pes evolution

8/12/2019 PES Evolution

1/34

From the SelectedWorks of Rohit Jindal

January 2012

Payments for Ecosystem Services (PES): evolutiontowards ecient and fair incentives formultifunctional landscapes

ContactAuthor

Start Your OwnSelectedWorks

Notify Meof New Work

Available at: hp://works.bepress.com/jindal/1
http://works.bepress.com/jindalhttp://works.bepress.com/jindal/contact.htmlhttp://works.bepress.com/jindal/contact.htmlhttp://works.bepress.com/cgi/sw_user_setup.cgihttp://works.bepress.com/cgi/sw_user_setup.cgihttp://works.bepress.com/jindalhttp://works.bepress.com/jindalhttp://works.bepress.com/jindal/1http://works.bepress.com/jindal/1http://works.bepress.com/jindalhttp://works.bepress.com/cgi/sw_user_setup.cgihttp://works.bepress.com/jindal/contact.htmlhttp://works.bepress.com/jindalhttp://works.bepress.com/http://works.bepress.com/


2/34

1

AnnualReviewofEnvironmentandResourceshttp://www.annualreviews.org/toc/energy/37/1

Payments for Environmental Services: evolution

towardefficient

and

fair

incentives

for

multifunc

tionallandscapes

MeinevanNoordwijk1,BeriaLeimona

2,Rohit Jindal

3,GraceB.Villamor

4,MamtaVardhan

5,Sara

Namirembe6,DeliaCatacutan

7,JohnKerr

8,PeterA.Minang

9andThomasP.Tomich

10

1WorldAgroforestryCentre(ICRAF),Bogor16880,Indonesia;email:[email protected]

2WorldAgroforestryCentre(ICRAF),Bogor16880,Indonesia;email:[email protected]

3.BantingPostdoctoralFellow,DepartmentofResourceEconomicsandEnvironmentalSociology,UniversityofAlberta,

Edmonton,T6G2H1Canada;Email:[email protected]

4.CenterforDevelopmentResearch(ZEF),UniversityofBonn,GermanyandWorldAgroforestryCentre(ICRAF);email:

[email protected]

5. InstituteforSustainableEnergy,EnvironmentandEconomy,UniversityofCalgary,Calgary,Alberta,CanadaT2N1N4;

email:[email protected]

6.WorldAgroforestryCentre(ICRAF),Nairobi,Kenya;email:[email protected]

7. WorldAgroforestryCentre(ICRAF),Hanoi,Vietnam;email:[email protected]

8.DeptofCommunity,Agriculture,RecreationandResourceStudies,MichiganStateUniversity,EastLansing,MI 48824;

email:[email protected]

9.WorldAgroforestryCentre(ICRAF),Nairobi,Kenya;email:[email protected]

10AgriculturalSustainabilityInstitute,

UniversityofCalifornia,Davis,California956168523;email:[email protected]

Abstract

Paymentsforenvironmentalservices(PES),ornonprovisioningecosystemservices, target

alignment of microeconomic incentives for land users with meso and macroeconomic

societalcostsandbenefitsoftheirchoicesacrossstakeholdersandscales.Theycaninterfere

with or complement social norms and rightsbased approaches at generic (land use

planning) and individual (tenure, use rights) levels, and with macroeconomic policies

influencing the drivers to which individual agents respond. In many developing country

contexts,communityscalefactorsstronglyinfluencelandusersdecisionswhileunclearland

rights complicate the use of marketbased instruments. PES concepts need to adapt.

Multiple paradigms have emerged within the broad PES domain. Evidence suggests that

forms of coinvestment in stewardship alongside rights are the preferred entry point.

Commodification ofESandESmarketsmightevolvelateron,butrequirestronggovernment

regulationtosetandenforcerulesofthegame.Weframehypothesesforwidertestingand

noregretsrecommendationsforpractitioners.

KEY WORDS: Altruism, Ecological economics, Environmental governance, Rightsbased

approaches,Tradeoff

Pleaseciteas: vanNoordwijkM,LeimonaB,JindalR,VillamorG

B,VardhanM,NamirembeS,CatacutanD,KerrJ,MinangPA,

TomichTP,2012.PaymentsforEnvironmentalServices:evolution

towardefficientandfairincentivesformultifunctionallandscapes.

AnnualReviewofEnvironmentandResources37(inpress)


3/34

2

IntroductionTheriseofagriculturecoincidedwiththeremarkable

climatic stability of the Holocene1, but land use

changeandfossilfuelusethreatentogetusbackto

thewilderfluctuationsofthePleistoceneandearlier

periods in the geological history of our planet2,3.

Much of agriculture and the dramatic change in

humanpopulationsizeandsocialorganizationthat it

made possible4 was based on reducing dependency

onnaturalecologicalprocessesforsecuringfood,by

finding effective technical substitutes to secure

growthand reproductionofplantsandanimalswith

the most desirable properties through

domestication5. The culture of land, with

agriculture as its shorthand, was contrasted with

wild and uncontrolled nature. Its key featuresapartfromgeneticselectionweremodification ofthe

soil environment by tillage, breaking out of the

constraints of the local nutrient cycle by use of

fertilizers, and controlling pests and diseases by

chemicalmeans6.Manipulationofthewaterbalance

by irrigationanddrainage,however, involved lateral

flows7 of water that created new dependencies on

thesurroundinglandanditswatershedservices.

The fossil record of the Neolithic revolution that

startedagriculturesuggeststhat ithadmixedeffects

onhumanwellbeingwhenhealthandqualityof life

rather thandemographicgrowthareconsidered8. In

terms of the human brain, it required and further

strengthenedtherational,reflectivesystem2 that

canoperateatdiscount rates thatallow investment

inactivitiesthatprovideyield inafewmonthstime,

balancing with the intuitive, subconscious, direct

system 1 that seeks immediate rewards9 and

dominatedinourhuntergatherhistory.Thesystem

3 that responds to and shapes social norms coevolvedwithsocietalorganization.

Aprimarymeasureofthesuccessofagriculturewasasocialsegregationwhenurbandevelopmentbecamepossible, as rural labor could be freed for otheractivities10.Expansionofagriculturealsoimpliedthatforest, landsbeyond theperimeterofthevillages,

and nature, land without direct human influence,declined in area11. Urban lifestyles developed, withdifferent norms, aspirations and expectations.Ironically,partoftheseexpectationsnowadaysrelatetoareturntomorenaturalformsoffarmingalongwithfairertraderelations12andforecoagriculture

landscapesastargetsforrecreationandleisure13

.Thedramatic success in increasing the goods that couldbederived fromagroecosystemscameatacost forthe regulatory and supportive ecosystem services14.Humankind may currently approach planetaryboundaries of safe operating space15: clean water,cleanair,floraandfauna,andmorerecentlythegascompositionoftheatmospherethataffectsclimate.

Econsandhumans

ThalerandSunstein16 positedthatwedeal

withtwospecies:EconsandHumans.Economics,asthetermsuggests,isgoodat

predictingthedecisionsmadebyEcons,but

thescienceofdecisionmakingbyHumans

remainslargelyunexploredterritory,and

needstobuildontheadvancesinpsychology,

neuroscienceandbehavioraleconomicsof

thepasttwodecades.Econsaretheefficient

calculatorsimaginedineconomictheory,able

toweighmultipleoptions,forecastallthe

consequencesofeach,andchooserationally.

Humansareordinarypeople,who,fallwell

shortofHomoeconomicus:theyareneither

fullyrational(asmostanalysesofeconomic

downturnsandcrashesimply)norcompletely

selfish,andtheirtastesareanythingbut

stable.CallingourselvesHomosapiens,

however,stretchestheconceptofwisdom

beyondhowitiscurrentlyunderstood,and

maywellreflectthecognitiveillusionand

overconfidencethatishardwiredinour

brains.TheliteratureonPESwasinitiallyfocusedonbringingenvironmentalissuesinto

theframeworkofefficiencyorientedEcons,

buthasgraduallyincorporatedmorerealistic

perspectivesonhumanbehaviorandits

abilitytodealcollectivelywiththreatsand

pressures.


4/34

3

The urban segment of population started to attach

value to the natural capital and ecosystem services

andregrettedtheirloss;theyevenbecamewillingto

pay moderate amounts of money to have secure

accesstosuchecosystemservices(ES*).Bypaying,

somemightevenfeellessguiltyabouttheirpatterns

of consumption and its global consequences. The

social, cultural, political and economic differences

between those able to provide or enhance ES and

those interested in supporting such activities had

become substantial and the interaction required a

framing that referred tobothfairness (a system3

concept) and efficiency (system 2) to bridge that

gap. Analysis of system2 (micro) economics

suggestedthatthediscountratesusedweretoohigh

tojustifyinvestmentsinenvironmentalqualitiesthat

operate on decadal rather than annual timescales.Lowering the apparent discount rates might nudge

decisionmakerstowardsdecisionsenhancinghealth,

wealthandhappinesswithgreaterpubliccobenefits,

andas suchjustifiedpubliccoinvestment16.Dealing

with intergenerational equity and expected scarcity

of global ecosystem functions requires system 3

brain functions that operate at zero or negative

discount rates, complementing the system1 and

system2 functions that had much more time to

evolve

9

. Low or even negative discount rates mayseem surprising to conventionally trained

economists, but the conventional discounted cash

flow analysis assumes complete markets (including

marketsforinsuranceandrisk)aswellasreversibility

of asset transactions. Yet, missing and imperfect

markets, prospects of extinctions and other

BOXMiniglossary

Coinvestment:Investmentacrossassettypes

(capitals)inenhancementofESby

beneficiariesandprovidersofES;examples

canincludeinvestmentinconditional

tenurialsecurityinareasofhighESvalue

(includingecologicalcorridorsorbufferzones),combinedsocial+human

capitalenhancementininstitutional

development,improvementsofhealth,

educationandinfrastructure

Commodification: Thederivationand

definitionofstandardizedunitsofESthat

canbetradedwithinregulatedmarkets

and/ortheassociationofverifiableESwith

brandedcommodities

Compensation:Governmentmediated

paymentstooffsettheopportunitycosts

for(voluntarilyormandated)foregone

legallyalloweddevelopmentoptionsthat

woulddecreaseESfunctions

Ecosystemservices(ES*):Thebenefitshumans

derivefromecosystems;usuallycategorizedas

provisioning,regulating,culturaland

supportivefunctions(ananthropocentric

conceptthatcanincorporateintrinsicvalue

onlythroughitshumanambassadors)

