillunpredictable rules of international climate-changemitigation. Markets for ecolabelled products forexport and for urban consumers in middle-incomecountries are likely to be the fastest-growingcomponent of biodiversity markets.

Governments play a critical role as the principaldirect buyers of many ecosystem services, and ascatalysts for many private-sector direct paymentschemes: since many ecosystem services are publicgoods, government intervention is usually requiredto make a market. This may entail directly payingfor a service, establishing property rights, orestablishing regulations that set caps and governtrading schemes. Since these markets are characterizedby high transaction costs to link buyers and sellersand the lack of specialized market institutions,government intervention is usually required to assistin addressing these two major constraints to marketdevelopment. Indirect payments, via certificationschemes, are dominated by private buyers.

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Ecosystem service payments will in most cases coveronly a modest – but potentially catalytic – shareof the costs of good forest management: prices ofecosystem services are generally not sufficient to justifyforest conservation in areas where there are moderateto high opportunity costs for the land. However,evidence suggests that these payments can have adisproportionate catalytic effect on forest estab-lishment and management. Even modest payments,reliably paid over a number of years, can provide theincrement to net income that makes forestry enterprisesviable, justifying the restoration of degraded landsand enhancing the livelihoods of poor people.

Strategic issues

Policy-makers concerned with tropical forests arebeginning to assess their strategic competitive positionvis á vis the option of markets for ecosystem services.They are keen to understand if and when they shouldseek to compete in global markets, and what kinds ofmarket approaches make sense in their own domesticcontexts. Policy-makers face a set of key issues whentrying to adequately assess and develop these options:

1) property rights and national legal frameworksare necessary for ecosystem service marketsto develop, yet these are poorly developedin most producer countries: recognizingproperty rights and reforming legal frameworksare often politically contentious and costly, yetare fundamental to establishing payment schemesof any type. Unfortunately, forest areas indeveloping countries are characterized currentlyby overlapping and conflicting claims to land andhistoric tensions over the rights of indigenous andother local communities. In most places it willbe necessary to negotiate political support fromkey stakeholders in order to establish new markets;

2) these markets are not likely to contributesubstantially to poverty alleviation unlessproactive efforts are made to recognize rightsand shape markets to provide equal accessto low-income producers of tropical forestecosystem services: as in the development of anynew market, rules governing the market tendto be set by the more powerful sectors of societywho have the capital and capacity to investin designing the rules. To some extent, this isalready taking place in the global carbon market.The implications of new markets, regulations andecolabelling standards for low-income producersneed to be identified and addressed; and

3) new market institutions are needed to reducetransaction costs and financial risks: a majorchallenge of ecosystem service market developmentis to ensure that critical institutions are establishedto reduce transaction costs and to provideintermediation between buyers, sellers, investors,certifiers and other key groups in the value chain.If there is not appropriate action to address thisat both national and international levels, manymarket opportunities will simply fail to materialize,especially in poorer countries and for poorerforest producers.

Knowledge gaps

Information about ecosystem service marketsis scarce and the capacity to assess and developmarkets is limited. Progress is hampered by a lackof understanding and political support from keystakeholders. Few national, state or local governmententities have access to the information needed toshape policy on market design. Most market expertiseis available only in the private sector, generallycompanies and consultants who are motivated bythe opportunity to promote business deals. Wheresite-specific design input is commercially available,pricing of services reflects the fact that most expertiseand most commercial demand is presently found inthe industrialized countries. While technical expertisefor measuring ecosystem services is becoming moreavailable through universities, it is often difficult forgovernments or non-governmental organizations toaccess or apply this in a site-specific project.

To realize the potential of ecosystem service marketsin tropical countries, leading organizations promotingforest stewardship will need to fill these knowledgegaps. In particular, policy-makers and programleaders require:

• objective technical assistance to identify theopportunities and risks of using different marketinstruments, and designing them to be effective,efficient and equitable;

• opportunities to exchange experiences,perspectives and lessons with peers in othercountries and regions about the most appropriatelegal and regulatory frameworks;

• practical data on costs of production, transactions,establishment and management of differentmarket mechanisms; and

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• capacity-building to develop sophisticatednational expertise in analyzing, designing and implementing ecosystem service markets in the public, private and civic sectors.

Ecosystem service markets could potentially offera powerful new set of incentives for tropical forestconservation and restoration, and new incomeopportunities for forest producers. However, itremains unclear which producers, consumers and

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types of forest resources will be the real beneficiariesof such market development. It is also unclear underwhat conditions the creation of ecosystem servicemarkets will be the most effective policy instrumentfor achieving forest policy goals. Most markets arestill incipient and their further development willrequire concerted government action. The decisionsbeing taken over the next few years will shape marketeffectiveness, efficiency and equity for decades to come.

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Résumé analytique

Situation des marchés desécosystèmes forestiers

La décennie écoulée a vu l’apparition généralisée demarchés et d’autres dispositifs de rémunération desservices assurés par les écosystèmes forestiers dansl’ensemble du monde : protection des bassins versants,protection de la biodiversité et piégeage du carbone.À l’échelle planétaire, plusieurs études récentesindiquent que ces activités sont encore en herbe etqu’elles restent d’extension et d’échelle limitées; ellesn’en recèlent pas moins la possibilité de s’accroîtrepour atteindre le niveau régional, celui d’un bassinhydrographique ou le niveau national avec de plusamples développements. La majeure partie desactivités visant à mettre à l’essai ces dispositifs onteu lieu pour l’heure dans des pays développés oùla science biophysique est souvent plus fortementdéveloppée et où l’existence de cadres juridiques etd’institutions permet le développement de marchésplus élaborés.

L’intérêt croissant pour ces marchés s’explique parles frustrations que créent les approches régulatricestraditionnellement suivies par les pouvoirs publics,la reconnaissance croissante des limites de la formuledes aires protégées pour la protection de la nature,les exigences de produits écologiquement rationnelsqui s’expriment dans la société, et la nécessité pourles entreprises de la filière forêt-bois de trouver dessources de revenu supplémentaires afin de restercompétitives. Ceux qui ont le souci de la conservationet du développement espèrent que ces marchéspourront contribuer à la protection et à la restaurationdes forêts pour devenir une source durable denouveaux revenus chez les populations pauvrestributaires des forêts, ces dernières étant propriétaireset administratrices d’une part de plus en plusimportante des forêts du monde. Les responsablesdes administrations centrales, les chefs de file del’industrie et les leaders d’opinion commencentdans leur ensemble à prendre la mesure de leurposition stratégique dans ces marchés: cerner lescréneaux, les risques stratégiques que comportetoute action ou inaction, et les implications quien résultent pour leur compétititivé. Ceux qui ontprocédé à un examen approfondi de ces optionsconstatent que sont encore nécessaires une évaluationdes lignes de conduite et une mise à l’essai pilotedes instruments, en tirant les enseignements decette expérience avec les participants locaux.

Les nombreux types de marchés et de dispositifs derèglement peuvent être regroupés en quatre catégories:1) les systèmes de rémunération publique despropriétaires forestiers privés destinés à assurer le maintien ou à permettre l’amélioration desfonctionnalités des écosystèmes; 2) un commerceouvert encadré par une réglementation qui fixe seuilset plafonds; 3) les marchés de gré à gré auto-organisés;et 4) l’écolabélisation des produits fermiers ouforestiers, forme indirecte de rémunération desfonctionnalités et services qu’assure l’écosystème.De chacun de ces types de marché, les exemplesabondent, dans les pays en développement commedans les pays développés.

Les services de protection des bassins versants: larégulation des eaux, la qualité de l’eau, l’alimentationen eau et la protection des habitats sont bien reconnueset constituent une motivation première à créerde nombreux parcs nationaux et forêts domaniales.La consommation en eau de quelque 30% des plusgrandes villes du monde dépend aujourd’hui demassifs forestiers. Les marchés des services queprocurent les bassins versants sont spécifiques auxsites et aux usagers concernés; ils se limitent pourl’heure aux situations où les éléments bénéficiaires enaval que sont par exemple les générateurs de stationshydroélectriques, les dispositifs d’irrigation, les réseauxmunicipaux d’alimentation en eau courante etl’industrie, ressentent directement et de manièresensible les effets du mode d’occupation des solsen amont.

Les systèmes de règlement public prédominent parleur échelle (mais ne sont pas les plus nombreux), etces paiements peuvent constituer une contributionsignificative aux revenus locaux et fournir ainsi uneincitation suffisante au maintien du couvert forestier.Au Costa Rica par exemple, on verse des rémunérationsallant de 30 à 50 dollars E-U par hectare et par anaux propriétaires fonciers des terrains situés dans desbassins versants assurant des fonctions indispensableset l’on prévoit d’octroyer des rémunérations du mêmeordre au Mexique. Aux Etats-Unis, les paiementsacquittés par les pouvoirs publics pour la protectiondes écosystèmes varient entre 25 et 125 dollars E-Upar hectare et par an. Les marchés passés de gré à gréparaissent plus limités, bien que les informations dansce domaine demeurent largement sous le sceau dusecret professionnel et que ce type de transactionn’ait pas fait l’objet d’un recensement exhaustif.

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Les dispositifs de commercialisation ouverte – tel lemitigation banking1 sur zones humides – sont rareset se limitent principalement aux pays développés.

Les nombreux différents services de protection de la biodiversité que sont la conservation desespèces, l’information génétique et chimique et lesfonctionnalités de l’écosystème dont la pollinisationse voient de plus en plus reconnus commeindispensables à de nombreux secteurs de l’économie,notamment la pêche commerciale. Les mécanismesde marché englobent les marchés fonciers des habitatsà forte valeur de biodiversité, les paiements des usagesprivés non consomptibles tels l’écotourisme, lesdroits et crédits cessibles dans un cadre réglementairerégissant les conversions d’habitats, et les produitsporteurs de labels écologiques que sont le café cultivésous ombrière, les médicaments naturels et d’autresproduits botaniques tirés des forêts naturelles. Lecommerce sur ces marchés connaît un essor sansprécédent, les médicaments produits à partir demolécules originellement issues de la forêt représententune valeur qui se chiffre en dizaines de milliards dedollars par an mais ces avantages ne profitent querarement aux populations forestières. Bien que lemarché de la bioprospection soit encore en évolution,il n’a pas encore engendré d’investissements ou depaiements directs au profit des populations riveraines.Une enquête mondiale a récemment recensé 72marchés de la biodiversité dans 33 pays, dont 63 setrouvaient répartis dans 28 pays tropicaux. Plus de70% de ces marchés sont internationaux. Les expertsestiment que dans les seuls Etats-Unis, plus de deuxmilliards de dollars E-U ont été investis dans desservitudes foncières aménagées pour la conservationd’habitats au cours des dernières années.

De tous les services ou fonctionnalités de l’écosystèmeforestier, le piégeage du carbone est sous doute celuiqui a suscité le plus d'attention et d'enthousiasme

chez les acteurs ces dernières années. Les scientifiquess’accordent aujourd’hui à reconnaître que les activitésanthropiques ont contribué au réchauffementclimatique et que les forêts jouent un rôle majeur dansle bilan global du carbone à l’échelle planétaire depar les fonctions de piégeage et de fixation de cegaz qu’elles assurent. Les segments de marché danslesquels les forêts tropicales peuvent jouer un rôlecomprennent les reboisements et les boisements prisen compte dans le Mécanisme du développementpropre (MDP) du Protocole de Kyoto (dispositifmondial de compensation), et un éventail d’optionsd’utilisation des terres susceptibles d’attirer lesinvestisseurs par le biais de transactions commercialesdites « non-Kyoto », ainsi que des versementsvolontaires opérés par des émetteurs de gaz à effet deserre dans le but d’équilibrer leur bilan du carbone.En tenant compte des restrictions imposées aux créditsd’émission de carbone liés aux forêts, et en retenantune valeur estimée de 10 dollars E-U par tonne, leMDP devrait rapporter au moins 300 millions dedollars E-U par an pour les boisements et reboisementsau cours de la première tranche d’engagement(2008-2012). Les estimations de la valeur numéraireen dollars du commerce du carbone forestier varientconsidérablement et cette valeur dépendra en dernierressort de la taille du marché, laquelle sera fonctiondes règles finales adoptées dans le cadre du Protocolede Kyoto, des règles européennes de commerce, etdes autres systèmes mis en place par les Etats-Unis.

Principales conclusions

Les caractéristiques du marché

La valeur totale des paiements directs auxquelsdonnent lieu les fonctionnalités des écosystèmesdans les pays tropicaux est aujourd’hui modeste,mais elle a progressé de façon spectaculaire aucours de la décennie écoulée et a atteint un niveausignificatif, particulièrement pour les producteursà faible revenu: les fonctionnalités (ou « services »)des écosystèmes tropicaux ne sont pas encore desmarchandises ; elles constituent plutôt des créneauxde marché pour des produits présentant une valeurparticulière auprès d’un spectre limité d’acheteurs.La rétribution des fonctionnalités des écosystèmesne couvrira qu’une part modeste des coûts de lagestion forestière durable et suffira à financer laseule gestion des forêts aménagées à des fins deprotection là où les coûts de renoncement sont trèsfaibles – tel est le cas des zones éloignées des centres

1 Le mitigation banking est un instrument de régulation et de coordinationvisant à assurer des substitutions entre fonctionnalités non-marchandesde la nature en assurant un système d’évaluation des substitutions (c.a.d.déplacement des fonctionnalités dans l’espace) et de financement. Sonobjectif est de conserver un nombre stable de fonctionnalités écologiquessur une zone donnée, comme par exemple la biodiversité, la rétentiondes nutriments, les espaces récréatifs, le paysage, la régulation desinondations, etc.. Le dispositif implique que les actions de développement(économique, résidentiel, agricole) ayant des impacts jugés négatifs surun ensemble de fonctionnalités, soient compensés, lorsque c’est possibleet écologiquement justifié, par l’achat de crédits de fonctionnalités.Ces crédits correspondent à des financements d’actions de conservation,de restauration ou de création de fonctionnalités écologiques (préalableset dans la même zone de fonctionnement écologique) par des entitéspubliques ou privées. C’est un instrument d’évaluation, de mise en œuvreet de financement des déplacements de fonctionnalité dans l’espace.D’après G. Geniaux - INRA Ecodéveloppement, 2001.

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où la production forestière n’est pas économiquementviable et où les usages fonciers concurrents sontlimités.

Très grossièrement estimée, la valeur annuelle despaiements directs sur les marchés des fonctionnalitésforestières dans les pays tropicaux est de l’ordrede quelques centaines de millions de dollars E-U.Les paiements indirects, par l’entremise des produitsécolabélisés tel le bois certifié, sont beaucoup plusimportants et représentent approximativementplusieurs milliards de dollars par an. Ensemble,ces paiements pèsent un certain poids, mais ilsrestent modestes au regard du commerce internationaldes produits ligneux tropicaux primaires (grumes,sciages, placages et contreplaqués, qui se chiffreaujourd’hui approximativement à 8 milliards dedollars E-U par an, ou au regard du commerce totaldes produits dérivés des bois tropicaux représentant20 milliards de dollars E-U par an, et à la valeurbeaucoup plus importante des marchés nationaux dubois et des produits forestiers non ligneux. Le totaldes paiements directs et indirects des fonctionnalitésdes écosystèmes sont approximativement du mêmeordre de grandeur que le total des investissementsannuels effectués dans la conservation forestière par lesgouvernements, les organisations philanthropiques,les organisations intergouvernementales, soit entre2 et 2,5 milliards de dollars E-U par an.

Les marchés des fonctionnalités des écosystèmesforestiers sont appelés à croître dans les paysdéveloppés comme dans les pays en développementau cours des 20 prochaines années. Les possibilitésd’augmentation de la demande portant sur lesfonctionnalités des bassins versants, et celles d’uneprogression de leur rémunération, sont immenses.On projette un doublement, voire un triplement,de la demande d’eau au cours des 50 prochaines annéeset une part notable de cette progression s’effectueradans les pays en développement. Les utilisateursen aval apprennent que les investissements dansla protection des bassins versants peuvent avoirune valeur économique bien supérieure auxinvestissements dans de nouveaux équipementsde retraitement des eaux. La croissance du marchédu carbone peut être riche de promesses, elle n’endépendra pas moins des règles pour lors impondérablesdes dispositifs internationaux d’atténuation duchangement climatique. Il est vraisemblable queles marchés des produits écolabélisés destinés àl’exportation et aux consommateurs des zones

urbaines des pays à revenu moyen soient parmitous les marchés de la biodiversité ceux dont lacroissance sera la plus forte.

Les gouvernements jouent un rôle déterminanten tant que premiers acheteurs directs denombreux services des écosystèmes et commeéléments catalyseurs de nombreux dispositifsde rémunération directe adoptés par le secteurprivé. Sachant que de nombreux services desécosystèmes sont des biens publics, l’interventiondes pouvoirs publics est généralement requise pourinstituer un marché. Cela peut prendre la formed’un paiement direct de services, de l’instauration dedroits de propriété ou de réglementations qui fixentun cadre et régissent les dispositifs de négociationdes effets de commerce. Sachant que ces marchésse caractérisent par des coûts de transaction élevésliant acheteurs et vendeurs, et par l’absenced’institutions de marché spécialisées, l’interventiondes pouvoirs publics est généralement requise pouraider à traiter ces deux contraintes majeures dudéveloppement du marché. Quant aux régimesde rétribution indirecte, qui fonctionnent parl’entremise de systèmes d’écocertification, ilssont dominés par les acheteurs privés.

Le paiement des fonctionnalités des écosystèmesne couvrira dans la plupart des cas qu’une partmodeste, mais potentiellement catalysatrice, descoûts de la bonne gestion forestière. Les prix desservices d’écosystème ne sont généralement passuffisants pour justifier la conservation forestièredans des zones où les coûts de renoncement à la terresont modérés à élevés. Toutefois, des preuves existentque ces paiements peuvent avoir sur l’aménagementforestier et la gestion forestière un effet catalyseurdisproportionné. C’est ainsi que des paiements,même modestes, effectués à échéances régulièrespendant un certain nombre d’années peuventréaliser un incrément de revenu net qui rende lesentreprises forestières viables tout en justifiant larestauration des terres dégradées et en rehaussantle niveau de vie des populations pauvres.

Les questions stratégiques

Les responsables chargés des politiques forestières dansle monde tropical commencent à prendre consciencede leur position stratégique compétitive dans laperspective des marchés des services d’écosystèmes.Ils se montrent désireux de savoir si et quand ilsdevront chercher à entrer en concurrence sur lesmarchés mondiaux, et quel type d’approche de

marché est le mieux indiqué dans leur sphèrenationale. Les responsables sont ainsi confrontés àun ensemble de questions incontournables lorsqu’ils’agit de peser ces options en vue d’en tirer parti.

1) Droits de propriété et ossatures juridiquesnationales sont nécessaires au développementdes marchés des services des écosystèmes, orces cadres sont mal développés dans la plupartdes pays producteurs. La reconnaissance desdroits de propriété et la réforme des cadresjuridiques sont souvent politiquement sensibles etcoûteuses, elles n’en sont pas moins fondamentalespour instaurer des dispositifs de rétribution quelqu’en soit le type. Malheureusement, les massifsforestiers des pays en développement secaractérisent aujourd’hui par des revendicationsfoncières concurrentielles ou contradictoires quis’accompagnent de tensions persistantes touchantaux droits des collectivités autochtones etriveraines. Dans la plupart des cas, il seranécessaire de négocier l’adhésion politiquedes acteurs principaux pour pouvoir instaurerde nouveaux marchés.

2) Il est peu vraisemblable que ces marchéscontribuent de manière sensible à atténuerla pauvreté si ne sont pas déployés des effortsde nature volontariste conduisant à unereconnaissance des droits et à donnerconsistance à des marchés qui offrent auxproducteurs à faibles revenus un accèséquitable aux services des écosystèmes desforêts tropicales. Comme dans le développementde tout nouveau marché, les règles qui régissentle marché sont trop souvent arrêtées par les secteursles plus puissants de la société qui disposent à lafois du capital et de la capacité de s’investir dansl’élaboration de règles nouvelles. Dans une certainemesure, c’est ce à quoi l’on assiste dans le marchémondial des crédits d’émission de carbone. Lesimplications que comportent pour les producteursà faibles revenus les nouveaux marchés, leursréglementations et les normes d’écolabélisationdoivent être reconnues et traitées.

3) De nouvelles institutions de marchésont nécessaires pour réduire les coûts destransactions et les risques financiers. Un desenjeux majeurs du développement du marché desservices des écosystèmes consiste à faire en sorteque soient en place les institutions indispensablespour réduire les coûts des transactions, et

qu’intervienne un courtage entre acheteurs,vendeurs, investisseurs, certificateurs et autrescatégories maîtresses dans la chaîne de la valeur.Si rien d’utile n’est fait en ce sens, au niveaunational comme au niveau international, denombreux créneaux de marché ne seront toutsimplement pas présents au rendez-vous, et ceparticulièrement dans les pays pauvres et pourles producteurs forestiers désavantagés.

Des connaissances lacunaires

L’information sur les marchés des services desécosystèmes est parcellaire et la capacité de jaugerles marchés et de les développer est limitée. Les progrèssont freinés par le défaut de compréhension chez lesacteurs clés et leur absence d’adhésion au concept.Rares en effet sont les entités nationales, étatiquesou les collectivités territoriales qui disposent desinformations nécessaires pour se déterminer sur laforme que doivent prendre ces marchés. Le savoir-faire et la maîtrise de ces marchés restent entre lesmains du secteur privé, à savoir des sociétés et desconsultants motivés par des perspectives de concluredes transactions. Là où des apports conceptuelsspécifiques aux sites sont disponibles, les prixpratiqués pour les services visés traduisent le fait quela majeure partie des connaissances spécialisées etde la demande commerciale se trouve aujourd’huidans les pays industrialisés. Alors que la maîtrisetechnique permettant de mesurer les fonctionnalitéset services des écosystèmes est diffusée par lesuniversités, il est souvent difficile aux administrationsnationales et aux ONG de l’appliquer dans un projetspécifique à un site donné.

La réalisation des potentialités des marchés desservices des écosystèmes dans les pays tropicaux passepar l’élimination de ces lacunes dans les connaissanceset par l’information que doivent assurer les grandesorganisations oeuvrant en faveur d’une gestionraisonnée des forêts. C’est ainsi que les responsablespolitiques et les chefs de programmes devront :

• se doter d’une assistance technique objective quileur permette de déterminer les perspectives et lesrisques qui s’attachent à l’utilisation d’instrumentsde marché différents, et d’élaborer ces instrumentsdans un souci d’efficacité, d’efficience et d’équité ;

• avoir la possibilité d’échanger des expériences, des points de vue et des enseignements avec leurshomologues dans d’autres pays et régions sur lescadres juridiques réglementaires les mieux adaptés ;

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• disposer de données concrètes sur les coûtsde production, ceux des transactions et surl’instauration et la gestion des différentsmécanismes de marché ;

• renforcer les capacités et se doter des moyens dedévelopper une maîtrise nationale sophistiquéequi permette l’analyse, la conception et la mise enoeuvre de marchés des services des écosystèmesdans les secteurs public, privé et la société civile.

Les marchés des services des écosystèmes recèlentla possibilité d’un ensemble d’incitations fortes à laconservation et à la restauration des forêts tropicales,et sont porteurs de nouvelles perspectives de revenus

pour les producteurs forestiers. Toutefois, on ne voitpas nettement quels producteurs, consommateurs,et types de ressources forestières seront les vraisbénéficiaires du développement de ces marchés.On ne voit pas non plus clairement dans quellesconditions les marchés des services des écosystèmesà créer seront les instruments politiques les plusefficaces pour la réalisation des objectifs forestiers.La plupart des marchés en sont encore à leur débutet leur futur développement nécessitera une actionconcertée des gouvernements. Les mesures que l’onprendra dans les prochaines années décideront del’efficacité, de l’efficience et de l’équité de ces marchéspour les décennies à venir.

