Payments for Ecosystem Services

This section outlines some of the innovative efforts to create a new economy for ecosystem services and gives an overview of the many different policy tools being used to realign economic incentives so that they reward the restoration and/or conservation of ecosystem services.

What is a market?

In its strictest sense, a market is a regular gathering of people (whether in person, on the internet, or via other forms of communication) for the purpose of buying and selling goods and/or services. The emphasis is on the term regular. If the gathering is between two people, and it only happens once, and is the only one of its kind, then it is not a market.

In order to avoid the confusion between what is and what is not a market, some people have turned to Payments for Ecosystem Services (PES) as a new umbrella term for the entire suite of economic arrangements used to reward the conservation of ecosystem services. There is, however, a trick here as well. While PES is increasingly used as a catchall phrase, the term originated (and is most often used) in the field of sustainable development. In this context, PES frequently describes schemes that do not rely upon a formal market, but rather rely upon a continual series of payments to rural landowners who agree to steward ecosystem services.

You will see environmental markets, ecosystem markets, and PES all used loosely in reference to a wide variety of economic tools for the conservation of ecosystem services. In order to avoid confusing true markets with one-off deals, the Ecosystem Marketplace uses PES as its preferred umbrella term when and where possible.

What are environmental markets, ecosystem markets, and payments for ecosystem services?
Environmental markets, ecosystem markets, and Payments for Ecosystem Services (PES) are all terms that are used to refer to the entire suite of economic tools used to reward the conservation of ecosystem services. Confusingly, each of these terms also refers to a more specific subset of these tools.
People use the term environmental markets pretty loosely to mean all markets that have been set up to fuel environmental improvements of some kind. Markets for renewable energy, sulfur dioxide emissions reductions, and organic food might all be termed environmental markets. Ecosystem markets is a slightly narrower term that usually refers only to those markets that trade permits or credits related to ecosystem services. The trouble comes when the moniker “environmental market” or “ecosystem market” is used to describe conservation payments that aren’t really part of a “market.”


What are the different economic tools that fall under the term PES (Payments for Ecosystem Services)?

We will now look at the various economic tools in the policy toolbox today. There are six main tools currently in use:

  1. Direct Public Payments:  Direct public payments are payments the government makes directly to providers of ecosystem services. This form of payment for ecosystem services is the most common, with governments around the world paying rural landowners to steward their land in ways that will generate ecosystem services. The Conservation Reserve Program in the United States, for instance, pays out over US$1.5 billion to farmers each year in exchange for their protection of endangered wildlife habitat, open space, and/or wetlands (see  Green Payments and American Agriculture). China has a similar program in place to fund erosion control (see  Grain for Green), while Mexico and South Africa target their payments toward stewards of watershed services (see  Mexico Forest Fund;  Ecosystem Farming – The Precursor of Markets in South Africa?;  Betting On Markets)
  2. Direct Private Payments: Direct private payments function much like the public payments described above, except that non-profit organizations or for-profit companies take the place of the government as the buyer of the ecosystem service in question (see  WWF in the Danube Region;  Cattle Farms Go Green in Latin America).
  3. Tax Incentives:  Tax incentives are a form of indirect government compensation for landowners protecting ecosystem services. In exchange for committing resources to stewarding ecosystem services, individuals receive tax breaks from the government. Tax incentives are used, for instance, to encourage landowners in the United States to put their land under conservation easements (see  Spotlight on Conservation Easements).
  4. Cap-and-Trade Markets:  A cap-and-trade program is one in which a government or regulatory body first sets a limit or “cap” on the amount of environmental degradation or pollution permitted in a given area and then allows firms or individuals to in order to meet the cap (see  Eight is Not Enough for RGGI Scheme;  Hitting the Target in New South Wales;  Sustainable Fisheries: Can Market Mechanisms Help Get Us There?;  Natsource Creates Carbon Credit Pool;  Hunter River Salinity-Trading Scheme;  Profile of a Company and an Industry;  Emissions Trading is Not the Mother of Invention).
  5. Voluntary Markets:  Voluntary markets are markets in which buyers and sellers engage in transactions on a voluntary basis (i.e. not because they are forced to trade by regulation or in order to meet a mandatory cap). Generally businesses and/or individual consumers engage in voluntary markets for reasons of philanthropy, risk management, and/or in preparation for participation in a regulatory market (see  Voluntary Carbon Market – Climate Wedge  ;  Can U.S. Entice Polluters into Early Reduction of Greenhouse Gas Emissions
  6. Certification Programs:  When consumers buy certified products, they are paying not just for the product itself, but also for the manner in which it was produced and brought to market. Since such production and transport are often expensive means of production and transport, price premiums associated with certified products can be considerable. When consumers choose to pay the price premiums associated with products that have been labeled as ecologically friendly, they are choosing, in a sense, to pay for the protection of ecosystem services. Certification programs designed to reward producers who protect ecosystem services have been developed for a variety of products, including wood, paper, coffee and food, among others (see  Pesticide Free But Pricey  and  Transforming Markets & Supply Chains).

We hope this guide has helped you understand:

  1. The definition of ecosystem services and their importance to us;
  2. The conditions driving the loss of ecosystem services in the current global economy; and
  3. The array of tools policy-makers are using to give ecosystem services economic value.