Environmentalservices(ES):Ecosystemservices

minustheprovisioningservicesforwhich

marketscanbeexpectedtobalancesupplyand

demand

Gigaeconomics: Studyofmanagementoptions

anddecisionmakingonuseand/or

conservationofscarceresourcesatglobal

(supranational)scale

Picoeconomics: Studyofthewaythehumanbrain(atsynapselevel)processesnewlyacquired

information,memoryandaccumulatedvalue

judgmentsinevaluatingmanagementoptions

anddecisionmaking

Rightsbasedapproach:Developmentapproachthatbuildsonthebundleofuserightsthatindividualsandcommunitiescanacquirebasedonlegalpluralismandcrossscaleharmonizationofprinciplesandcriteriaforresourcemanagement,balancingprivateandpublicinterests


5/34

4

essentially irreversible contingencies, and prospects

for only limited (if any) substitution among major

asset classes say between some forms of natural

and financial capital mean that some important

resourcesreallywillbescarcerinthefuture,entailing

verycostlyadjustments.16

Where markets have been generally acclaimed for

linking demand and supply of goods and nudging

producer decisions towards efficient use of

resources,threatstoecosystemservices14,17became

associated with market failure and

externalities18,19,20. Two types of solutions have

been tried to address this imbalance: 1) to restrict

marketfunctionsongoodsprovisionbyregulationof

resource access to secure conservation of natural

capitalandES*,and2) tobringmarketefficiencytothe supplyofES*,bymaking increasedprovisionof

such services pay at a level that the tradeoffs

betweengoodsandservicescanbemanagedat the

leveloffarmerorlandmanager.Thelatterapproach

is conventionally,butnot veryaccuratelyaswewill

see below, described as payments for ecosystem

services or PES. While the regulatory approach is

associated with sticks, the incentivebased

approaches are referred to as carrots with

sermonsasthethirdpolicyinstrumentreferringto

suasion and the hope that internalization of values

willleadtoselflimitation(system3).

Started some three decades ago in Europe and N.

America21,thePESapproachhasbeenadvocatedand

tested in the tropics for over a decade now.

Environmental services in the tropics are

considerably diminished by the development and

spreadoflandusepracticesthatprofitthelanduser,

butreducetheregularityandqualityofwaterflows,

habitat quality of the landscape for globally

threatened biota, carbon storage capacity, and

landscapebeauty22,23.Marketbasedinstrumentsthat

make the continued provision of environmentalservices(ES)moreprofitable,havebecomeanactive

area of experimentation and learning over the past

two decades24,25,26, as purely regulatory approaches

that exclude rural populations from forests have a

negative impact by perpetuating forestrelated

poverty27,28.

Figure1.PESisoneoffourcategoriesofresponseandfeedbackmechanismsthatallowthosewhoexperience

theESconsequencesofchangesinlandcoverandlanduse,totryandinfluencethegenericdrivers(A1

and B1) or actors/agents (A2 and B2) of land use change in specific places to modify behavior and

decisions, via spatial regulation and rights (A, sticks) or economic incentive structures (B, carrots); the

suasion(sermon)categorymodifiestheresponseofactors/agentstodrivers(modifiedfrom28)


6/34

5

PES is one of multiple feedback mechanisms by

whichstakeholdersaffectedbychangesinlanduse

can try to influence the agents/actors directly

deciding on transformations of the landscape,

and/or theunderlyingdriving forces towhich they

respond29. A broad categorization (Figure 1)

distinguishes rules/rightsbased approaches from

economic incentive approaches, each with entry

pointsattwoscales.Afurtherdistinctioncanbethe

degreetowhichtheresponseandfeedbackoptions

arechanneledthroughpublicand/orprivatesector

entities. Inthisclassification andfigure,PESstands

for B2 approaches targeting the microeconomic

level of decision making. Its effectiveness is

contingent on the way it interacts with macro

economicincentivestructures(B1)andrightstouse

land (A1,A2).The languageofPES refersprimarilyto the efficiency of a quid pro quo (money for

services) but, as we will see in this review, the

fairnesssidedeservesatleastequalattention,asis

gradually rediscovered for the rest of the

economy30.Thenatureofboththequidandthequo

is often not as clear as it appears to be, with

additionality,leakageandpermanenceconcerns31,32

that straddle temporal and spatial scales and

requirecomplementarytypesofeconomicanalysis.

TheemergingPESliteraturedealswithfivescalesof

economic analysis, only two of which (micro and

macro)havebeenconventionallystudied:

Picoeconomics33 (or neuroeconomicsunderpinningbehavioraleconomics): individuals

andtheirbrainsynapses(pico)that involve in

decision making, interpretation of observations

and construction of perceived causal

mechanisms,

Microeconomics: household, farm enterpriseswith the cash flows and investment issues at

thatscale,asinfluencedbymarketfunctionand

thetotalityoftaxes,subsidiesandregulations,

Mesoeconomics34: landscape, community andlocalgovernancescalesaswellasprivatesector

actors where determinants of ecosystem

services interact with the paradigms of

integratedruraldevelopment,

Macroeconomics: nation states as part ofregional cooperation arrangements, at the

interface of world markets, political ambitions

fordevelopmentandtheeconomicdecisionsof

subnational actors, responding to taxes,

subsidies, regulations and public investment in

physicalinfrastructure,

Gigaeconomics:earthsystemmanagement,andthe rediscovery that humans can care about

their broader context if appropriately primed

and motivated, by concepts such as

footprint35.

PESdiscussionsusuallyfocusontheroleofpositiveincentives (carrots)at the interfaceofmesoand

micro economics, but the involvement of other

scalesisincreasinglyrecognized,as istheclose link

with sticks and sermons (or suasion) targeting

picoeconomics and the putative system 3. Yet,

the macroeconomic context of national

development and, increasingly, the gigaeconomic

scaleofglobalissuesareofdirectrelevanceaswell.

PES is usually framed within an environmental

economicsframeworkthatacceptsthestatusquo

of macro and microeconomic analyses and

associated policies, but aims at internalizing the

environmental externalities of current decision

making. In contrast, the ecological economics

tradition has articulated more fundamental

critiquesofstatusquoandhasbeenmoreopento

the emerging pico, meso and gigaeconomic

scales,thatmaysetnormative(sustainability)and

pragmatic constraints to micro and macro

economic scales. Within the environmental

economicsframingtheupsanddownsoftheglobaleconomy (at macrogiga scales) with more than

proportional impacts on carbon markets have

beenamajorconcern.

AsPESpraxishasevolved, its relationwith theory

haschanged.WhilemostofPESisstillperceivedin


7/34

6

a decision support system mode of natural

resource management, where better informed

managers can take better decisions and PES can

involve negotiations of prices and contract details

but not of its fundamentals, the more complex

reality may be better understood if approached

from a negotiation support perspective36, 37

where multiple knowledge and value systems

interact in shaping a negotiation platform and its

outcomes. Further complications derive from the

way temporal scales are included in the analysis:

beyondasustainability timescalethatemphasizes

persistence, a sustainagility time scale38 may be

needed,thatbalancesthiswithacontinuedchange

perspective39.