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Los numerosos tipos de mercados y sistemas de pagodiferentes pueden clasificarse en cuatro categorías:(1) sistemas públicos de pago a los propietariosforestales privados para mantener o aumentar losservicios ecosistémicos; (2) comercio libre conformea un límite reglamentario superior o inferior;(3) transacciones privadas organizadasindependientemente; y (4) etiquetado ecológico de losproductos forestales o agrarios, una forma indirectade pago por los servicios ecosistémicos. Existennumerosos ejemplos de cada tipo de mercado enlos países en desarrollo y desarrollados.

Los servicios de protección de cuencas hidrográficas– tales como la regulación de caudales, calidad del agua,suministro de agua y protección de hábitats – estánampliamente reconocidos y, por cierto, representanuna motivación primaria para establecer muchosparques y bosques nacionales. Aproximadamente el30 por ciento de las ciudades más grandes del mundodependen actualmente de los bosques para susuministro de agua. Los mercados de servicios decuencas hidrográficas son específicos para el sitioy el usuario, y actualmente están limitados a lassituaciones en que los beneficiarios “corriente abajo”,tales como los generadores de energía hidroeléctrica,irrigadores, sistemas municipales de suministrode agua y la industria, reciben el impacto directoe importante del uso de las tierras “corriente arriba”.

Los sistemas públicos de pago predominan por suescala (pero no por su cantidad), y dichos pagospueden efectuar una contribución importante alos ingresos locales y ofrecer también un incentivosuficiente para mantener la cobertura boscosa. EnCosta Rica, por ejemplo, los terratenientes en zonasde cuencas hidrográficas de importancia crítica recibenentre US$ 30 y US$ 50 por hectárea por año y enMéxico se están planeando pagos de escala similar.En los Estados Unidos, los pagos del gobierno porla protección de ecosistemas oscilan entre US$ 25 yUS$ 125 dólares por hectárea por año. Los tratosprivados organizados independientemente parecenser limitados, aunque la información es en su mayorparte de dominio privado y nunca se ha efectuadouna evaluación completa de este tipo de transacciones.Los sistemas de comercio libre, tales como los bancosde mitigación para humedales, son poco numerososy están limitados principalmente a los paísesdesarrollados.

Resumen analítico

Situación de los mercados de serviciosde ecosistemas forestales

En los últimos diez años, se ha registrado por todoel mundo un gran surgimiento de mercados y otrossistemas de pago de servicios ecosistémicos tales comola protección de cuencas hidrográficas, la protecciónde la biodiversidad y el secuestro de carbono. En el ámbito mundial, varios estudios realizadosrecientemente indican que dichas actividades seencuentran en la etapa inicial y que todavía son de envergadura y escala limitadas, pero que puedentener el potencial de extenderse a nivel regional,de cuenca o nacional con un mayor desarrollo.A la fecha, la mayor parte de la actividad realizadapara probar dichos sistemas ha tenido lugar en paísesdesarrollados, donde los conocimientos científicosbiofísicos suelen ser mayores y existen los marcosjurídicos e institucionales que permiten el desarrollode mercados más sofisticados.

El enorme y creciente interés observado paradesarrollar dichos mercados está impulsado por lafrustración causada por los enfoques reguladoresgubernamentales tradicionales, el reconocimiento cadavez mayor de las limitaciones de los sistemas de áreasprotegidas con respecto a la conservación, la demandade productos ecológicamente racionales por parte dela sociedad, y la necesidad que tienen las industriasforestales de encontrar fuentes suplementarias deingresos para poder mantener su competitividad.Todos aquéllos dedicados a la conservación y aldesarrollo esperan que dichos mercados puedancontribuir a la protección y restauración forestaly convertirse en una fuente sostenible de nuevosingresos para las poblaciones pobres que dependende los bosques y que son propietarias de una porcióncada vez mayor de los bosques del mundo y seencargan de su administración. Los funcionariosgubernamentales y los líderes industriales ycomunitarios están comenzando a evaluar su posiciónestratégica en estos mercados: identificando susoportunidades, los riesgos estratégicos de la accióno inacción, y las repercusiones de su relativacompetitividad. Quienes han examinado estasopciones en detalle consideran que sigue existiendola necesidad de una evaluación de las políticas y deexperiencias piloto para probar instrumentos yaprender junto con los participantes locales.

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Los muchos y diversos servicios de protección de labiodiversidad – tales como la conservación de hábitatsy especies, información genética y química, y funcionesecosistémicas como la polinización – están cobrandoun creciente reconocimiento por su importanciacrítica para muchos sectores de la economía, talescomo las pesquerías comerciales. Los mecanismos demercado incluyen mercados de tierras para hábitatsde gran valor de biodiversidad, pagos para usos noconsumistas tales como el ecoturismo, derechosy créditos comerciables dentro de un máximoreglamentario por conversión de hábitat, y productoscon etiquetado ecológico tales como el café cultivadobajo sombra, plantas medicinales y otros productosbotánicos provenientes de bosques naturales.El comercio en estos mercados de productos estáprosperando; por ejemplo, los fármacos derivadosde compuestos encontrados originalmente en losbosques tienen un valor de miles de millones dedólares estadounidenses por año, pero estos beneficiosrara vez llegan a los pueblos de los bosques. Pese a laevolución del mercado de bioprospección, todavía noha generado cantidades importantes de inversionesdirectas o de pagos para las poblaciones locales. Unaencuesta mundial realizada recientemente reveló 72casos de mercados de biodiversidad en 33 países, 63de los cuales se encontraban en 28 países tropicales.Más del 70 por ciento de estos mercados eraninternacionales. Los expertos estiman que enEE.UU. solamente, en los últimos años, se haninvertido más de 2.000 millones de dólares enservidumbres para la conservación de hábitats.

De todos los servicios del ecosistema forestal, elsecuestro de carbono es el que ha despertado el mayorentusiasmo e interés en los últimos años. El consensocientífico actual es que la actividad humana hacontribuido al calentamiento del planeta y que losbosques tienen una función primordial tanto en lasemisiones mundiales de carbono como en la prestaciónde servicios de secuestro y almacenamiento del mismo.Los segmentos del mercado en que los bosquestropicales pueden tener una función incluyen laforestación y reforestación conforme al Mecanismode Desarrollo Limpio (MDL) del Protocolo de Kyoto(el sistema mundial de límite máximo y comercio),y una diversidad de opciones de uso de la tierra que son de interés para los inversores por medio delcomercio no sujeto al Protocolo y los pagos voluntariospor los responsables de las emisiones para lograr la neutralidad con respecto al carbono. Dadas lasrestricciones impuestas en las compensaciones

forestales de las emisiones de carbono y la estimaciónde un valor de US$ 10 por tonelada, se anticipa queel MDL generará un máximo de 300 millones dedólares por año para actividades de forestación yreforestación en el primer período de compromiso(2008-2012). Las estimaciones del valor dólar querepresenta el comercio de carbono forestal son muydiversas y, en definitiva, dependen de la magnituddel mercado, la cual a su vez depende de las normasfinales aprobadas con arreglo al Protocolo de Kyoto,las reglamentaciones comerciales europeas y lossistemas alternativos aplicados por EE.UU.

Conclusiones principales

Características del mercado

Actualmente, el valor total de los pagos directospor servicios ecosistémicos en los países tropicaleses limitado, pero ha aumentado drásticamente enel último decenio y es importante especialmentepara los productores de bajos ingresos: los serviciosde los ecosistemas tropicales todavía no son productosbásicos; más bien se comportan como mercadosespecializados de productos de valor especial paraun grupo limitado de compradores. Los pagos porservicios ecosistémicos, en general, cubrirán sólo unapequeña parte de los costos de la ordenación forestalsostenible y serán suficientes para financiar bosquesmanejados únicamente con fines de protección,donde los costos de oportunidad son muy bajos, porejemplo, en zonas remotas en las que la producciónforestal no es económicamente viable y las alternativasde uso de la tierra son limitadas.

En términos muy generales, el valor anual de los pagosdirectos a los mercados de servicios de ecosistemasforestales en los países tropicales es del orden delos cientos de millones de dólares estadounidenses.Los pagos indirectos por medio de productos conetiquetado ecológico, tales como la madera certificada,los productos de cultivos forestales tropicales y otrosproductos forestales no maderables, son muchomayores y generan aproximadamente varios milesde millones de dólares cada año. En conjuntorepresentan cifras importantes, pero son modestasen comparación con el comercio internacional deproductos primarios de maderas tropicales (trozas,madera aserrada, chapas y madera contrachapada),que representan actualmente unos 8.000 millonesde dólares estadounidenses por año, el comerciototal de productos de madera de los países tropicales,de un valor de 20.000 millones de dólares al año,

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y el valor mucho más elevado de los mercadosnacionales de madera y productos forestales nomaderables. Los pagos directos e indirectos porla totalidad de servicios ecosistémicos son deaproximadamente la misma magnitud que lasinversiones anuales totales en la conservaciónforestal efectuadas por gobiernos, organizacionesfilantrópicas y organizaciones intergubernamentales,que oscilan entre 2.000 y 2.500 millones de dólaresestadounidenses por año.

Se anticipa que en los próximos veinte años, losmercados de servicios de ecosistemas forestalesaumentarán tanto en los países en desarrollocomo en los países desarrollados: existe un enormepotencial para aumentar la demanda y los pagos porservicios de las cuencas hidrográficas. Se prevé que lademanda de agua se duplicará, o incluso triplicará,en los próximos 50 años y buena parte de dichoaumento se producirá en los países en desarrollo.Los usuarios de los sectores de la producción y laindustria están aprendiendo que las inversiones hechasen la protección de cuencas hidrográficas puedenresultar mucho más económicas que las inversionesen nuevas instalaciones de tratamiento. El desarrollodel mercado de carbono tiene un gran potencial,pero dependerá de normas aún imprevisibles demitigación del cambio climático a nivel internacional.Es probable que los mercados de productos conetiquetado ecológico para exportación y paraconsumidores urbanos de países de ingresos mediosconstituyan el componente de crecimiento másacelerado de los mercados de biodiversidad.

Los gobiernos cumplen una función deimportancia crítica como principales compradoresdirectos de muchos servicios ecosistémicos y comocatalizadores para muchos sistemas de pago directodel sector privado: dado que muchos serviciosecosistémicos son bienes públicos, en general senecesita la intervención del gobierno para constituirun mercado. Ello puede implicar el pago directode un servicio, el establecimiento de derechos depropiedad o la instauración de reglamentos quefijen topes máximos y rijan los sistemas decomercialización. Puesto que estos mercados estáncaracterizados por elevados costos de transacciónpara vincular a compradores y vendedores y porla falta de instituciones de mercado especializadas,normalmente requieren la intervención del gobiernopara ayudar a superar estas dos limitacionesimportantes del desarrollo del mercado. Los pagos

indirectos, por medio de sistemas de certificación,están principalmente en manos de compradoresprivados.

En la mayoría de los casos, los pagos de serviciosecosistémicos cubren sólo una parte reducidade los costos de la ordenación forestal racional,pero dicha parte tiene potencial para actuar decatalizador: en general, los precios de los serviciosecosistémicos no son suficientes para justificar laconservación forestal en zonas en que los costos deoportunidad de la tierra son moderados o elevados.No obstante, todo parece indicar que dichos pagospueden ejercer un efecto catalizador despropor-cionadamente elevado en el establecimiento y laordenación de los bosques. Incluso pagos modestos,efectuados de forma fiable durante varios años,pueden llevar a un aumento de los ingresos netosque permita la viabilidad de las empresas forestales,justificando así la restauración de las tierrasdegradadas y mejorando los medios de sustentode la población pobre.

Cuestiones estratégicas

Los responsables de la formulación de políticasrelativas a los bosques tropicales están comenzandoa evaluar su posición competitiva estratégica conrespecto a la opción de mercados de serviciosecosistémicos. Les interesa enormemente saber sideben procurar competir en los mercados mundiales,y cuándo hacerlo, así como qué tipo de enfoquescomerciales son razonables dentro de su propiocontexto nacional. Se enfrentan así a una serie decuestiones fundamentales en sus esfuerzos por evaluarcorrectamente y promover estas opciones:

1) los derechos de propiedad y los marcosjurídicos nacionales son necesarios parapermitir el desarrollo de los mercados deservicios ecosistémicos, pero en la mayoría delos países productores no están correctamenteestablecidos: con frecuencia, el reconocimientode los derechos de propiedad y la reforma de losmarcos jurídicos son actividades costosas y muydiscutidas a nivel político, pero son fundamentalespara el establecimiento de los sistemas de pago detodo tipo. Lamentablemente, las zonas forestalesde los países en desarrollo, en la actualidad,están caracterizadas por reivindicaciones detierras superpuestas y conflictivas y por tensioneshistóricas con respecto a los derechos de lospueblos indígenas y otras comunidades. En la

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mayoría de los lugares, será necesario negociarel apoyo político de los interesados clave parapoder establecer nuevos mercados;

2) es poco probable que estos mercados efectúenuna contribución sumamente importante a lareducción de la pobreza, a menos que existaun gran empeño por reconocer los derechosy formar mercados con miras a brindar unacceso equitativo a los productores de serviciosde ecosistemas forestales tropicales de menoresingresos: como suele suceder con el desarrollode todo mercado nuevo, las reglas que rigen elmercado suelen estar determinadas por los sectoresmás poderosos de la sociedad, que tienen el capitaly la capacidad para invertir en la formulaciónde las reglas. En cierta medida, esto ya estásucediendo con el mercado mundial del carbono.Es preciso identificar y examinar las repercusionesque tienen los nuevos mercados, lasreglamentaciones y las normas del etiquetadoecológico para los productores de bajos ingresos; y

3) se necesitan nuevas instituciones comercialespara reducir los costos de transacción y losriesgos financieros: uno de los principalesdesafíos del desarrollo del mercado de serviciosecosistémicos es garantizar el establecimientode instituciones cruciales a fin de reducir loscostos de transacción y brindar una intermediaciónentre compradores, vendedores, inversores,certificadores y otros grupos de importanciaclave en la cadena de valor. Si no se tomanmedidas apropiadas para ello a nivel nacionale internacional, muchas oportunidades demercado simplemente no se concretarán,especialmente en los países más pobres y paralos productores forestales de menores ingresos.

Brechas de conocimientos

Es poca la información existente sobre los mercadosde servicios ecosistémicos, y la capacidad de evaluacióny desarrollo de mercados es limitada. El progreso se veimpedido por la falta de comprensión y apoyo políticode los principales interesados. Pocas entidadesnacionales, estatales o municipales tienen accesoa la información necesaria para dar forma a lanormativa en materia de diseño de mercados.La mayoría de los conocimientos expertos sobreel mercado existen solamente en el sector privado,generalmente en compañías y consultores motivadospor la oportunidad de promover negocios comerciales.En los casos en que se comercializan diseños para

sitios específicos, el precio de los servicios refleja elhecho de que la mayoría de los conocimientos y dela demanda comercial se encuentran actualmenteen los países industrializados. Si bien se observaun aumento en la disponibilidad de conocimientostécnicos para la medición de servicios ecosistémicospor medio de las universidades, el acceso o aplicaciónen un proyecto específico suele ser difícil para losgobiernos u organizaciones no gubernamentales.

A fin de concretar el potencial de los mercadosde servicios ecosistémicos en los países tropicales,será preciso que las organizaciones líderes quepromueven la gestión forestal cubran dicha brechade conocimientos. En particular, los responsablesde la formulación de políticas y los coordinadoresde programas necesitan:

• asesoramiento técnico objetivo para identificar lasoportunidades y los riesgos del uso de diferentesinstrumentos de mercado, y formularlos de modoque sean eficaces, eficientes y equitativos;

• oportunidades para intercambiar experiencias,perspectivas y lecciones con sus pares de otrospaíses y regiones sobre los marcos jurídicos ynormativos más apropiados;

• datos prácticos sobre los costos de producción,transacciones, establecimiento y administraciónde diferentes mecanismos de mercado; y

• aumento de capacidades con el objeto dedesarrollar sofisticados conocimientos nacionalesen materia de análisis, diseño y aplicación demercados de servicios ecosistémicos en los sectorespúblico, privado y civil.

Los mercados de servicios ecosistémicos ofrecen laposibilidad de toda una nueva gama de poderososincentivos para la conservación y restauración de losbosques tropicales y nuevas oportunidades de ingresospara los productores forestales. No obstante, aún noestá claro qué productores, consumidores y tipos derecursos forestales serán los verdaderos beneficiariosdel desarrollo de tales mercados. Tampoco está claroen qué condiciones será más efectiva la creaciónde los mercados de servicios ecosistémicos comoinstrumento normativo para el logro de las metasde la política forestal. La mayoría de los mercadosaún son incipientes y su desarrollo ulterior exigirála acción concertada de los gobiernos. Las decisionesque se tomen en los próximos años determinaránla eficacia, eficiencia y equidad de los mercadospor décadas.

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offset carbon emissions. In Karnataka State, India,farmers have formed a fund with the assistance ofan NGO, the Government of India and the SwissAgency for Development Cooperation to help otherlocal farmers with watershed protection activities suchas regenerating forest and maintaining fallow land.

Increasingly, public authorities – particularly whenfaced with budgetary crisis – require those who mostobviously benefit from ecosystem services to providefinancing. This is the case in Colombia, for example,where hydroelectric and water utilities are requiredby law to allocate a fixed percentage of revenues to anecosystem fund. The fund pays private landowners forwatershed management and purchases hydrologicallysensitive lands for management by governmentagencies. In addition to direct-investment approachesof this nature, some governments are experimentingwith new fiscal approaches. In Brazil, a number ofstates have pioneered a new tax allocation systemunder which a percentage of state tax goes directly tomunicipalities that actively protect watershed areas.

Despite this flurry of interest and activity, paymentsand markets for ecosystem services are a nascentactivity. The innovations remain limited in scale,scope and impact. While this reflects a growingglobal trend, it is not yet clear what promise marketsfor ecosystem services hold for tropical forest countriesand industries. Most of the activity to date has beenin more developed countries – where biophysicalscience tends to be stronger and legal frameworks andinstitutions permit more sophisticated markets todevelop. That being said, a number of interestingcases are under way in developing countries andmarkets are evolving quickly and often in seeminglyunpredictable ways.

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1 IntroductionThe many ecosystem services provided by forests –watershed protection, biodiversity conservation andcarbon sequestration, for example (see Table 1) – aregaining increasing attention from governments andthe forest industry, as well as from private citizens.People are becoming aware of the dangers and costsof allowing forest services to be degraded or lost.Forest degradation and conversion can have localimpacts, such as floods and landslides, as well asbroader impacts, such as global climate change.

This growing awareness is drawing attention tothe economic benefits of healthy forest ecosystems,benefits that until recently have often been takenfor granted. Indeed, as human demands increaseand natural resources become scarcer, those whobear the costs of degradation – such as downstreamwater utilities, local governments, private insurers andsociety as a whole – are exploring opportunities toreduce these costs. Forest owners are beginning to seekcompensation for the costs of maintaining healthyforests. The linkage between degraded ecosystems,rural poverty and human health is also becomingmore apparent.

At the same time, there is greater awareness of thelimitations of government protection and regulatoryapproaches to forest conservation. Approximately15 million hectares of natural forest were lost eachyear during the 1990s, the vast majority of it intropical countries (FAO 2001). Frustration withtraditional approaches is spurring action by a broadrange of stakeholders. Private companies, individuals,non-governmental organizations (NGOs) andcommunities are getting involved, driven bythe desire to reduce costs, capture new income,improve public relations, manage risks and protectcurrent well-being. This action is being backedup by a willingness to pay for the protection ofecosystem services.

A recent global survey found almost 300 new cases ofpayments in all continents (See Box 1). For example,a private Costa Rican utility company voluntarilypays into a fund that provides money for privateupstream landholders to increase forest cover.This reduces sedimentation, thus providingsufficient water flow for hydroelectricity generation.In Paraguay, AES, an international power company,paid US$2 million to form a protective reserve forone of South America's last remaining areas ofundisturbed dense tropical forest. This helps to

Table 1 Major forest ecosystem services

• Purification of air and water• Regulation of water flow

• Detoxification and decomposition of wastes

• Generation and renewal of soil and soil fertility

• Pollination of crops and natural vegetation

• Control of agricultural pests

• Dispersal of seeds and translocation of nutrients

• Maintenance of biodiversity

• Partial climatic stabilization

• Moderation of temperature extremes

• Wind breaks

• Support for diverse human cultures

• Aesthetic beauty and landscape enrichment

Source: Daily 1997

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Tropical forest producers in the legal trade arebattling to remain competitive with illegal operatorsand natural forest producers are losing market shareto fast-growing plantations – many outside tropicalareas. While there is growing demand for certifiedwood, certification often raises costs without bringinggreater returns. The legal tropical industry is searchingfor new ways to reap financial returns from theirforests and remain viable enterprises. Someenvironmental groups hope that markets forecosystem services will provide forestry withsufficient additional income to compete moreeffectively with alternative land-uses, such assoybean farms in the Brazilian Amazon or oil palmplantations in Malaysia, and to finance large-scalerestoration of degraded forest lands.

These great but uncertain expectations are drivingproducer country governments to investigate theirinterests and options in these markets. Most of theinterest, finance, and – at least in the case of carbon– definition of market rules to date has originated inthe more developed, temperate countries. What isin this for tropical developing countries? Can theydesign and influence markets so that they can benefitfairly? Will these markets be a significant source ofnew financing – or will this pass as another fad,distracting from more fundamental obligations?

At the same time, industrialized country governmentsare beginning to assess their own interests andexposure. Will they be expected to finance thecosts of protecting globally significant biodiversity?Will their industry remain competitive if producercountry industry rights itself? Will they be expectedto finance the costs of building legal and regulatoryenvironments in developing countries to permitfair market trade?

And, of course, indigenous communities and otherlow-income forest people have their own interestsand concerns. Will these markets be used as wedgesto further alienate them from their traditional lands?Or could perhaps these markets be a driver forincreased tenure security and incomes?

The purpose of this paper is to take a modest steptowards helping policy-makers assess these questionsby providing a preliminary assessment of the statusand potential for markets for ecosystem services tocontribute to tropical forest conservation. The termsof reference are provided in Annex 1. Data on thesemarkets are difficult to attain, either because they areproprietary or because the market is evolving quicklyand no data on these topics are collected regularly bygovernments or intergovernmental organizations.The analysis depends upon the limited availablesecondary literature and on information and materialsprovided by colleagues in the Katoomba Group,a network of global innovators in ecosystem servicemarkets. A more substantive analysis will requirean organized effort to collect new primary data.

Section 2 of this paper reviews the diverse reasonsfor growing interest in ecosystem service marketsin tropical countries. Section 3 assesses the status ofmarkets for the major ecosystem services: biodiversityconservation, watershed protection and carbonsequestration and storage. Section 4 assesses emergingmarkets from the perspective of forest owners andproducers, including commercial timber producers,forest and farming communities, and governmentforest agencies. Section 5 steps back from thedescriptive assessment of these markets to raise someof the important strategic issues facing tropicalcountries in positioning themselves to participate(or not) in ecosystem service markets. This addressesissues of international competitiveness, legal andregulatory frameworks, property rights and thepolitics of protecting ecosystem services, domesticequity concerns, and the need to build institutionsto reduce transaction costs and financial risks.Key findings on the scale and characteristics of,and potential future markets for, forest ecosystemservices, and challenges for their future development,are summarized in Section 6.

