Payments for Ecosystem Services

Ecosystem services can be defined as "the conditions and processes through which ecosystems, and the species that make them up, sustain, and fulfill human life" (Whitten et al. 3).  The idea being that the natural world provides, not only raw materials that are useful to humans, but vital processes as well. The development of markets through which these processes or services may be bought and sold represents another market-based policy approach to conservation. Many ecosystem services depend on vibrant and stable levels of biodiversity. In fact, "there are cases in which the full diversity of organisms in an ecosystem is required for that system to function and to provide services to human societies" (Heal, "Biodiversity as Commodity").   This vital nexus between human need and the conservation of an area's full spectrum of biodiversity has created a great deal of enthusiasm for developing public policy that includes payments for ecosystem services as an essential piece. Such enthusiasm is not misplaced, however it must be tempered with the recognition that, in application, the payments for the ecosystem services model poses at least one major challenge that may relegate it to the periphery of future conservation efforts.

Some argue that "Markets work well at providing rewards — and markets for ecosystem services may prove to be one way of rewarding and encouraging land managers to protect and produce ecosystem services" (Whitten et al. 2).  This statement is truer for some ecosystem services than others. Ecosystem services fall under four categories: the production of goods, regeneration processes, stabilization processes, and life-fulfilling functions (Daily, "Developing a Scientific Basis" 64).  The first category describes those services we are most familiar with, such as food, fuel, and fiber production. The second category includes slightly less obvious services like decomposition and water filtration. The third category continues this trend towards obscurity with services like climate stabilization and the regulation of the hydrological cycle. Lastly, the fourth category includes things we don't often associate with the concept of service, like natural beauty or spiritual inspiration. We already have elaborate markets in place to deal with the first category of ecosystem services (the production of goods). Most of what this paper will address falls under the last three categories for which a large body of academic papers has been written and for which a small number of working examples exist.

As already noted, evidence suggests that the future health of the environment in the state of Washington will depend on increased coordination between all natural resource owners and managers (both public and private). Traditional methods of ensuring coordination, through direct public ownership, regulation, public assistance, or incentives, may not be adequate. Landowner resistance to the first two, and the participatory challenges of the second two, limits all of their effectiveness. As some familiar with the problem have stated, "Mechanisms are needed by which owners are rewarded for their role as stewards in providing biodiversity and ecosystem services" (Jenkins, Scherr, Inbar 36).  Payments for ecosystem services meet the three characteristics used to group market-based policies in a straightforward way. First, they define a natural service or function (like water storage). Second, they measure that service or function (like acre-feet of water). And third, they arrange for quantities of what is being measured to be paid for or invested in (like payment for every acre-foot delivered per year). The government plays a less intrusive role in the market for ecosystem services when compared to the role it plays in mitigation banking. When it comes to the fundamental questions of how much of the good should be produced, who should pay for the production of the good, and who should carry out the production of the good (Heal 153),  this model lets the government decide on the first one and the market decide on the last two.

A garden-variety scenario for an ecosystem service payment would be a local water utility paying a farmer to improve the quality of water draining off his or her land so that the utility didn't need to invest in expensive water  improvement infrastructure (Please see "Clean Water Services" box on page 22). Here, the ultimate goal of water quality is met through the use of a natural process for less money than the creation of new infrastructure. If the behavior of the private landowner also provides secondary benefits, as efforts to improve one component of water quality often improves others as well, then the public benefits without cost. For instance, paying for ground vegetation that reduces sedimentation in a river might also provide habitat for endangered species or reduce water temperature through shading.

The importance of an ecosystem service is defined by human need. This need may depend on a number of things, but generally originates from scarcity. Scarcity may be naturally occurring, like a water shortage faced by a growing city. Or, it may be created though regulation, like the requirement to reduce water temperature due to the application of federal regulation. In either case, more of a good is needed than is currently available. The price of the service is controlled by a number of complex contextual factors. What may be the most important thing to recognize is that the absolute price of the service is usually less important than how the price relates to the price of other options. If a city has the option to pay twenty million to cool water through built infrastructure, and another option to pay a farmer twenty thousand to accomplish the same cooling through various natural mechanisms, then the price may be right even if another city in an adjacent town is paying two thousand for the same service. Ultimately, price does relate to scarcity for ecosystem services, like many other commodities, but because these services are not transferable outside of limited areas, price will not be entirely consistent.

In a very real sense, the payment for ecosystem services model is not fundamentally different to the government than the contracting-out it does for other types of services (like garbage removal). In both circumstances, the public sector is relying on the private sector to provide a public service in exchange for compensation. When it comes to payments for ecosystem services, the relationship between the public and private sector is really a contractual one in which local governments pay private landowners to deliver specific outcomes, with the added benefit of also achieving conservation goals. Such an arrangement can provide for a great deal of flexibility for both parties. The government only pays for what it wants, when and where it wants it. Meanwhile, private landowners receive a new property right if they choose to participate and their participation is totally optional. This model does, however, expose the government to serious risks, as services will only be provided as long as the contract is valid. This places a premium on planning for the future. Planning then depends on the formulation of goals, which makes this payment model no different then mitigation banking in that they are both useless in achieving conservation goals unless attached to a strategic plan.

Lessons from the Field: Clean Water Services

Clean Water Services, an independent special service district located in Northwestern Oregon, provides an accessible example of how payments for ecosystem services can effectively and efficiently meet regulatory requirements related to environmental protection — and deliver a host of other vital ecological benefits in the process.

Clean Water Services provides a variety of services to about 500,000 customers in the Tualatin River Watershed. These services run from wastewater and storm water management, to flood management and habitat protection. With around 93% of the watershed that Clean Water Services serves in private ownership, its options are limited when it comes to mitigating the ecological impact of its activities. This reality, combined with progressive thinking by the district, led the Oregon Department of Environmental Quality to issue an integrated, municipal watershed-based permit in 2004. This unprecedented permit includes, among other things, permission for the district to implement a water quality trading program within its service territory. Generally speaking, this trading program allows Clean Water Services to meet its regulatory obligations related to water quality by paying others, who produced relevant ecosystem services, to mitigate the district's impacts on the watershed.

Clean Water Services currently uses the program to reduce water temperature, or thermal loading, in the watershed. The district's effluent contributes to the warming of river water. Federal and state regulations demand that this water stay cool (for aquatic species). As a result, the district is required to counter the warming affects of its activities. By paying private landowners to reduce their contributions to thermal loading by planting shady vegetation that cools the water or conservation easements that maintain healthy stream corridors, Clean Water Services offsets some of its own thermal loading. And, as these private landowners "produce" cooling with less expense through natural means than the district can through unnatural ones, the district realizes a significant savings in costs. Importantly, this reliance on natural capital also produces a number of other valuable ecosystem services for the basin. The plantings and easements provide additional services that built capital cannot, like erosion prevention, carbon sequestration, runoff filtering, and habitat expansion.

By taking advantage of the lower costs enjoyed by the private landowners to cool water, Clean Water Services is demonstrating that market-based policy offers a tenable alternative to more prescriptive policy approaches that is both economically efficient and ecologically effective. While the program currently focuses on temperature, it appears suitable for expansion into to other aspects of water quality as well — making it a working archetype relevant to the rest of the nation.

                                      

Next. . .

Payments: Strengths and Weaknesses
Using payments for ecosystem services to achieve conservation goals includes many advantages and disadvantages.