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date: 17 February 2019

Payments for Ecosystem Services

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Environmental Science. Please check back later for the full article.

Payments for ecosystem services (PES) programs are broadly defined as voluntary programs that pay (in-kind or cash) for provision of environmental services either to a specific user or to society at large, with payments conditional on agreed-upon rules of natural resource management. PES programs have been established in a variety of contexts to address environmental issues such as forest degradation, watershed management, and biodiversity protection. They often pay landowners for conservation practices, including protection of native ecosystems.

The early literature on PES is grounded in the Coase Theorem, which suggests that negative environmental externalities can be reduced through voluntary, market-like transactions, as long as transaction costs are low and property rights are clearly defined. In the context of PES, the Coase Theorem suggests payments negotiated directly between beneficiaries and producers of ecosystem services could result in an equilibrium price and quantity that maximize welfare, thus creating a more cost-effective conservation program. In addition, in both developed and developing countries, there is a high spatial correlation between areas that could supply ecosystem services and areas where poverty is high. This leads to equity arguments for PES as a way for society to compensate the relatively poor providers of ecosystem services. Thus, many programs have dual environmental and social policy objectives of ecosystem service provision and rural development or poverty alleviation. That is, PES programs are expected to result in “win-win” scenarios by simultaneously reducing negative environmental externalities and helping the poor.

In practice, PES institutions diverge significantly from the market transactions suggestion by the Coasian framework. Governments often administer PES programs, using public revenues to make payments on a defined per-hectare schedule (not determined by the market or by the ecosystem services produced) to landowners who apply for the programs. Both the transaction costs of applying to the program and the selection rules shape the distribution of participation across ecological zones and landowner types. There are often trade-offs between minimizing transactions costs and maximizing benefits, and between providing ecosystem services and social objectives.

There is some evidence these departures from theory and other implementation issues, such as nonexistent or inconsistent monitoring, have made the “win-win” scenario elusive. However, through a case study of the Costa Rican program, we show how program administrators can design and implement institutional changes to PES programs in order to address concerns about cost efficiency and the distribution of participation.