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Box 1 The growing number of marketsfor ecosystem services

A global review of markets for forest environ-mental services conducted in 2001 identifiedover 280 cases of actual and proposed pay-ments. These include 75 deals for carbonsequestration, 72 for biodiversity conservation,61 for watershed protection, 51 for landscapebeauty and 28 for sales of ‘bundled services’.These cases were drawn primarily from devel-oping countries in the Americas, the Caribbean,Africa, Asia and the Pacific.

The study suggests an impressive expansionof markets and also highlights the tremendousvariety of market structures. Schemes differaccording to the number and type of partic-ipants involved, the payment mechanismsemployed, the degree of competition and theirlevel of maturity.

Source: Landell-Mills & Porras 2002

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2 Reasons for interest inecosystem service markets

Historically, it has been the responsibility ofgovernments to ensure access to ecosystem serviceswhere these are scarce relative to demand. The maininstruments have been direct forest management bygovernment agencies, regulation of private forest use,public investment to improve private management,or targeted taxes and subsidies (Table 2). But inrecent decades several factors have stimulated thoseconcerned with tropical forest ecosystem servicesto begin exploring ways to create market-basedinstruments. These factors include: lack of financialincentives for providing forest ecosystem services;concern about the sustainability of commercialtimber production in natural tropical forests; theneed to find new means to finance forest conservation;and the potential contribution of such markets tolink environmental management to economicdevelopment and poverty reduction.

Lack of financial incentivesto provide ecosystem services

Most ecosystem services are considered ‘publicgoods’ – positive benefits resulting from goodforest management that can be enjoyed by all.Under present property rights and institutions,those forest managers responsible for providing

benefits cannot exclude the beneficiaries fromenjoying the service (‘non-excludable’), and thebeneficiaries are not in competition with oneanother (‘non-rival’). This undermines the formationof markets, since beneficiaries have no incentive topay suppliers. Thus, in most of the world, forestecosystem services are not traded in markets andhave no ‘price’. The failure of forest owners andproducers to capture financial benefits fromconserving ecosystem benefits leads to the over-exploitation of forest resources and the under-supply of ecosystem services.

Thus, where the opportunity costs of forest land foragricultural enterprises, infrastructure and humansettlements are higher than the use or income valueof timber and non-timber forest products (NTFPs),forest will be cleared. Such income cannot usuallygenerate enough income to forest owners tojustify natural forest conservation. In some cases,deforestation occurs because of perverse policy andinstitutional incentives – such as credit, agriculturaland logging subsidies – or land tenure rules (Nasi etal. 2001). But even in the absence of perverse publicpolicies, forest environmental services would still beunder-supplied by the market, in most cases due totheir nature as ‘externalities’ or ‘public goods’. Forestowners and producers ignore the value of ecosystemservices in making decisions about land-use andmanagement because they receive little or nodirect benefit from them.

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Table 2 Instruments to promote forest ecosystem services

Lead actors Instrument Examples Who pays?

Government Public direct management National forests and forest Government (taxpayers)of forest resources protected areas

Government Regulation of private Harvest permits, rules Private forest owners forest resource management on logging methods & managers

Government Support services for forest Technical assistance program Government or NGOsowners/users’ own initiatives for forest owners to improve

management

Government Public pricing policies to reflect Lower tax rate on forested land Mixed; indirect incentiveecosystem costs and benefits (outcome not measured)

Government Open trading deals under Carbon trading under Consumers or producers/market a regulatory cap or floor the Kyoto Protocol subject to cap (least cost)

Government Public payments to private Agro-environmental payments Government /market land and forest owners to for forest conservation

maintain or enhance easements on farmsecosystem services

Market Self-organizing private deals Payments by a water Private company, NGO, bottling company to community (user)upstream watershed managers

Market Ecolabelling of forest Forest certification Consumer, intermediaryor farm products

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Economists and others have argued that mechanismsare needed by which forest and other resource ownersare rewarded for their role as stewards in providingecosystem services. Anticipation of such incomeflows would enhance the value of forest assets andthus encourage their conservation. Compared toprevious approaches to forest conservation, market-based mechanisms promise increased efficiency andeffectiveness, at least in some situations. Experiencewith market-based instruments in other sectors hasshown that such mechanisms, if carefully designedand implemented, can achieve environmentalgoals at significantly less cost than conventional‘command-and-control’ approaches, while creatingpositive incentives for continual innovation andimprovement. Where the benefits and costs ofconservation vary spatially, market-based instrumentsseek out and concentrate on higher-benefit cases(Pagiola et al. 2002).

The search for sustainable incomesin the tropical timber industry

The tropical timber trade has undergone dramatictransitions in the last decade. According to ITTO(2003), the export value of primary products (logs,sawnwood, veneer, and plywood) from natural forestsin ITTO producer countries has declined some 40%– from US$13 billion to US$8 billion per year since1990 (Figure 1). At the same time there has beenrapid growth in secondary products exported –up some 200% since 1990, from US$1.5 billion toUS$5 billion, and in plantations – up from 28 millionto over 60 million hectares. Plantation products arethe majority basis for the secondary product industry,and plantation products (including pulp, paper andreconstituted panels) now constitute the majorityof the value of the aggregate tropical timber trade.

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Figure 1 Tropical timber export trends

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.01990 1991

US$

bill

ion

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

ITTO primary products SPWP

ITTO primary products

SPWP

ITTO primary products = plywood, sawnwood, veneer, logs SPWP = secondary processed wood products: furniture,

moulding, woodwork, etc – excludes pulp, paper and

reconstituted panelsSource: ITTO (2003)

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During the same period, the problem of illegallogging, the largely stagnant prices for tropicaltimber products from natural forests, the widespreadgovernment practice of subsidizing plantations,and increasing standards of practice, have all madesustainable production from natural forests afinancially challenging proposition. Legal producersfrom natural forests are finding it difficult to competewith illegally harvested wood and plantation products.In this climate, legal producers with natural forests areeagerly searching for additional sources of revenue.

Need for new means to financeforest conservation

Until recently, the financing and management ofnatural protected areas remained the responsibilityof the public sector. There are presently 102,102protected areas worldwide, covering an area of18.8 million km2, of which 17 million km2, or 11.5%of the Earth’s terrestrial surface, are forests. Two-thirdsof these have been assigned to an IUCN managementcategory of protection. However, over the last fewdecades, severe cutbacks in the availability of publicresources have undermined the effectiveness of suchstrategies, and budgets for government protection andmanagement of forest ecosystem services are declining(Table 3). Land acquisition and compensation for lostresource-based livelihoods are both often prohibitivelyexpensive. For example, it has been estimated thatUS$1.3 billion would be required to compensatepeople fully in just nine Central African parks (Cernea& Schmidt-Soltau 2003). At the same time, publicresponsibility for nature protection is shifting withprocesses of devolution and decentralization. Protectedareas in the tropics are mostly dependent for financingon international public or private donors. But thedonation-driven model is not sustainable, eithereconomically or environmentally (Swingland 2002).

Sovereignty is an issue, as about 30% of private forestconcessions in Latin America and the Caribbeanand 23% in Africa are already foreign-owned.

Moreover, the dominant model of excluding people from natural habitats which are targetedfor conservation disenfranchises them. In India,for example, 30 million people are targeted forresettlement from protected areas (Khare et al. 2000).An estimated 240 million rural people live in theworld’s high-canopy forest landscapes. Populationgrowth in the world’s remaining ‘tropical wildernessareas’ is twice the global average (Cincotta &Engelman 2000). In Latin America, for example,80% of all forests are located in areas of mediumto high human population density (Chomitz 2003).Over a billion people live in the 25 biodiversity‘hotspots’ identified by Conservation International;in 16 of these hotspots, population growth is higherthan the world average (Cincotta & Engelman 2000).There is an urgent need to identify alternativeconservation systems that respect the rights of forestdwellers and owners and that address conservationobjectives in the 90% of forests outside publicprotected areas. Markets for ecosystem servicespotentially offer a more efficient and lower-costapproach to forest conservation.

Potential contribution to economicdevelopment and poverty reduction

Roughly a quarter of the world’s poor and 90% ofthe poorest depend substantially on forests for theirlivelihoods (World Bank 2001; see Box 2). In China,most forests are found in officially designated ‘poorcountries’ (Lele et al. 2002). In India, two-thirds offorests are in economically poorer tribal areas; some100 million people are estimated to be forest dwellers,while another 275 million live in the vicinity of

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Table 3 Estimated financial flows for forest conservation (US$)

Sustainable forest Sustainable forestmanagement management Protected areas Protected areas

Sources of finance (early 90s) (early 2000s) (early 90s) (early 2000s)

Official development 2 billion– 1 billion– 700 million– 350 million–assistance 2.2 billion 1.2 billion 770 million 420 million

Public expenditure NA 1.6 billion NA 598 million

Philanthropy* 85.6 million 150 million NA NA

Communities** 365 million 1.3 billion NA NA–730 million –2.6 billion

* Under-estimates self-financing and in-kind NGO contributions** Self-financing and in-kind contributions from indigenous and other local communities. Estimated community-managed forests in 1990: 100 million hectares.NA = not availableSource: Khare (2003)

26

forests (Kumar & Saxena 2002). Finding new sourcesof forest income for these populations is importantfor economic development and poverty reduction,as well as to conserve forests as populations continueto rise, as is predicted in low-income tropical countries.

Moreover, as a result of public forest tenure reformsworldwide, indigenous and other rural communitiesnow own or control a quarter of all natural forestsin tropical developing countries, and this share isprojected to double by 2020 (Table 4; White &Martin 2002). Agroforestry on small-scale farms andcommunity forest plantations are also expanding

rapidly and offer opportunities to promote patterns ofagricultural development that also enhance ecosystemservices. A major challenge is to translate these assetsinto new streams of income and wealth at a timewhen prices for timber, pulpwood and other productsare relatively stable or declining. Markets for ecosystemservices could potentially provide financial benefitsfrom the sale of ecosystem services, improved humancapital from associated training and education, andstrengthened social capital due to investment inlocal cooperative institutions.

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Table 4 Forest tenure in tropical producer countries

Country Public land (million hectares) Private land (million hectares)

Reserved for Administered indigenous & Indigenous/ Individual/

by government community groups community firm

Brazil 423.7 74.5 0.0 57.3Democratic Republic of Congo 109.2 0.0 0.0 0.0Indonesia 104.0 0.6 0.0 0.0Peru no data 8.4 22.5 no dataIndia 53.6 11.6 0.0 5.2Sudan 40.6 0.8 0.0 0.0Mexico 2.75 0.0 44.0 8.3Bolivia 28.2 16.6 2.8 5.4Colombia no data no data 24.5 no dataTanzania 38.5 0.4 0.0 0.0Myanmar 27.1 0.0 0.0 0.0Papua New Guinea 0.8 0.0 25.9 0.0Cameroon 22.8 0.0 0.0 0.0Central African Republic 22.9 0.0 0.0 0.0Gabon 21.0 0.0 0.0 0.0Guyana 30.9 0.0 2.8 0.0Total 926.05 112.9 122.5 76.2

Source: White & Martin (2002)

Box 2 Rough estimates of forest-dependent poor

Grouping Estimated population

Indigenous peoples who depend primarily on natural (usually closed canopy) forests for their livelihoods (hunting, gathering, shifting cultivation) 60 million

Rural people who live in or at the margin of natural forests or woodlandswho rely on the forest as a safety net or for supplemental income 350 million

Smallholder farmers who grow farm trees or manage remnantforests for subsistence and income 500 million–1 billion

Artisans or employees in formal or informal forest-based enterprises 45 million

Estimated total 0.955–1.455 billion

Sources: Calibre & SCC (2000); Krishnaswamy & Hanson (1999)

27

3 Status of main ecosystemservice markets

The past decade has seen the widespread emergenceof systems of financial payments for ecosystemservices (Landell-Mills & Porras 2002). This sectionprovides an overview of the types of ecosystem servicemarkets. It then describes, for the major ecosystemservices (watershed protection, biodiversity protection,and carbon sequestration and storage), the types ofpayment mechanisms being used, some examples,the scale of current markets, and the potential formarket growth. The final sub-section considers theoverall scale of ecosystem service markets relative toother forest financial flows. The discussion touchesupon critical strategic issues related to internationalcompetitiveness, legal frameworks, the politics ofecosystem service markets, equity concerns, and thechallenges of institutional development. These issuesare addressed in detail in Section 5.

Types of ecosystem service markets

Four broad types of market mechanisms forecosystem services can be distinguished, in decliningorder of the level of government involvement:

1) public payments to private land and forestowners to maintain or enhance ecosystemservices: in this system, governments determinewhat ecosystem services are priorities forprotection, and pay landowners or managersdirectly to manage their land and forest for thispurpose. Examples of public payment instrumentsinclude: permanent conservation easements(guarantees that such land will not be loggedor farmed); contract farmland set-asides forconservation (such as North American andEuropean set-aside programs); programs toco-finance investments in afforestation orsustainable forest management (SFM); andpayments for the confirmed presence ofendangered wildlife species. Generally, paymentsare made to individual landholders, but mayalso be paid to common-property forest ownergroups or organized watershed users. Paymentsmay be standardized or negotiated individually;

2) open trading under a regulatory cap or floor:in this system, a government defines a mandatorylevel of a specific ecosystem service to be provided,but to achieve this level the regulated partycan choose either to comply directly with the

requirement or to pay others – who are in aposition to supply the service more cheaply –to do so. Essentially, government regulationcreates demand, but independent buyers andsellers can respond flexibly by trading with oneanother. For example, to ensure no-net-loss ofhigh-biodiversity wetlands, a system of ‘tradabledevelopment rights’ may be put in place. Thenany land developer who wishes to convert awetland must pay another landowner to restorea similar type and quality of wetland. Anotherexample is carbon emission offset trading,whereby carbon polluters face a regulatorycap on emissions that they can meet eitherby reducing their own emissions or by payingother parties to do so or to sequester anequivalent amount of carbon;

3) self-organized private deals: this approachinvolves direct, usually closed, transactionsbetween offsite beneficiaries of forest services andforest landholders responsible for the services.Instruments include the purchase of developmentrights to land and direct payment schemes forecosystem services. For example, a company sellingbottled water may pay upstream landownersto use best management practices on theirland to ensure their supply of quality water.A conservation NGO may pay the owners ofhigh-biodiversity-value forest for a long-term‘conservation concession,’ analogous to alogging concession, to be managed explicitlyfor conservation. Government agencies mayplay a minor role in facilitating such dealsthrough appropriate contract law; and

4) ecolabelling of forest or farm products:the fourth approach is also handled by privateactors, but the payment for ecosystem servicesis embedded in a traded product. Producerssell forest or farm products produced undermanagement systems certified to enhance forestecosystem services. Products are sold to consumerswho prefer to support suppliers who are goodenvironmental managers. But there need be nodirect transaction between the consumer and theproducer of ecosystem services; rather, third-partycertification or marketing agents are involved.Examples include Forest Stewardship Councilwood and non-wood product certification, and‘salmon-safe’ labelled products from farmers inthe northwest US that maintain forest protectionof waterways important for salmon.

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3

28

The actual payments for ecosystem services to forestowners or producers for providing ecosystem servicesmay take various forms: direct payment of a fixedsum, a fixed sum per hectare, or a fix sum per unit ofecosystem service produced; payment of a premiumon farm or forest products sold; payment to acommunity or cooperative which in turn distributesincome or services to its members; or paymentto a third-party provider of technical assistance,infrastructure or other services.

Watershed protection services

The hydrological services of forests are among themost valuable of the many ecosystem services fromforests – and indeed many if not most national parksand forests have often been justified in part basedon their water benefits, as have many governmentregulations limiting private land-use. Unfortunately,the relationship between forest cover and theproduction of ecosystem services is complex, variableand in general not very well understood.2 Althoughthe relative importance of the ecosystem serviceswill depend upon the interests of landowners anddownstream beneficiaries, in general the mostimportant services include the regulation of waterflow, maintenance of water quality, control of erosionand sedimentation, and maintenance of aquaticproductivity. These services are described in moredetail in Box 3.

Rationale for financial approaches

Public-sector agencies have traditionally made mostinvestments in watershed management, but thatmay be changing. Typically, funds for watershedmanagement and protected areas come fromgovernment general revenues and are not basedon the value of water that these areas provide.This approach has been effective in some places,but there are also serious limitations. One problemis that many governments have serious revenueshortfalls caused by ineffective tax systems ordepressed economies. Burgeoning social welfaredemands compete with public-sector investments inprotected areas and natural resources management;the latter have actually declined in many countriesduring the past decade. A related problem is thatusing general revenues may not be equitable sincesome people and businesses use much more waterthan do others.

There is also growing recognition that traditionalwatershed management projects, which rely either onregulatory approaches or subsidies to encourage theadoption of soil conservation techniques on privatelands, have generally not proved effective (Kaimowitz2000). Meanwhile, watersheds continue to degradeand most water-users around the world pay less thanit costs to provide the service. Given these problems,investors and policy-makers around the world areexploring alternative, more effective and lower-costapproaches to achieve watershed management goals(Tognetti 2001, Trust for Public Lands 1997).

Types of payment schemes and examples

The desirability and potential for financial incentivemechanisms for watershed management varies widelyfrom place to place. Differences in the nature of theservice provided, who supplies it, who receives it,how economically important it is, and what legaland regulatory systems are in place are just a few ofthe factors that shape payment schemes. The maingroups of beneficiaries include hydroelectric powergenerators, municipal water supply systems, irrigationsystems, industrial users, and populations in flood-prone areas (Pagiola et al. 2002).

In most situations, forest-owner responsibilities toprotect ecosystem services are poorly defined, as arethe rights to be compensated for providing them.This is complicated by the difficulty of tracingthe origin of the ecosystem service as one movesdownstream. Furthermore, water-related ecosystemservices are often thought of as public goods flowingfrom a mixture of private and public lands, for whichdownstream beneficiaries may thus be reluctant topay. For these reasons, governments often retain animportant or even predominant role in protectingwater-related ecosystem services. Still, a variety ofeconomic tools, including markets and other financialmechanisms, are being used to help restore, maintainand enhance water-related ecosystem services onforestlands. Diverse examples are presented in Table 5.

Self-organized private deals: in some situations,private entities have developed their own mechanismsto pay for watershed protection with little or nogovernment involvement. These cases are morelikely to be found where an ecosystem approach canprovide water services at a lower cost than traditionaltreatment investments, where private interests needwater quality or flow that goes beyond regulatorystandards, or where there is no effective regulatorysystem in place. Financing is from private sources but

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2 The complex relationships between forests and the production ofecosystem services, and of the many persistent myths regarding theserelationships, are covered in Pagiola et al. (2002), Kaimowitz (2000),Johnson et al. (2001), Chomitz and Kumari (1998), and Calder (1998).

29

ITTO

Box 3 Biophysical relationships that link forests, water and people

The biophysical relationships between forests and water are highly variable from one location to anotherdepending on climate, soils and vegetation types; there is no substitute for site-specific information.The following are a few simplified basic relationships to keep in mind.

Forests can slow the rate of runoff in a watershed: forest vegetation takes up water and delays thetime to soil saturation (after which water pools or runs off the land into the nearest watercourse). Forestsoils also usually have a higher water storage capacity than non-forest soils (Falkenmark et al. 1999).The more complex structure of the forest ground surface and underlying soil allows more efficient soilinfiltration compared to a deforested watershed. By slowing the rate of runoff, forests may help tominimize flooding in smaller watersheds (although they will not influence large-scale flooding).

Forests can reduce soil erosion and sedimentation of waterways: interception of rain and snowfall byforest canopies means that less water falls on the ground compared to a deforested watershed. Understoreyforest vegetation and leaf litter protects the soil from the impact of rain that does fall through thecanopy. Extensive root systems help hold soil more firmly in place and resist shallow-seated landslidescompared to clear-cut or heavily disturbed watersheds. Sedimentation levels in forested watersheds aregenerally lower than in nearby agricultural or urbanized watersheds, but the degree depends on soiltypes, topography and climate (Falkenmark et al. 1999).

Forest soils filter contaminants and influence water chemistry: forest soils are more waterlogged thanother soils (except wetlands) and contain more nutrients, allowing them to filter out contaminants(Falkenmark et al. 1999). Clearing and cultivating forest soils tends to greatly accelerate decomposition andrelease large amounts of nutrients that leach into groundwater, surface water runoff, and streams. Forexample, streams in agricultural areas in temperate regions typically have nitrate levels ten times higherthan streams in nearby forested watersheds (which is also partly the result of fertilizer applications).

Forests reduce the total annual water flow in a watershed: contrary to popular opinion, forestsgenerally reduce the total annual streamflow (Calder 1998). This is because trees consume water fortranspiration, which is then evaporated back into the atmosphere. In general, trees consume more water thanother types of vegetation, including grasses and annual crops. The degree to which forests reduce streamflow,however, depends on various factors. For example, shallow-rooted trees tend to use less water than deep-rooted trees. Young regenerating forests tend to use much more water than mature and old-growth forests.

Forests can increase or decrease groundwater recharge: forest cover can lower groundwater rechargebecause more precipitation is intercepted by vegetation and returned to the atmosphere through evapo-transpiration. In some areas, however, removal of forest cover can result in a crusting of the soil surfacethat reduces or prevents water infiltration and groundwater recharge (Falkenmark et al. 1999).

Forest loss shifts aquatic productivity: forest cover plays an important and complex role in sustainingaquatic productivity (Revenga et al. 2000). Trees shade waterways and moderate water temperatures.Woody debris provides fish with habitat while leaves and decaying wood provide nutrients to a widearray of aquatic organisms.

Forests may influence precipitation at a large regional scale, but the effect of forest cover on rainfallin most areas is limited: the distribution of forests is a consequence of climate and soil conditions – notthe reverse. Some evidence suggests that large-scale deforestation has reduced rainfall in China and someclimate models indicate that extensive forest losses in Amazonia and Central Africa could lead to a drierclimate (Institute of Hydrology 1994). Still, afforestation is not an effective strategy to increase rainfall(Kaimowitz 2000).

Source: Johnson et al. (2001)

30

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Tabl

e 5

Exam

ples

of w

ater

mar

ket p

aym

ents

Wat

er-r

elat

edec

olog

ical

ser

vice

Inte

nded

impa

cts

Nam

e of

cas

e st

udy

prov

ided

Supp

lier

Buye

rIn

stru

men

tson

for

ests

Paym

ent

Self

-org

aniz

ed p

riva

te d

eals

Fran

ce: P

errie

rQu

ality

Upst

ream

dai

ryA

bottl

erPa

ymen

ts b

y bo

ttler

toRe

fore

stat

ion

but l

ittle

Vitte

l pay

s eac

h fa

rm a

bout

US$

230

per h

ecta

reVi

ttel’s

pay

men

tsdr

inki

ng w

ater

farm

ers a

ndof

nat

ural

upst

ream

land

owne

rs

impa

ct b

ecau

se p

rogr

ampe

r yea

r for

seve

n ye

ars.

The

com

pany

spen

t an

for w

ater

qua

lity

fore

st la

ndho

lder

sm

iner

al w

ater

for i

mpr

oved

agr

icultu

ral

focu

ses o

n ag

ricul

ture

aver

age

of U

S$15

5,00

0 pe

r far

m o

r a to

tal

prac

tices

and

for

of U

S$3.