Asabroaddelineationofthetopicsforthisreview,wewilldiscussemergingPESpraxis in thecontext

of these five scales of economic analysis, the five

capitals (assets) of the livelihoods approach40

(although alternative formulations41 also have

foundfollowers),andthreeaspectsofhumanbrain

function(systems1,2,and3).Inourview,theseall

need tobe reconciled inorder tounderstandhow

individualbehaviorsandchoices interactwith local

actions, their global consequences and the

opportunities for effective feedback mechanisms

(Figure2).Paymentsforecosystemservicescanbe

conceived and implemented by a government

mediated institution without explicit reference to

markets.Adjustmentsof levelsofcompensation to

whattaxpayersarewillingtoaffordwillovertime

provide a coarse feedback mechanism adjusting

supply to demand. Much of the PES literature,

however, suggests that marketbased schemes to

enhance ES will be more efficient and require

monetizing or commoditizing biodiversity

conservation, watershed protection, and carbonsequestration42. PES schemes depend on funds

derivedfromdirectbeneficiariesofsuchservices(in

case of commodification) , and/or an increased

publicinterestinsupportingconservation(incase

Figure2.Thefivecapitals(assets)ofthe livelihoodapproach38 interactwiththreesubsystemsofthehuman

brain (system1andsystem2ofKahneman9plusa system3 shapingand responding tosocialnorms),

influencingfivescalesofeconomicanalysis(pico,micro,meso,macroandgiga)ofhumandecisionsabout

governance,resourceuseanddevelopment


8/34

7

of compensation). In the latter case, funds are

usedtocompensatefor involuntaryorvoluntaryr

estrictionson landuse. Theyaim tobesufficient

tooffsettheopportunitycostsofforegoingprivate

benefits from legal activities with negative

environmenttal effects43. In a marketbased

approach to enhancing environmental quality

throughfreelynegotiatedformsofPES,bargaining

position is crucially important44. Where potential

supplyofESdeliverycontractsislessthandemand,

ESproviderscannegotiateforprice levelsbeyond

compensationforopportunitycosts;ifdemandfor

such contracts is less than potential supply, the

marketmay settleonaprice that isjustaboutat

breakevenlevelforESproviders.Commodification

with price levels reflecting current supply and

demand can work where the timelags for

increasing supplyare less than the time scalesat

which demand varies, and where production

decisionsarereversible.Few,ifany,ESmeetthese

requirements and the mechanisms to set price

levels must reflect longer term societal values,

ratherthantheeconomicmoodoftheday.Whilethis may generally point towards a government

mediated compensation approach rather than

marketbased commodification, a third paradigm

(coinvestment) has been recognized in PES

literatureandpraxis..Primarilyonthebasisofthe

conditionalityof contracts, adistinctionhasbeen

suggested45betweencommodification ofES(CES),

compensationforopportunitiesskipped(COS)and

Coinvestmentinenvironmentalstewardship(CIS).

Much of the literature on PES focuses on

identifying the payment level needed to change

land use 46, targeting land users, structuring

payments and contracts25, effectiveness of public

versus private sector arrangements47, and design

of public policy48. Few empirical studies so far

havedescribedthemediumtermimpactofPESon

1)thelandmanagers,2)thesocialsystemtheyare

partof,and3)theEStargeted49.Someofthefirst

PES efforts in Southeast Asia and Africa are now

reachingapointwheretheseissuescanbestudiedempiricallyandmostof theauthorsof thispaper

aredirectlyinvolvedinsuchstudies.

Wewill focusour reviewon various typesofPES

applicationsinthecontextofdevelopingcountries,

but explore the way paradigms, concepts and

approaches have been influenced by the

BOXAcronymsused

CES:Commodification ofES(CES1=ESas

such,CES2=ESpackagedwithbranded

commodities)

CIS:CoInvestmentinenvironmentalStewardship

COS:CompensationforOpportunitiesSkipped

CRES:CompensationandRewardsforES

ES*:EcosystemServices(seeminiglossary)

ES:EnvironmentalServices(seeminiglossary)

PES:PaymentsforEnvironmentalServices

REDD+:ReducingEmissionsfrom

Deforestationand(forest)Degradationplus

foreststockenhancement

System1:Brainfunctionasdescribedby

Kahneman2011thatisrapid,intuitive,

subconsciousandsyntheticandthatleadsthe

primaryresponseofhumanstoopportunities

andchoices

System2:Brainfunctionasdescribedby

Kahneman2011thatisslow,rational,

consciousandanalyticalandthatleads

problemanalysisandrationalizationof

choicesmade

System3:Brainfunctioncomplementing

systems1and2andreflectingsocialnormsto

whichanindividualhaslearnedtocomply

with


9/34

8

experience in countrieswithdifferenthistoriesof

land use patterns, land ownership and tenure

regime, rural population densities and degree of

market integration. Financial incentives can both

support and undermine social norms compatible

with ES enhancement. External coinvestment

e.g., through incentives fromprograms to reduce

emissions from deforestation and degradation

(REDD) and ecocertificationneeds to synergize

with localeffortsbyunderstanding localdynamics

and conditions for free and prior informed

consent.

Inthisreviewofrecentliteraturewewill:

Analyze the different interpretations of PES insegregation perspectives on landscapes

functions and those based on integration in

multifunctionallandscapes

DiscussPESdefinitionsandtheirrelationshiptoRealistic, Conditional, Voluntary and ProPoor

performancecriteriaandevolvingparadigms

Provide a brief history of PES concepts andapplicationindevelopingcountries

Position PES in the debate aboutmultifunctionalityoflandscapes

Summarize critiques of PES theory andquestionsarisingfromemergingPESpractice:

Missing metrics for environmental serviceperformance

Arealbusinesscase?Motivationforbuyers Motivational crowding out: motivation for

ESproviders

PESinthepoverty*environmentnexus Areclearpropertyrightsapreconditionfor

PES?

IsthereenoughPESfundingforapplicationsatscale?

Can international REDD+ funding supportlocalPES?

In the discussion, beyond reviewing published

literature, we provide a new comprehensive

altruism frameworkanddiscuss itsapplications.

Wewillendwithasetoftentativeconclusionsand

frame hypotheses for the interface of praxis and

research.

2. PES definitions and their relationship toRealistic, Conditional, Voluntary and

ProPoorasperformancecriteria

Early work on the interface of giga and macro

economics

50

tried toquantify thesustainablepartofnationalandglobaleconomic systems (roughly

50%)47 by focusing on the loss of ES associated

with economic growth as conventionally

measured51.Environmentalservice functionswere

definedasthepossiblehumanusesofthenatural

and biophysical surroundings. For national

accounting, the concept of flows (services) was

linked to stocks (capital). Analyses in the 1990s

thusemphasized natural capitalasessential for

development52. In2000, itsderivative in the form

of services53 became the key concept for the

Millennium Ecosystem Assessment, but was

relabeledasecosystemservices14.Itexpandedthe

domainofenvironmental concerns toall benefits

that humans gain from ecosystems, ranging from

provisioning services supplying tangible value to

people, suchas food, fuel,andotherconsumable

goods;toregulatingservices(suchasairandwater

purification, climate buffering), habitat or

supportingservices(e.g.breedinggroundsforfish,

regeneration of soil fertility), and cultural andamenity services that give intangible benefits to

human wellbeing54. Originally intended to focus

on the value of nature53, there was no logical

demarcation along the naturalmanaged system

continuum,andtheconceptcametoincludeallof

managed forests and agricultural landscapes. By


10/34

9

including the provisioning services that support

commodity production and market function, the

concept of ecosystem services gained in public

attention; however, the externality argument

and market failure does not apply to these

provisioning services,although the clarificationof

property rightsmaybe an issue.Wewilluse the

term environmental services (ES) for all

ecosystem services (ES*) except for provisioning,

following18,21,24,26,41.Currentliterature,however,is

split over ecosystem services or environmental

servicesaspartofthePESacronym.

ThemosthighlyciteddefinitionofaPESremains24:

avoluntary,conditionaltransactionwhereatleast

onebuyerpaysat leastoneseller formaintaining

or adopting sustainable land managementpractices that favor the provision of welldefined

environmental services. The definition applies

binary, qualitative standards to the concepts of

conditionality, welldefined ES, voluntarily agreed

contracts at the level of individual buyers and

sellers. Strictapplicationofthedefinitionmaylead

totheconclusionthatPESdoesnotcurrentlyexist

in pure form, but that there are PESlike

approaches thatapproximate the ideal to various

degrees.Thesamemaybetrueforthemajorityof

economic concepts16, but the binary definitions

can also be replaced55 by gliding scales of the

degreetowhichrealistic,conditionalandvoluntary

contracts the provision of welldefined

environmental services are negotiated and

implemented, with additional attention for the

fairness dimension of propoor approaches.

Basedonvariationsinthewaythecriteriaaremet,

threecomplementaryparadigmscancoexistwithin

abroadPESframework45,with1)commodification

of welldefined environmental services so thatbuyersandsellerscannegotiateprices (closestto

the Wunder24 definition), 2) compensation for

opportunitiesforegonevoluntarilyorbycommand

and control decisions, and 3) coinvestment in

environmental stewardship as key features,

respectively.

In the basic PES concept, payments (flows of

financial capital) are the primary vehicle through

whichthebuyerscanexpresstheirappreciationfor

the ES.As long as the sellers keepproducing the

ES, it is up to them how they use this financial

capital: to invest in natural capital, quality of

houses,meansoftransportorsavingsaccountsor

payforschoolingofchildren,healthcare,amenities

and luxuries of life or any other expenditure. In

practice,however,buyersmaybedisappointed if

they dont see the sellers invest a considerable

share of payments into direct enhancements of

naturalcapital;theyexpectamultipliereffect56.

BuyersofESarenotwillingtoforegotheircontrol

at least partly because indeed the production

functionofESasemergentpropertiesofcomplex

landscapesystemsremainspoorlyunderstood.

Efficiencycanbeconsidered from theperspective

ofthebuyer,thesellerortheprocessasawhole,

including its intermediaries and longerterm

dynamics (sustainability).Akeyeconomicconcept

here is that of Pareto efficiency, where an

equilibrium has been found where no further

transactions can increase the wellbeing of any

actorwithoutmakinganyoneelseworseoff57. Like

laws of physics that ignore friction, Pareto

efficiency can be most easily be perceived in a

worldwithperfect informationtoall,fullyrational

decision making about the true interests of all

agentsand in theabsenceof transactioncosts. In

therealworld,however,transactioncostsexist,as

do intermediarieswhoserveasbrokerstoprovide

information and influence decisions. These third

party brokers also have their own longerterm

interests and business models that need to be

understood.Efficiencyconsiderationsforthebuyer

consistofeffectivenessandcosts,weighedagainstalternative opportunities to satisfy their ES

demand. Efficiency considerations for the seller

require understanding of the production

function forES,aswellashow the provisionof

the ES fits into the production function for


11/34

10

agricultural and other goods of the farm or local

economy.

