Role of payments for environmental services in landscape approaches

5 Jun 2019

Photo credit: Intensive silvo-pastoral practices. Stefano P. Pagiola

By Stefano P. Pagiola, senior environmental economist, Global Platform, Environment and Natural Resources, World Bank

Payments for Environmental Services (PES) are an important tool for implementing landscape approaches, since they allow the conservation or restoration of landscape elements that are important for hydrological services, biodiversity, and/or carbon but that are not profitable for the local population. This note explains the rationale for the use of PES in a landscape approach, and the challenges faced in doing so.

Rationale for the use of PES in landscape approaches

Depending on how they are used, landscapes can provide a wide variety of benefits. In addition to producing agricultural products, they can produce hydrological services, conserve biodiversity, and sequester carbon, for example. Landscape approaches attempt to take all these benefits into consideration, rather than focusing on any single one.

Typical degraded landscape. Credit: Stefano P. Pagiola

However, the landholders who actually manage the landscape generally only receive a small part of all the possible benefits, while others benefit downstream water users such as irrigation systems, domestic water supply systems, and hydroelectric power producers, in the case of hydrological services, and the global community in the case of biodiversity conservation and carbon sequestration. As a result, landholders don’t take these broader benefits into account in their land use decisions, and many valuable parts of the landscape are lost, replaced by much less environmentally friendly land use practices, while others are under severe threat of conversion.

Many of the improvements to be undertaken under a landscape approach are “win-win” in the sense that they will benefit both the landholders themselves and environmental service users. Replacing unsustainable annual crop production with a sustainable agroforestry system, for example, would increase income for landholders while reducing erosion, increasing carbon sequestration, and providing a more biodiversity-friendly habitat. Replacing extensive pastures without trees with silvo-pastoral practices would have similar effects.

Intensive silvo-pastoral practices being implemented. Credit: Stefano P. Pagiola

In cases in which the new practices to be adopted are more profitable to landholders than their current practices, short-term support should be sufficient to stimulate their adoption sustainably. This support might take many forms, such as the financial support to the necessary investment, technical assistance (TA), and/or provision of required inputs, depending on the nature of the obstacles to adoption of the practice.

However, all elements of the desired landscape are not necessarily “win-win.” Some of the practices that generate environmental services such as watershed protection, biodiversity conservation, and/or carbon sequestration are less profitable to individual landholders than alternative, less environmentally friendly practices. Landholders are unlikely to be willing to adopt these practices voluntarily. Short-term support might persuade them to do so, but they are then likely to abandon them once the short-term support ends. Such practices are only likely to be adopted sustainably if landholders are offered long-term support that compensates them for the opportunity cost of foregoing more profitable (but less environmentally friendly) practices.

The various possible cases are shown in Figures 1-3. In each case, the benefits shown are the net benefits to landholders of undertaking a given activity. The benefits to downstream users or the global community of undertaking activities such as forests or agroforestry are not shown, and neither are the costs imposed on others by environmentally harmful activities. For concreteness, the environmentally damaging activity is labeled here as ‘pasture’, but could take any number of forms.

Figure 1: Adopting a practice that is profitable to landholders

In Figure 1, pasture is replaced by productive practices such as agroforestry or silvopastoral practices, which are more profitable for landholders than pasture once established. Switching practices involves initial costs (for seedlings, fertilizer, labor, etc), and then it takes some time before the new practice becomes productive. Eventually, however, these practices become more profitable than the current, environmentally damaging practices. Their profitability mean that landholders are likely to adopt them readily, once obstacles to their adoption have been removed, and then retain them even after the project ends. This is the “win-win” case. Most of the land use practices supported under landscape projects are likely to be of this kind. For such practices, providing short-term support is usually sufficient. Such short-term support would help overcome initial investment costs, brings forward the time at which agroforestry becomes more profitable than the current practice, and increases the net present value to landholders of making the switch. PES could be used to provide such short-term support, but there are often many alternative approaches, such as providing upfront financing or inputs. Because short-term support is sufficient, efforts to induce adoption of these practices can easily be financed under a project. Moreover, the support provided need not cover all the initial investment costs, as the higher returns to the new practices will reimburse those who adopt them.

Figure 2: Adopting a practice that is not profitable to landholders

Figure 2 shows a case in which pasture is replaced by a conservation practice such as forest, which generates limited or no returns to landholders, either because of its characteristics (for example, practices that produce few or no harvestable products) or because of restrictions on its use (for example, if the land is located inside a protected area, which might prohibit commercial uses). In this case, net returns to landholders may well be lower than those of pasture. In addition to the initial investment cost, there would thus be an opportunity cost for landholders from foregoing income from pasture. A sufficiently large short-term subsidy might induce landholders to adopt such practices, but they are likely to abandon them in favor of the more profitable pasture once the subsidies end. Landholders are only likely to retain such practices if they receive a payment sufficient to offset the opportunity cost of foregoing pasture. Crucially, this payment must be made annually, and indefinitely. As such, it cannot be financed under a project beyond the first few years (although a project can certainly finance the initial cost of reforestation). Note also that the support provided must cover all the initial investment costs, as there are no long-term profits that could reimburse adopters.

Figure 3: Conserving a practice that is not profitable to landholders

Figure 3 shows a case in which a landscape project seeks to conserve a forest remnant, to avoid it being cut down for pasture. In this case there is no initial investment cost[1], but maintaining the forest would impose an opportunity cost to landholders in the form of foregoing income from pasture. Landholders are thus unlikely to retain forest unless they receive a payment sufficient to offset this opportunity. Here, too, this payment must be made annually, indefinitely, and so cannot be financed under a project beyond the first few years.

