Author: Carolyn Kousky

As payments for ecosystem services (PES) become an increasingly popular policy tool, Carolyn Kousky at Harvard's Kennedy School of Government tells the Ecosystem Marketplace about her research into when PES should be used and, equally important, when it should not.

Scholars and practitioners alike are interested and optimistic about the potential of payments for ecosystem services (PES) to fuel ecological and economic gains. In the midst of the zeal with which implementation of these new policy tools is being pursued, it is useful to step back and critically identify both when and where such approaches are likely to succeed, lest we begin to see every environmental problem as a nail waiting for the PES policy hammer.

While PES can include many types of policies, from private deals to the creation of markets, I refer here to government schemes in which landowners receive payments in exchange for adopting land-use changes associated with the stewardship of ecosystem services. I begin by reviewing the potential benefits of using natural capital in place of built capital and go on to highlight the challenges faced by practitioners and policy makers in attempting to do so. I then take a preliminary pass at identifying the circumstances under which government payments for ecosystem services are both feasible and beneficial.

The Benefits of an Ecosystem Approach

For many services that ecosystems provide there is some degree of substitutability between natural capital and built capital in providing the service. For example, a local government can either build a filtration plant for its drinking water or invest in protecting its watershed. Levees can be constructed, or wetlands can be protected as nature's own floodwater storage system. Local governments must therefore decide if and when protecting or restoring an ecosystem is preferable to the use of built infrastructure. Initial research of mine focusing on local governments in the U.S. suggests there are four primary reasons a local government might choose natural capital over built capital. Investing in ecosystem services can: prove cost-effective; provide an array of co-benefits to the community; broaden political support for the project; and prevent human or technical errors.

Investing in natural capital has proven cheaper than built capital alternatives in several instances. In two well documented examples, New York City saved billions of dollars by protecting land in the Catskills instead of building a filtration plant [1] and the U.S. Army Corps of Engineers saved an estimated $90 million by restoring wetlands for flood control purposes in the middle and upper basins of the Charles River instead of building a dam and levees [2]. Since ecosystems produce many services simultaneously, protecting natural areas for one service can also provide communities with additional benefits. For example, in Napa, California over 650 acres of wetlands are being restored to protect the community from hundred-year flood levels. The project also involves the creation of a trail along the river and habitat for birds. The newfound beauty of the river, combined with flood control, has spurred over $196 million in new investment downtown [3]. Community members have described this change by noting that the river is now the front door to their community, not the backdoor.

These multiple benefits of an ecosystem approach often bring previously opposing stakeholders together in support of the same project. For example, in Reno, Nevada environmental groups, business groups, recreation interests, and home and business owners all support a flood project that restores the Truckee River to its flood plain, while also increasing recreational opportunities, improving the quality of the water, and restoring habitat. According to Paul Urban, Washoe County Flood Control Manager, the project "has allowed environmental groups and business groups to work together on the same side for a successful flood project, rather than fighting against each other." Finally, investing in ecosystems can minimize human and technical error. Built infrastructure often requires operation and maintenance, leaving room for human mistakes or technical failures. By contrast, once in place, ecosystems will continue to function without human aid. This is not a new insight. In 1895, the Massachusetts State Board of Health noted that choosing a pristine water supply was preferable to filtering the Merrimack River, as "filtering areas require continuous care on the part of well-trained attendants, and that, in a few instances at least, inefficient administration or inherent defects of construction have allowed disease germs to pass through filters which were assumed, by good authority, to be a sufficient protection" [4].

The Challenges of an Ecosystem Approach

While the above discussion highlights four substantial benefits of an ecosystem approach, there are also four challenges: ecosystem services are public goods; landowners generate externalities that affect ecosystem service provision; often society takes ecosystem services for granted until it is too late; and ecosystem services can cross political jurisdictions. Many researchers and practitioners have recognized these difficulties. Indeed, it is often for these very reasons that PES is put forward as an antidote.

Since many ecosystem services are public goods, they are subject to free-riding problems--namely, some individuals seek to enjoy the ecosystem services provided by others without contributing any investment of their own. To compound the public goods problem, the quality or quantity of an ecosystem service is often impacted by the land-use decisions of private landowners. The simplest approach to addressing these externalities might be direct regulation, but citizens often resist such policies. To wit, the US Supreme Court recently agreed to hear two cases regarding federal wetland policies, and voters are passing new initiatives such as Measure 37 in Oregon--which requires compensation to property owners for zoning and environmental regulations--around the country.

The third challenge when it comes to setting up payment schemes for ecosystem services is convincing the users of ecosystem services to pay for services that they have previously received for free. Often society does not recognize the services it is receiving from ecosystems until the services decline or disappear due to ecosystem degradation. If action is not taken to preserve ecosystems until ecosystem degradation occurs, however, it may be too late. When development is already extensive it can be impossible or extremely costly to reverse. The final challenge to ecosystem services policy is that ecosystem services cross political jurisdictions, such that actions in one jurisdiction can dramatically alter service levels in another.