The Wunder PES definition24 referred to at least

one buyer and seller exchanging ES for money

(Figure 3A), withPareto efficiencydeterminedby

therelativeshortageofESandsurplusoffinancial

capitalonthebuyerside,andreverseendowments

onthesellerside.Inpractice,mostofthecurrently

known PES applications in the tropics58,59,60,61,62

involve linkagesof complex systems inbuyerand

sellercommunities, involvingexchangesinmultiple

asset types (Figure 3B). Contracts involve

investments and linkages in social capital and

individualhumancapital.The initialcurrencymay

be recognition and respect as social capital

exchanges,ratherthanmoney

63

.Whentakentoitsfullconsequences,thisimpliesthatthebuyersand

sellersbecomecoinvestorsincrosslinkedsystems

3. BriefhistoryofPES conceptsandapplicationindevelopingcountries

After the initial excitement of PES, approaching

silverbulletstatus21,thepromiseandperilsof

PESformedthetitleofreviewsinboth200564and

201120.BothreviewsassertedthatPESexperiences

hadalreadydemonstratedthatinvestinginnatural

capital rather than built capital can make both

economicandpolicysense,butthatmarketsforES

orES*(seedefinitions)createchallengesincluding

moral hazards, rentseeking, free riders and

perverse incentives. Lack of market reflection of

the full social cost of ES production can lead to

incorrectmeasuresofthescarcityofsomeESand

nomeasuresfortherest.

EarlyliteratureonPESclassifiedtheformsofPESin

practiceand recognizedat least fourtypesofPES

schemes, differentiated by the degree of

government intervention in administration of the

schemes,by thecharacteristicsof thebuyersand

sellers,andbythesourceofpayments(65,66)65,66.

By pointing out the weaknesses of indirect

environmental interventions such as Integrated

ConservationandDevelopmentPrograms,others67

argued that PES can create a direct incentive

Figure3A.PES interpretedasexchangeof financialcapitalforES,usuallybetweenpartsofsociety thatare

shortinnaturalcapital(N)buthavefinancialcapital(F)tospare,andcommunitieswherethebalanceisthe

otherwayaroundandwheretheESsellersarefreetousethefinancialcapitalobtainedaccordingtotheir

ownprioritiesaslongastheEScontractualobligationsaremet;B.Exchangesthatinvolverelationshipsin

terms of human capital (H), social capital (S) and/or infrastructure (I) as well, and can be termed co

investmentinES45


12/34

11

scheme between ES sellers and buyers and thus

might better achieve both conservation and

development objectives by better targeting and

lowering transaction costs. PES concepts were

testedasapossibility to increaseeffectiveness in

environmental protection and reduced (public)

conservationbudgetsinLatinAmerica,theUSand

Europe21,46,68. It appears that the coinvestment

paradigm seeks a middle ground between ICDP

and PES concepts, with partial conditionality and

escapefromaprojectcycle.

CostaRicabecameapioneer inPES indeveloping

countriesbasedon its1996 forest legislation that

provided a publicly funded incentive scheme for

private landowners tomaintainorenhance forest

as provider of valuable ES. Payments tolandownerscanbemade fortheprovisionoffour

types of ES, i) carbon sequestration and storage

(mitigation of greenhouse gas emissions); ii)

watershed protection (hydrological services); iii)

biodiversity protection (conservation); and iv)

landscape beautification (for recreation and

ecotourism). Landowners receivedirectpayments

for theES their landsareassumed toproduceby

adopting sustainable forest management

techniques thatdonothavenegative impactson

theforestcoverandthatmaintainqualityoflife69.

The Government of Costa Rica acted as the

buyer/investor, seeking international stakeholder

buyers for carbon sequestration services and

domestic ones for expected hydrologic services.

This combination of domestic and international

sales together with tax revenue, international

loans and donations was used to finance

environmental service provision70. The country

made substantial progress in (involuntarily)

chargingthecaptiveaudienceofwaterusers,andmore limitedprogress inchargingbeneficiariesof

thebiodiversityandcarbon sequestrationusers71.

Strongpathdependencyinthewaypaymentsto

service providers originated in previous forest

subsidy schemes, however, implies considerable

roomforimprovementintheefficiencywithwhich

it generates ES71. While the initial success and

visibilityoftheCostaRicaprogramhasencouraged

experimentation elsewhere72, a more critical

literature on the Costa Rica case73 and its

followers28,74,75,76,77isnowemergingthatsuggestsa

reframingoftheway incentivebasedmechanisms

areperceived,andadeeperanalysisof the social

and psychological dimensions of human decision

making in response to external signals45,68,78.

Approaches that support collectiveactionat local

communitylevelandaddressissuesofconflictover

land use rights are now seen as essential to

achieve success (see section 5.4). Proponents of

fairness dimensions as elements that need to be

added to effectiveness and efficiency prefer the

useofthebroaderconceptofrewards(RES)rather

than payments for ES32,45,79. The notion of RESfocuses on the multiple goals of ecological

sustainability, just distribution and economic

efficiency and favours a variety of payment

mechanisms to achieve these goals, both market

and nonmarket80. RES further involves the

integration of propoor elements into economic

instruments to enhance ES with the basic

argument that poverty alleviation has to be

included into any portfolio to protect the

environment, especially in developing

countries81,82. This contrasts with the view that

poverty alleviation can be a positive side effect,

that canbe includedas longas itdoesnot imply

efficiency losses83 . PES schemes are likely to

change (and sometimes reinforce) existing power

structure and inequalities indecision making and

access to resources, with significant equity

implication82,84.Whiletheprimarydecisionmaking

powermaybe in thehandsof the buyer, their

lack of knowledge of local conditions and

opportunity costs isadisadvantage.Procurementauctionsweredesignedtoreducetheincentivefor

sellerstoinflatetheircontractprices85.

Swallow et al.43 introduced the term

compensation and rewards for environmental

servicestorefertoarangeofmechanismslinking


13/34

12

ecosystem stewards and environmental service

beneficiaries, including the mechanisms normally

included under the term payment for ecosystem

service.Theynotedthattherelationshipsbetween

ecosystem stewards, environmental service

beneficiaries and intermediaries may be more

complex than a simple transaction, with

agreements that are not wholly voluntary and

payments that are not wholly conditional. Based

ontheseenrichedconcepts,recentstudiesofPES86

tested multiple paradigms andhypotheses. Many

oftheconclusionsofthepastdecadesupportthe

earlier assertion that environmental functions

dontlendthemselvestomarkettransactions87.

4. PES and multifunctionality based on

segregation

(sparing)

or

integration

(sharing)

of

landscapefunctions

Other interpretations of the terms PES exist88 ,

however, (Figure 4A) and inform part of the

literature.Theyrelatetoalternativeviewsonhow

multifunctionality of land can be achieved, by

spatialsegregationorintegration.

In the use of marketbased instruments to

increase ecosystem services, as applied in

Australia88 (Figure 4A), the ecosystem services

production function is dominated by the natural

capital of an area and is best served by a

segregationapproach, inwhichagricultural inten

sification on the best land can lead to land

sparing, aided by incentives to take marginally

productivelandoutofproduction.Incontrast,the

integrationand landsharingperspectiveofFigure

4B, suggest that the various services can be

obtained within a land use system, with PES

incentives modifying the internal tradeoffs

between provisioning and other ecosystem

services.

The contrasting definition and perception of

ecosystem and environmental services of Figure

4A and B can be understood in response to the

types of landscape in which they apply, and the

perspective on the sparing versus sharing

debate that reframed the segregation versus

integration issue

89,90

.

Landsparingbyreductionofthe area needed for food, feed and fiber

production through forms of agricultural and

silvicultural intensification (Borlaug hypothesis),

isassociated, inaparadigm that remainspopular

in the conservation world as well as agricultural

industry,withexpectationsofhighlevelsofESthat

can be provided on the land taken out or not

neededforagriculturalorforestryproduction.The

primarytradeoffisbetweenhowmuchlandcanbe

taken out of production, at what cost, and what

quantity of services this land will then provide.

Landsharing,bycontrast, isbasedontheconcept

ofoptimizinglandproductivityintermsof

Figure4.Twoways the termenvironmentalservicesareunderstood in thePES literature:A.Environmental

servicesarethesustenanceorenhancementofnaturalcapital linkedto landuse,asbasisforecosystem

services of all types88; and B. Environmental services are ecosystem services beyond provisioning but

influencedbylandusethatisprimarilytargetingprovisioningservices18,21,24,26,41


14/34

13

provisioning, regulating, supporting and cultural

functions in integrated systems, rather than for

provisioning alone.. The primary tradeoff in this

perspective is internal to the landuse:what level

of services can be coproduced with tradable

goods, and how do economic incentives for ES

modify the optimum point for the local decision

maker. The land sparing approach may focus on

generic instruments 1A and 1B of figure 1, the

sparing approach requires the more specific

targetingofinstruments1Band2B.

PartofthePESliterature isabouttaking landout

of production91, ecological restoration and

nature management. Another part is about

marginal changes in intensity of agriculture and

use of inputs, where ES are coproduced withtradable goods. In terms of decisionmaking, the

firstcasedealswithdiscreteoptionsandadrastic

shiftintheprimaryfunctionofparcelsoflandwith

relatively simple compliance checks; the second

dealswithcontinuawith thresholdsand theneed

to create sufficient performance criteria for

contracts. The first situation refers to a

segregation of landscape functions, and the

second to integration in multifunctional

landscapes56,57.

