Abstract
This article draws lessons from the design of national government-financed payments for ecosystem services (PES) schemes in developing country settings in order to understand what factors will most likely lead to/enable the participation of the poorest actors or small holders[1] as service providers in these schemes. It seeks to understand under what conditions PES functions as an income redistribution or social empowerment instrument for the most disadvantaged stakeholders possible in addition to ecosystem service (ES) provision goals. Whether participation results in actual net positive impacts will require a more rigorous social impact assessment of benefits of mature schemes minus costs of ES provision. However, that is beyond the scope of this study. This paper looks at four mainly water PES schemes but makes policy recommendations for targeting, removing barriers and reducing transaction costs to influence pro-poor design and participation. Finally the paper lists multilateral funds available for financing these recommendations as well as suggests integrating national level PES schemes with emerging national level Reducing Emissions from Deforestation and Degradation (REDD) initiatives due to the potential for scaled up financing resulting from international, national and subnational compliance driven as well as the voluntary markets for greenhouse gas mitigation.
Context: Carbon and Water Markets
The most prominent and biggest markets are those linked to global climate change mitigation. Significant international funding streams for carbon sequestration services—coming either from cap and trade/compliant-driven carbon markets resulting from international agreements such as the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC), sub national compliance markets, or from the voluntary carbon markets motivated by individual or corporate social responsibility or pre-compliance—are likely to flow to forestry ecosystem services projects due to their climate change mitigation potential. In 2008, these regulated and voluntary markets for carbon sequestration activities were worth US$126 billion.[2]
However, markets for hydrological services are prevalent throughout Latin America. Mexico’s Payment for Hydrological Environmental Services (PSAH) Program, worth US$27.3 million in 2004 (Munoz-Pina et al, 2005), and Costa Rica’s National PES program, worth approximately US$140 million since its inception in 1997, are two well known examples of national level PES schemes. The Costa Rica program was initiated after Forest Law No. 7575 recognized four environmental services provided by forest ecosystems: a) carbon sequestration b) hydrological services including water quantity and quality for consumption but also irrigation and energy provision c) biodiversity conservation d) provision of scenic beauty for recreation and tourism. The law also established the National Fund for Forest Financing (FONAFIFO) which manages the program and receives its revenues from a 3.5% gas tax as well as multilateral and bilateral funds. In Mexico, the program arose as a response to water scarcity and high deforestation rates (1.3 percent annually) in the country. For example, two thirds of 188 of its most important aquifers are overexploited while an additional 28 percent are fully used (Comision Nacional del Agua, 2003). The Government’s environmental research agency (Instituto Nacional de Ecologia, INE)—which is part of the Secretariat of Environment and Natural Resources (SEMARNAT)—as well as two Mexican universities and the University of California at Berkeley conducted the analysis and design of the program. The National Forestry Commission (CONAFOR) provided the political support it needed to pass through Congress. Another market like water scheme is South Africa’s Working for Water (WfW) Program, worth US$43 million in 2005 (Turpie et al, 2005). In South Africa it arose as a policy response to water scarcity as there is only between 500 m^3 and 1000m^3 of water available per person per year making it chronically water stressed (Turpie et al, 2008). While the primary objective of the schemes was improved ES provision, the three programs had specific pro-poor side objectives. In the PSAH program, 31 percent of recipients had incomes below the extreme poverty line in 2004. One study demonstrated the Costa Rica program improved tenure security by preventing forested land as being considered idle and confiscated and by providing protection against land invasions (Miranda et al., 2003). In South Africa the WfW Program employed 24,000 previously unemployed people in 2000, 52 percent of whom were women. The following section will present lessons or mechanisms for designing pro-poor PES and recommend policy responses drawn from a literature review from several case studies. While PES schemes develop in particular environmental, economic, social, and political contexts, program design and targeting can have a significant influence on whether the most vulnerable segments of our society can tap into these markets.
