Markets for hydrological services – or "water trading" schemes – are prevalent throughout Latin America and gaining in Africa. Though primarily designed to clean water or restore water flows, these schemes tend to achieve their environmental goals by hiring small farmers and other impoverished people to restore or preserve catchments and perform other tasks that help deliver ecosystem services.
These payments for ecosystem service (PES) schemes have tended to be viewed – and funded – as win-win solutions that promote sustainable development while preserving environmental value. There are, however, two schools of thought concerning the payments themselves and the social benefits that flow from them.
One school believes that poverty reduction should be a stated goal of constructing such schemes, and that payments should be priced specifically to achieve that goal. The other school believes the payments should be based on the economic value of the environmental benefit, and worries that placing too much emphasis on pricing to reduce poverty will bankrupt the schemes, leaving us with neither environmental nor social improvement.
Several studies have attempted to evaluate these theses, and we've attempted to summarize the studies. (For a more detailed examination, including a list of all studies surveyed and all works cited, please download "Pro-Poor PES", right)
Among Latin American programs, we will examine literature evaluating Mexico's Payment for Hydrological Environmental Services (PSAH) Program (which transacted payments worth US$27.3 million in 2004) and Costa Rica's National PES program (which has transacted payments worth US$140 million since its inception in 1997). We will also examine literature evaluating South Africa's Working for Water (WfW) Program, which transacted payments totaling US$43 million in 2005.
The Costa Rica program was initiated after Forest Law No. 7575 recognized four environmental services provided by forest ecosystems: a) carbon sequestration b) hydrological services including water quantity and quality for consumption but also irrigation and energy provision c) biodiversity conservation d) provision of scenic beauty for recreation and tourism. The law also established the National Fund for Forest Financing (FONAFIFO), which manages the program and receives its revenues from a 3.5% gas tax as well as multilateral and bilateral funds.
The Mexican and South African programs each arose in response to water scarcity. Two thirds of Mexico's 188 most important aquifers are overexploited, while an additional 28 percent are fully used, according to a 2003 study by the National Water Commission (Comision Nacional del Agua). This scarcity is coupled with high deforestation rates of 1.3% annually.
South Africa is also chronically water-stressed, with less than 1000 cubic meters of water available per person per year.
All three schemes were devised primarily to improve the provision of ecosystem services, but they also had specific pro-poor objectives.
In the PSAH program, 31% of recipients had incomes below the extreme poverty line in 2004. One study demonstrated the Costa Rica program improved tenure security by preventing forested land from being considered idle, which would warrant its confiscation. In South Africa, the WfW Program employed 24,000 previously-unemployed people in 2000, 52% of whom were women.
In analyzing national government-financed PES schemes, Wunder et al (2008;see Ecological Economics Special Issue: Payments for Environmental Services in Developing and Developed Countries) argue that loading too many non-environmental benefits into PES schemes ultimately dilutes the environmental benefits themselves. On the other hand, if opportunity costs are known so that buyers pay providers just barely over their provision costs, program efficiency (maximizing the provision of ecosystem services from a given budget) is gained while welfare to providers is lost.
WfW's experience, however, demonstrates that these goals need not be mutually exclusive – in part because the program's stated goal of reducing poverty through job creation has attracted political support that a purely environmental program might not have.
Environmentally, the program clears invasive alien plants that affect water flows in water catchment areas. It achieves this by hiring roving "service providers" who are small-scale contractors. To make sure the program really is delivering social benefits, the contractor must have been previously unemployed.
The results, according to two studies – one conducted by Marais and Wannenburgh, and the other conducted by Milton et al – are good for both the environment (stream flows increased by nearly 46 million cubic meters per year) and the economy (the above-mentioned 24,000 newly employed in 2000).
In Mexico, the PSAH program also shows that after spatially targeting to achieve program effectiveness and efficiency in meeting the primary environmental objectives of PES, social side objectives can be incorporated.
In fact, in government-financed schemes, measures to improve efficiency such as price differentiation according to environmental service provision, risk of service loss (i.e. risk of deforestation) and participation costs (sum of opportunity, transaction and protection costs) can free up funds to further contribute to these dual goals. In the PSAH program, eligible areas are determined by spatially targeting recharge areas of overexploited aquifers, watersheds with high water scarcity and areas with high flood risk.
While poverty targeting is not part of the eligibility criteria, it is incorporated into a grading system (which includes a series of weights for water scarcity and an index for deforestation risk) during the selection process when eligible area applications exceed the budget.
In the three years of the program's operation in eligible areas, 78% of payments went to forests owned by people living in population centers characterized with high or very high marginalization, but the very highly-marginalized were under represented relative to the high-marginalized.
This may be due to barriers to entry, such as a lack of education and clear land titles.