The Tinbergen principle92,93,94, first formulated in

1952, follows the basic matrix algebra principle

whereby the number of equations has to match

the number of unknowns for a problem to be

solvable. Accordingly, the number of policy

objectivesandnumberofpolicy instruments also

have to match. As attractive as multipurpose

policiesmayseem,theyrequirestrongcorrelations

in the realworldbetween the targets.As carbon

stocks and biodiversity in tropical forest margins

areonlypartiallyrelated,optimizationforreduced

C emissions does not give the same results as

optimization forbiodiversityconservation,andan

additional, corrective policy instrument may be

needed. Similarly, poverty and environmental

issues can be correlated over part of the space

timedomain,buttheyarenotsufficientlycausally

linked to expect propoor PES to maximize

efficiency of (shortterm) ES enhancement94. The

EU Agrienvironment scheme has only partially

achieveditsgoals95,asadditionalgoalswereadded

in itsdesignbeyondenhancementofES.The fully

segregatedandfullyintegratedlandscapefunction

options are extremes of a wide range of partial

integrationsolutions(Table1).Intheupperpartof

thetableahighlyreducedmatrixshowsthateach

policyrelevant objective has its own part of the

landscape. Synergy between objectives in such

configuration is minimal, but policy makers can

rapidly switch land use allocations if objectives

changeinweight.Inthelowerhalfofthetable,all

land use types potentially contribute to all

objectives, and land use planning has to find a

solution that satisfies theminimum requirementsfor each function and maximizes the aggregate

benefit beyond this minimum condition. Under

certain parameter conditions, a multifunctional

approach as in the lower part of the table can

achieve more overall functionality on the same

landarea;thetableprovidesaformalcriterionfor

suchanoutcome.Configurations inthe lowerhalf

of the table can be strongly interlinked, in which

caseallfunctionsmaybebufferedbuttheflipside

ofthismaybethatthestatusquo istooresilient.

As posited by various authors independently55,96,

theconditionswheresegregationor integration is

superior and/or where sparing or sharing would

work best depends on the convex or concave

shape of the tradeoff curve between multiple

functions. Inreality,however,suchtradeoffcurves

as the one between productivity andbiodiversity

may have convex as well as concave parts.

Regardless of the detailed shape of the curve, a

graphical representation can explore under what

conditions mixed systems can be superior,dependingonthe levelofrewardsforES.Figure5

explores the plausible relations between flows

(e.g., provisioning services) and stocks of an

(agro)ecosystem. If all the utility for users

depends on the flow, the system will be driven

towardsthemaximumflow,regardlessofthe


15/34

14

Table 1. Relationship between land use category and policy objectives under fully segregated (only

diagonalcellsarenonzero)andfullyintegrated(nocellsarezero)extremes56

Land use

category

Policyobjective

A

Resource

extraction

B

Economic

growth

C

Centre

based

welfare

D

Decentralized

welfare

E

Environmental

integrity

Segregated land

useplan

f(A) A 0 0 0 0

f(B) 0 B 0 0 0

f(C) 0 0 C

0 0

f(D) 0 0 0 D 0

f(E) 0 0 0 0 E

Integrated land

useplan

1 f(1,a) f(1,b) f(1,c) f(1,d) f(1,e)

2 f(2,a) f(2,b) f(2,c) f(2,d) f(2,e)

3 f(3,a) f(3,b) f(3,c) f(3,d) f(3,e)

4 f(4,a) f(4,b) f(4,c) f(4,d) f(4,e)

5 f(5,a) f(5,b) f(5,c) f(5,d) f(5,e)

Total f(i,a) f(i,b) f(i,c) f(i,d) f(i,e)

Equivalence

requirement

f(i,a)=A f(i,b)=B f(i,c)=C f(i,d)=D f(i,e)=E

Multifunctionality

advantage ifthere is a set of

f(i)forwhich

f(i)


16/34

15

Figure5A.Concaveandconvexshapesoftradeoffcurvesbetweenflow(harvestableyieldandotherservices)and

stock(e.g.biodiversity,landhealthorCstock)oflandusesystems;B.totalincomebasedontheflowsplusPtimes

the stock, forconcaveand convex tradeoffcurves;arrows indicate incomemaximizing solutionsand theupward

shiftofstocksatincomemaximizinglandusechoices

shape of the curve, as long as it is monotone.

However, if economic value can be assigned to

the secondary function (Yaxis) relative to the

primary function (Xaxis) before optimization,

mixed systems may be superior. For concave

curves, there isno such solutionandoptimality

implies a choice between the two functions; for

convex curves intermediate solutions exist, for

any nonzero value of the value ratio. Adding

income value to landscapelevel, carbon and/orbiodiversitystockseffectivelymeanstiltingtheY

axisofthebiplot(Income=Flow+P*Stock)and

mayshiftthepointofmaximumeconomicreturn

toahighercarbonstocktrajectory.Dependingon

the ratio between stock and derived income

stream and the shapeof the stockflow tradeoff

curve,rewardsystemsforESrelatedtocarbonor

biodiversitystockscanbeexpectedtoshiftfarmer

decisionsonly where convex tradeoff curves are

involved.

5.Critiques ofPES theory andquestions arising

fromemergingPESpractice:

5.1 Missing metrics for environmental

serviceperformance

In order to get ES into the domain of market

functions, the spatial and temporal scales at

which performance can be measured are

important for the way conditionality can be

included in contracts23,24,45,97. For goods there

typically is a value chain in which the price per

unit substance shifts with processing, transport,

qualitycontrolandbranding,but there isaclear

relationshipbetweentheunitsinwhichendusers

buy or consume goods and the way they areproduced. For most ES such relationship is

lacking98.Whatisoneunitofwatershedfunction,

apartfromwaterquality?99,100.Whatisoneunitof

biodiversity, apart from the populations of

specific, flagship species?101 Carbon stocks and

greenhouse gas emissions are relatively easy to

quantify, as they scale with area, in contrast to

watershed functions and biodiversity that have

fractal dimensions on a length scale other than

the 2.0 of areabased scaling7. Most PES

arrangements cannot deal with the actual

services, buthave to accept proxies such as the

condition of land cover that is supposed to

enhance ES; in other cases it has to go a step

further back towards the human actions taken

that affect the condition of the land45. In many


17/34

16

cases trees and forests are associated with

perceptionsofES,buttheevidenceonwhichthis

is based may be relatively weak when held to

scientific scrutiny102,103. Also, the contrast

between forest and nonforest agricultural lands

in terms of tree cover is less than often

perceived104.However,thetypeoftreesand lack

of right tree at right place concepts may be a

limitation to actual ES enhancement where tree

coverisusedasproxy105,106,107.

Aninterestingalternativetodirectcommoditizing

ofES (theCESparadigm45maybe split intoCES1

and CES2, accordingly), is to tie ES to existing

commodity flows. Ecocertification in its various

forms is doingjust that108. It usually implies an

aggregated ES concept rather than sharplydefined separate ES, and leaves the details to

interactionsbetweenproducers(farmers)andthe

design and quality control agency of the

certificationprocess,butmultiplestandardstend

tocompeteforconsumerattentionandintroduce

a market element in the shaping of operational

rulesforcertification.

Even for carbon, performance metrics remain

contested. Concerns over global climate change

haveresultedinthecreationofpartialmarketsforcarbon credits, but their exchange between

trading systems (such as the European and

Americanmarkets)hasbeen constrainedby lack

ofpoliticalagreementonhowtotacklethe issue

at global scale. Partial successes in emission

reductionwithinAnnexB countriesof theKyoto

protocolmaywellhavebeennegatedbytheshift

of highemission production sectors to countries

outside the reach of the agreements. Emissions

embodied in tradehavenot yetbeenaddressed

by agreements and are a rapidly rising share of

the total anthropogenic emissions. Credibility of

national scale accounting of land use and land

coverchange in industrializedcountries isstillso

lowthatthissector(currentlyabout9%ofglobal

CO2 emissions3 but a larger share for nitrous

oxidesandmethane) isexcluded from theKyoto

protocol. In order to create credible results, the

voluntary Verified Carbon Scheme (VCS) and

similar approaches have created protocols that

aresoheavyindatarequirementthattransaction

costsmaytakeupamajorshareofmarketvalue

oftheresultingcredits.Thisisthecaseevenwhen

localcommunitiesare involved indatacollection

andmanagement109 ,andevenwith the typesof

public funding subsidies that have characterized

thefieldsofar.

AninterestingaspectoftheCES2approachisthat

it linksareabasedES concepts toproductbased

marketsandvaluechains.Productivitylinksthese

twomodesofexpressionandsomeofthenewer

ecocertification approaches, such as those for

cacao

110

, indeed have minimum standards forproductionperha,toreducetheleakageriskthat

locally ESfriendly but lowproductivity land uses

mayotherwisehave.

5.2 A real business case? Motivation for

buyers

Theprofileofcompaniesonpollutionprevention

has been found111 to correlate with firmlevel

financial performance after controlling for

variables traditionally thought to explain such

performance. Reduction in emissions of toxic

chemicals,within the legal limits,wasassociated

witha substantial increase inmarketvalue,with

magnitudeoftheeffectsvaryingacrossindustries.

This correlation may reflect that good

management practices that reduce the

environmental loading can also, independently,

increase asset value. Data such as these have

already led to reduced costs of borrowing for

clean companies from banks an indirect but

potentially important aspect of the businesscaseforenvironmentalmanagementinpolluting

industries.