Lessons in Designing Pro-Poor PES
Targeting
Problem: In analyzing national government-financed PES schemes, Wunder et al (2008) argue that poverty targeting may come at the expense of environmental objectives. The reasoning is that when the criteria for spatial targeting are something other than ES delivery (level of service) and additionality (risk of loss of the service) then program effectiveness (in which PES leads to an actual increase in ES compared to results without PES) declines. Moreover, if opportunity costs are known so that buyers pay providers just barely over their provision costs, program efficiency (maximizing ES provision from a given budget) is gained while welfare to providers is lost. The South African Working for Water Program demonstrates these goals need not be mutually exclusive. One of the primary objectives of the program is poverty alleviation and job creation and it has continued to receive wide political support because of this mission. The program clears invasive alien plants that affect water flows in water catchment areas by hiring roving “service providers” that are small scale contractors who perform restoration work on land under any type of ownership. The targeting criterion is that the contractor must have been previously unemployed. Milton et al (2003) estimate that the program employed 24,000 previously unemployed people, 52 percent of whom were women, in a given year. It has also been highly successful in restoring water supply in alien infested catchments. Between 1997 and 2006 one study found the clearing of invasive plants increased stream flows by nearly 46 million m3 per annum (Marais and Wannenburgh 2007). The Mexican PSAH program shows that after spatially targeting to achieve program effectiveness and efficiency in meeting the primary environmental objectives of PES, social side objectives can be incorporated. In fact, in government financed schemes, measures to improve efficiency such as price differentiation according to environmental service provision, risk of service loss (ie risk of deforestation) and participation costs (sum of opportunity, transaction and protection costs) can free up funds to further contribute to these dual goals. In the PSAH program, eligible areas are determined by spatially targeting recharge areas of overexploited aquifers, watersheds with high water scarcity and areas with high flood risk. While poverty targeting is not part of the eligibility criteria, it is incorporated into a grading system (which includes a series of weights for water scarcity and an index for deforestation risk) during the selection process when eligible area applications exceed the budget. In the three years of the program’s operation in eligible areas 78 percent of payments went to forests owned by people living in population centers characterized with high or very high marginalization.[3] However, the very highly marginalized were under represented relative to the high marginalized. This may be due to barriers to entry such as clear land titles and low education. Another example of targeting is by defining and prioritizing smallholders by farm size in the grading scale. In a Biocarbon Fund project[4] a socio-economic characterization of the local farming community was undertaken and low and medium income farmers were targeted. The study identified the following types of actors:
· Agricultural worker: temporal worker without land
· Employee: permanent worker without land
· Low income farmer or peasant: peasant with land that in addition works as a temporal agricultural worker. No more than 3 ha.
· Medium income farmer or peasant: peasant with land that can work only with her family in her land. More than 8 ha.
· High income fanner or peasant: peasant with land that can hire additional workers to work in his land. More than 8 ha.
· Rural Entrepreneur: landowner that has land, employees and also other business.
Policy Response: Define and map poor communities in environmentally sensitive areas using Geographic Information Systems (GIS). To encourage participation of the landless, target training and hiring of women and men below the national poverty line taking into account depth of poverty indicators[5] for labor intensive activities such as nursery maintenance, tree planting or clearing of invasive plants. Incorporate a gender perspective by providing flexible hours, onsite child care facilities and training women in vegetable gardening, for example, to supplement their income at home.
Removing Barriers
Problem: In addition to poverty targeting, a second step would be to remove any unnecessary regulatory obstacles that restrict access to the rural poor. The following are some barriers to entry for small holders to the market schemes identified by GRIEG-GRAN et al. 2005:
a) Informal and insecure land/resource tenure- Eligibility requirements for PES schemes require clear land titles. The landless will be excluded de jure. In PES schemes it is necessary to be able to exclude access to land and resources in order for service providers to reliably guarantee specific land management services.
