Market Features & Rules
The Costa Rican Payment for Ecosystem Services (PSA) program has been in operation for over a decade making it the global pioneer program motivated to stop deforestation and promote forest conservation nationally. Indeed, the Forestry Law of 1996, on which the national program for the payment of ecosystem services is based, defines these services as "those offered by the forests and forest plantations for the protection and enhancement of the environment." Through the PSA program, FONAFIFO recognizes 4 major types of ecosystem services that are offered by the country's tropical forests: greenhouse gas mitigation, watershed protection, biodiversity conservation, and preservation of scenic beauty. These four services create a single bundle which reflects the aggregate ecological value of a given forested area. In 2008, the program’s budget was close to US$13 million dollars for an area of 652.000 hectares.
In its national program (PSA), FONAFIFO receives between $10 and $45 per hectare per year in private funds from businesses interested in protecting hydrologic services in an area. These funds are matched with government funds from a fossil fuel tax, multilateral loans and grants and FONAFIFO establishes five-year to fifteen-year contracts with private land owners, who receive periodic payments depending on the type of contract. These payments range from approximately $41/ha/year for natural regeneration, $64/ha/yr for forest preservation and over $980/ha over a five year period for new forest plantations. Contracts can also pay per tree for agroforestry contracts.
Over 7,000 private land owners have signed contracts to conserve or reforest their land. FONAFIFO has recently launched a certification program (CSA) which is designed to encourage investments in ecosystem services.
Bilateral agreements also take place in Costa Rica outside of FONAFIFO's efforts, which gives the program additional flexibility and adaptability. In the province of Heredia, a public water utility added a tariff on its water bill in order to contribute to the conservation of the watershed. There also exists bilateral agreements between conservation NGOs and a hydroelectric company that is starting up a project in a conservation area.
The program operates nation-wide aiming to tap the four ecosystem services defined above.
The water-based ecosystem services programs are based upon voluntary contracts between private buyers and sellers, which are channeled through FONAFIFO (Fondo Nacional de Financiamento Forestal), a mixed private-public entity under the leadership of the Minister of Environment. This organization legally represents the financial institution of the forestry sector of the country.
Private companies and public utilities act as buyers of services and additional funding has been received from international organizations. Buyers include hydroelectric companies such as Energia Global, Hidroelectrica Platanar and Compania Nacional Fuerza y Luz, a beer brewing company, Florida Ice & Farm, and the World Bank. Buyers pay $10/ha/year, which represents a quarter of what is paid by FONAFIFO to the private landowners.
Sellers are private land owners who receive compensation for the bundle of ecosystem services (water, carbon, biodiversity, and scenic beauty). The transactions between FONAFIFO and the service providers remain relatively straight-forward, as the forest landowners receive a fixed compensation, depending on their type of contract.
Market intermediaries play a significant role in facilitating the various contracts. Buyers usually pay a fee to the intermediary in addition to the $10/ha/year that goes to the seller. Several regional organizations (both governmental and non-governmental) also play an important role in the development of the market. SINAC (National System of Conservation Areas) and FUNDECOR (Central Volcanic Range Development Fund – Conservation NGO) are responsible for finding sellers and monitoring the implementation of the conservation/reforestation efforts.