Payments for Payments for Ecosystem Services: Ecosystem Services:
towards a more towards a more sustainable, just and sustainable, just and efficient allocation of efficient allocation of
natural capitalnatural capitalJoshua FarleyJoshua Farley
Community Development and Applied EconomicsCommunity Development and Applied EconomicsGund Institute for Ecological EconomicsGund Institute for Ecological Economics
University of VermontUniversity of Vermont
Outline of PresentationOutline of Presentation
• Economics on a finite planet• Why markets fail• Solving market failures: the role of PES• PES: the role of institutions• Ignorance, urgent decisions, high stakes
and adaptive management• Summary and conclusions
Economics on a Finite PlanetEconomics on a Finite Planet
The Laws of PhysicsThe Laws of Physics• You can't make something from nothing
– All economic production requires the transformation of resources provided by nature
• Energy is required to do work– All economic production requires energy– Fossil fuels drive our economy
(though there are exceptions to every rule)(though there are exceptions to every rule)
The Laws of PhysicsThe Laws of Physics• You can't make nothing from something,
and you can't burn the same match twice– Everything the economy uses eventually
returns to the ecosystem as waste
© Basel Action Network
The Laws of EcologyThe Laws of Ecology• The raw materials converted into economic
products are elements of ecosystem structure• Ecosystem services are provided by a special
configuration of ecosystem structure
The Laws of EcologyThe Laws of Ecology• If we deplete ecosystem structure, we
deplete ecosystem services• When we return waste to the ecosystem,
we deplete ecosystem services.• All economic activity affects ecosystem
services
The Ecosystem Sustains and The Ecosystem Sustains and Contains the Economic SystemContains the Economic System
• Ecosystem services are the limiting factor in enhancing human well being
The Economic ProblemThe Economic Problem
• 200 years ago: How do we allocate raw materials provided by nature (ecosystem structure) among different economic products?
• Markets are one effective solution
The Economic ProblemThe Economic Problem
• Today: How do we allocate finite ecosystem structure between:– Economic production– Production of life sustaining ecosystem goods
and services• Can markets achieve this?
Why Markets FailWhy Markets Fail
•Tropical forests provide:
•Erosion control •Climate regulation (local to global)•Disturbance regulation •Water purification, regulation•Many other ecosystem services
•Estimated value: $2006/ha/yr(Costanza et al., 1997)
Converted to Pasture for $20/ha/yrConverted to Pasture for $20/ha/yr
•Why?•Benefits of conservation ($2006/ha/yr) accrue to community (local to global)•Benefits of conversion ($20/ha/yr) accrue to landowner•Market forces and private property favor conversion
Non-excludable ResourcesNon-excludable Resources
Excludable resource regime One person can prevent another from using the resource Requires government enforcement of property rights Necessary for markets to exist
Non-excludable No enforceable property rights Can’t charge for use Many ecosystem services are non-excludable Cooperative management required
Some resources non-excludable by nature. None are inherently excludable.
Why Markets Fail IIWhy Markets Fail II
• Record ozone loss in 2006
• Why?• Air-conditioning
boom in India and China
• Cannot afford to pay royalties on refrigerants that do not deplete ozone
Rival ResourcesRival Resources
My use leaves less for you to use, e.g. Raw materials provided by nature
Competition for use Appropriate to use prices to ration
consumption Markets can be efficient
Non-Rival ResourcesNon-Rival Resources
My use does not affect you– Many ecosystem services– Rationing reduces benefits without reducing
costs: MARKETS INEFFICIENT – Cooperative provision appropriate
Non-rival but congestible– Non-rival, but becomes rival at high levels of
use, e.g. Beaches, hiking trails, recreation– Prices ration use, efficient when congested
Anti-Rival ResourcesAnti-Rival Resources
• My use makes you better off– e.g. alternatives to compounds that deplete the
ozone, alternatives to carbon intensive energy, cures for contagious diseases
– Knowledge improves through use– Price rationing (markets) are PERVERSE– Provision and consumption must be
cooperative– Common property solutions are essential
Solutions to Market Solutions to Market FailuresFailures
When no explicit property rights When no explicit property rights existexist
• Example: waste absorption capacity• Propertize: create common property rights• E.g. cap (assumes common property),
distribute (can be turned into private property, but bad idea) and trade mechanism for carbon emissions
• Can also tax
When Explicit Property Rights ExistWhen Explicit Property Rights Exist
• Option 1: Status quo– Let rights to ecosystem structure trump rights
to services– Unsustainable, unjust, inefficient
• Option 2: Regulate or revoke property rights– More sustainable. Is it just and efficient?