b) Regulatory access discrimination- Another study regarding payments for reforestation in Huetar Norte in Costa Rica (GRIEG-GRAN et al. 2005) identified some factors in practice in the underlying regulatory framework that restricted access for the poor. For one, participation in the PES scheme meant a disqualification from accessing some other public benefits such as housing subsidies. Second, land reform beneficiaries are not eligible for PES, even if their land contains forest or is suitable for forestry activities. Third, forestry activities were not eligible for credit from the National Bank System for Financing, the main source of finance in Costa Rica. Additional finance is necessary for start up costs of reforestation and this restriction on bank credit penalizes small landowners as they have fewer alternatives for funding.
c) Exclusion of mixed land uses when defining eligibility criteria such as livestock-forestry or agro-forestry systems which are often favored by smallholders. In the national Costa Rica PES scheme agroforestry was excluded and empirical evidence has shown agroforestry benefits positively poor, small scale farmers[6]. It can be implemented on marginal or degraded lands of poor land holders with low opportunity costs so as not to displace or replace other productive activities so that the income generated through these activities is entirely additional. It increases the productivity of the soil, diversifies income and complements reforestation, aforestation or avoided deforestation activities.
Policy response: Do not exclude smallholders with informal land tenure who have historical control over resources and have added value to the land. Instead devise strategies that strengthen land tenure and speed up the titling process, especially for those people living in environmentally sensitive lands. Risk insurance can be purchased for participants without formal titles until titles are secured to ensure continuous service provision. In Costa Rica, the national law forbade using public funds to pay landowners without a formal title. As a first solution, they created parallel contracts similar to the National PES contracts financed by service buyers for landowners without titles. In a particular region, Platanar, they covered only half of the payments to landowners with titles and FONAFIFO paid the rest. This freed up funds to pay landowners without titles that would otherwise not be eligible for public funds. Afterwards the law was changed to allow public funds for the participation of landowners that lacked titles. In regards to the second, conduct an analysis of the program to identify any arbitrary barriers or impediments to participation within the management structures of the program that are biased towards small holders and initiate the necessary steps to remove them. Thirdly, a lack of participatory decision-making structures in the formulation of rules—especially in government financed schemes—means the poor are not usually present when eligibility rules and project types are decided that determine access to the scheme. Conducting public consultations with communities within the target area that is to receive funds for ecosystem provision would be a starting point for carrying out an analysis of barriers and opportunities for smallholder participation as well as ensuring customary rights or access to resources are upheld.
Transaction costs
Negotiating with 100 small service providers entails much higher transaction costs than negotiating with one or two large landowners managing an equal area of land. The Forests Absorbing Carbon-dioxide Emissions Forestation Program (PROFAFOR) in Ecuador has a minimum size criterion of 50 ha due to the high transaction costs of working with smaller plots which effectively excludes smallholders.
Policy response: Costa Rica’s national PES program has developed a system of collective contracting through which groups of small farmers join the program collectively rather than individually thus spreading transaction costs over a large group (FONAFIFO, 2000). Making contracts simpler and taking out requirements unrelated to the transaction at hand could also reduce transaction costs. Although the PROFAFOR program has a minimum size criterion it has aggregated smaller size areas into 43 collective contracts with cash poor highland communities. These account for nearly 30 percent of PROFAFOR’s contracts in the highland region of Ecuador and for 40 percent of the 23,722 hectares of land covered by these contracts.
Financing Pro-Poor National PES Design: Multilateral Funds and Climate, Community and Biodiversity Standards (CCB)
Multilateral funds such as the UN REDD[7] Programme, the BioCarbon Fund, the Forest Carbon Partnership Facility and the Forest Investment Program (see Appendix 1 for a table of major forest sector funds) could be used to provide upfront financing to reduce transaction costs of poor landholders in designing national level PES programs as long as they are working towards establishing a REDD component. Alternatively, national level REDD initiatives can piggy back on these PES institutions or at the very least coordinate with national level PES programs to make sure there is information sharing of lessons learned and best practices as well as streamlining or identifying synergies of processes. National level REDD initiatives are incipient at the moment—Panama and Guyana are the only two countries in Latin America that have initiated the Forest Carbon Partnership Facility process by submitting a Readiness Plan.