Another example of targeting is by defining and prioritizing smallholders by farm size in the grading scale. In a Biocarbon Fund project a socio-economic characterization of the local farming community was undertaken and low and medium income farmers were targeted. The study identified the following types of actors:
Policy Response: Define and map poor communities in environmentally sensitive areas using Geographic Information Systems (GIS). To encourage participation of the landless, target training and hiring of women and men below the national poverty line taking into account depth of poverty indicators for labor intensive activities such as nursery maintenance, tree planting or clearing of invasive plants. Incorporate a gender perspective by providing flexible hours, onsite child care facilities and training women in vegetable gardening, for example, to supplement their income at home.
In addition to poverty targeting, a second step would be to remove any unnecessary regulatory obstacles that restrict access to the rural poor. The following are some barriers to entry for small holders to the market schemes identified by GRIEG-GRAN et al. 2005:
Policy response: Do not exclude smallholders with informal land tenure who have historical control over resources and have added value to the land. Instead devise strategies that strengthen land tenure and speed up the titling process, especially for those people living in environmentally sensitive lands. Risk insurance can be purchased for participants without formal titles until titles are secured to ensure continuous service provision.
In Costa Rica, the national law forbade using public funds to pay landowners without a formal title. As a first solution, they created parallel contracts similar to the National PES contracts financed by service buyers for landowners without titles. In a particular region, Platanar, they covered only half of the payments to landowners with titles and FONAFIFO paid the rest. This freed up funds to pay landowners without titles that would otherwise not be eligible for public funds. Afterwards the law was changed to allow public funds for the participation of landowners that lacked titles. In regards to the second, conduct an analysis of the program to identify any arbitrary barriers or impediments to participation within the management structures of the program that are biased towards small holders and initiate the necessary steps to remove them.
Thirdly, a lack of participatory decision-making structures in the formulation of rules—especially in government financed schemes—means the poor are not usually present when eligibility rules and project types are decided that determine access to the scheme. Conducting public consultations with communities within the target area that is to receive funds for ecosystem provision would be a starting point for carrying out an analysis of barriers and opportunities for smallholder participation as well as ensuring customary rights or access to resources are upheld.
Negotiating with 100 small service providers entails much higher transaction costs than negotiating with one or two large landowners managing an equal area of land. The Forests Absorbing Carbon-dioxide Emissions Forestation Program (PROFAFOR) in Ecuador has a minimum size criterion of 50 hectares due to the high transaction costs of working with smaller plots which effectively excludes smallholders.
Policy response: Costa Rica's national PES program has developed a system of collective contracting through which groups of small farmers join the program collectively rather than individually, thus spreading transaction costs over a large group (FONAFIFO, 2000). Making contracts simpler and taking out requirements unrelated to the transaction at hand could also reduce transaction costs. Although the PROFAFOR program has a minimum size criterion it has aggregated smaller size areas into 43 collective contracts with cash poor highland communities. These account for nearly 30 percent of PROFAFOR's contracts in the highland region of Ecuador and for 40 percent of the 23,722 hectares of land covered by these contracts. Coordination with microfinance networks and other women's associations or community groups would be useful in identifying lessons learned to reduce transaction costs, to target poor communities and other activities to achieve pro poor outcomes.
Multilateral funds such as the UN REDD Programme, the BioCarbon Fund, the Forest Carbon Partnership Facility and the Forest Investment Program could be used to provide upfront financing to reduce transaction costs of poor landholders in designing national level PES programs as long as they are working towards establishing a REDD component. Alternatively, national level REDD initiatives can piggy back on these PES institutions or at the very least coordinate with national level PES programs to make sure there is information sharing of lessons learned and best practices as well as streamlining or identifying synergies of processes. Some areas with potential for collaboration due to economies of scale include: land use sector emissions inventories and baselines methodologies as well as estimations of net anthropogenic GHG removals by sinks; GIS spatial and poverty targeting as well as an analysis of deforestation drivers and projected location (spatial modeling); coordinated strategies for addressing drivers; monitoring and verification systems; registries; payment distribution mechanisms; rapid titling programs; targeted crediting systems for eligible activities. National level REDD initiatives are incipient at the moment—Panama and Guyana are the only two countries in Latin America that have initiated the Forest Carbon Partnership Facility process by submitting a Readiness Plan which has been approved. Indonesia's plan was rejected.
A market-based mechanism for financing high transaction costs of incorporating the poor is to seek 'gourmet carbon' certification as it is a growing market niche. A recent review cites projects certified to Climate, Community and Biodiversity standards as getting about a 35% premium over uncertified projects. These 'charismatic' carbon credits can build on the CCB brand to fetch a premium and find buyers who are willing to pay more for co-benefits.
Pro-Poor PES [doc]