PES policies in which the government compensates landowners for stewarding the ecosystem services flowing from their property have been suggested as one policy mechanism that could potentially overcome these challenges. Government intervention could solve the collective action problems inherent in providing a public good and internalize the externalities landowners impose on others when they undertake actions that alter service provision. Payments would align the incentives of the individual landowner with those of the community to maintain the benefits of many services. Finally, PES could overcome jurisdictional problems, since voluntary contracts between landowners and the government do not require regulatory authority over landowners in another jurisdiction. Yet, despite the possibility for PES to overcome the challenges outlined here, it will not always be the optimal solution.

When to use PES?

I propose five criteria for determining when government payments for ecosystem services should be used over other instruments: fee simple purchase is overkill; the built infrastructure alternative is expensive; provision actions are enforceable; transaction costs are low; and there are drivers for demand.

Property ownership is often likened to a bundle of sticks, each stick representing a different right to the land, such as the right to sell or lease, the right to develop, or the right to subdivide. Part of what makes PES a cost-effective policy tool is that there is no need to purchase all the "sticks" associated with a piece of land to secure the provision of a certain service. For example, it may be possible to increase water quality through the use of buffer strips along streams, leaving the rest of a land parcel in agriculture. In this case, fee simple purchase of the land would be "overkill." This will not, however, always be the case. Using wetlands to control flooding, for example, might be incompatible with other uses of the land. In this case, fee simple purchase of the land would be needed.

PES is also more attractive economically when the built infrastructure substitute is costly. Part of what made investing in the watershed such an appealing option for New York City was the large avoided expense of a filtration plant. If, however, a filtration plant had been cheaper than investing in the watershed, economic reasoning would suggest building the plant if the aim of the project was solely to provide water quality. If other co-benefits were considered, it is possible investing in the watershed would still create net benefits, but it would no longer be the cheapest way just to get clean water.

Even when there is no need for fee simple purchase and investing in natural capital is cheaper, for PES to be possible, there must be enforceable actions that reliably provide the service. In most cases, it is not possible to contract for an ecosystem service directly; some services are difficult to measure explicitly and it can often be impossible to determine the contribution of any particular landowner to overall service provision. Contracts must therefore be based on land-uses that are directly correlated with provision of the service.

Monitoring and enforcement are one type of transaction cost. When transaction costs to PES are high, the cost-effectiveness of the policy can be compromised. The number of landowners with whom payments must be established to reach a desired level of services is one key factor influencing the magnitude of transaction costs. When there is only one landholder, negotiations are less costly for the government than if there are a large number of providers, all of whom must be negotiated with separately. There are institutional structures, however, that might serve to lower transaction costs. New York City provides an example-- instead of negotiating with each individual landowner, the city is often able to work with the Watershed Agricultural Council, suggesting when landowners in a region are organized it could be less costly for the government.

Finally, PES will only succeed if the beneficiaries are willing to pay for the service. Individuals or governments will not voluntarily pay for services they could receive for free. When faced with declining services, governments may find it worthwhile to pay to restore the quantity or quality of the service. Using PES preventatively, however, will be more difficult. Higher levels of government, though, could cause local governments to pay for certain services--preventatively or reactively. In the U.S., for example, states must comply with the E.P.A.'s Surface Water Treatment Rule. They are thus required to provide a given level of water quality to their residents and as such, some have found using ecosystems to achieve this goal a more economically or politically attractive option.

On Balance

The exuberance with which many academics and practitioners have embraced the concept of ecosystem services and the notion of using market-based mechanisms, like PES, to ensure their provision is not without justification. Yet, it is important to remember there are many policy tools for guaranteeing the flow of services from ecosystems, from command and control regulations to the purchase of land to PES policies, which also come in many flavors. Scholars and practitioners of ecosystem conservation now need to move toward a clear understanding of the conditions under which each type of policy will be the most cost-effective and equitable.

Carolyn Kousky is a doctoral student at the Kennedy School of Government, she may be reached at Carolyn_kousky@ksgphd.harvard.edu.

Notes

1. Heal, G., Economic returns from the biosphere. Nature, 1998. 391: p. 629-630.

2. National Research Council, Valuing ecosystem services: toward better environmental decision-making. 2005, Washington, D.C.: National Academies Press. xii, 277 p.

3. Napa County Flood Control and Water Conservation District, Progress and Plan Summary 2004. 2004: Napa.

4. Massachusetts State Board of Health, Report of the Massachusetts State Board of Health Upon a Metropolitan Water Supply. House Document No. 500 of 1895. 1895: Boston.

First posted: November 30, 2005