Jim Salzman May 18, 2005

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The Nuts and Bolts of
Creating Markets for Ecosystem Services

• Jim Salzman
  May 18, 2005
• Duke Law School Nicholas School of
  Environment Earth Sciences

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Why Such Poor Protection of Services?

• Ignorance

• Services taken for granted
• Biophysical provision poorly understood

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Production of Goods

• Food
• Pharmaceuticals
• Energy
• e.g., biomass
• Industrial products
• waxes, oils, fragrances, dyes, latex, rubber,
  etc.
• Durable materials
• precursors to many synthetic products
• Genetic resources

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Why Such Poor Protection of Services?

• Market Failure

• Few markets for public goods and services
• Current price signals dont indicate sufficient
  value to encourage protection and provision of
  services
• Value is landscape-specific
• Under-provision of public goods

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Why Such Poor Protection of Services?

• Institutional Failure

• Policies and institutions do not encourage or
  value management of ecosystems for service
  provision
• Ecological and political boundaries rarely
  overlap
• Challenge of extending authority beyond
  traditional institutional boundaries

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The Policy Toolkit The 5 PsWater Quality from
Farm

• Prescription
• regulations requiring riparian fencing
• Penalties
• fines per metre of unfenced streambank
• Property
• tradable right to have unfenced streambank
• Persuasion
• pilot projects with fenced streambanks

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Ecosystem Service Payments

• B2B
• Perrier Vittel, MRFF
• Mitigation Markets
• Wetlands Mitigation Banking, CDM
• Direct Payment - Subsidy
• Direct Payment - Competitive
• CRP, Bushtender
• Hybrids
• Catskills, PSA

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Designing Policy Instruments to Protect
Ecosystem Services

• What is the service being provided?
• Who provides the service and who benefits?
• What level of service is provided?
• What level of service is needed?
• Who is paid?
• How are they paid?

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What is the service being provided?

• Can the problem be addressed by land management?

• Costa Rican hydropower gets at reservoir sediment
  through service of sediment retention
• MRFF gets at rising saline water tables through
  evapotranspiration
• For Catskills, what type of water purification?

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What is the service being provided?

• Can the services be bundled?
• Can we conserve biodiversity by maintaining a
  forested watershed or reforesting for carbon?
• Can an uneconomic service be bundled with a
  marketable service?

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Who Provides the Service and Who Benefits?

• Must identify discrete groups of buyers and
  sellers
• Challenge of public goods
• Why biodiversity markets so hard to establish
• Why so many ES market examples involve water
• If service widely enjoyed by diffuse
  beneficiaries, absent intervention unlikely a
  market will arise

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Who Provides the Service and Who Benefits?

• Monopsony many sellers and few buyers
• Why water quality contracts in Costa Rica involve
  dominant user in watershed (hydropower)
• Why NY water authority must act on behalf of New
  Yorks water consumers in negotiating with
  catchment landowners

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What Level of Service is Provided?

• Importance of landscape context
• Necessity of robust assessment methodologies
• BushTender and RMFF
• Which land uses should be paid for?

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BushTender

• Reverse auctions for biodiversity conservation

• Calculation of Biodiversity and Habitat
  Significance Scores
• Combined with bid price and graphed

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Macquarie River Food and Fibre

• Payment to upstream farmers to plant trees

• NSW State Forests acts as broker
• Steady income stream in marginal tree cropping
  country
• Uncertainty over effectiveness

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What Level of Service is Provided?

• Necessity of robust assessment methodologies
• How accurate and expensive is the field scoring?
• Importance of technically capable staff
• Is the service more like biodiversity or salinity?

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What Level of Service is Needed?

• Who gets paid?
• How much do we pay?
• How are they paid?

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Who gets paid?

• Payments to continue provision of services,
  maintain land use
• Catskills, Costa Rica
• Payments to change land use
• CRP, BushTender, Catskills, Perrier Vittel
• Cant pay everyone

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Creation of a Moral Hazard?

• If we pay for marginal improvements in service
  provision, what message does it send?

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Farmer B
Farmer A
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Creation of a Moral Hazard?

• Even if we pay for marginal improvements in
  service provision, what message does it send?

• Insurance or maintenance payments
• Likelihood of detrimental land use change
• Likelihood of delay in improving land use

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What Are Payments Indexed To?

• Value of service unit delivered (output)
• Capital and opportunity costs (input)
• Market decides

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Payment Conditions?

• Should payments be front-loaded, back-loaded, or
  evenly spaced?
• Who bears the risk of innocent loss?

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Length of Payments?

• The longer the better?
• Or as transitional assistance?
• Problems of hold-outs
• Length of commitment/budget security

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Ensuring Accountability

• Important in any case, private or public
• Clarity of goals what are you paying for?
• Valuation avoided costs?
• Clarity of means how are you getting it?
• What exactly are you paying them to do?
• Clarity of result what did you get?
• 11 million gallons of clean water per year

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Horses for Courses

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Horses for Courses

• Payments not always the preferred choice
• But, for any ES instrument, need to know
• Service to be provided
• Means of provision
• Provider of service
• Level of provision

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Horses for Courses

• Payments will be particularly attractive when
• Landscape management can provide sufficient
  service levels
• High avoided costs can be identified
• Consumer/public understanding of ES importance
• Discrete buyers and sellers
• Service provision levels can be cheaply and
  adequately measured