8 m

illio

nre

fore

stat

ion

of se

nsiti

vein

filtra

tion

zone

s

Refo

rest

atio

n bu

t litt

leRe

gula

rity

of w

ater

Priv

ate

upst

ream

Priv

ate

hydr

oele

ctric

Paym

ents

mad

e by

Incr

ease

d fo

rest

cov

erLa

ndow

ners

who

pro

tect

thei

r for

ests

rece

iveim

pact

bec

ause

pro

gram

flow

for h

ydro

elec

tricit

yow

ners

of f

ores

t lan

dut

ilitie

s, Go

vern

men

t of

utili

ty c

ompa

ny v

ia a

on p

rivat

e la

nd;

US$

45/h

ecta

re/y

ear,

thos

e w

ho su

stai

nabl

y fo

cuse

s on

agric

ultu

rege

nera

tion

Cost

a Ri

ca a

nd lo

cal N

GOlo

cal N

GO to

land

owne

rs;ex

pans

ion

of fo

rest

sm

anag

e th

eir f

ores

ts re

ceive

US$

70/h

ecta

re/y

ear,

paym

ents

supp

lem

ente

dth

roug

h pr

otec

tion

and

thos

e w

ho re

fore

st th

eir l

and

rece

iveby

gov

ernm

ent f

unds

and

rege

nera

tion

US$

116/

hect

are/

year

.

Cauc

a Ri

ver,

Colo

mbi

a:Im

prov

emen

ts o

f bas

eUp

stre

am fo

rest

As

socia

tions

of i

rriga

tors

;Vo

lunt

ary

paym

ents

Re

fore

stat

ion,

ero

sion

Asso

ciatio

n m

embe

rs v

olun

taril

y pa

y a

wat

er u

se fe

e as

socia

tions

of i

rriga

tors

’flo

ws a

nd re

duct

ion

ofla

ndow

ners

gove

rnm

ent a

genc

ies

by a

ssoc

iatio

ns a

nd

cont

rol,

sprin

gs a

ndof

US$

1.5–

2/lit

re o

n to

p of

an

alre

ady

exist

ing

wat

er

paym

ents

sedi

men

tatio

n in

gove

rnm

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genc

ies

wat

erw

ays p

rote

ctio

n,

acce

ss fe

e of

US$

0.5/

litre

. The

tota

l inv

estm

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irrig

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n ca

nals

to p

rivat

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stre

am

and

deve

lopm

ent o

fw

as o

ver U

S$1.

5 bi

llion

bet

wee

n 19

95–2

000

land

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rs; p

urch

ase

wat

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ed c

omm

uniti

esby

age

ncy

of la

nds

Trad

ing

sche

mes

Unite

d St

ates

:Im

prov

ed w

ater

qua

lity

Poin

t-sou

rce

pollu

ters

Pollu

ting

sour

ces

Trad

ing

of m

arke

tabl

eLi

mite

d im

pact

on

Ince

ntive

pay

men

ts o

f US$

5–10

per

acr

enu

trien

t tra

ding

disc

harg

ing

belo

ww

ith d

ischa

rge

abov

enu

trien

t red

uctio

nfo

rest

s; m

ainl

y th

eal

lowa

ble

leve

l; no

n-po

int

allo

wab

le le

vel

cred

its a

mon

g in

dust

rial

esta

blish

men

t of

sour

ce p

ollu

ters

redu

cing

and

agric

ultu

ral

trees

in ri

paria

n ar

eas

thei

r pol

lutio

npo

llutin

g so

urce

s

Aust

ralia

: irri

gato

rsRe

duct

ion

of

New

Sou

th W

ales

An a

ssoc

iatio

n of

Wat

er tr

ansp

iratio

n cr

edits

Larg

e-sc

ale

refo

rest

atio

n,Irr

igat

ors p

ay U

S$40

/hec

tare

/yea

r for

ten

year

s fin

ancin

g up

stre

amw

ater

salin

itySt

ate

Fore

sts (

stat

eirr

igat

ion

farm

ers

earn

ed b

y St

ate

Fore

sts

inclu

ding

pla

ntin

g of

to N

SW S

tate

For

ests

. Rev

enue

s are

use

d by

Sta

te

refo

rest

atio

ngo

vern

men

t age

ncy)

for r

efor

esta

tion

and

desa

linat

ion

plan

ts, tr

ees

Fore

sts t

o re

fore

st o

n pr

ivat

e an

d pu

blic

land

s. so

ld to

irrig

ator

san

d ot

her d

eep-

root

edPr

ivat

e la

ndow

ners

rece

ive a

n al

low

ance

but

pe

renn

ial v

eget

atio

nrig

hts r

emai

n w

ith S

tate

For

ests

.

31

ITTO

Tabl

e 5

(con

tinue

d)

Wat

er-r

elat

edec

olog

ical

ser

vice

Inte

nded

impa

cts

Nam

e of

cas

e st

udy

prov

ided

Supp

lier

Buye

rIn

stru

men

tson

for

ests

Paym

ent

Publ

ic p

aym

ent

sche

mes

New

York

City

: wat

ersh

edPu

rifica

tion

ofUp

stre

am la

ndow

ners

Wat

er u

sers

taxe

d by

Taxe

s on

wat

er u

ser;

Adop

tion

of lo

w im

pact

Dai

ry fa

rmer

s and

fore

ster

s who

ado

pted

bes

t m

anag

emen

t pro

gram

New

Yor

k Ci

ty’s

New

Yor

k Ci

ty w

ithN

ew Y

ork

City

bon

ds;

logg

ing;

retir

emen

t of

man

agem

ent p

ract

ices w

ere

com

pens

ated

with

w

ater

supp

lysu

pple

men

tal f

unds

trust

fund

s; su

bsid

ies;

envir

onm

enta

lly se

nsiti

veUS

$40

mill

ion,

whi

ch co

vere

d al

l the

ir ad

ditio

nal c

osts.

prov

ided

by

fede

ral,

logg

ing

perm

its;

land

from

agr

icultu

ral

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ster

s who

impr

oved

thei

r man

agem

ent p

ract

ices

stat

e an

d lo

cal

diffe

rent

ial l

and-

use

prod

uctio

n; fo

rest

(s

uch

as lo

w im

pact

logg

ing)

rece

ived

addi

tiona

lgo

vern

men

tsta

xatio

n; d

evel

opm

ent

rege

nera

tion

logg

ing

perm

its fo

r new

are

as, a

nd fo

rest

land

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rsrig

hts;

cons

erva

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0 ac

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e an

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reei

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com

mit

to

ease

men

ts; d

evel

opm

ent

a te

n-ye

ar fo

rest

man

agem

ent p

lan

are

entit

led

to a

n of

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kets

80%

redu

ctio

n in

loca

l pro

perty

tax

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mbi

a: e

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nmen

tal

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larit

y of

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er

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ate

land

owne

rsIn

dust

rial w

ater

use

rsEc

o-ta

x on

indu

stria

l Im

prov

ed fo

rest

N

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rvice

s tax

(eco

-tax)

for

flow

for i

ndus

trial

use

s; an

d m

unici

palit

ies

and

mun

icipa

litie

sw

ater

use

rs; p

aym

ents

m

anag

emen

t;w

ater

shed

man

agem

ent

regu

larit

y an

d w

ater

by m

unici

palit

ies a

ndex

pans

ion

of fo

rest

spu

rity f

or d

rinkin

g wa

ter

wat

ersh

ed a

utho

ritie

s to

land

owne

rs

Stat

e of

Par

aná,

Reha

bilit

atio

n of

priv

ate

Mun

icipa

litie

s and

Stat

e of

Par

aná

Publ

ic-se

ctor

redi

strib

utio

nRe

habi

litat

ion

of

US$

170/

hect

are

Braz

il: p

ublic

and

publ

ic ar

eas f

orpr

ivat

e la

ndow

ners

mec

hani

sm: S

tate

pro

vides

degr

aded

fore

st a

reas

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strib

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echa

nism

wate

rshe

d pr

otec

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addi

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l fun

ds to

thos

em

unici

palit

ies w

ithpr

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32

may take various forms, including user fees, transferpayments, land purchases, cost-sharing arrangements,and/or low-interest credit.

In France, for example, the most important watersources for Perrier-Vittel, the world’s largest bottler ofnatural mineral water, are in heavily farmed watershedswhere nutrient runoff and pesticides threaten theaquifers the company relies on. Perrier-Vittel foundthat reforesting sensitive infiltration zones, financingfarmers to build modern facilities, and switching toorganic farming practices are cheaper than buildinginfiltration plants.

In Colombia, large agricultural producers in theCauca Valley assess their own fees through theirwater users’ association in order to finance watershedmanagement practices in upland areas and therebyimprove base flows and reduce sedimentation inirrigation canals. These practices include reforestation,erosion control on steep slopes, land purchases andprotection agreements for springs and stream buffers,and economic development in upland communities.

Neither case required legal or regulatory reform;rather, the contracts were based on intensivenegotiations between the potential buyer andseller of water services. A critical factor affectingtheir performance was that both efforts developeda participatory process early on to negotiate theactions and payments. Public-sector institutionsplayed support roles in both cases. In the Perrier-Vittel case, a government research agency helpedfinance and conduct research that led to the program.In Colombia, a regional public development agencycarries out some of the watershed managementactivities and provides technical assistance tolocal communities and landowners carryingout watershed protection.

Open trading schemes: trading schemes arebeginning to emerge in countries with strongerenvironmental regulation, where government setseither a very strict water quality standard or a cap ontotal pollution emissions. In most cases, individualfacilities or landowners have a defined maximumallowable amount of emissions they can release.The opportunity for trading requires the governmentto say, in effect, that it does not care who takes actionas long as the overall standard is met or the cap is notexceeded. Emission credits are earned based on theproduction of emissions lower than the set standardand companies and landowners can make economicdecisions as to whether it is cheaper to lower theiremissions or to buy credits from others who havebeen able to do so.

In the US, for example, highly regulated factories(or point sources) that must spend large sums onpollution control technologies to comply with theirlimits on nitrogen and other organic pollutants arepaying unregulated farmers (or non-point sources)in the Midwest to reduce their emissions. Tradingallows those factories seeking to reduce their emissionsto find the most cost-effective means of doing so.And, since the farmers can often achieve significantreductions at a fraction of the cost to factories,pollution standards can be met at less cost to factoriesand to the community as a whole. In Australia, land-clearing has exacerbated salinization problems inmany parts of the Murray-Darling Basin. This occursbecause the lost vegetation no longer takes up waterand transfers it back to the atmosphere, so watertablesrise and bring dissolved mineral salts to the surface.New South Wales State Forests, a state governmentagency, recently launched a pilot project in whichdownstream irrigation farmers are purchasingtranspiration credits from State Forests, who areplanting trees on state land upstream (Brand 2002).This pilot project is designed to test the possibilityof generating a new market in water transpirationto benefit irrigation farmers and other water users.If the pilot is successful, farmers, other water usersand governments could purchase units of transpiredwater from landowners who planted forest or restorednative vegetation. The next step in establishing thistrading scheme would be for the government toestablish forest cover targets for individual landownersor watershed areas.

Financing for trading schemes typically comes fromthose companies or landowners that have found thatbuying credits or units from other sources is cheaperthan changing their own processes to comply with theregulatory limitation. Authority for trading schemes,however, must come from state, federal or localregulatory agencies. A strong regulatory system andeffective monitoring systems are key requirementsfor any trading scheme.

Public payment schemes: in public paymentschemes, government or a public-sector institutionpays for the watershed service. Financing can comefrom various sources, including general tax revenues,bond issues, or user fees. Payments are made toprivate landowners and private or public resourcemanagers. Box 4 discusses one recent nationalscheme developed by Mexico.

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New York City’s watershed management programis an alliance between federal, state and municipalgovernments to protect water quality in the Crotonand Catskills watersheds that supply the city’s ninemillion residents with some of the highest qualitydrinking water in the United States (Box 5). In Brazil,the state of Paraná has an ecological tax to financepayments to those municipalities that take actioneither on their own or in cooperation with privatelandowners to protect watersheds (see Box 6).

In both cases, intensive negotiations betweendownstream and upstream governments, businessesand citizens’ groups were necessary to establish thesemechanisms. Significant changes in the regulatoryenvironment were also needed to enable downstreambeneficiaries to pay for watershed improvements inupper watersheds. Because of the public goods natureof hydrological services, publicly financed transferpayments are likely to remain the most commonfinancial mechanism used to protect water-relatedecosystem services.

Current status of watershed service markets

Demand is the main driver of watershed marketsand the private sector dominates their establishment.Landell-Mills and Porras (2002) found that in 62cases of watershed protection markets in 22 countries(24 cases in eleven tropical producer countries),the private sector accounted for 65% of sellers and60% of buyers of watershed services. Private investorsincluded companies for whom watershed propertiesare a key input to their production capabilities,companies who are required to offset their waterpollution, and private home-owners who use waterfor everyday functions. Still, governments are themost influential buyers of watershed services.Agencies such as water boards and electricity

suppliers have the most defined interest inmaintaining water flow and quality. Althoughindividual landowners are the primary sellers ofwater services, governments also play a role inmaintaining supplies.

Of the various types of watershed paymentmechanisms, Landell-Mills and Porras (2002)found that intermediary-based transactions are mostcommon, accounting for 44% of all mechanismsemployed among the 62 cases. Intermediaries eitherhave significant local knowledge or are establishedspecifically to manage the transaction processand include NGOs, government agencies andcommunities. Intermediary-based transactionsare used as a way of pooling demand and for risk-sharing and fundraising.

Of the cases studied by Landell-Mills and Porras(2002), 68% involved local markets while only 11%were national and 3% were international. In largermarkets, downstream beneficiaries of watershedproperties are less willing to pay for upstreamwater protection and, where watersheds crosspolitical boundaries, other types of risks mayprevent payments from occurring. The majorityof markets are characterized as emerging, while themost mature markets rest in developed countries,most notably the US.

As indicated in the examples given above, benefitsare highly variable from one watershed to the next.In many watersheds, the opportunities for watershedprotection payments do not yet exist or are extremelylimited. This is especially true in remote, very large,or sparsely settled watersheds and in countries withpoorly defined or ineffective legal and regulatoryframeworks. In other places, the opportunity isthere but its development is hindered by a lack of

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Box 4 A new fund to finance forest ecosystem services in Mexico

The Government of Mexico recently announced the creation of a new, US$20 million fund to pay Indigenousand other communities for the forest ecosystem services produced by their land. Indigenous and othercommunities own approximately 80% of all forests in Mexico – totaling some 44 million hectares – ascollectively-held private land. The Mexican Forestry Fund has been under design since 2002, guided bya consultative group with government, NGO and industry representatives. The purpose of the Fund is topromote the conservation and sustainable management of natural forests, leverage additional financing,contribute to the competitiveness of the forest sector, and catalyze the development of mechanisms tofinance forest ecosystem services. Operational manuals are being prepared and priority conservation siteshave already been identified. The Fund proposes to pay US$40/hectare/year to owners of deciduousforests in critical mountain areas and US$30/hectare/year to other forest types.

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information about the source of the ecosystem serviceand who exactly benefits from it. Even where thisis known, the beneficiaries of the service may havelittle interest in paying for a service they now believethey are getting for free.

Hydroelectric generators, municipal water systems,irrigators and industrial users, rather than the generalpopulation, are the most likely beneficiaries to payfor watershed services – since their relationship tothe service is more direct, regular and predictable.A variety of innovative financing mechanisms arebeing used in watershed management, but transferpayments from downstream water users to upstreamstakeholders for ecosystem conservation are themost common approach and account for the largestcurrent source of financing by far. These systems donot involve the direct buying and selling of servicesper se, but rather the ‘selling’ of land-uses thatgenerate those services. Overall, there is no blueprintthat fits all situations: mechanisms tend to be site-and user-specific, depending on the nature of theecosystem services, the number and diversity ofstakeholders and the legal and regulatoryframework in place.

Self-organized private deals are few, are likely tooccur when the water services provided are privategoods (drinking-water supply, electricity, agriculturalproducts), and will be limited to the particularwatersheds upstream of their investment where astrong link between land-use actions and watershedservice can be demonstrated. These deals tend to takeplace only if the monitoring and transaction costsare covered by the market price received or can besubsidized. Trading schemes are rare – especially indeveloping countries – but growing, and private-sector participation in trading schemes stems fromopportunities for large cost savings.

Scope for increased demand

The future scope for using financial incentives toencourage the conservation of forest watersheds –particularly in developing countries – is potentiallyhuge for at least three reasons. First, the globaldemand for clean water is immense. The globalpopulation tripled in the last 100 years, but wateruse increased sixfold. Most population estimatesproject that the global population will grow bytwo billion over the next 30 years and anotherone billion in the subsequent 20 years – and virtually

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Box 5 New York City pays for watershed management

Three watersheds serve nine million people in New York City and surrounding suburbs. The watershedsare 830,000 hectares in size (nearly the size of Delaware) and deliver 1.2 billion gallons of water per day.New York City has historically had high-quality drinking water. It was able to avoid the water-relatedproblems that plagued most other cities until the 1980s, when suburbanization, destructive road construction,and highly concentrated farming activities polluted major watersheds.

City commissioners initially turned to filtration as the solution to clean up non-point source contamination,but it would cost US$4–6 billion dollars annually to filtrate just one watershed. Initial calculations showedthat a comprehensive program of watershed protection would cost far less than filtration, would maintainwater quality even more effectively, and would produce numerous other benefits. Instead of paying toclean up the results of degrading the water, the City decided to invest in preserving the 200 km2 of ruralCatskill environment that was responsible for providing it with the world’s best urban water. Farmersand City commissioners met and developed a plan that would best suit both actors.

Termed ‘whole-farm planning’, the program requires the City to pay both the operating costs of the programand the capital costs for pollution control investments on each farm as an incentive to farmers to join.Farmers then administer the program through a self-selected Watershed Agricultural Council, whichprovides the technical assistance needed to custom-design pollution control measures for each farm,maximizing their effectiveness and minimizing their cost. The measures are selected for their pollutioncontrol benefits and are also designed into and integrated with farmers’ business plans and managementpractices. Thus, farmers not only solve their pollution problem cost-free, but they also gain significantancillary benefits as well. Five years after implementation, 93% of all farmers were participants in theprogram. Whole-farm planning successfully reduced watershed pollution loads and enabled the City toavoid the multi-billion dollar cost of filtration.

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all of this growth will take place in developingcountries. These trends suggest that water demandwill either double or triple current use over the next50 years. In India, for example, urban and industrialuse is projected to increase 135% over the next40 years (Dudley & Stolton 2003).

Second, the majority of the world’s population livesdownstream of forested watersheds, making them allsusceptible to the costs of watershed degradation.One rough estimate is that about 13% of the world’sland area is currently needed to protect water suppliesfor the global population – an area that will growwith population. These downstream populations,and their interest in reducing vulnerability, floodingand degradation are likely to grow with educationand spending power. Already, some 40% of the world’slargest cities rely on protected areas and multiple-use forests for their drinking water (Dudley &Stolton 2003); this includes 19 of the largest citiesin the tropics (Annex 2). Payments for afforestationand agroforestry establishment may be justifiedin many more watersheds where forests werehistorically cleared.

Third, investments in sustainable watershedmanagement are often substantially cheaper thaninvestments in new water supply and treatmentfacilities. By investing approximately US$1 billionin land protection and conservation practices,New York City has avoided spending US$4–6 billionon filtration and treatment plants (Echavarria &Lochman 1999). Other cities in the United States –Portland, Oregon; Portland, Maine; and Seattle,Washington – have found that every US$1 investedin watershed protection can save anywhere fromUS$7.50 to nearly US$200 in costs for new filtrationand water treatment facilities (Trust for Public Lands1997). In South Africa, removing thirsty alien treespecies in Cape Town’s watershed and restoring nativevegetation produces water at a fraction of the costof water delivered through diversion or reservoirprojects (Gelderblom & van Wilgen 2000).

Biodiversity protection services

Biodiversity is defined as the variability among livingorganisms in terrestrial, marine and other aquaticecosystems and the ecological complexes of whichthey are part. Components of biodiversity includegenetic variability within species, populations ofspecies, ecological communities, ecosystems and

landscapes. Lowland and montane tropical rainforestsprobably hold more than 65% of all terrestrial species,while tropical woodlands hold a high share of alldryland species (Wilson 1992). Conservation ofthis diversity requires provision for all species andecological communities of adequate natural andmanaged habitat to provide nesting sites, protectivecover, clean water, breeding territory, food sources inall seasons, predator-prey balance, and the presenceof interdependent species (such as pollinators). Whilehuman intervention serves to protect biodiversityin many tropical ecosystems, biodiversity is widelythreatened by deforestation, fragmentation, forestdegradation and pollution. Annually, an estimated14.2 million hectares of tropical forest are lost todeforestation (FAO 2001).

Barbault and Sastapradja (1995) estimate that lossrates of tropical forest of just under 1% per annumcould result in 1–10% of the world’s species beinglost over the next 25 years.

Scientific studies indicate that biodiversity cannotbe conserved by a small number of strictly protectedareas. Conservation must be conceived in a landscapeor ecosystem strategy that links protected areas withina broader matrix of land-uses that are compatiblewith and support biodiversity conservation in situ(Agius 2001, McNeely & Scherr 2003).

Benefits of biodiversity protection

Biodiversity performs a wide range of services,including:

• providing habitat conditions that supportdiverse wild plant, animal and microorganismpopulations of economic, subsistence orcultural value: for example, wild animalsaccount for 25% of protein requirements inWest Africa and as much as 75% in Congo;in Botswana 50 different species account for40% of protein consumption. Wild species arethe source of traditional medicines basic to thehealth care of about 80% of people in developingcountries. Over 5000 species of plants andanimals are used for medicinal purposes inChina alone. In dry ecosystems, open woodlandsare critical sources of fodder for livestock herds(Kerkhof 2000). The health of natural freshwaterand coastal fisheries is strongly affected byadjacent forests;

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• maintaining ecosystem functioning:research indicates that increased species’ diversitygenerally provides more opportunities for species’interactions, which in turn improves the ratesof resource use that govern ecosystem efficiencyand productivity. Species’ diversity may increasethe reliability of ecosystem function, especiallyunder conditions of dynamic environmentalchange. Many of these functions are critical toagriculture and forestry. Bats, bees, beetles andother insects are the principal pollinators of fruittrees, most important oil crops, coffee, coconutand major staple food crops including potato,cassava, yams, sweet potato, taro and beans(Prescott-Allen & Prescott-Allen 1990).Worldwide declines in pollinator populationsthreaten both the yields of major food cropsand the biodiversity of wild plants. For example,the estimated cost to North American farmersfrom the one-quarter decline in wild and domestichoneybees since 1988 is US$5.7 billion peryear (Buchmann & Nabhan 1998). Ecosystemfunctions are also critical for controlling humanand livestock disease vectors (Weinhold 2004);

• conserving genetic and chemical informationof potential future utility: for example, the seedindustry (the leading user of genetic resources)constantly seeks new genetic material to improveplant yields and performance, and draws onsources of genetic material from the wild.In 1993 in the US, 57% of the top 150prescription drugs contained at least one majoractive compound from biological resources.2–10% of the crop protection product marketof US$30 billion was developed from naturalgenetic material (Landell-Mills & Porras 2002).The combined commercial worth of all geneticmaterials has been estimated at US$500–800billion per year (ten Kate & Laird 1999);

• providing insurance against future change:for example, the greater resilience of diverseenvironments and species may be requiredto adapt to climate change;

• providing spiritual, aesthetic and culturalvalues: for example, nature tourists dependenton access to biodiverse habitats and wild speciescomprise 40–60% of all international tourists.Nature tourism is increasing at a rate of 10–30%a year. UK nature and beach tourism generates£14 billion per year – 3.5 times the annual levelof public farm subsidies (Pretty 2002); and

• ensuring the continued existence of wildorganisms as legitimate claimants on earth’sresources: some conservation advocates andinvestors are driven by ethical, philosophicaland religious imperatives to conserve biodiversity.Many consumers of ‘biodiversity-friendly’products and investors in biodiversity-friendlycompanies are motivated by these concerns.The socially responsible investment communityuses environmental screens that often includebiodiversity protection. Socially screened portfolioassets in the US surpassed the US$2 trillion markin 2001 (SIF 2001).