What about the "business case for PES"? A

wellquoted example of the early PES literature

refers to the New York drinking water company


18/34

17

and its interactionswith theCatskills catchment.

Rather than spending $8$10 billion (112)112 on

mandatedwaterpurificationinstallations,thecity

engaged in preventive actions and negotiated

withlocalgovernments intheCatskillswatershed

toenact landuse restrictions thatwouldprotect

the water supply. Although in general this case

demonstrated that prevention can be cheaper

than cure, the business case arose in a well

regulatedenvironmentwherethecitycouldavoid

costs imposed by rules that were themselves

preventive.Similarly,asurveyofthebusinesscase

ofexistingPES in thePhilippines113with indepth

interviews of public and private enterprises

engaged in PES brought to light that most

companiessawaclearbusinesscase for themto

make such payments, but the business caseconsistedlargelyoftheneedtomaintainrelations

withgovernmentauthoritieswhoseconsentthey

needed to continue operating permits. Early

investors inPES inKenya include flowergrowers

in the Lake Naivasha area whose business case

depends on export markets and associated

customerperceptions inEuropeanmarket.Inthis

sense ES probably relate to customer loyalty in

thesamewayasotherservicedimensionsviaan

aggregate corporate image in the system1

brainofcustomers114.

5.3Motivationalcrowdingout:motivationforES

providers

The role of social motivation and persuasion as

the thirdpart of the carrot, stick, and sermon

triangle115isonlygraduallyenteringthedebateon

environmental and resource management116,117.

The interface of social motivation and

monetization of ES is not trivial, and an

economicceteris paribusassumption that PES

should enhance the supply of such services has

been challenged both by laboratory evidence

from behavioral economists118,119,120 and

emerging experience in the context of rural

development61,121,122,123. Numerous experimental

studies have found that a monetary incentive

crowds out alternate sources of motivation to

performa taskorengage inprosocialbehaviour.

Thesestudieshavefoundthatsmallpaymentscan

actually reduce levels of desired behaviour

relative to abaseline118, or that when payments

end,thelevelofthedesiredbehaviourreducesto

a level below its baseline before payment was

introduced124 (Deci1971).Thisbodyof research,

which is largely outside the realm of natural

resourcemanagement,raisesthequestionofhow

theutilitarian framingofecologicalconcernsand

market strategies can modify the way humans

perceiveandrelatetonature. Additionalstudies

areneeded intherealmofconservation inorder

tohelpgainabetterunderstandingoftheextent

to which monetary incentives are more likely to

have positive or counterproductive effectsregardingconservationaims125.

Concernsaboutmotivationcrowdingoutalsoare

relevant where collective action is required to

protectnaturalresourcesthatcommunitygroups

manage as common property. The theoretical

literature on PES cited in this review tends to

ignorethechallengesofelicitingcollectiveaction

in a group contract; there is an implied

assumptionthatcollectiveactionwilltakecareof

itself if the payment is well calibrated126.

However, research on management of the

commonsandonthepsychologicalfoundationsof

motivation give strong reasons to anticipate

difficulties in theuseof monetary incentives for

environmental services derived from common

property.Commons literaturearguesthatgroups

must build trust gradually to be able to

function127,128 . In addition, inmany casespro

socialmotivationsamongstindividualsarerooted

in intrinsic motivators, such as long standingtraditionsornorms that favorcollectiveaction129130

or concern about self image131, or public

image132. Where collective action is driven by

social, nonpecuniary norms, the introduction of

monetary incentives can undermine the social

norms and thus weaken instead of strengthen


19/34

18

collective action133. Although such studies were

notundertakenspecifically in thecontextofPES,

they point to a need for more research to

understand how monetary or other incentive

types interact with prosocial motivation and

collectiveaction.

The emerging experience with auctions in a

developing country context suggests that these

aresocialinteractionsofarathercomplexnature,

rather than simple experimental procedures to

establishacorrectprice134,135,136.

5.4PESinthepoverty*environmentnexus

PES literature often highlights a potential

compatibility between environmental

conservation and poverty reduction especiallywhenpoorhouseholdsarecontracted to receive

payments in return for theirconservationefforts21,137.An importantreasonbehind thispremise is

that in many developing countries, landscapes

with high potential to provide ES are also

inhabited by a high proportion of poor people.

However, it would be simplistic to assume that

the poor can easily participate in such PES

projectsorthattheywillbenefitsignificantlyonce

incentive payments are disbursed 138. In some

projects, researchers have found that poorhouseholds are able to participate79, while in

others participation seems to have been limited

torelativelywelloff landowners75.Indeed,there

arestrongbarriersthatmayrestricttheextentto

which poor households can access PES projects.

These include lack of clear tenure, lack of land,

high transaction costs, and high upfront

investments needed to adopt new land use

practices26,94. Thepooroftendonothavesecure

landtitle,whichmaybarthemfromobtainingPES

contracts.This isespecially true forservicessuch

ascarbonsequestration,wherepaymentsaretied

tointendedpermanenceoftheservice.Withouta

clear land title, it may be difficult for those

withoutlandtitletoconvincebuyersthattheycan

ensure the flow of services in the future139.

Landlesspoororthosewithouttitlemayinfactbe

ineligible to participate in such PES programs.

Similarly, in the case of rented land, tenants

cannot promise anything about longterm land

usewithoutinputfromthelandowner.Also,ifthe

possibility of environmental service payments

makes the land more valuable, the landowner

may either increase the rent or discontinue the

lease, possibly disrupting the renters

livelihood140.

Transaction costs (here interpreted as costs of

negotiating, implementing, monitoring and

enforcing PES contracts) are generally

independentof thesizeof thecontract involved,

which means PES programs that contract many

smallholdersfacemorecostsperunitoflandand

servicesthanthosethatcontractwithonlyafew

largelandowners.ThusPESarrangementsfocused

on individual landholdings may be less viable

wherethere isahighconcentrationofverysmall

farms. Service buyers may try to contract with

large landholders rather than small ones, which

would exclude the poor. For instance, to limit

transactioncoststhePROFAFORcarbonprojectin

Ecuador signed individual carbon contracts only

withfarmersowningat least50hectaresof land,

thus restricting the participation of the local

smallholders in project activities104. Similarly,

initialinvestmentcosts(buyingseedlingsorhiring

labor), opportunity costs (loss of benefits from

existing landusethatneedstobereplaced),and

risksassociatedwithpotentialbenefits fromnew

landuseallaffecttheparticipationbythepoor141.

Itispossibletopayanadditionalsumtocoverthe

additional costs for poor households to

participate; empirical estimates142 of what such

approachwouldcostforatreeplantingprojectin

Tanzania are available. However, it is hard to

imagine thatallbuyersofESwouldbewilling topaythispremium.

The second related issue is theactual impacton

households once they do participate in PES

projects.EvidenceofeconomicbenefitsfromPES

is mixed. In one of the first studies on local

impactsofforestcarbonprojects143,theScolelTe


20/34

19

project in Mexico was found to have a positive

effectonhousehold incomes in theprojectarea.

In contrast, an evaluation144 of the Noel Kempff

project in Bolivia had a mixed effect, with net

benefitsforthelargemajorityoflocalpeoplebut

a large proportion of community members

expressing dissatisfaction with the project as it

had not met their expectations . Managing

expectations isachallenge inall suchefforts;an

initialhypephasehelpstogetattention,butmay

lead to disappointment later on . In a more

comprehensive impactstudy 145ofPESpayments

in a local community in Mozambique, effective

levels ofper capita payment and impacts were

found to be small when compared to increased

employment benefits from developmental

activities of the project. On the other hand,provision of rewards in the form of longterm

tenuresecurity for localfarmers in Indonesiahas

had a positive impact on the households

livelihoods146.The interactionofPESwithpoverty

is therefore still far from well understood and

moreempiricalresearch isneededtounderstand

thepovertyenvironmentnexus.

Gender dimensions of the poverty*environment

nexus have been studied in terms of gender

differentiated roles in interactingwithwaterand

landresources147.Perspectivesonrelativemaleor

female poverty depend on the criteria and

methods of assessment148. Where PES contracts

arenegotiatedatcommunityscaleitmaybehard

for outsiders to challenge existing gender roles

and biases, without introducing an additional

objective to an already complex set of social

norms149.

5.5Areclearproperty rightsaprecondition for

PES?

Skewed landdistributionoftencompels thepoor

tosurvivebycultivatingmarginal landerosion

proneslopesandotherenvironmentalproblems.

Without tenure, and often with only passing

claimsonthelandtheycultivate,thepoorareless

likely to make investments to protect natural

resources36. Looking back at Figure 1, the PES

arrow(B2)iscontingentonrightstouse(A2),and

the rights for individual households are

constrainedbyoverall landusepolicies (A1),just

asPES isconstrainedbyoveralleconomicpolicies

(B1). For Indonesia, where large tracts of forest

land are underperforming in terms of ES but

remain claimed by the state, the forestry

regulatory framework may (over some parts of

thedomain?)havetobereplacedbyanagrarian

one150. Conflicting claims are the primary

bottleneck to any carbon related PES in the

peatlandsof centralKalimantan 151. Yet,positive

examples exist where resolution of conflicts and

implementation of community forest

management, with certain conditionality with

regards to maintenance of ES, has allowed localESfriendly investment in land uses152. In other

cases, formal recognition was not required153

when the general positive perception of ES

friendly landuseallowedfarmerstoreclaimtheir

de facto landuse rights from the state. Inother

situations,resolvingtenureissueshasbeenapre

cursortootherformsofPES154.Thecoinvestment

paradigm45 allows such steps to be discussed

under the wide umbrella of PES, rather than

putting tenure securityasaprecondition forPES

effortsanddisqualifyingalargepartoftherural

poor.