There are thus likely to be at least some elements of the landscape that would be desirable because of their hydrological, carbon sequestration, or biodiversity conservation benefits that will not voluntarily be adopted or retained by landholders in the absence of long-term payments. Because such payments must last far beyond the end of a project, however, they cannot be financed by the project itself.

One approach to avoiding this problem is to try to increase the returns that landholders receive from forests. Developing ecotourism or agro-tourism, for example, could generate an income stream for landholders from conserved areas. Developing new value chains for sustainably harvested forest products could have the same effect. Many landscape projects support such efforts, wherever possible. In some cases, these efforts will be sufficient to make forests more valuable than the alternatives, thus converting a case such as that shown in Figure 2 to one similar to that shown in Figure 1. In some cases, however, such efforts will either be impractical (for example, areas where access is too limited for commercialization of forest products to be viable), disallowed (for example, forests within protected areas), or insufficient (ecotourism and/or forest products may not enough generate additional income to compensate for the opportunity cost of foregoing pasture). There will thus remain some practices whose presence in the landscape would be desirable that would not be adopted (or retained) by landholders with short-term support alone.

Providing long-term compensation to landholders who adopt environmentally friendly land use practices is precisely the objective of Payments for Environmental Services (PES), which are contingent payments to those who manage natural resources so as to benefit others. The World Bank has supported PES programs in a large number of projects.[2]

Challenges to implementing PES in a landscape approach

Implementing PES generally requires three parallel sets of activities: (1) understanding the linkages between land use and the desired environmental services; (2) putting in place financing arrangements for long-term payments; and (3) putting in place field arrangements to contract providers, monitor compliance, and make payments. This section reviews the challenges faced by these activities in landscape projects.

Links between land use and service generation

Understanding how different land use practices affect environmental services is critical to any landscape approach. In many countries, this understanding is imperfect. It is important to note that this problem is not limited to PES. Any effort to implement a landscape approach requires an understanding of how different landscape elements contribute to generating environmental services. Without such an understanding, any tool is likely to fall short. In any case, advances in the use of remote sensing imagery and hydrological modeling make this much less of an obstacle than it once was.

The primary challenges to including PES in a landscape approach are thus the need to secure long-term financing and the need to put in place implementation arrangements to make long-term payments.

Farmer’s plan comparing current land use on the farm to that established with project support. Credit: Stefano P. Pagiola

Financing long-term payments

As noted, conserving or restoring landscape elements such as forests that are important for hydrological services, biodiversity, and/or carbon but which are not profitable for local landholders, requires long-term compensation to landholders and, therefore, long-term financing sources. Such long-term payments cannot be financed by landscape projects themselves, as these projects only last a few years.[3]

In some countries, such as Costa Rica and Mexico, the government provides such financing (usually through dedicated income sources to avoid year-to-year variations in funding levels). Given their fiscal constraints and other pressing demands, however, few developing country governments are willing and able to provide such long-term funding, and even when they do, they face pressures in maintaining such funding.[4] Government financing of PES also often suffers from pressures to use PES to achieve a variety of extraneous objectives, which can affect its efficiency.

The obvious source for the long-term financing required for PES would be those who benefit from the conservation practices: especially downstream water users such as hydroelectric power producers, domestic water supply systems, and irrigated areas. It is in their interest to ensure that these practices are adopted and maintained. Their contribution to the compensation of those who adopt conservation practices upstream would be an investment in their own future productivity, similar to expenditures on O&M of the water supply systems (‘green infrastructure’). It is important to note that it only makes sense for service users to pay for conservation if by doing so they avoid greater costs resulting from degradation.

Working with landholders. To achieve the desired conservation outcomes, a PES program must make payments to the actors that manage areas at risk of degradation or degraded areas that need restoring in ways that induce them to adopt the desired land uses. This requires appropriate implementation arrangements: technical field staff that will visit potential participants to explain the program and contract them; provide technical assistance if needed; monitor compliance with the terms of the contract; and make payments. These arrangements can be implemented in a number of ways.

Institutional arrangements. The institutional arrangements required for a PES program include the logistical arrangements to contract participants, monitor compliance, and make payments; the rules under which the program works; and the broader legal and policy framework. If PES programs work through local community organizations, such as COBAs, many of the logistical problems would be greatly simplified, as there would a single contract and a single payment. The biggest challenge is likely to be that of monitoring the areas receiving payments, to ensure that they are under the agreed land uses. The community would carry out its own monitoring, but this would have to be verified by a third party. Advances in the use of remote sensing imagery and/or drones for such monitoring are likely to make this task much less onerous than it would have been in the past.


[1]     There may be some initial costs, for example to fence off the conserved areas, but these costs are likely to be substantially lower than in restoration cases such as those shows in Figures 1 and 2.

[2]     Ten projects with PES components are currently being implemented (in Brazil, Colombia, Mexico, Nicaragua, Ghana, Madagascar, Albania, and Bhutan) and one is being prepared (in Kenya).

[3]    Donors could finance long-term payments by establishing a trust fund, as was done in the Costa Rica Mainstreaming Market-based Instruments for Environmental Management Project (P093384/P098838) and the Mexico Environmental Services Project (P087038/P089171), for example. This approach is not broadly applicable, however, as it requires a very large capital investment to generate a sufficient payment stream, particularly with low interest rates.

[4]     Poor economic conditions have recently led Mexico and several Brazilian states to substantially cut back their funding for PES, for example.

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