Market mechanisms

The market for biodiversity protection can becharacterized as a ‘nascent market’. Many approachesare emerging to remunerate financially the ownersand managers of tropical forest resources for theirgood stewardship of biodiversity (Table 6).Diverse examples are listed in Table 7.

Land markets for high-biodiversity-value habitat:national governments (public parks and protectedareas), NGO conservation organizations (eg theNature Conservancy) and individual conservationistshave long paid for the purchase of high-biodiversity-value forest habitats. Direct acquisition can beexpensive, as underlying land and use values arealso included. Local sovereignty concerns arisewhen buyers are from outside the country or eventhe local area, or where extending the area of non-commercial real estate reduces the local tax base.New commercial approaches – such as throughconservation communities, ecotourism-based landprotection projects and the eco-real estate projectsbeing organized in Chile (Corcuera et al. 2002) –are being developed to encourage the establishmentof privately owned conservation areas. These buildon growing consumer demand for housing andvacation in biodiverse environments.

Payments for biodiversity-conserving use ormanagement: a lower-cost approach to securingconservation is to pay only for the biodiversity servicesthemselves by paying landowners to manage theirassets so as to achieve biodiversity or species’conservation. Probably the largest-scale paymentsfor land-use or management agreements aregovernment agro-environmental payments madeto farmers in North America and Europe forreforesting conservation easements and managementcontracts aiming to conserve aquatic and terrestrial

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wildlife habitat (OECD 1998). In Switzerland,‘ecological compensation areas’ using farmingsystems compatible with biodiversity conservationhave expanded to include more than 8% of totalagricultural land. In the tropics, diverse approachesinclude: nationwide public payments in Costa Ricafor forest conservation (Chomitz et al. 1999);and payments by conservation agencies, such asthe conservation concessions being negotiated byConservation International (Rice et al. 2001),and forest conservation easements negotiated bythe ‘Cordão de Mata’ project with dairy farmersin Brazil’s Atlantic Forest in exchange for technicalassistance and investment resources to raise crop andlivestock productivity (McNeely & Scherr 2003).Some countries that use land taxes are using taxpolicies in innovative ways to encourage the expansionof private and public protected areas, as illustratedin Box 6 for Brazil.

Payment for private access to species or habitat:private-sector demand for biodiversity has tendedto take the form of payments for access to particularspecies or habitats that function as ‘private goods’ butwhich in practice serve to cover some or all of thecosts of providing broader ecosystem services.Pharmaceutical companies have contracted for‘bioprospecting rights’ in tropical forests (Box 7).Ecotourism companies have paid forest owners forthe right to bring tourists into their lands to observewildlife, while private individuals are willing topay forest owners for the right to hunt, fish orgather NTFPs.

Tradable rights and credits within a regulatoryframework: multi-actor markets for ecosystemservices have been established successfully – notablyfor sulphur-dioxide emissions, farm nutrientpollutants and carbon emissions – by creating rightsor obligations within a broad regulatory framework.Developing such markets for biodiversity is morecomplicated because specific site conditions matterso much. The US has operated a wetlands’ mitigationprogram since the early 80s in which developersseeking to destroy a wetland must offset that bybuying mitigation credits. A variant of this approachis being designed for conserving forest biodiversityin Brazil by permitting flexible enforcement of thatcountry’s ‘50% rule’, which requires landholders in Amazon forest areas to maintain half of theirland in forest, as well as in other regions where lesser proportions of land are set aside for forest use (Chomitz 2002). Careful designation ofcomparable sites is required. Another approach underdevelopment in Australia is biodiversity credits.

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Table 6 Types of payments for biodiversity protection

Purchase of high-value habitat

• Private land acquisition (purchase by private buyers or NGOsexplicitly for biodiversity conservation)

• Public land acquisition (purchase by government agencyexplicitly for biodiversity conservation)

Payment for access to species or habitat

• Bioprospecting rights (rights to collect, test and use geneticmaterial from a designated area)

• Research permits (right to collect specimens, takemeasurements in area)

• Hunting, fishing or gathering permits for wild species

• Ecotourism use (rights to enter area, observe wildlife,camp or hike)

Payment for biodiversity-conserving management

• Conservation easements (owner is paid to use and managedefined piece of land only for conservation purposes; restrictionsare usually in perpetuity and transferable upon sale of the land)

• Conservation land lease (owner is paid to use and managedefined piece of land for conservation purposes, for definedperiod of time)

• Conservation concession (public forest agency is paid tomaintain a defined area under conservation uses only;comparable to a forest logging concession)

• Community concession in public protected areas (individualsor communities are allocated use rights to a defined area offorest or grassland in return for commitment to protect thearea from practices that harm biodiversity)

• Management contracts for habitat or species’ conservationon private farms, forests, grazing lands (contract that detailsbiodiversity management activities and payments linked tothe achievement of specified objectives)

Tradable rights under cap-and-trade regulations

• Tradable wetland mitigation credits (credits from wetlandconservation or restoration that can be used to offset obligationsof developers to maintain a minimum area of natural wetlandsin a defined region)

• Tradable development rights (rights allocated to develop onlya limited total area of natural habitat within a defined region)

• Tradable biodiversity credits (credits representing areas ofbiodiversity protection or enhancement that can be purchasedby developers to ensure they meet a minimum standard ofbiodiversity protection)

Support biodiversity-conserving businesses

• Business shares in enterprises that manage for biodiversityconservation

• Biodiversity-friendly products (ecolabelling)

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Table 7 Value of payments for biodiversity conservation: selected examples

Payment scheme Country Type of payment/commodity Estimated value

Critical Ecosystems Partnership Developing Fund to finance diverse groups US$150 million(World Bank, Conservation International, countries to protect biodiversity capitalizationGlobal Environment Facility)

Ejido financing of local Pas – Mexico US$14 million7 million hectares

BOCOSA Project (Osa Penninsula) Costa Rica Payments to farmers to conserve US$24/their lands hectare/year

Payment for environmental services Costa Rica Compensation to forest owners for US$221–344/the ecosystem services of their lands, hectare/yearas included in 1996 Forest Law Total: US$14

million

Shade-grown coffee Mesoamerica Coffee trees grown among other US$5 billiontrees, enhancing biodiversity for sale of

shade-growncoffee in US alone

Privately protected areas Chile Private investments in land conservation NAincluding: private parks, land donations to national park system, conservationcommunities, eco-real estate andecotourism, and private administrationof government conservation lands

Wetland banking US Developers who have mitigated off-site US$7,500–draw from bank of ‘mitigation’ credits 100,000/acre to offset damage to wetlands as (cost of banking development is implemented credits)

Bioprospecting Worldwide Biodiversity prospecting, primarily US$17.5 billionpharmaceutical, to market products (natural-product and conserve forests drugs)

Ecological value-added tax Brazil Mechanism that compensates US$150 millionmunicipalities that have conservation areas. (Parana State)Stimulates improvement of existing areas US$45 millionor creation of new areas (Minas Gerais)

Box 6 Brazil’s value-added tax for conservation

Brazil has been actively promoting its protected areas as critical instruments for biodiversity conservation andwatershed protection. Yet results have often been unsatisfactory. Strict government regulations restrictingforest exploitation and requiring property owners to rehabilitate degraded areas have limited the profitabilityof the forest sector. Furthermore, lax enforcement has provided an incentive for landowners to disregardthose regulations that have proven expensive to follow.

In 1991, the General Assembly of the State of Paraná passed a law requiring that 5% of the revenues it receivedfrom the Circulation of Goods and Services (ICMS), an indirect tax charged on the consumption of goodsand services, be distributed according to environmental standards. 2.5% was to go to those municipalities withconservation units or protected areas and the other 2.5% to municipalities that supply water to neighbouringmunicipalities. The transfer is basically a compensation for the opportunity cost of development foregoneby environmental protection but it is not calculated according to scientifically established relationshipsbetween forest cover and water improvement. The municipalities are in competition with other municipalitieswithin Paraná for the ecological ICMS. The more areas within the municipalities that are involved inecological activities, the more revenues the municipalities will receive from the State. But the more thatthe ecological tax motivates municipalities to expand protected areas, the less each such protected area will beworth at the margin, because the overall tax base expands slowly. Furthermore, the new tax revenues arenot earmarked for activities that improve environmental protection locally. An innovative protected areaquality ranking system has made the scheme – now adopted in over ten Brazilian states – more effective.

Sources: Perrot-Maître & Davis (2001), May et al. (2002)

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In this system, legislation creates new property rightsfor private landholders who conserve biodiversityvalues on their land; such landholders can sellresulting ‘credits’ to a common pool. The law alsocreates obligations for land developers and othersto purchase those credits. The approach requiresthat the ‘value’ of the biodiversity unit can betranslated into a dollar value (Agius 2001).

Biodiversity-conserving businesses: conservationvalues are beginning to inform consumer and investordecisions. Ecolabelling schemes are developing thatadvertise or certify that products were produced inways consistent with biodiversity conservation. Theglobal trade in certified organic agriculture was worthUS$21 billion worldwide in 2000 (Clay 2002).International organic standards are expanding tolandscape-scale biodiversity impacts. The RainforestAlliance and the Sustainable Agriculture Networkcertify coffee, bananas, oranges and other productsgrown in and around high-biodiversity-value areas.

The Sustainable Agriculture Initiative is a coalitionof multi-national commercial food producers (Nestle,Dannon, Unilever and others) who are seeking tosource commodity supply from producers who areprotecting biodiversity. In 2002, over 100 millionhectares of forest were certified as well-managed(a fourfold increase over 1996), although only 8%of the total certified area is in developing countries,and most of that is in temperate forests.

Current market demand

Available data suggest that biodiversity protectionservices are presently the largest market for ecosystemservices. A McKinsey-World Resources Institute-Nature Conservancy team estimated the annualinternational finance for conservation (protectingland from development) market at $2 billion,with the forest component a large share of that.The buyers are predominantly development banksand foundations in the US and Europe (Arnold &Jenkins 2003; see Table 3).

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Box 7 From bioprospecting to botanicals

Bioprospecting was viewed throughout the 1990s as a major potential source of financing for biodiversityconservation. The pioneering agreement between Costa Rica’s National Institute of Biodiversity (INBio) andMerck for generalized research on tropical botanical species from a highly biodiverse set of ecosystemshas not been followed by other company-country partnerships of this nature, where direct paymentswere agreed on a per hectare basis based on calculated returns from identifying new pharmaceuticals.Rather, the conservation potential of bioprospecting is coming from more indirect returns from the largerole played by natural products and their derivatives – botanicals – as key active ingredients in high-valuedrugs. While a few countries have tithed financial earnings from bioprospecting to conservation, in mostcases financial investments have taken place in parallel as a result of recognition of the importance ofconservation for its multiple benefits, including the market.

Local and national benefits of partnerships are thus coming indirectly from sustainable economic activitiesbased on raw material supply, capacity-building and support for biodiversity science, country capacity toundertake research and develop its own biodiversity, and diverse spin-off benefits to research institutions,local businesses and others. For example, while the National Cancer Institute maintains a joint venturewith the government of Sarawak for research into two potential anti-cancer compounds, which providesSarawak with flexible benefit-sharing arrangements over time, the Institute has abandoned a similararrangement in Cameroon, and another pharmaceutical bioprospecting venture, Shaman Pharmaceuticalsin the Amazon, has folded.

The importance of botanicals in medicine continues to be enormous. Natural products or entitiesderived from natural products made up eleven of the 25 best-selling drugs in 1997, with a 1997 value ofUS$17.5 billion. Between 10 and 50% of the ten top-selling drugs of each of the top 14 pharmaceuticalcompanies are either natural products or entities derived from natural products.

There are also high values in other industries – seed, crop protection, horticulture, botanical medicine,personal and cosmetic care, and biotechnology sectors. The next generation of issues relate to establishingadequate legal frameworks, recognizing indigenous intellectual property rights, and creating multiplelayers of access and benefit-sharing.

Source: Laird & ten Kate (2002)

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In their study of 72 cases of markets for forestbiodiversity protection services in 33 countries(63 cases in 28 tropical developing countries),Landell-Mills and Porras (2002) found that themain buyers of biodiversity services (in decliningorder of prevalence) were private corporations,international NGOs and research institutes, donors,governments and private individuals. Of these cases,73% were international markets, and the rest weredistributed among regional, national and local buyers.International and many national actors demandingbiodiversity protection services tend to focus onthe most biodiverse habitats (in terms of species’numbers), or those perceived to be under thegreatest threat globally (high number of endemicspecies where habitat area has greatly declined).

Most of the private corporations identified in theLandell-Mills and Porras (2002) study were interestedin biodiversity-friendly companies, horticulturalcompanies concerned with ecosystem services, orpharmaceutical bioprospecting. Such private paymentsare usually site-specific. Local actors more commonlyfocus on protecting species or habitats of particulareconomic, subsistence or cultural value. Developmentof market-based conservation for tropical forestbiodiversity is most advanced in Latin America.Although the highest overall level of expenditure onconservation is found in Africa, very little of this ischannelled through market or payment schemes.

Projected growth in market demand

The fastest-growing component of future marketdemand for biodiversity services from tropicalforests is likely to be in the ecolabelling of crop,livestock, timber and fish products for export andfor urban consumers in middle-income tropicalcountries. Pressures continue to increase on majorinternational trading and food-processing companiesto source from suppliers who are not degradingecosystem services (Clay 2002). Demand for organicfarm products is increasing at 20% per year, and theinternational organic movement is strengtheningstandards for biodiversity conservation (IFOAM2002). Voluntary biodiversity offsets are also apromising source of future demand, as many largecompanies are seeking ways to maintain their ‘licenseto operate’ in environmentally sensitive areas, andoffsets are of increasing interest to them.

The cost of and political resistance to land acquisitionare rising. The construction of biological corridorsin and around production areas is an increasingly

important conservation objective, while many of themost important sites for biodiversity conservationare in more densely populated areas with highopportunity costs for land. Thus, we are likely tosee a major shift from land acquisition to varioustypes of direct payments for easements, land leasesand management contracts.

Carbon sequestration and storage

There is now a scientific consensus that humanactivities, including fossil fuel combustion, industrialprocesses, and land-use change, have led to risinglevels of greenhouse gases, most notably carbondioxide, in the atmosphere. The increased rateand magnitude of these gases have manipulated the‘greenhouse effect’, a natural system that regulatesthe earth’s temperature regime, to warm the earth.During the 20th century, the warmest in the past600 years, global temperatures increased by 1 degreeFahrenheit. The ten warmest years have all occurredin the past fifteen years, the 1990s being the hottestdecade on record. Experts expect more variable andextreme climatic events. Both regional and globalassessments have indicated the profound impactsthat climate change will have on water supplies,agricultural productivity, biodiversity and humanhealth. While reducing global fossil-fuel emissionsis essential to mitigate climate change, forest cover andmanagement can also play an important role in bothmitigation and adaptation – with a financial valuethat tropical forest producers may be able to capture.

Value of carbon sequestration and storage

Forests play an important role in the carbon cycleby absorbing carbon dioxide and releasing oxygento the atmosphere through the natural process ofphotosynthesis. Carbon dioxide is converted tocarbon (sequestered) and stored in the woodytissue (biomass) of the plant (Figure 2). The rate atwhich carbon is sequestered varies by the site, age,management and species’ characteristics of the forest.Because tropical deforestation, forest fires and otherland-use change contribute approximately 20% ofglobal carbon dioxide emissions, forestry activities –to sequester carbon by promoting forest establishmentand growth, or to avert the loss of standing forestresources from land-clearing, disease or fire – couldpotentially be an important strategy for slowingclimate change. Forestry can also play an importantrole in strategies to adapt to climate change.

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Market mechanisms

Because fossil-fuel emissions account for the majorityof total emissions, international policy action onclimate change has emphasized emission reductionfrom such sources, including energy, transportationand waste. Forestry investment has been seenprimarily as a flexibility mechanism by whichcarbon polluters could lower their costs bycomplying with part of their emission reductiontargets through forest-based carbon sequestration.The market for carbon sequestration and storagefrom tropical forests has three major segments:the Clean Development Mechanism of the KyotoProtocol; non-Kyoto trading schemes intended foreventual crediting; and voluntary carbon emissionoffsets for green organizations and companies.

The Kyoto Protocol: at the Earth Summit in Riode Janeiro in 1992, the United Nations FrameworkConvention on Climate Change was signed andthe issue of climate change came to the forefrontof international environmental discourse. In 1997,the convention produced the Kyoto Protocol,requiring industrialized nations to reduce theirgreenhouse gas emissions by 5% below 1990 levelsby 2012. These (referred to in the Protocol as‘Annex I’) countries thereby set national standards

to place caps on company emissions and establish aframework by which they may trade their emissioncredits. In order to reduce emissions at least cost,the Protocol provides three flexibility mechanisms:international emissions trading, allowing Annex Icountries to trade emission permits; jointimplementation, allowing Annex I countries to earnemission reduction units through projects in otherAnnex I countries; and the Clean DevelopmentMechanism (CDM), allowing the generation ofcertified emission reductions from either energy orforestry projects in non-Annex I developing countries.

The CDM provides an opportunity for industrializednations to meet part of their obligation for emissionreductions (up to a maximum of 1% of their 1990emission level for each of five years). Companiesand agencies obliged to meet national greenhousegas emissions’ reduction requirements can doso at a lower cost than domestic abatement whileproviding host countries with an additional sourceof investment finance. The CDM will go into effectfollowing Russia’s ratification of the Kyoto Protocol,should that occur. At this time, only projects of‘afforestation’ and ‘reforestation’ are eligible for theCDM in its first commitment period of 2008–2012.‘Afforestation’ is defined under Article 3 of the Kyoto

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Figure 2 Carbon sequestration in the humid tropics by vegetation type

Carb

on (

tonn

es/

hect

are)

350

300

250

200

150

100

50

0

-50

-100Land-use category

Primary forest

Logged forest

Shiftingcultivation Complex

agroforestrySimple

agroforestry

Crops, pastures,and grasslands

Source: Tomich et al. (2001)

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Protocol as the conversion of land, which has had noprevious forest cover for at least 50 years, to forest,while ‘reforestation’ is defined as the planting offorest on land which previously had forest butwas seriously degraded. These may include diversetypes of projects: agroforestry, community forestplantations, agroforest establishment, forestrestoration, and large-scale industrial forestplantations. Other forest project types may ormay not be included in future commitment periods,including fire control, improved forest management,and forest protection.

The rate at which carbon is sequestered varies bythe site, age, management and species’ characteristicsof the forest. The Kyoto Protocol administers credit,called a certified emission reduction (CER), for eachmetric tonne of carbon dioxide reduced. CDMprojects must meet strict criteria for the certificationand registration of CERs. These include baselineforest cover, ‘additionality’ of carbon sequestration,the level of verified carbon emission offsets, andcontribution to sustainable development. Theseadd significantly to the transaction costs of projects.

Rules governing the CDM are still being debatedbut should be finalized in 2004. Several dozenpilot forest carbon projects have been establishedto develop experience and methodologies for carbonprojects, including under several World Bankcarbon funds described in Box 8.

Non-Kyoto market trading: although the US failedto sign the Kyoto Protocol, Americans largely supportits fundamental cap-and-trade structure. Voluntarysystems have developed in the shadow of Kyoto,encouraging US businesses, municipalities anduniversities to make verifiable reductions in theirgreenhouse gas emissions while developing tradingpartnerships. Such programs have emerged as analternative market for domestic carbon trading, suchas the Partnership for Climate Action, the ChicagoClimate Exchange (CCX), and the EnvironmentalResources Trust (ERT). They have encouragedinvestment in projects that grow and conserveforests, creating carbon offsets for companies.Additionally, many US states have taken actionindependent of the federal government, initiatingreforestation, afforestation and conservation schemesas part of their climate action plans.

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Box 8 World Bank funds invest in forest carbon projects

The World Bank has launched three funds to invest in projects for reducing industrialized greenhouse gasemissions while promoting sustainable development and engaging public and private partnerships. The fundsbuy cost-effective CERs in developing countries as part of the CDM and in economies-in-transition underjoint implementation. They have established a unique interface of carbon asset creation, private projectfinance, and intergovernmental market regulation.

The Prototype Carbon Fund (PCF) began operations in April 2000 and by June 2002 had contributions ofUS$180 million from six investing countries and 17 companies. The fund has allocated US$90 millionto date (October 2003), primarily in renewable energy and energy efficiency projects. Two years after thecreation of the PCF, the World Bank launched the Community Development Carbon Fund (CDCF)and the BioCarbon Fund. Because high transactions costs involved with the Kyoto Protocol have led tosignificant bias towards large-scale projects, poorer rural communities have been left out of the carbonmarket. The CDCF seeks to work with local intermediaries to lower transaction costs and enhance the livesof the poor through carbon financing. With a target size of US$100 million, the CDCF will finance small-scale projects with specific community development benefits. Such projects include renewable energy, energyefficiency, methane capture, and agroforestry.

The BioCarbon Fund buys CERs from land-use, land-use change and forestry projects admissible under theKyoto Protocol and for diverse carbon sequestration and conservation projects under emerging alternativeor voluntary carbon management programs. The fund’s target size is US$100 million and it will targetagricultural and forestry projects that enhance other ecosystem services, such as biodiversity and watershedprotection, while improving the livelihoods of local people. Example projects include conservationagriculture – such as shade-grown coffee, agroforestry to restore degraded areas, improved agriculturalpractices, such as shifting from subsistence farming to organic agriculture – and reforestation. The fundis also looking into bundling projects in order to achieve optimum benefits for all stakeholders.

Sources: Prototype Carbon Fund (2003), Biocarbon Fund (2003)

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The CCX, which planned to begin trading inOctober 2003, has developed a comprehensive setof guidelines to foster emissions’ trading betweenparticipating entities. They include InternationalPaper, American Electric Power, Ford MotorCompany, the City of Chicago, and Tufts University.Participants must reduce their emissions to a levelbelow their average between 1998 and 2001 andmay invest in offset projects in the US, Mexicoand Brazil. Offset activities include both forest andsoil sequestration as well as agricultural methaneconversion.

Retail ‘green’ markets: a third component ofthe carbon market is in voluntary payments bycompanies, individuals and organizations who wishto be environmentally responsible by making theiractivities ‘carbon-neutral’. Such buyers undertake aninternal ‘carbon accounting’ to then reduce emissionsor purchase emission offsets. A number of companiesand NGOs (such as the NGO Future Forests) haveset up forest carbon projects in developing countriesto serve this market by producing carbon offsets.Within the ERT, a non-profit which pioneers marketsfor environmental protection, the Ecolands programfacilitates transactions between landowners andbuyers who wish to buy carbon offsets and also investin wildlife conservation and/or watershed restoration.ERT worked with the Rocking C Ranch to measureand sell carbon credits from the reforestation ofsouthern Oregon riparian forest to the OregonClimate Trust. In addition to trading sequestrationrights, the project improved vital fish habitat andled to an enhanced forest management plan.

The rigour of the carbon accounting in these projectsis variable, but increasingly buyers will demandquality comparable to that in Kyoto-compliantprojects. An example of a transaction in this marketis the Scolel-Te project in Mexico, funded by theInternational Automobile Federation (Box 9).