5.6 Is thereenoughPES funding forapplications

atscale?

Most of the PES literature so far has looked at

specialcaseswhereahighlocalinterestinESwas

the starting point of PES experiments. To check

how special those situations must be, a recent

study 65 considered the supply/demand

relationship and the relative income additions

that upland people might obtain from supplying

watershed services to their downstream

neighbors. Thepercapitabenefitspossibleinthe

uplands,RPu,werefoundtobe:

RPu=(AdAu1)(IdIu

1.)(du1)d(1T)(1u).


21/34

20

which consists of a number of dimensionless

ratios of values upstream (subscript u) and

downstream (subscript d): area (A), income (I),

populationdensity (P), thewillingness topay by

downstream beneficiaries (d) relative to their

income,transactioncostsTandtheoffsetfraction

u of what is received in upstream areas. If a

tentativethreshold forRPu issetasa5% income

increase before upstream land users might take

noticeoftheopportunityandrespond,theresults

areatleastafactor4off,whendataforIndonesia

areused. This implies that this typeof financial

transfercanhardlybeexpectedtomakeadentin

rural poverty in the uplands, but it can be

significantinanonnegligiblesubsetofsituations.

Nonfinancialpaymentpotentiallyopensaccesstocritical livelihood capitals that might be lacking

within theESprovidercommunities.This typeof

payment is usually considered as indirect and

patronizing, while cash payment is frequently

seenasmore flexible forESproviders toconvert

to localgoodsandservices.Casestudies inAsia65

andLatinAmerica63indicatedthata nonfinancial

payment was preferred by some of the local

communitiesinvolvedbecauseofseveralreasons,

suchaslimitedcapabilityoflocalcommunitiesfor

savings, investment and entrepreneurship.

Observations in developing countries reveal that

both financial and nonfinancial payments might

face complexbureaucraticandhighly contagious

collusion because the PES governance is still

unclear, formally and informally. However, this

situation might be contextual as an Indonesian

case in Cidanau watershed62 showed that cash

payment had been successfully transformed to

independent smallscale business and

infrastructure(i.e.,publicaccesstocleanwaterbydevelopingsimplepipingsystem).

5.7 CanREDD provide international funding for

localPES?

ThepotentialforinternallygeneratedPESfunding

may be limited, once expressed on a per capita

basis,but theCostaRicacasepresentedanearly

example of international funds supporting a

domesticpolicyforESoriented incentives.Atthe

start of the international debate on REDD+,

reducing emissions from deforestation and

(forest) degradation plus forest stock

enhancement, the focus was on national scale

efforts. As the preceding avoided deforestation

had shown, leakage cannot be contained in a

piecemeal projectbyproject approach. To

achievetheREDD+goals,atgigaeconomicscale,

a multiscale, layered effort is needed that

reaches down to micro and picoeconomic

aspects.Intheinternationalnegotiationsissuesof

pride and sovereignty have been at least as

important and hard to deal with as issues of

carbon price and data collection to supportrealistic performancebased systems. As soon as

expectationsoffundingforadditionaleffortswere

raised, existing norms for national forest policy

appeared to be crowded out. Yet, international

effortstobringtransparencytosectorsknownfor

corruption and highlevel support for illegal

logging,seemedtorequireafullcommoditization:

if the same currencies (money and carbon stock

changes) are used across the value chain, elite

capture can be more easily quantified and

reported.

EarlyclaimsonperverseincentiveswithPESapplications in the context of tropical forests,suggesting that direct payments forenvironmentalservicesspelldoomforsustainableforest management in the tropics, could still beeasily dismissed155. In view of the complexity ofmultiscaledriversofchange inforestextentandcondition, in socioecologicaleconomicsystems156, and the contested nature of tenureand ownership of large tracts of forest, theclaimants for a piece of the pie are many andnegotiationscomplex.Manyattemptsweremadeto bypass local and/or national governments inlinking international finance to local action toprotectforestandclaimemissionreductiontheymay all be bound to fail. A nested, multiscaleapproachmaywellhavetobepolyparadigmatic,


22/34

21

changingfacebetween,butsynergizing,CES,COSand CIS paradigms157. In countries with existingpublic sector payment schemes for forestmanagement,REDD+canbeaddedtothebundleofservicesrewardedatrelatively lowtransactioncosts,aslongasthecorrelationsbetweenforestC

stocks and other services are sufficientlytight158,159,160,161.

6.Discussion

6.1Challenges inbridgingacross temporal scales

andassociateddiscountrates

PESwasconceivedasalternativeorcomplement

togovernmentprograms,givingagreaterstaketo

local communities and landusers,with a simple

way to convey the relative merit of variousalternative land uses through the details of the

conditionalityclausesinacontract.Wemayhave,

however,come fullcircleback to the conceptof

investing in natural capital: the ecological

economics approach to sustainability162. The

financial transfers that have so far been

effectuated49, 163are farbelow thetruevalueto

society that studies such as TEEB (19)19 are

documenting164.Thismightimplythatthecurrent

framing of ES is less universally shared among

stakeholders than assumed and that it needs to

be further contextualized165. In the meso

American countries Costa Rica and Mexico that

pioneered in thePESapproachatnational scale,

the link between measurement, value and

paymentisfarfromresolved166

It may also imply that the interaction betweengovernmentpoliciesandPESmechanismshasnotbeen fully understood167. The crowding out ofsocial norms at the community and government

level may reduce the effectiveness of the fundsspent (picoeconomic leakage). The concept ofaltruismandprosocialbehaviorhaveemergedaskeytoadeeperunderstandingofthese feedbackmechanisms.Referringback to the five scalesofeconomicanalysis,wehave so far seen thatPESwasinitiallyperceivedasprimarilyaimingtobringmicroeconomic decision making at individual,

household or farm level in line with the longerterminterestsatmeso ormacroeconomiclevels.Much of the discussion so far has been on therecent advances in picoeconomics of decisionmakingwhen humans are offered choices. Fromthe other side of the scale, gigaeconomics, an

equally important challenge arises, as futureresourcescarcityneeds tobeproperlyweighted;iftemporalscaling(discountrates)differasmuchassuggested inTable2, it isunrealistictoexpectanysinglepricetoemergeasreflectingtruevalue.Differential time scales and discount rates makeadaptation a more tangible entry point fordiscussionson climate change than mitigation,even though treesand forests canplaya role inboth107,168.Two main differences between pico and micro

economics can be summarized in the way future

options are discounted. While microeconomics(system2 brain functions) operate at apparent

discount rates that relate to the costs and risks of

borrowing money, the system 1 goes for instant

rewards,preferringwhat's in frontofone'seyesover

almostanypromiseoflargeramountsinanearfuture.

Atthesametime,picoeconomicsrespondstronglyto

socialnorms(tentativelylabeledassystem3here,but

requiringfurtherstudy inrelationtosystems1and2),

whichappears tooperateatnearzerodiscountrates,

as lifetime values appear to be at play. Financial

motivations tend towinoutwhen socialand financial

motivationsaremixedinexperimentalsettings169,andthe way pico andmicro economic spheres interact is

incompletelyunderstood.

In micro as well as macroeconomics,

importantcategoriesofhumanmediatedservices

are considered as equivalent to goods, with

markets approximating a price (exchange rate)

that reflects options for producers to switch

betweenways toearna living.Macro economic

scales differ in discount rates, linked to lower

levels of perceived risk for aggregated entitiessuch as nation states or large companies

comparedtohouseholds especially ifthe latter

don't have secure ownership or resource use

rights. The difference between private and

socialdiscountratesisanimportantpartofthe

PolicyAnalysisMatrixapproach170,171,andcan


23/34

22

Table2.Comparisonacrossfivescalesofeconomicanalysisoftheapparentdiscountrates

Economics Decisionmaking Discount rate for goods

and human/ social

services

Environmentalserviceissues

Pico Brainsynapse Goods:>100%/day

Social:~0%

Crowdingoutsocialnorms Suasion efforts for inter

nalizationforESproducers

Feelgood social statusmotivationforbuyers

Micro Household ~20%/year

PES operational domain, adaptation

to global climate change, dealing

withinvasivesandbiodiversityloss

Meso Landscape,

Enterprise

~10%/year

Macro Nation ~5%/year

Giga Global natural

resources


24/34

23

system1 feature thatmodifies thesystem2

utility. There appear to be clear patterns in

theconditionsunderwhichrisktakingcan

be expected (i.e., i. hope to avoid loss,

perceived high probability of loss but small

chance to get bailed out; and ii. hope of

large gain, perceived low probability of

substantialnetgain,withoutriskofloss),and

when riskavoidancemayprevail (iii. fear

ofdisappointment,highprobability,butno

certainty, of net gain; and iv. fear of large

loss, low probability of substantial loss).

Wheretheportrayalas lossorgaindepends

on theanchoringorbenchmark, rather than

objectiveeffect,shiftsfromrisktakingtorisk

avoidance can be under the influence of

communicationstyles

Prospecttheoryallowsmuchofthegains in

economicequationstoberetainedbymerely

replacingutilitybyprospect.Theframingof

issues, however, suggest incomplete reverse

bility.

PES instrumentsgenerallytry toreducethe

gap between the overall prospects for the

decision maker (at a specific scale) and the

prospects as evaluated at other scales.