• Option 3: Purchase existing rights, including payments for ecosystem services– Many mechanisms available
Regulation can be sustainable and efficient
•Appropriateness of PES may be determined by justice
How does PES work?How does PES work?• Generally instigated by beneficiaries• Provider must receive more than
opportunity cost (next best alternative)• Beneficiaries must pay opportunity,
transaction and implementation costs. • Benefits received in addition to what they
would have received without the payments must be greater than their costs.
How does PES work?How does PES work?• Payments are typically conditional on
management practice/service provision• Payments are typically for a specific
service, provided by specific management practice or activity
• Is this appropriate?
Ecosystems Provide a Bundle of Ecosystems Provide a Bundle of servicesservices
• Goal is to maintain life support functions and other services
• Focus on single service may undermine Others
• Markets must be adapted to ecological necessities, not vice versa
PES: the Role of PES: the Role of InstitutionsInstitutions
Importance of InstitutionsImportance of Institutions
• Must collect money from beneficiaries and disburse to service providers
• Payments for market goods and marketable goods can come from individual beneficiary– e.g. Perrier
• Payments for services should be provided by all beneficiaries– Free rider problem for public goods
• Institutions required to reduce transaction costs
Transaction costs often greatest Transaction costs often greatest obstacle to PESobstacle to PES
• Institutions (private sector, public sector, civil sector) reduce transaction costs
• Conditions of monopsony (single buyer) reduce transaction costs– Perrier – Irrigation cooperative – NY Water authority– Costa Rican government
Institutions Must be at Scale of Institutions Must be at Scale of ProblemProblem
• Local• Regional• Global: missing link
–Ecosystems are interdependent–Richest nations are free riders–Carbon offsets inadequate–Support for PES schemes should not be
grants or loans, but payments
Market Failure 1: Forest LossMarket Failure 1: Forest Loss
Forest loss: Countries sized in proportion to forest loss
Market Failure 2: Royalty FlowsMarket Failure 2: Royalty Flows
Flow of Royalties: Countries sized in proportion to royalty payments made to them
Types of PES Types of PES
Rival
Non-rival
Excludable Non-Excludable
Market Good: Purchase of waste absorption capacity CO2 (CDM); water supply (Perrier)
Congestible: Club goods: e.g. ecotourism
Pure Public Good:Government payments; Green certification
Open Access Regime:Create common property regimes; e.g. cooperatives, government payments, caps on CO2 emissions
Non-rival
Anti-rivalTragedy of the non-commons: (NOT PES) Avian flu,Ozone depleting compounds, etc.
Public provision: Public investment in and free use of technologies that protect ecosystem services.
Ignorance, urgent Ignorance, urgent decisions, high stakes decisions, high stakes
and adaptive and adaptive managementmanagement
Facts are UncertainFacts are Uncertain
• How does ecosystem provide services?• What are human impacts on services?• Thresholds of irreversibility• What is service worth?
Economic Value and Inelastic DemandEconomic Value and Inelastic Demand
Natural Capital Stocks
Mar
gina
l Val
ue
The loss of agriculture does matter even if it’s only 3% of GNP
Stakes are HighStakes are High
• Life support functions• Food security• Water security• Fuel security• Irreversible thresholds
Decisions are urgentDecisions are urgent
• When will we pass irreversible thresholds?• How long before we lose life support
functions?
Adaptive ManagementAdaptive Management
• Must act on knowledge we have• Must learn from action
– Design PES schemes to generate knowledge• Must evaluate actions• Must act again in presence of increased
information
Summary and ConclusionsSummary and Conclusions
• Must begin acting now: no time to delay• Must experiment with variety of policies,
including PES• Experiments increase knowledge• Must learn from mistakes and successes,
communicate knowledge• Conferences like this one are necessary
and will remain so until we've solved the problem
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