There are a number of ongoing efforts to developcriteria and standards for ‘high-quality’ forest carbonprojects that would be guaranteed to have significantpositive impacts on rural livelihoods and onbiodiversity conservation. Such ‘gold standard’carbon may sell at a higher price or be preferredby some buyers.

Current market demand and pricesfor carbon credits

Of the 75 payment schemes in 27 countries (29payment schemes in 15 tropical producer countries)for forest-based carbon offsets surveyed by Landell-Mills and Porras (2002), 20 were registered as jointimplementation projects under the Kyoto Protocol,while the rest were independent schemes. Twenty-fourof the cases reviewed were in Latin America, whileonly five occurred in Africa. Unlike the other markets,the carbon market has given rise to a series ofancillary services such as investment funds, advisoryservices, insurance and legal counsel. The privatesector dominates the market as a buyer of carboncredits, and its role is growing as supplier andintermediary. Most reviewed trades wereinternationally brokered.

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Box 9 Indigenous communities in Mexico sell carbon services to auto federation

The Scolel Té project has allowed companies, individuals or institutions willing to offset their greenhousegas emissions to buy emission reductions from agricultural and forestry projects in Chiapas, Mexico’s pooreststate. Buyers, including the International Federation of Automobiles, purchase credits from a local trustfund called Fondo BioClimático, which provides small-scale farmers with the technical assistance neededto switch from swidden agriculture to agroforestry. Local actors help farmers create plans for systems thateither combine crops with trees or enrich fallow lands. All plans are assessed for maximum social, economicand climate sequestration potential. The fund supports projects including live fences, shade-grown coffee,plantations, tree-enriched barren areas, and the intercropping of forestry and agricultural crops. The projectsare independently verified and certified by the Société Générale de Surveillance. These activities all providesubstantial income to farmers to cover the costs of implementing new farming systems, to purchase foodsand medicines, and to improve households. The new system has utilized traditional knowledge to makesignificant contributions to agriculture, biodiversity and livelihoods.

Source: Orlando et al. (2002)

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The growing international concern for global climaticchange is the driver of the carbon market. National,regional and local emissions’ standards, as well aspressure from NGOs and insurance companies,have all been catalysts for action in the market.Most carbon exchanges are currently in an early stageof development, but their heightened emergence,along with ancillary services to reduce transactioncosts, demonstrate the increasingly sophisticatednature of the carbon market.

Given restrictions on forest carbon trading throughthe CDM, it is possible to estimate the upper boundof potential income flows through that mechanism.If we assume a value of US$10/tonne of carbon, themaximum level would be US$300 million per yearduring the first commitment period of 2008–2012.This is based on the fact that land-use, land-usechange and forestry can account for no more than 1%of the 5% decrease in emissions required for AnnexI countries. Given the difficulty of establishingprojects, the level is likely to be much lower. Fewdata are available on the value of carbon tradesthrough the non-Kyoto and green retail markets,and much of this is proprietary. Estimates of theper-tonne price of carbon negotiated on these dealsrange from US$3 to US$40. The average deal inthe World Bank’s Biocarbon Fund (see Box 8) wasUS$3.88/tonne of carbon dioxide (US$14.23/tonneof carbon) between 1996 and 2002.

Market projections

As global commitments to reduce and offsetemissions rise in later commitment periods, and withthe eventual launch of binding US strategies, thedemand for forest carbon offsets is likely to increasesignificantly. In July 2003 the European Parliamentvoted to approve the rules surrounding the world’sfirst international market in greenhouse gases, theEuropean Emissions Trading System. This market,expected to become operational in January 2005, willaffect some 10,000 installations across 25 countries,instantly creating a market that some experts estimatecould be worth around US$29.6 billion per year,although most of this would be for energy projects.Observers of the non-Kyoto markets note that theyhave been surprised by recent increases in the numberof companies and other organizations seeking tooffset their ‘carbon footprints’.

A major question for tropical forest producers,however, is whether they will be in a competitiveposition to supply this demand. They will facecompetition from non-tropical forests and fromnon-forest sources of carbon sequestration and

mitigation. On the other hand, it seems likelythat any realistic global strategy to mitigate climatechange will eventually need to focus attentionexplicitly on reducing the 20% of forestry-relatedemissions, both by reforming policies and by payingfor such emission reductions.

While at this time, the non-Annex I (developing)countries contribute a modest share of total carbonemissions, it is estimated that in the near future theywill account for a majority of emissions. A long-termglobal strategy to mitigate climate change musttherefore ultimately involve the ‘Annex II’ developingcountries. If (when) these countries makecommitments to reduce or offset emissions, nationalmarkets for forest carbon could grow rapidly.

Niles et al. (2003) estimate that over the next 20years, 48 major tropical and subtropical developingcountries have the potential to reduce the atmosphericcarbon burden by about 2.3 billion tonnes of carbonif all types of biocarbon projects are eligible. Givena price of US$10/tonne of carbon and a discountrate of 3%, this mitigation would generate a netpresent value of about US$16.8 billion collectivelyfor these countries. This would require a significantglobal effort on more than 50 million hectares toimplement carbon-friendly practices in agriculture,forestry and on previously forested lands. Such agoal would probably imply shifting from a project-to a program-based approach. Pretty et al. (2003)calculate that the carbon benefits of 40 sustainableagriculture and natural resource managementprojects in China and India alone provide offsetspotentially worth US$324 million at US$5/tonneof carbon. Present international dialogue has notyet reached a point where it can enable therealization of this opportunity.

Scale of ecosystem market potential

Ecosystem service markets are certainly expandingrapidly. But to what extent do they represent a majornew market for tropical forest owners and users ofecosystem services? We consider here estimates of theactual economic value of these services, the currentscale of impacts on income and forest conservation,and the projected future scale of such impacts.

Economic value of ecosystem services

Table 8 presents a summary by Pearce andPearce (2001) of the range of recent estimates ofthe economic value of ecosystem services from ahectare of tropical forest, assuming that non-marketecosystem values are actually captured through some

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market creation mechanism. The dominant valuesare carbon storage and timber (though timber valuemust be adjusted for loss of carbon in harvest wood).Conventional, unsustainable logging is moreprofitable than sustainable timber management.Other values do not compete with carbon andtimber unless the forests have some unique features(in themselves or as habitat for unique species)or are subject to potentially heavy demand dueto proximity to towns.

This analysis does suggest that valuing the ecosystemservices would indeed have a huge impact on forestconversion. Converting primary forest to any otheruse other than agroforestry or very-high-valuetimber extraction is likely to fail a cost-benefit test.Converting secondary forest to logging, cropsand ranching could make economic sense, whileconversion to agroforestry makes a lot of economicsense assuming that most of the ecosystem servicesare retained (Pearce & Pearce 2001).

Current scale of markets

A rough back-of-the-envelope estimate suggests thatthe current value of international, national and localdirect payments and trading markets for ecosystemservices from tropical forests could be worth several

hundred million dollars per year, while the value ofcertified forest and tropical tree crop products mayreach as much as a billion dollars. While this is a largeand significant amount, it represents a small fractionof the value of conventional tropical timber and otherforest product markets. For example, by comparisonthe total value of tropical timber exports isUS$8 billion (including only logs, sawnwood, veneerand plywood), which in turn is a small fraction of thetotal wood exports and domestic timber, pulpwoodand fuelwood markets in tropical countries.NTFP markets are far larger still (Scherr, White &Kaimowitz 2001). The total value of internationaltrade in NTFPs is US$7.5–9 billion per year, withanother estimated US$108 billion in processedmedicines and medicinal plants (Simula 1999).Domestic markets for NTFPs are many times larger(eg domestic consumption accounted for 94% ofthe global output of fresh tropical fruits in 1995-2000;FAO 2000). Nonetheless, these rough figures arequite interesting when compared with the scaleof public and donor forest conservation financesummarized in Table 3. There is no way to knowat this time how much total area of tropical forestsreceives financial benefits from these markets.

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Table 8 Estimated economic value of forests (US$/hectare/year unless otherwise stated)

Forest good or service Tropical Forests Temperate Forests

Timber 200–4,400 (NPV)Conventional logging 300–2,660 (NPV) -4000 to + 700 (NPV)Sustainable 20–440Conventional logging 30–266Sustainable

Fuelwood 40 –

NTFPs 0–100 Small

Genetic information 0–3,000 –

Recreation 2–470 (general) 80750 (forests near towns)1000 (unique forests)

Watershed benefits 15–850 10 to +50

Climate benefits 360–2,200 (gross present value) 90–400 (afforestation)

Biodiversity (other than genetics) ? ?

Amenity – Small

Non-use values Not available 70?

Option values 2–12 12–45

Existence values 4,400 (unique areas)

NPV = net present value

Source: Pearce & Pearce (2001)

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At this time, national government agencies are thelargest-scale buyers of watershed services; conservationagencies (especially international) and overseasconsumers of certified products are the leadingbuyers of biodiversity services; developed countryutilities, private companies and NGOs are theleading buyers of carbon services.

Projected future scale of markets

It seems certain that the scale of markets for ecosystemservices will grow rapidly. If the Kyoto Protocol isratified, the CDM is implemented with relativelyflexible rules, and the US develops a parallel carbontrading scheme, the market for carbon could expanddramatically, especially as obligations increase afterthe first commitment period.

Increasing water scarcity will result in more watershedservice payments, especially around large urban areas,irrigation areas, etc. However, it is not necessarily thecase that this will lead to natural forest conservationand afforestation unless the biodiversity services arealso valued.

The growth in payments for biodiversity serviceswill be greatest in high- and middle-income countriesand to protect natural assets of especially highbiodiversity value. It is still not clear that fundingfrom conservation agencies and governments will beavailable for dramatically higher levels of payments.The greatest opportunities may lie in changingstandards for agricultural production, although thiswill initially impact mainly on areas that producecommodities for export.

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4 Benefits and risks to forestowners and producers

It is important for individual producers to understandthe opportunities and threats of markets for ecosystemservices before deciding to participate. It is alsoimportant for rural communities to play a proactiverole in the design of markets wherever possible andto have in place local institutions that can help tonegotiate fair deals with buyers that will not onlyprovide individual producer benefits but also supportcommunity goals for landscape development.

Potential benefits

Payments for ecosystem services can potentiallybenefit forest owners and producers by increasingforest income, encouraging sustainable production,increasing the scale and value of forest assets, andproviding non-income livelihood and communitysocial benefits (Box 10).

Financial benefits

Like any type of market, markets for ecosystemservices present both opportunities and risks fortropical forest owners and producers (Table 9).The degree of competition in both supply anddemand will, of course, determine the prices paid forthese services. Buyers will tend to seek the lowest-cost suppliers of services. In most current markets,potential supply far outstrips market demand,suggesting that prices will typically be fairly low.

A major benefit for producers from regular, directecosystem service payments (from easements,concessions, access payments, etc) is the reliabilityof income, given that other income sources fromforestry, farming and tourism, etc, are typicallyquite variable from season to season or year to year(Figure 3). Experience to date with ecolabellingand certification is more variable. In some markets,there is a sizable premium that more than makes upfor the expenses of certification. In forest certification,premiums have tended to be modest (0–30%) andthe major economic impact has been from preferredmarket access (Molnar 2003).

Because many ecosystem payments will provide onlysupplemental income, it makes sense to consider theirrole as a catalyst or enabling mechanism for adoptingbetter management practices. Even a modest level ofpayment, reliably paid over many years, can providethe increment to net income that makes a sustainableforest enterprise viable, justify the restoration ofdegraded forest, or increase resource-use efficiency.For low-income producers in tropical countries, evensmall increments to income can function as a strongincentive for conservation. Figure 4 illustrates howpayments for ecosystem services would be able toprovide the incremental income to make SFMin the Colombia lowlands profitable.

Some producers may be able to sell several ecosystemservices from the same forest. The Landell-Mills andPorras (2002) study found 17 cases in the tropics ofbundled environmental services. Most of these mixedcarbon sequestration and biodiversity protection, andsold the two together. A few cases used the ‘shoppingbasket’ approach that is economically more efficientbut is more difficult to implement under conditionsof incomplete markets.

Non-financial benefits

Producing for ecosystem service markets can providenon-income benefits to forest owners and producers.Producing and protecting ecosystem services foroutside buyers may have important co-benefits forlocally-valued ecosystem goods and services, such as:higher-quality local water supplies; the establishmentof new forest resources such as fuel, medicinesand wild game; and improved air quality due toa reduction in forest fires. New or healthier forestresources may also help to reduce landslides andcontrol soil erosion and sedimentation.

Payments made to community organizations canfacilitate social investment and may help to protectforest-based cultural heritage. Participation inpayment-for-ecosystem-services schemes canbuild local capacity for enterprise management

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Box 10 Types of compensation mechanismsfor environmental services

• Direct payments to individual producers

• Direct payments to producer associations

• Provision of social services andinfrastructure

• Price premiums for products

• Financing inversions for improvingmanagement

• Technical assistance and supportfor commercialization

• Projects of community ecotourism

• Expansion of rights over natural resources

Sources: Rosa et al. (2003), Scherr et al. (2001)

4

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and development, marketing and social organization.Markets may spur the formalization of resource tenureand the clarification of property rights over ecosystemservices. Moreover, payments for ecosystem servicesexplicitly recognize forest managers for their roleas environmental stewards, which can potentiallystrengthen their position in negotiations withbeneficiary groups.

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Table 9 Potential benefits and threats of ecosystem service markets for local livelihoods

Potential contributions of ecosystem service markets to reduce rural poverty

• Establish higher productivity and more sustainable farming and forest systems for local livelihoods (biomass, water, biodiversity services)

• Provide cash income that can be used by local people for consumption or investment purposes (from ecosystem service payments,increased gathering of products for sale, improved enterprise productivity)

• Restore the local ecosystem services of forests and agroforestry, such as watershed maintenance, pollinator species and soil control

• Provide a resource for community social investment

• Contribute to improved business and market organization in local communities

• Provide training and technical assistance and improve environmental knowledge and appreciation

Potential threats of ecosystem service markets to local livelihoods

• Loss of rights to land, harvest products or environmental services. If a project infringes upon the sovereignty of local people, their rightsto access the resources or services that the land provides could be lost

• Loss of land ownership rights. In the case of a large entity purchasing land for the objective of selling ecosystem services, localownership claims may be ignored

• Loss of employment when local forest harvesting rights are excluded for ecosystem service protection

• Loss of control and flexibility over local development options and directions, where easements or long-term contracts specify a narrowrange of management alternatives

Figure 3 Profiting from investments in ecosystem services

Traditionalforest investments

A long-term commitment to conservation and sustainable forestmanagement can increase asset returns by 15-25% from:• higher inventory levels • reduction of risk from pests & disease outbreaks• higher valuations of older stands • reduction of risk from government regulation on timber flows• biodiversity preservation

Conservation-basedforestry investments

Timber

Conservation &ecosystem services

Timber income, including certification

Asset appreciation

CarbonWater rightsConservationHunting/fishingEcotourismPlants incl. medicinalFruits and nutsFibres and rattansGluesOilsSpicesValue-added products(timber & non-timber)

60%

40%

35%

15%

50%Asset appreciation

Source: Pacific Forest Trust (based on a number of US forest companies), in Arnold & Jenkins (2003)

Benefits for different typesof producers

The opportunities and threats of markets forecosystem services will play out differently forcommercial timber producers, forest communities,farming communities and government forests.

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Commercial timber producers

Whether forest management for timber or non-timber forest products is compatible with supplyingecosystem services depends very much on the specificservice to be delivered and on biophysical conditions.Ecosystem services are typically quite compatible withthe production of NTFPs, but carbon sequestration,for example, will commonly compete with incomefrom timber produced on the same piece of land.Many producers report that managing forests forecosystem services (for example, to comply withtimber certification requirements) has resulted ingreater efficiency of production (Conroy 2001).Forest owners with more limited resources willcommonly wish to produce multiple outputs(Scherr et al. 2001). Timber companies can oftenbenefit from the diversification of income sources,and some private companies have reported earningmore than 10% of their income from ecosystemservice payments. Advances in forest ecology arealso beginning to identify a wider range of forestmanagement systems that will produce higher levelsof ecosystem services than conventional systems,especially for carbon and watershed services.

Modifying forest management in order to protector enhance ecosystem services may affect the assetvalue of forests. Where systems lead to enrichedforest stands or enhanced value for recreation,tourism or other forms of access, asset value mayincrease substantially. Where permanent easementsor long-term leases prevent other economic uses,asset value may decline.

Forest communities

Local forest communities who rely heavily ontheir forest resource asset for income may welcomeecosystem service payments as part of a ‘portfolio’ ofincome streams. Business strategies will usually seekto ensure both subsistence security and sustainableincome in the face of market risks and uncertainties.

Biodiversity payments intended to achieve the fullprotection of endangered habitats (land acquisition,permanent easements, and long-term leases) musttypically pay the full opportunity cost of theproductive value of the land; otherwise, landownerswill not relinquish their rights. In remote areas,that value may be a fairly low. Elsewhere, availablepayments for watershed, biodiversity or carbon

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Figure 4 Bundling of income streams

8

7

6

5

4

3

2

1

0

Poverty

Trad

itio

nal

farm

ing

syst

ems

Illeg

al c

rops

Ecot

ouris

m

Fore

stry

, agr

ofor

estr

y,an

d si

lvop

asto

ral

syst

ems

Envi

ronm

enta

lse

rvic

es

Lega

l mul

ti-

func

tion

al la

nd-u

se

Productiveactivities

Surplus forsecurity andstability

Hypothetical legal income acceptable for a campesino family

Options

Time(years)

Productivearea

Source: Adapted from Villa Lopera, A. (2000). Figure 2. Hypothetical behaviour of rural producer facing different rural productive activitiesand average income potential from CDM forest projects. In Analisis preliminary de beneficios colaterales.

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services will not necessarily compensate for the fullopportunity costs of leaving the land or forest out ofproductive use, nor cover the entire cost of adoptingmanagement systems that protect ecosystem services.Moreover, given poorly developed market institutions,transaction costs can be very high, so that forestproducers will typically receive payments that aremuch less than the original buyer pays for the service(see next section). These modest payments aretherefore most attractive to producers who are alreadymanaging ecosystem services fairly well and thus incurfew additional costs. Indeed, forest communities whohave a strong historical record of forest biodiversityconservation and management have recently arguedthat they should be remunerated for good stewardship.Many payment schemes, however, tend to targetproducers with the most destructive practices,creating a problem of perverse incentives.

An advantage for poorer and more remote forestcommunities is that, unlike conventional forestand agricultural markets, they can potentiallysell ecosystem services even with poor marketinfrastructure, weak market institutions andunreliable access to external inputs. Some observers

also suggest that for indigenous communities withouta market-oriented culture, ecosystem service marketsoffer a greater opportunity than forest-productmarkets (Richards 1997). At this time, payments forthe conservation of globally important biodiversityand for region-specific watershed protection servicesare the most likely source of payments for such forests.

There is also an emerging dialogue within theinternational indigenous peoples’ community (andto some extent, the rural development community),especially in Latin America, that sees a primary rolefor indigenous and rural communities as the stewardsof nationally and globally important ecosystemservices. In order to realize such a role, however,the structure of ecosystem service payments andmarkets needs to be shaped to reward goodstewardship, rather than focusing, as it currentlydoes, on modifying the behavior of ‘bad actors’.

Farming communities

Ecosystem service payments are, at present,a potentially more important tool for forest ecosystemrestoration than for the conservation of standingforest. The effective demand for ecosystem services

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Box 11 Financial contributions of ecosystem service markets to household incomes

Payments for ecosystem services can contribute to rural livelihoods in both economic and non-economicways, but there are currently few data demonstrating the extent to which they increase household incomes.Farmers’ annual income is directly affected by market forces for the crops they produce. The annual incomeof farmers participating in the Scolel Te project in Chiapas, Mexico, ranges from US$800–US$3000,depending primarily on coffee and corn. Carbon payments also vary depending on the size and land-usesystem of land registered into the project. Farmers in Scolel Te generally receive US$8 per tonne of carbonsequestered; in a year they sequester anywhere between 13 and 2,000 tonnes of carbon. Therefore,carbon payments have been estimated in the range US$120–$16,000 per farmer.

Forty-four percent of surveyed New York Catskill farmers participating in the Water Agricultural Programmaintained that watershed payments had enhanced their economic well-being. In Costa Rica, ecosystemservice payments rewarded farmers a total of US$57 million in 1997–2001; however, one survey ofparticipants in the Costa Rican scheme showed that for three-quarters of respondents these paymentsaccounted for less than 10% of individual family income.

The bigger point surrounding payments for ecosystem services is that while they may be small andvariable compared to household income, they continue to have significant impacts on the livelihoods ofparticipants. Almost all of the farmers surveyed in New York had other sources of income outside farming.Watershed payments provide them with additional economic benefits, such as infrastructure improvementsand marketing assistance, which help to increase the net worth and efficiency of watershed farms. Carbonpayments in Scolel Te are, unlike crop prices, consistent sources of capital for farmers investing in moresustainable land-use systems and livelihoods. Ecosystem service payments provide a form of financialstability that allows households to make sound investments in their futures while continuing to work fortheir primary revenues.

Sources: Orrego (2003), Rosa et al. (2003), Pagiola et al. (2003)

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tends to be greater in areas of higher populationdensity, where a higher share of the natural foresthas been converted to other uses and where thescarcity factor has increased the financial value ofecosystem services. The current structure of thecarbon market focuses only on tropical afforestationand reforestation. Higher population densityfavours the formation of local watershed protectionorganizations that may be able to negotiate local or– if federated – regional ‘deals’ (Scherr et al. 2001).The establishment of agroforestry systems (togetherwith afforestation in critical areas of watersheds) offers

a way of enhancing ecosystem services in regions ofannual cropping and of creating biological corridorsto enable wildlife movement across agriculturallandscapes (Box 11). Poor rural communities thatare suffering from resource degradation are alsobeginning to become buyers of ecosystem services,paying other nearby landowners and communitiesto protect critical water sources and waterways. Box12 describes an example of such a system in India.

Product certification for crops produced in ways thatprotect biodiversity and water quality is likely tobecome increasingly important for farmers producing

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Box 12 Rural communities in India develop equitable watershed service markets

The gradual siltation of Sukhna Lake, a popular recreation site in the city of Chandigarh, and fears of itscomplete disappearance, led to the development of a watershed project in the village of Sukhomajri in thestate of Haryana in India. One side of Sukhomajri Hill drained into Sukhna Lake and the other side drainedinto Sukhomajri village, where runoff water flooded and destroyed agricultural lands. The Central Soiland Water Conservation Research and Training Institute (CSWCRTI) regenerated both watersheds byconstructing conservation structures (check-dams and gully plugs) to stop the flow of silt. When the raincame, the check-dams filled with water presented an opportunity for the irrigation of the fields below;three additional check-dams were constructed to take advantage of this opportunity. The village peoplewere asked to refrain from allowing their grazing animals into either the Sukhomajri watershed or theSukhna Lake watershed. CSWCRTI investment in runoff ponds compensated the village for providingChandigarh with the environmental service of protecting the hillside in the Sukhna Lake watershed.

In Sukhomajri, a problem quickly emerged: the runoff ponds provided the irrigation water to only aminority of landowners with holdings below the pond. However, others in the village, including thelandless, had no incentive and stood to lose if they were forced to abandon the hillside as a grazingresource. The stand-off was eventually resolved by a simple but ingenious solution that ensured that allhouseholds would benefit from eliminating grazing in the watershed. First, pipes were laid so that mostfields in the village would receive water. More importantly, all households, both landed and landless,would share equally in the ownership of water in the catchment ponds. Moreover, water rights would betradable so that landless villagers could either sell their share to landowning households that could use itfor irrigation, or hire cropland and utilize their water share directly.