Internalization of externalities is fully achieved

when the prospect evaluations have become

independentof scale;maybe it helps if a term

such as weakly internalized replaces

externality, to indicate space forquantitative,

gradual shifts.PES relates financialbenefits for

privateorcorporatedecisionmakerstooptions

thatminimizeenvironmentaldamage forother

scale levels. Such financial transfers, however,

are part of a complex crossscale crossvalue

exchange, and cannot assume to be ceteris

paribus, as the financial transfers can involve

broaderinteractions.Wemay,however,havetogoonestepfurther ifwewanttobringpicoto

giga economics into a single framework. The

bounded rationality concept implies that, in

contrasttotheassumptionthatthere isperfect

information and unlimited intellectual

capacities,wemusttakeintoaccountthata

Table3.Classificationofprospectsovercapitaltypesxandactor levels i,withassociateddiscountratesand

affinityvector

Accountingstance (scaleof economicanalysis)

Affinity Discountrate

SumsofdiscountedbenefitsminuscostsFinancial Human Social Natural Infra

structure

Fin Hum Soc Nat Inf

Private (pico,

micro)

Apriv rpriv bF,p,cF,p bH,p,cH,p bS,p,cS,p

bN,p,cN,p

bI,p,cI,p

Local (pico,

micro)

Aloc rloc bF,l,cF,l bH,l,cH,l bS,l,cS,l bN,l,cN,l bI,l,cI,l

Downstream

(meso)

Adownst rdownst bF,d,cF,d bH,d,cH,d bS,d,cS,d

bN,d,cN,d

bI,d,cI,d

Corporate

(meso)

Acorp rcorp bF,c,cF,c bH,c,cH,c bS,c,cS,c

bN,c,cN,c bI,c,cI,c

National

(macro)

Anat rnat bF,n,cF,n bH,n,cH,n bS,n,cS,n

bN,n,cN,n

bI,n,cI,n

Global(giga) Aglob rglob bF,g,cF,g bH,g,cH,g bS,g,cS,g

bN,g,cN,g bI,g,cI,g

Universal Auniv Religionmediatedconcernsbeyondcapitalsapplyatscalesbeyondglobe

Note: 1 indicatesestimateofallcostandbenefittermsratherthantruevalue


25/34

24

landownersmayfailtofindtheoptimaladoptionof

theirlanduseinthepresenceofcomplicatedspatial

evaluationrules174,175.Ingenericframeworkdecision

making at any scale can be analyzed to be the

outcomeofaweighing(bybrainsystems1,2and3

in different and still poorly understood ways) of

optionsbasedon176:

a)asetofoptions,

b)asetofcriteria(compareTable1),

c) expectations of how the various options will

performagainstthesecriteriaovertime,

d) incomplete information on merits (or costs and

benefits)

d) a way of summarizing timebased performance

intoasingleattribute,

e)anoperationalweighingofthecriteria,and

f)anallocationof resourcesacrossoneormoreof

theoptions.

Based on Table 3, we can conceptualize a

simpleprospectfunctionforeachaccountingstance

i could be an affinityweighted sum of expected

benefits and costs across the various asset types(capitals) x, and across allother scales (accounting

stances) i, each discounted with an appropriate

discountraterx,iandweightedbywx,i:

Prospecti = i Ai x wx,i t(bx,i,tc x,i,t)/(1+ rx i)t

(2)

Inpracticemanytermswillhavenegligiblysmall

values formanyoftheagents/decisionmakers,but

wecansee thattherearemultipleentrypoints for

nudging decisions towards greater ES performance

via,A,w,ror:

: increasing knowledge of costs and benefits to

othersofactionsanddecisionsbythefocalagent,

A:increasingaffinityandsenseofbelonging,

w: modifying the implicit weighting factors across

capitaltypes,

r:discountratecomponent reflectingthescaleand

itsassociatedriskaggregation,

: discount rate component reflecting the type ofcapital.

A number of parallel approaches have been

proposedthatcanbeseenassimplificationsofthis

genericscheme:

a) Valuingecosystemservices isaimedat findingthe exchange rates (wx,i) across capitals and

expressing all in financial terms19; however this

approach is challenged by the intrinsically

differentdiscountratesandinstitutionalcontextsthat tie any specific conversion factor to an a

priori choice of time frame, along with evolving

sciencebasedunderstandingofESdynamics

b) Carrots (positive incentives leading to increasebF,p)and sticks (enforced regulations leading to

increase cF,p) interact with sermons that

enhance the affinity vector for other scales,

reducethediscountratesforcapitalsotherthan

financial and scales other than private, and

increase knowledge of expected costs andbenefitsbeyondprivatefinancialgains.

c) Crowding out social motivation where bF,p,cF,pinteractwithbS,p,cS,p;preferencesexpressed ina

social (group) context may differ from those

expressedindividually(175)177

d) CES forms of PES/CRES, e.g., from national toprivatescales,translatethe(bN,n cN,n bN,p+cN,p)

differential into bF,p terms, with market

mechanisms determining the right price that

apparently expresses the value for external

stakeholders

e) COS formsofPES/CRESdoes the samebutwithpricesdeterminedatbroadernegotiation tables

andabroaderrangeofinteractionswithrules


26/34

25

f) CISformsofPES/REScantakeinamuchbroaderrangeofvaluesanddiscountrates

6.3 A new comprehensive altruism framework

anditsapplications

In the simplified form of two levels, private andother and a uniform relative weighting of the

variouscapitals,equation2resemblestheequation

George Price developed for the emergence of

altruismasprobleminevolutionarybiology:

Figure 6. George Price178 clarified in 1968 that a cova

riancematrixbetween individualandaggregatebenefits

canreconcilealtruismandselfishgenes.

InasenseGeorgePricesequation foraltruism

(subordinating private utility to that of a broader

group) specifies conditions for internalization of

externalities,as itshowsthat thebest interestsof

the individualcanmatch thoseofabroadergroup,

as long as the benefitminuscost differential is

balanced by the social cohesion term. The affinityparameterisscaledbetween 1and+1andincludes

foesaswellasfriends.

6.4MultiscaleframingofREDD+linkedtomultiple

PESparadigms

Comingbacktothemultiscale institutionalframing

of the REDD+ agenda, a multiparadigmatic

approach appears to be logical: at national scale

property rights are clear (national borders),

performancemeasuresat this scalehave absorbed

most of the crosslandscape leakage, and

permanence can focus on continuity of accounting

rulesataggregated levels.ACESparadigmofcross

nationalcarbontradeisfeasible.Betweenanational

scale and its subnational entities (sectorbased or

geographically defined), a COS paradigm of

compensating for choices on the development/

environment possibility frontier is appropriate. At

locallevel,aCISparadigmisappropriateandcanbe

usedtocreatecomanagementregimesandgreater

clarity in resource use rights. A key challenge,

however, is to maintain transparency in such a

multiparadigmatic approach, given the tendencies

toelitecapture, lowaccountability (corruption)and

electioncyclepoliticalbiases.Inthefuturedirection

paragraph we therefore put these ideas in

hypothesis format: there is some evidence that

supportstheideas,butacriticalglobalcomparisonis

needed.

6.5Closingremarks

Finally,at thegigaeconomicscale theconcerns forplanetary boundaries179 and the need for more

targeted, more rapid, more transparent and moreinnovative feedback loops remains urgent, ascurrentfeedbackdoesnotkeepupwiththerateofchange intheplanetearthsystem.Theexpectationthat PES could provide flexible, effective and fairfeedback loops has only partially be met. Sometwentyyearsbeforethe1992Rioconference,adviceto the Club of Rome called for reshaping theinternational order (RIO)180. Twenty years after1992, that call is urgent as it was then181. Unlessglobal agreements and policies set the pace andclarifytheboundaries,marketbasedESapproaches

will only serve subsystems and may make thingsworse for others. We thus end on a ratherpessimisticnoteontheprospectsforPEStoserveasa panacea to align ecology and economics. Theoptimistwillnotehowfarwehaveprogressedfromthe stoneage economics182 at the start of theAnthropocene183andbe lessconcernedthatwestillhave a way to go. The realist will appreciate theprogressmade,butseethepaceastooslow184.

FUTUREISSUESThe following set of issues at the interface of PES

praxis and interdisciplinary research may guide

futureefforts:

H1: Crossscale mechanisms for fair and efficient

enhancementofES(betheywater,biodiversity

orclimaterelated)needtoacknowledge


27/34

26

differencesinclarityofrightsandperformance

measures between local, subnational and

national scales that reshape fairness and

efficiencyconceptsatscaletransitions.

H2: At national borders an international form of

commoditized environmental services carbon

trade is feasible that links performance on

verifiable emissions reduction below

internationally agreed reference levels, to

financialflows(CES1paradigm).

H3: In response to consumer concerns over the

consequence of current modes of production

international trade will increasingly include

voluntary and mandatory standards for

emissions reduction and biodiversity

conservation linkedtocommodityvaluechains

that provide incentives for reduced emission

land use and reducing biodiversity threats

(CES2paradigm)

H4:Fromnational tosubnationalentitiesa formof

compensating for opportunities skipped is

appropriate,usingproxiessuchasforestcover

in relation to human population density,

combining biodiversity, watershed concerns

andGHGemissions(COSparadigm)

H5: At local level, property rights and outcome

basedperformancecriteriaareachallengetoa

$ per t CO2 exchange and coinvestment in

environmental services (interpreted across

water, biodiversity and Cstocks) and the

humanand

pes evolution

Documents