The Hill Resource Management Society (HRMS), with representation from each household, has becomethe main instrument for managing the system. Anyone who requires water from the pond buys it fromHRMS, which in turn distributes the proceeds equally among its members. In addition to water, villagersalso have shared rights to collect Bhabber grass growing in the watershed. This system has become sosuccessful that Sukhomajri became the first village in India to be charged income tax on the value of biomassgrown on common lands. Siltation in Sukhna Lake declined by 95%, saving the city of Chandigarhabout US$200,000 annually in dredging and related costs. Vegetative cover on the hillside increasedfrom 13 trees per hectare to 1292 trees per hectare, increasing the value of forest to an estimated US$20million capable of generating at least US$700,000 per annum. In the 1990s the forest yielded nearlyUS$3000 worth of grass annually. Other benefits accrued in the form of increased milk and crop yield.

The Sukhomajri case involves two upstream/downstream environmental relationships with two separateinstitutional arrangements. The first involves the relationship between Sukhomajri and the City ofChandigarh and the second involves the relationship between upstream and downstream land-users withinthe village. In both cases, a form of market mechanism was utilized to secure the provision of environmentalservices in the form of soil conservation to prevent the siltation of downstream water bodies.

Source: Kerr (2002)

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for export. Government regulations mandating theproduction of certified crops are being introducedin many countries to protect critical watershedswhere land-use is dominated by agriculture.Certification may not bring net additional incomebut may be necessary to access major markets or toproduce legally.

Government forests

Despite the active pace of forest devolution over thepast 15 years, 75% of forests in developing countriescontinue to be controlled by governments (as well asmuch land designated officially as forest that has notrees). What role will payments for ecosystem servicesplay in managing and conserving these forests?A preliminary analysis suggested that it will bedifficult for public land managers to charge forpublic goods, given that the public has already paidthrough taxes. However, it may be possible to chargecompanies and other specific users of private goods(for example, through bioprospecting agreements, orfor the management of a specific watershed providinga commercial bottling plant). Public forests may alsobe positioned for biodiversity protection payments forinternationally-valued biodiversity, and for paymentsfor carbon sequestration from afforestation on publiclands. Especially in carbon markets, public landswill be competing directly with private land- andforest-owners, which may create political concerns.

Potential risks

In areas where land and forest tenure are notformalized, politically powerful groups may claimlands belonging to the poor in order to receiveecosystem service payments. Given the lack of formallegislation in many countries regarding ownershipof the ecosystem services themselves, it is possiblethat local people could be coerced to modify landand forest management in ways that reduce theirown incomes, while payments for ecosystem servicesare made to other actors. Where the poor aredependent upon forests they do not own for food,fuel, building materials and medicines, the ‘lockingup’ of those forests for conservation easements orconcessions could reduce food security, access tomedicines, employment and income earned fromharvesting forest products. There is a danger that

such rules will limit potentially positive changes inlivelihood choices, such as among indigenous peoplesin the Peruvian and Brazilian Amazon who arerequired by law to remain collectors of subsistencefruits in their ancestral domains. In some cases thelong-term implications of these contracts are notclear to local people.

Local people need to be involved in negotiating thespecifics of use and management contracts, to avoidthe risk that critically important local ecosystemservices may be lost. For example, afforestation ofa local watershed with fast-growing tree plantationsfor carbon sequestration could dry up local watersources. If the performance of watershed servicesis measured in terms of water flow, there may beincentives in a drought year to divert water fromirrigating local crops to increase downstream waterdelivery. To address equity concerns, it is essentialthat the poor have a voice in setting market rules(Rosa et al. 2003). Easements, concessions, long-term land leases and management contracts maylock forest owners into particular managementcommitments for long periods of time. This reducestheir flexibility to respond to new economicopportunities and threats. As prices change overtime, payments for ecosystem services and incomefrom new management systems may no longercover opportunity costs.

Where payments are dependent upon the deliveryof specific ecosystem outcomes, factors outsideproducers’ control (such as the spread of fire froma neighbour’s land, disease, extended droughts,the introduction of invasive species) may resultin a failure to achieve contractual obligations andin non-payment. All producers participating inpayment-for-ecosystem-services’ schemes thus needto have some type of insurance strategy. Formalinsurance policies are little used in tropical forestry,although new insurance products are beingdeveloped for large-scale companies (Cottle &Crosthwaite-Eyre 2002). Alternative approachesmust be used to mitigate performance risk, suchas self-insuring by implementing the new use ormanagement practices over a larger area of landthan is actually contracted.

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Linking ecosystem servicemarkets to rural development

Local producers and communities rely on ecosystemservices for their livelihoods and, as pressures on ecosystems intensify with population growthand economic development, will increasingly haveto manage resources for the provision of ecosystemservices. It is important that the capacity ofcommunities to plan for ecosystem service provisionis strengthened as regional, national and internationalmarkets for ecosystem services evolve so thatparticipation in markets contributes to livelihoodsecurity rather than threatens it. Compensation for ecosystem services can be designed creatively

to make such contributions and to reflect the widerange of local values of ecosystem services (Rosa etal. 2003).

Increasingly, the ecosystem services performed byforests will be rewarded in the landscape mosaicsfound in agricultural ecosystems. Thus, ecosystemservices will need to be evaluated and managedas part of this broader system, often calling onimprovements in agricultural, grazing and otherland management systems to complementafforestation and forest conservation. If ecosystemservice markets can be shaped to support andassisting in financing this process, there couldbe important benefits for rural development.

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5 Strategic issues fortropical countries

Market-based instruments for ecosystem services aredeveloping most rapidly in high-income, temperatecountries. The development of internationalconservation finance, environmental certificationand international carbon trading schemes – all verymuch concerned with protecting or utilizing tropicalforest resources – have thrust low- and middle-income tropical countries into these fast-evolvingecosystem service markets. The decline in publicbudgets for forestry and conservation, meanwhile,has encouraged domestic advocates to actively explorefinancial opportunities in ecosystem service markets.With a few notable exceptions (such as Colombia andCosta Rica), tropical developing country governmentshave not yet begun to position their countriesstrategically in these markets. In fact, there areimportant strategic issues to consider, withimplications for public policy and investment.These include:

• international competitiveness;

• legal and regulatory framework;

• property rights and the politicsof protecting ecosystem services;

• domestic equity; and

• reducing transaction costs and financial risks.

International competitiveness

At present, the biggest buyers of tropical forestecosystem services are in the industrialized countries,and, with the exception of watershed services, that islikely to remain the case for at least the next decade.To what extent will tropical countries be able tocompete in these markets, and what will determinecompetitiveness? To what extent should countriesinvest in the institutional developments required tomarket tropical forest ecosystem services? What is thelikely payoff? To what extent are developing countrygovernments being asked to invest in internationalpublic goods? Although the low-income countriesare often the richest in terms of biodiversity, carbonstorage potential, and watershed services, they maysuffer similar disadvantages in these markets as theydo in international product trading.

Biodiversity markets

The three principal international markets forbiodiversity will likely be for certified timberand other ecolabelling, direct payments for high-biodiversity-value forest conservation, and naturetourism. These markets behave very differently.In certified timber and crop markets, the principalservice ‘commodity’ being sold is the guaranteethat biodiversity has not been harmed by loggingor farming. Producers from industrialized countriescompete directly with those from the tropicalcountries, except in some niche markets for high-value tropical fruits, beverage crops (coffee, tea, cocoa)and certain timber species grown in natural tropicalforests. Tropical producers, especially in low-incomecountries, are at a competitive disadvantage. Timbercertification systems are not yet well adapted totropical forest conditions and especially not fornon-industrial producers. The process of cropcertification is just beginning, but could potentiallypose serious market disadvantages for tropical andespecially low-income producers. Until certificationstandards are so adapted, and greater efforts are madeto support the certification process, that disadvantagewill continue. In many parts of the tropics, landtenure insecurity and other factors will continueto limit certification. Many international buyers donot support the logging of tropical forests, yet theseenterprises are in many places essential to makeecologically sustainable forest managementfinancially viable.

In the direct payment market for tropical forestconservation values, tropical countries have fewdeveloped-country competitors. Countries andforest owners with very high-biodiversity-valueresources (endangered species, high endemicspecies, etc) may have considerable capacity tonegotiate with international buyers, regardlessof national market or institutional conditions.Such areas are, however, likely to be a relativelysmall share of the total tropical forest area,although possibly important in a few countries.

In the nature tourism market, tropical countrieswill compete sharply with one another for buyers.Biodiversity value will be only one of many factorsdetermining competitiveness, most of which willrelate to the availability of investment andinfrastructure, marketing, and other factors,including landscape beauty.

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Carbon markets

Until such time as the tropical countries establishobligations for carbon emission reductions, themain buyers of carbon in those countries will beinternational, through the CDM, through retail‘green’ markets, and through whatever mechanismsemerge for the US. Unlike other ecosystem services,carbon sequestration is site-neutral. It will thus behaveas a classic commodity, forced to compete primarilyon the basis of price and to struggle with tradebarriers. The latter are already evident. Emissionoffsets based on forest carbon in the CDM havebeen capped and important types of forest carbonprojects are not eligible. It is likely that any US systemwill favour domestic rather than foreign producersof carbon offsets. CDM projects are burdened witha large number of regulatory requirements andprocedural hurdles that are not required for forestryprojects in developed-country emission tradingschemes or joint implementation projects.

Nonetheless, it still seems likely that tropicaldeveloping countries will be able to compete onthe basis of low cost. In many places, the cost ofproducing carbon offsets is indeed quite low due togood conditions for forest growth, low opportunitycosts and low labour costs. Where carbon projectshave significant co-benefits, many of the productionand transaction costs may be offset by other incomeflows or investment sources. However, there willbe potentially stiff competition among the tropicalcountries. The critical factors in competition arelikely to be institutional: those countries that canmobilize carbon trading in areas with secure tenure,secure investment environments, good availability ofbusiness service providers, etc, will likely out-competethe others. This means that the greatest opportunitieswill be in middle-income developing countries,unless low-income countries do very strategicplanning to identify investment opportunitiesand strengthen support.

Strengthening capacity

Participation in some ecosystem markets requiresa fairly high level of production, marketing orinformation management skills, and may beunsuitable where key actors do not have those skills.Producers need a high level of business skills tonegotiate private deals effectively. Public institutionsmust have adequate human capacity to implementregulatory schemes effectively. Private businesses andmarket agents need to have the capacity to handle

complex organizational demands for instrumentssuch as trading permits. In order to compete ininternational markets for ecosystem services, or toattain an adequate level of efficiency in domesticmarkets, there will need to be much greaterinvestment in human and institutional capacity.A strong argument can be made for a much greaterrole for developed countries in supporting capacity-building for ecosystem service markets, especiallyfor markets primarily serving developed-countrybuyers. International assistance may be essentialin order to attract the necessary level of privateinvestment.

Legal and regulatory frameworks

For the majority of ecosystem services that are‘public goods’, the creation of markets requiresproactive efforts on the part of governments andnon-government actors. While purely privatepayment schemes require a minimal public legalframework, public schemes often require a fairlycomplex set of rules. Strategies to develop ecosystemservice markets need to be integrated into broaderresource planning frameworks.

Laws and regulations

Product certification schemes require little, if any,special public legal framework, although they canbenefit from supportive public policies, such asthe exemption of certified producers from publicenvironmental regulations. However, the rules andprocedures for certification, including criteria andstandards, and procedures for verification, must bedeveloped and agreed upon by private buyers, tradersand NGOs. As argued by Meidinger et al. (2001),certification thus functions in many ways as a formof civic environmental regulation, although to a largedegree the rule-making to date has been limited toa narrow range of elite environmental groups andwestern scientists.

Direct buyer-seller deals require from the governmentonly adequate contract law and legal services toprovide contract enforcement and, ideally, clear legalguidelines as to who ‘owns’ ecosystem services andwho has the right to sell them. For example, somecountries have claimed carbon rights for the state, sothat private sellers cannot receive payment withoutgovernment authorization. Due diligence requiresthat buyers ensure that sellers have legal rights to theland or forest covered by the contract. Dependingon the institutional and legal environments inwhich they are operating, contracts may be quite

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simple and flexible or detailed and binding withclauses on non-compliance. Private contracts forpermanent conservation easements need to beformally recorded in public land records.

Public payment schemes require legislativeauthorization to allocate budgets and setadministrative rules and responsibilities. Such rulesdefine what services are to be purchased, who iseligible to be a supplier, the terms of payment,performance standards and monitoring procedures,and procedures in case of breach of contract. Examplesof recently established public payment schemes intropical countries include the Mexico example inBox 4, and China’s Ecological Compensation Fund(Box 13). In Mexico, clear legal tenure of forest ejidosand communities has facilitated the initiation ofpayments and markets for ecosystem services.

Instruments that rely on formal contracts and reliablecontract enforcement will require a well-functioninglegal system. Mechanisms to assess and addressliability in case of non-performance are required.In Guatemala, for example, markets for watershedservices needed plans to offer three times the areato ensure the delivery of contracted services to theinvestor.

To establish open trading markets, governmentsmust first establish regulations creating a marketfor ecosystem service credits by legally mandating

(and enforcing) a group of buyers for such credits,such as carbon polluters in carbon markets or landdevelopers in biodiversity markets. Governmentsmust then specify what types of ‘commodities’ (forexample, types of habitat in specific ecosystems) canbe traded and set the ‘rules of the game’ for trading thecredits. One of the few jurisdictions to establish anextensive legal and regulatory framework for tradinghas been New South Wales, Australia (Box 14).

Land-use planning

While international buyers currently dominatemarkets for ecosystem services in tropical countries,over the long run their most important markets will bedomestically focused. To the extent that market-typeinstruments can reduce the overall cost of providingcritical ecosystem services and increase the efficiencyand effectiveness of providing them, it is desirable topromote their use domestically. A little-asked questionis whether the types of market rules and institutionsthat are being developed for international marketsare the most suitable and cost-effective for domesticmarkets. It may be that less stringent, more easilymeasured or locally developed indicators would bemore suitable. More flexible and informally negotiatedcontracts may sometimes be more appropriate forlocal agreements.

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Box 13 China’s ecological compensation scheme

China’s Ecological Compensation Fund remunerates organizations, collectives and individuals thatmanage forests for the ecological services provided by forests. The program was developed in response toincreasingly lax forest protection standards, because forest caretakers were disproportionately bearing thecosts of public forest benefits and were, therefore, becoming poorer. In 1996, the Ministry of Financedeveloped an initial plan to issue payments for the public services provided by forests, such as watershedmaintenance, salinity control and soil management. It was incorporated into the National Forest Law in1998 and became ready for implementation in 2000.

The plan focuses on the protection and management of protected and special-use forests, subsidizingafforestation, reforestation and forest management activities and supporting ranging, fire prevention,insect prevention and resource monitoring. Farmers are compensated 5 yuan/mu/year (1 mu = 0.0667hectares). Pilot implementation has allocated 1 billion yuan to 65 counties and national-level naturereserves in eleven provinces including Hebei, Heilongjiang, Fujian, Shandong, Liaoning, Anhui, Jinagxiand Xinjiang. China’s program has led to better forest protection in recent years, but also needs furtherimprovements. Landowners often lack a good understanding of their rights and obligations under theprogram and complain that subsidies are half what they should be. Funding is drawn primarily from thefiscal budget but as yet has not been collected from all the public beneficiaries of forest ecological services.

Source: Sun (2002)

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Over the long term, ecosystem service markets intropical countries should serve as one element inmeeting the broader objective of securing ecosystemservices critical to sustainable development.Landscape-scale planning and the coordinatedmanagement of natural resources is needed thatencourages the efficient, equitable and integratedprovision of diverse ecosystem services and products.Markets should be promoted where and how theycan contribute most effectively to those objectives.For example, Binning and Moles (2001) describe indetail an example in Australia that emphasizes theprovision of ecosystem services to support the localeconomy and local consumer needs. The disciplineimposed by markets for ecosystem services – in termsof their requirements for explicit information onsupply, demand, price, cost and management impacts– can potentially contribute to better overallresource management.

Stakeholder participation, negotiation andinstitution-building are critical in all strategies –self-organized private deals, trading schemes andpublic payment schemes. While some initiativeshave succeeded well by organizing formal alliancesbetween users and suppliers, such alliances are asyet uncommon.

Property rights and the politicsof protecting ecosystem services

Introducing market mechanisms into ecosystemmanagement raises important and difficult questionsabout ethics, equity and politics. Issues include whohas rights to ecosystem services, the political balancebetween landholders and beneficiaries of ecosystemservices, and potential public resistance to marketmechanisms.

Rights to ecosystem services

Of fundamental importance is the distributionof rights and responsibilities. Do landowners havethe right to pollute water, emit carbon or destroybiodiversity? Do consumers have a right to cleanwater, smoke-free air or a biodiverse ecosystem? Inmost situations, people adhere both to legal/formalsystems of rights and to customary/informal rights.Should landowners be paid to provide what theymight already have a moral and legal responsibilityto protect? Will the use of market toolsdisproportionately benefit certain groups whomay be responsible in the first place for the declinein water quality and supply? Clearly defined rightsand responsibilities are an important factor in theuse of market tools to protect ecosystem quality.The degree of confidence to attach to these toolswill be determined by the integrity of the legal andregulatory systems that support the allocation of rights,as well as by public attitudes about fairness and equity.

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Box 14 New South Wales, Australia, establishes legal framework for ecosystem service markets

Over the past 200 years, approximately 95 million hectares of forest and woodland vegetation in Australiahave been cleared for pastoral grazing and agricultural cropping. As a result, Australia’s forest and land-usesector was a net emitter of carbon dioxide in 1990, the baseline year of the Kyoto Protocol. About 15–20% of Australia’s greenhouse gas emissions arise from the on-going clearance of forests and woodlands.Dryland salinity, caused by this deforestation, continues to threaten millions of hectares of productivefarmland and the water supplies of some major cities. It is important from a socioeconomic perspectivethat land-use changes take place in areas where marginal cropping or grazing activities are currentlyoccurring. Changing these areas back into forestry can help to diversify regional economies and willincrease the long-term economic product in many areas.

Pioneering efforts have been made to support the commercialization of ecosystem services from forests toachieve these goals. In late 1998, the New South Wales (NSW) state parliament passed carbon-rights’legislation that allows investors to record ownership of the rights to carbon sequestration in forests onland titles. Most recently, in January 2002, the Government of NSW indicated that, as part of its goal ofreducing greenhouse gas emissions by 5% per capita from 1989–1990 levels, it would impose a penaltyof 10–20 Australian dollars per tonne of excess emissions. The government also indicated that carbonsequestration credits could be used as offsets against this commitment and released a detailed positionpaper on the carbon-credit accounting, registry and trading systems.

Source: Brand (2002)

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For example, if citizens have a right to high-qualitywater they may be unwilling to pay landowners forimproving degraded water quality. In this situation themarket opportunity may be limited to transactionsamong landowners as they seek the most cost-effectiveways of meeting their responsibilities. Beneficiariesmight be willing to pay landowners for measurablewater quality improvements if the government has notdefined water quality standards, has no monitoringsystem in place, or lacks enforcement capacity.On the other hand, if landowners have the rightto pollute, changing their behavior may requirecompensation from downstream users. Thesedecisions are not technical – they are political.In many tropical countries, property rights on landand forest are far from settled, much less rights tobenefit from the sale of ecosystem services. Resolvingsuch tenure questions is an essential first step insetting up markets for ecosystem services.

Political balance between landholdersand beneficiaries

The choice of policy instrument with which toprotect ecosystem services will often be heavilyinfluenced by political realities. One key factor is thepower of landholders relative to ecosystem serviceusers (Figure 5). Where the rights of landholders arevery strong, regulatory approaches may be difficultto implement. Where the rights of service users arevery strong, they may demand that forest landholdersabsorb all the costs of meeting environmental

objectives. For some cap-and-trade schemes,governments must either be powerful enough toimplement change despite important opponents, orbe able to negotiate consensus. If governments aretoo weak to regulate effectively using conventionalregulatory mechanisms, they will often be too weak toregulate a cap-and-trade system for ecosystem services.An attractive feature of ecolabelling mechanisms isthat they do not generally rely on coercion of eitherbuyer or seller, and can often be implemented withoutpublic policy action. Political acceptance of a policyinstrument will require that beneficiaries be willingto lobby for action.

The decisions about which among the possibleecosystem service suppliers should be paid are alsopolitical. There is a serious ‘moral hazard’ issue forecosystem service payments that are made primarilyto ‘bad actors’ so they will mend their ways. Strategiesare needed that will explicitly reward good husbandryin the past and present, as well as in the future.

Public resistance

Major political resistance has arisen in manycountries to the commercialization of some services,as illustrated in ongoing World Trade Organizationnegotiations about including services under thatorganization's umbrella. Many feel that servicessuch as water are so basic that they are a publicresponsibility. Much of the high-visibility debatehas been about the privatization of downstream

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STRONG

STRONG

Prod

ucer

rig

hts

Consumer rights

WEAK

WEAK

Informal claims

Ecolabelling schemes

Private deals

Public payments for ecosystem services

Community credit and technical assistance for land-use change

Trading under a regulatory cap

Taxes and subsidies

Public regulation

Public management

Figure 5 Property rights and policy instruments to promote ecosystem services

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water distribution services and markets for wateritself as a commodity (as distinct from watershedprotection services), and the establishment of large-scale private conservation areas.

There has been a very mixed reaction fromindigenous communities to the development ofecosystem markets, due to concerns about theirpotential loss of sovereignty, use and access rights,their weak position in market negotiations, andthreats to local culture posed by the commercializationof important natural values. In the case of carbon, forexample, indigenous people and local communities,supported by civil society groups such as the AmazonAlliance in Ecuador and the Amazon Working Groupin Brazil, participated actively at the conferences of the parties to the United Nations FrameworkConvention on Climate Change in the Hague andMarrakesh. While some community groups havepointed out the risks of forests in the CDM (eg Forumof Indigenous Peoples 2000), others emphasize thepotential benefits, provided safeguards are included(eg Declaration of Brazilian Civil Society on theRelation Between Forests and Climate Change2000; Amazonian Indigenous Forum 2001).

Ecosystem markets that involve public payments orcap-and-trade markets, where they are implemented,will need to address these debates carefully and involvediverse stakeholders in their design. Public oversightof private deals may also be required in many placesto ensure that ecosystem services previously availableto the public are not diverted to private benefit.

Domestic equity concerns

How emerging markets for ecosystem services impacton poor people is an important ethical issue. Butequity concerns also affect economic efficiency, sincethe exclusion of certain groups from markets hindersthe ability of those markets to ensure that the lowest-cost supplier is rewarded and that all consumers aresupplied. Moreover, if markets exacerbate inequalities,they can undermine social stability. The long-termviability of markets for ecosystem services dependson retaining the support of key local stakeholders,including low-income landowners and users.Thus, it is important to make sure that newmarkets include low-income producers andreduce potential livelihood threats.

Participation of low-income producersin markets for ecosystem services

Without proactive effort, there will be a tendency tofavour large-scale landowners in ecosystem servicemarkets. Experience to date shows that compensationfor reduced forest use or access has gone primarily towealthier and more powerful forest users. Costa Rica’simpressive system for forest ecosystem servicepayments imposed a minimum land area requirementfor participation that effectively excluded the poor.Commodities may de facto exclude the poor wheretheir design is incompatible with important localland-uses, or incompatible with subsistence security.

Since governments and large-scale private landownerscontrol a majority of tropical forest area, in many sitesthey will control a majority of forest (or afforestation)sites of high ecosystem value. To be credible, marketsmust be set up to deliver specified services, and thusit is problematic and probably not sustainable todesign such markets explicitly to deliver paymentflows to low-income forest owners, if largeholdersare in fact the principal suppliers of those services(Pagiola 2002).

However, under many circumstances it does makesense to direct payment flows to the poor. In manyparts of the world (the Philippines, parts of CentralAmerica and the Kenyan highlands, for example),low-income farmers actually dominate land-usein upper watersheds and should be the principalbeneficiaries of watershed service payments. In thecase of biodiversity conservation, there is considerableopportunity for mobilizing service payments toindigenous communities who have historicallybeen good stewards of biodiversity (Molnar 2003).If largeholders are responsible for the past deteriorationof ecosystem services, regulation is an alternativeapproach for these groups, as they have the capacityto self-finance improved resource management(if politics permit). Then, public payments couldbe reserved for low-income producers who requiresupplemental finance to make land managementchanges.

Low-income producers may, in many cases,have potential comparative advantages in supplyingecosystem services. These include: control overenvironmentally critical resources, local presence thatimproves protection against exploitation by outsidegroups, in-depth local ecological knowledge, a long-term commitment to their territory, and/or loweropportunity costs for land and labour. An especially

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strong case can be made for structuring markets forcarbon sequestration to benefit low-income farmersand forest producers. Carbon can be sequesteredin almost any type of site. The highest rate ofsequestration per hectare is found in fertile, humidareas where trees grow most rapidly, but carbonpayments are made per ton of carbon sequestered,not per hectare. Thus, sequestration investments cango to areas most in need of ecosystem restoration,increased farm productivity, or forest benefitsfor the poor.

Designing market mechanismsto reduce livelihood threats

As discussed in Section 4, it is important to designecosystem service markets so that they do not threatenthe livelihoods of vulnerable groups. Even wherethere are no technical, legal or institutional barriersto the participation of low-income people in ecosystemservice markets, they are at a disadvantage incompeting with other potential suppliers, muchas they are in forest product markets. Inequity mayresult from inadequate skills and education, a lackof scientific understanding of ecosystem services,inadequate finance, poor market information, lackof market contacts, weak bargaining power, weakproducer organizations, or a lack of access to businessservices. Proactive efforts can usefully address theseconstraints in the building of new ecosystem servicemarkets (Rosa et al. 2003; Scherr et al. 2001).

In designing new market instruments, it is importantto consider potential impacts not only on participatinglow-income producers and other households that relyon lands and forests affected by market schemes, butalso on poor consumers of critical ecosystem services.

Institutions to reduce transactioncosts and financial risks

The financial benefits realized by ecosystem servicemarket suppliers are likely to be far lower than theprice paid by buyers. Because these are very newmarkets, there has been little development of theintermediary institutions found in mature marketsto reduce what are called ‘transaction costs’. If suchmarkets are to deliver real benefits, governments,civil society and producer organizations need topay particular attention to developing institutionsto reduce these transaction costs and the level offinancial risk.

Transaction costs and risks

Transaction costs include the cost of attractingpotential buyers (such as establishing ecosystemservice potential), costs of working with projectpartners (such as negotiating with project participantsand capacity-building), and costs of ensuring thatparties fulfill their obligations (such as contractdevelopment and enforcement, legal costs andinsurance, and monitoring of ecosystem services).In cases where buyers are physically and socially remotefrom sellers, a chain of intermediaries may be requiredfor the transfer of funds. One preliminary assessmentsuggests that transaction costs in forest carbon projects(presently the most complex market) absorb morethan 50% (and in some cases more than 90%) ofthe value of total payments made, while the forestproducer directly receives only the residual (Nileset al. 2003). The effectiveness of ecosystem servicemarkets will be greatly diminished without aggressiveaction to reduce transaction costs.

To develop payment systems, technical experts,producers and buyers must agree on the biophysicallinkages between land-uses and ecosystem servicebenefits, and develop suitable methods for measuringand monitoring the provision of the service. Pagiolaet al. (2002) identified the lack of good informationover land-uses and services as the ‘Achilles heel’ ofpayment schemes. People do not tend to willinglypart with their money unless they are confidentthat they will receive something of equal valuein return.

Institutions to reduce transactioncosts and risks

Institutional innovations are thus needed to reducetransaction costs. As costs such as project design,management and certification are characterizedby economies of scale, project size has an importanteffect on unit costs. Where highly specialized expertiseis needed intermittently or for limited periods –to design ecosystem monitoring methods, forexample, or to develop service contracts – specializedcompanies, public agencies or experienced NGOscan provide necessary business services. Intermediarygroups with expertise in community organizationcan take responsibility for local project managementand mediation between investors and local people.Because carbon can be sequestered in almost any site(unlike more site-specific biodiversity and watershedservices), area-based projects (sometimes called

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‘bubble projects’) can be designed in which an entirejurisdiction commits to a defined increase in forestcover or area of forest protected. This increasesland-use flexibility and is especially useful forlandscape mosaics dominated by non-contiguousforest patches (Smith & Scherr 2002).

Transaction costs can be greatly reduced bydeveloping projects in communities where there arealready active local organizations and participatorydevelopment programs in place, with communityrepresentatives already selected and authorized tonegotiate with outsiders. For example, organizedindigenous communities in El Salvador have donetheir own diagnostic studies of local needs andpriorities and are actively marketing specificecosystem services from specific areas in a waydesigned to contribute to meeting those priorities(Rosa et al. 2003). If critical ecosystem services arefound in areas with little organization, NGOs orpublic agencies with an interest in co-benefits maybe willing to cover selected transaction costs for thelevel of community organization needed for paymentsfor ecosystem services.

The participation of smaller-scale forest producers inecosystem service markets also requires institutionalinnovations to reduce marketing costs and reducerisks to outside buyers and investors. As somemarkets mature, more open trading systems willbegin to replace closed deals, and producers, buyersand investors will develop cooperative institutions.Intermediary organizations will attract investorsby ‘bundling’ projects within a country or regionto market carbon offsets, biodiversity credits orwatershed services.

Many market schemes require the organization,training and management of large numbers ofpeople to develop management standards, assignvalues to credits, provide technical assistance to designinterventions, negotiate contracts, and monitor andverify compliance. Technical specialists and land-users need to work jointly to define the appropriate‘commodity’ that reflects clear, verifiable linksbetween forest management and ecosystem serviceoutput, and to develop alternative performancestandards where there is an imperfect understandingof ecosystem functions.

Trading deals require master registries for thejurisdiction in which obligations and credits arerecorded. Secondary markets for such credits maybe established in security exchanges. In many cases,existing institutions, such as financial services, legalservices and other business-support services mustacquire specific knowledge and skills to work inecosystem service markets.

Projects may be pooled together in a ‘mutual fund’type arrangement to significantly lower transactioncosts and the risk of individual project failure, and tooffer specialization. For example, the independentnon-profit Face Foundation has developed a portfolioof five projects in five countries, affecting 135,000hectares that are sequestering 82 million tonnes ofcarbon (Emmer & Verweij 2000). The World Bank’sPrototype Carbon Fund, BioCarbon Fund andCommunity Development Carbon Fund are otherexamples. National and local environment trustfunds could also pool investments.

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6 Key findingsThis initial global overview of markets for theecosystem services of tropical forests draws some keyconclusions, identifies critical issues, and highlightsgaps in knowledge and information that need to beaddressed if tropical forest producers are to moveforward aggressively to benefit from these markets.

Current status of ecosystemservice markets

Current ecosystem service markets present four keyfeatures that shape opportunities for tropical forestcountries.

1. The total value of direct ecosystem servicepayments in tropical countries is presentlymodest, but has grown dramatically over thepast decade and is significant, particularlyto low-income producers.

The total value of direct ecosystem service paymentsfor tropical forests is probably in the order of severalhundred million US dollars annually, a relativelysmall percentage of the total value of the tropicalwood products’ trade of approximately US$20 billion.Ecolabelling markets, including certified lumber,crops, livestock products, and fish, appear to beworth several billion US dollars annually (Clay 2002).Though limited now, the aggregate value is likely torise fairly rapidly over the next two decades, and itsshare of the total income from tropical forests mayrise even faster if trends in tropical timber exportscontinue to stagnate.

While international markets for ecosystem servicesreceive the greatest attention, it is likely that onlypayments for globally important biodiversity,transboundary watershed management andinternational carbon trading will involveinternational payments. The vast majority ofpayments in the future for watershed conservation,biodiversity conservation and carbon sequestrationor storage will be domestic. Nonetheless, the shapeof domestic markets will be heavily influenced bythe designs, methods and rules being developed forinternational trade.

Water and biodiversity markets are characterized byhighly location-specific value, highly fragmenteddemand, high variation in price and a limited numberof buyers – all characteristics of niche markets. It isunlikely that this will change much in the foreseeablefuture. Rather, the number of niche opportunities

will expand greatly as interest and experience expandin using this instrument and as more standardizedinstitutions are put in place to reduce the cost oftransactions. Carbon sequestration and storage,by contrast, could eventually become a true globalcommodity – with fully interchangeable products.The developing countries that will be able to competewill be those with good governance systems, biologicalconditions for lower-cost plantation establishmentand forest restoration, and positive legal frameworks.For the present and for some years to come,however, the carbon market will continue to behavemuch more as a niche market and will probablycontinue to do so until the major international and national mechanisms are fully implementedand intermediary institutions develop.

2. Markets for forest ecosystem services areexpected to grow, in both developed anddeveloping countries, over the next 20 years.

Demand and payment for the watershed services of tropical forests is expected to intensify as waterdemand grows in developing countries anddownstream users realize the economic benefits ofwatershed protection programs. Ecolabelled productsare the fastest growing segment of biodiversitymarkets, with much of the market focused amongmiddle-income countries. Growth in the carbonmarket will depend on the status of the internationalrules and debate concerning climate-changemitigation.

3. Governments play a critical role as theprincipal buyers of many ecosystem servicesand as catalysts for many private-sectordirect-payment schemes.

Government agencies (federal, state, municipal) arelikely to be the principal direct buyers of ecosystemservices in many tropical countries, and will be thecatalysts to bring in foreign buyers and investors andto build the market institutions needed for domesticprivate actors to become engaged. Important newpublic funds are being set up to finance ecosystemservices (such as in Mexico and China, etc). Carefulattention needs to be paid to designing such funds tomake sure that they support broader policy objectives,do not create disincentives for good but unpaidconservation behaviour, and explicitly addresspossible equity concerns. Indirect payments forecosystem services – via certification schemes – aredominated by private-sector actors. ConservationNGOs are key players in biodiversity payments intropical countries.

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It is notable that forest officials or forest industry aregenerally not the main actors driving the developmentof forest ecosystem markets. Rather, the main actorsare the potential buyers: carbon-emitting utilities inthe case of carbon, municipalities in the case ofwatershed services, and conservation agencies inthe case of biodiversity protection services. Theforestry community has been more reactive. Yet inmany cases the forest sector is over-estimating thepotential size of the market and under-estimatingthe institutional developments required for them towork effectively and equitably. Forest industry andpolicy-makers would benefit by taking more of aleadership position to shape these markets as theygrow and to actively cultivate potential buyers.

4. Ecosystem service payments will in most casescover only a modest – but potentially catalytic– share of the costs of good forest management.

Ecosystem service payments will not usually besufficient to justify forest conservation in areas wherethere are even modest opportunity costs for the land.For this reason, governments will find it most rationalto concentrate on catalyzing a market-basedmechanism where investment will go to the mostcost-effective sites and opportunities. The tendencyof present models to channel scarce investmentresources to actors engaging in negative behaviouror in sites with less economic potential is in directconflict with the opportunities for bundlingecosystem service market payments to make on-going initiatives – certified timber or ecotourismenterprises, organic or bird-friendly crop andperennial cultivation – viable and sustainable.

Issues to consider when engagingin ecosystem service markets

While markets for ecosystem services are growingsteadily and can be expected to grow even morerapidly in the next decade, a number of issues limittheir potential contribution to forest incomes andecosystem service provision.

1. Property rights and national legal frameworksare necessary for ecosystem service marketsto develop, yet these are poorly developed in most producer countries.

Few countries have established systems of rightsover or market regulations for ecosystem services,or thought through equity implications. It is

important to consider who will make the rules inemerging markets; in many cases, other sectors willbe most influential. Forest producers and civil societyneed to take a proactive role to ensure that the rulessupport the public interest. Otherwise, favouredindustries and groups will take low-hanging fruit,leaving few development opportunities.

The idea of paying for basic ecosystem services isstill a new one for most people around the world,and not always a welcome one. Underlying someof these concerns are real potential problems ofaccountability, transparency and equity in thestructure of new markets. Political debate andnegotiation with a wide range of stakeholdersis essential to build an appropriate policy andregulatory framework within which private-sectoractors can conserve forest ecosystem serviceseffectively and efficiently.

2. These markets are not likely to contributesubstantially to poverty alleviation unlessproactive efforts are made to recognize rightsand shape markets to provide equal accessto low-income producers of tropical forestecosystem services.

There are important reasons to involve low-incomeforest producers in these markets. These includethe opportunity to address problems of incomegeneration and poverty alleviation, and the factthat smallholders and traditional forest dwellers aremore responsive to small payments, making thesemore cost-effective. Investments by NGOs can havean important role in building capacity and organizinglow-income producers and communities to reducetransaction costs. Legal and policy analysis is alsoneeded to ensure that low-income producers arerecognized as the owners of the ecosystem servicesthat they generate.

3. New market institutions are needed toreduce transaction costs and financial risks.

A major challenge of ecosystem service marketdevelopment is to ensure that critical institutions areestablished to reduce transaction costs and to provideintermediation between buyers, sellers, investors,certifiers and other key groups in the value chain.If appropriate action is not taken to address this atboth national and international levels, many marketopportunities will simply fail to materialize, especiallyin poorer countries.

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New market institutions are also needed for technicaldesign and monitoring, registers, the setting of rulesand standards and other key activities that must beadapted to particular markets. Efforts must also bemade to ensure that the specialized rules for certainmarkets do not act to negate the potentials fromother markets, at local, national or internationalscales. For example, it is important that criteriaand standards for certified timber and other formsof ecolabelling are consistent where forest ownerspursue multiple goals.

Principal gaps in knowledge

Ecosystem service markets could potentially offer a powerful new set of incentives for tropical forestconservation and restoration, and new incomeopportunities for forest producers. Watershed,biodiversity and carbon-service markets will almostcertainly continue to develop rapidly. However, itremains quite unclear which producers, consumers andtypes of forest resources will be the real beneficiariesof market development. It is also unclear under whatconditions the creation of ecosystem service marketswill be the most effective policy instrument forachieving forest policy goals. Most markets are stillincipient and their further development will requireconcerted government action. Decisions taken overthe next few years will shape market effectiveness,efficiency and equity for decades to come.

Yet few national, state or local government entitiesin tropical countries have access to the informationneeded to shape policy on market design. Whilethere are some public-sector sources of informationand capacity-building (eg from the World Bank,FAO, etc), the scale of these efforts is very small andmost input is generic rather than tailored to nationalor local requirements. Most market expertise isavailable only from the private sector, generallycompanies and consultants who are motivated by theopportunity to promote business deals. Where site-specific design input is commercially available, thepricing of services reflects the fact that most expertiseand commercial demand are presently found in theindustrialized countries. While technical expertisefor measuring ecosystem services is become moreavailable through universities, it is often difficultfor governments or NGOs to access or apply thisin a site-specific project.

In particular, policy-makers and programleaders require:

• objective technical assistance to identify theopportunities and risks of using different typesof market instruments, and for designing themto be effective, efficient and equitable;

• opportunities to exchange experiences,perspectives and lessons about the use and designof ecosystem service markets with peers in othercountries and regions;

• insights for the design of appropriate legal andregulatory frameworks, and the assignment ofproperty rights around ecosystem services;

• practical data on producer costs for managingecosystem services, market transaction costs, andthe costs of establishing and operating differenttypes of market mechanisms;

• better documentation of the biophysical linkagesbetween land-uses and ecosystem service benefits,and suitable methods for measuring andmonitoring the provision of services;

• objective analysis to synthesize the practicallessons being learned from functioning markets;

• objective analysis for the site-specific designof market rules and institutions; and

• capacity-building to develop nationalsophisticated expertise in analyzing, designingand implementing ecosystem service marketsin the public, private and civic sectors.

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Annex 1

ITTO terms of reference forenvironmental services study

The paper should set out the main issues ofrelevance to tropical forests for various environmentalservices. It should give an overview of the currentstatus and future potential of markets and trade ofenvironmental services provided by tropical forests.The paper should:

• set out the conventional wisdom, contemporaryunderstanding and views, as well as uncertaintiesthat still exist in the field of marketability ofenvironmental services;

• identify markets in services flowing from forests,with particular reference to environmental services,and global biodiversity benefits, including theirrelation to tropical-timber producing forests;

• explore issues, potentials and constraints ofemerging environmental service markets, including,inter alia, carbon, water and bioprospecting;

• analyse environmental services internalizedby forest owners/managers versus externalbenefits; and

• identify and describe instances whereremuneration for environmental serviceshas contributed to the economic and financialviability of sustainable forest management.

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Annex 2

Tropical cities that manage forests for water services

City Protected area is source of water Multiple-use forest is source of water

Bogotá, Columbia Chingaza National Park (50,374 ha)

Brasília, Brazil Brasilia National Park (28,000 ha)

Brisbane, Australia Brisbane Forest Park:D’Aguilar National Park (2,050 ha)

Cali, Columbia Farallones de Cali National Park (3,200 ha)

Cape Town, South Africa Cape Penninsula National Park (29,000 ha)Hottentots Holland Nature Reserve (24,569 ha)

Caracas, Venezuela Guatopo (122,464 ha)Macarao (15,000 ha)Avila National Park (85,192 ha)

Dar es Salaam, Tanzania Udzungwa Mountain National Park (190,000 ha)Seleous Game Reserve (5,000,000 ha)Mikumi National Park (323,000 ha)Kilombero Game Controlled Area (650,000 ha)

Durban, South Africa Ukhlahlamba-Drakensberg Park (242,813 ha)

Harare, Zimbabwe Robert Mcllwaine Recreational Park (55,000 ha)Lake Robertson Recreationa Park (8,100 ha)

Jakarta, Indonesia Gunung Gede Pangrango (15,000 ha)Gunung Halimun (40,000 ha)

Johannesburg, South Africa Maluti/Drakensberg Transfrontier ParkUkhlahlamba-Drakensberg Park (242,813 ha)

Maracaibo, Venezuela Perijá National Park (295,288 ha)

Medellín, Columbia Alto de San Miguel Recreational Parkand Wildlife Refuge (721 ha)

Mumbai (Bombai), India Sanjai Ghandi National Park (8,696 ha)

Nairobi, Kenya Mount Kenya National Park (58,800 ha)Biosphere Reserve (71,759 ha)

Santiago, Chile The Santiago Foothills have beenclassified as an ‘ecological conservationarea.’ The forests supply potable waterfor part of the municipal district of LaReina: about 20% of potable water inrequirements for Santiago.

Santo Domingo, Armando Bermudez National Park (76,600 ha)Dominican Republic Juan B. Perez Rancier National Park (40,900 ha)

Jose del Carmen Ramirez National Park (73,784 ha)Nalga de Maco National Park Ebano Verde Scientific Reserve (2,310 ha)

Singapore Bukit Timah (2,796 ha)

Yangon, Myanmar The forested watershed of the two dams,Gyobu and Phugi, which supply drinkingwater to Yangon, are managed by theForest Department of Myanmar, which carries out forest conservation activities,i.e. restoration, in the watersheds.

Source: Dudley & Stolton (2003)

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Annex 3

Additional resources

The sources listed below provide additionalinsight into the development of markets forforest ecosystem services.

General information on ecosystemservice markets

Landell-Mills, N., & Porras, I. 2002. Markets forForest Environmental Services: Silver Bullet or Fool’sGold? Markets for Forest Environmental Services andthe Poor, Emerging Issues. International Institutefor Environment and Development, London, UK.

Pagiola, S., Bishop, J. & Landell-Mills, N. 2002.Selling Forest Environmental Services: Market-BasedMechanisms for Conservation and Development.Earthscan Publications, London, UK.

Powell, I., White, A. and Landell-Mills, N. 2001.Developing Markets for Ecosystem Services of Forests.Forest Trends, Washington, DC, USA.

The Katoomba Group: the Katoomba Group is aninternational working group composed of leadingexperts from forest and energy industries, researchinstitutions, the financial world, and environmentalNGOs, all dedicated to facilitating strategicpartnerships that can launch green forest productsin the marketplace: www.katoombagroup.org

World Conservation Union (IUCN): the IUCNis a partnership of non-governmental organizations,scientific institutions, and government agenciesthat work to apply sound ecosystem managementto demonstrate how to sustain livelihoods for thosedirectly dependent on natural resources. IUCN hasbeen actively engaged in restoring ecosystems andregenerating people’s lives, economies and societies:www.iucn.org

Resources on carbon sequestrationand carbon trading initiatives

Smith, J. & Scherr, S. 2002. Forest Carbon andLocal Livelihoods: Assessment of Opportunities andPolicy Recommendations. CIFOR Occasional PaperNo 37. Center for International Forestry Research,Bogor, Indonesia.

Swingland, I. (ed) 2002. Capturing Carbon andConserving Biodiversity: the Market Approach.Earthscan, Sterling, Virginia, USA.

Biocarbon Fund: initiated by the World Bank Groupand the Prototype Carbon Fund, the BiocarbonFund provides carbon finance to demonstrate andtest carbon sequestration projects in forest andagricultural ecosystems. It aims to deliver cost-effective emission reductions while promotingthe conservation of biodiversity, the reductionof poverty, and opportunities for adaptationto climate change: www.biocarbonfund.org

United Nations Framework Convention onClimate Change: this convention was signedat the 1992 Earth Summit in Rio de Janeiro andfrom it came the Kyoto Protocol, which requirescooperating nations to abide by stringent reductionsin greenhouse gas emissions. To achieve reductions atleast cost, the Kyoto Protocol involves two flexibilitymechanisms: emissions trading and the CleanDevelopment Mechanism: www.unfccc.int

Information on watershedprotection services

Johnson, N., White, A. & Perrot-Maître, D. 2001.Developing Markets for Water Services from Forests:Issues and Lessons for Innovators. Forest Trends withWorld Resources Institute and the Katoomba Group,Washington, DC, USA.

Ramsar Convention on Wetlands: signed in Ramsar,Iran, in 1971, the Ramsar Convention on Wetlandsis an intergovernmental treaty which provides theframework for national action and internationalcooperation for the conservation and wise useof wetlands and their resources: www.ramsar.org

World Water Council: an international waterpolicy think-tank, The World Water Council wasestablished in Marseille, France in 1996. It aims topromote awareness and build political commitmenton critical water issues at all levels, including thehighest decision-making level, to facilitate theefficient conservation, protection, development,planning, management and use of water:www.worldwatercouncil.org

Information on biodiversity protection services

Convention on Biological Diversity: this conventionwas established at the 1992 Earth Summit in Riode Janeiro to conserve the earth’s rapidly vanishingbiodiversity. It aims to do this by promoting theconservation of biological diversity, the sustainableuse of its components, and the fair and equitablesharing of benefits from its the use: www.biodiv.org

ITTO

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The current status and future potential of marketsfor the ecosystem services provided by tropical forests

JULY 2004

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