Payments for Ecosystem Services: Strengths and Weaknesses

What are the Main Strengths of Payments as Policy?

Using payments for ecosystem services as a public policy model to achieve conservation goals includes many advantages and disadvantages. They are presented below in the same way that those of the mitigation-banking model are, by listing the environmental and economic benefits, and then the design and implementation weaknesses. 

Environmental Benefits

• Payments as policy allow for needed environmental outcomes to be delivered strategically by paying more for that which is needed most in a given location; and

• The delivery of one service often has the affect of delivering others.

Economic Benefits

• Payments as policy allow for the definition of new property rights in a way that meets the public good;

• They can provide the public with considerable cost-savings related to new infrastructure development;

• Private landowners can be paid directly for achieving public conservation goals, thereby reducing the chance that private resources will be developed.

What are the Main Weaknesses of Payments as Policy?

It should come as no surprise that the number of design limitations and implementation challenges is significantly lower for the ecosystem-payments model than for the mitigation-banking model. This difference is attributable to the amount of government interference required for each of these options. Banks require a lot while payments require relatively little. This lack of public control allows for market forces to fill the resulting vacuum — which can be a good or a bad thing depending on the state of the market. 

Design Limitations

Participation in an ecosystem payment program is entirely voluntary for private landowners. This could be the most important design limitation of them all. There is simply no regulatory driver forcing compliance like in mitigation banking. This makes the government entirely dependent on market forces and market logic to ensure participation. If the conditions are favorable, and the payments are attractive relative to other options, then participation will increase. If conditions are not favorable then participation will plummet. What this limitation suggests is that this model is not durable over time unless development pressures are managed with it in mind. This then returns us to an earlier assertion that market-based policy must be created while considering the existing matrix of public policy. A recent example drawn from the East Coast illustrates this point clearly. Dozens of programs and policies currently operate in the Chesapeake Bay to clean its polluted waters. One program involved water-utilities paying farmers to produce higher quality water run-off from their properties. However, after the program was instituted, a levy was passed in Maryland to support the creation of water-treatment facilities around the bay. This created a new revenue source for utilities to build infrastructure, and therefore, undermined their incentive to pay for the services farmers were providing (Jenkins, Scherr, and Inbar 39). 

A somewhat related design limitation for this model is that payment for an ecosystem service is hard to justify without comparison to an alternative. For instance, it is easy to rationalize payments to farmers, loggers, or other private landowners if these payments are significantly less, or even equal to, the cost of a major public-works project. But what happens when no comparison can be made? For instance, one major argument for preserving biodiversity is that by doing so we "foster genetic diversity, maintaining a 'library' of genes with values yet to be discovered for future medical and industrial products" (Daily and Ellison 6). There really isn't any alternative with which to compare this ecosystem service, making the valuation of it next to impossible. We don't yet have the ability to make this public-good characteristic of biodiversity a private-good one.

Another smaller but potentially serious design limitation is that the service only becomes possible when it becomes scarce. When this point is reached it may already be too expensive to secure commitments from landowners, or too late to deliver the conservation benefits needed. As those familiar with the problem explain, payments "are only a practical option where ecosystem services generate sufficient values to encourage trade and where transaction costs can be sufficiently minimized to facilitate market exchange" (Whitten and Salzman 14).  If developing a property with housing is more lucrative for a landowner than receiving payments for ecosystem services, then they can't be expected to take payments.

One final limitation that broaches the next category of implementation challenges becomes apparent when considering what should be paid for and how this payment should be administered. Few argue that the owners of natural resources should be paid for obeying the existing regulations that apply to them. That would be akin to paying a person not to litter. Instead, there should be a baseline of compliance. At a certain point, however, management actions taken by the owners of natural resources might go beyond this baseline. Payments for ecosystem services must make a determination on when this threshold is crossed. Furthermore, if the threshold is crossed, payments need to accurately reflect how far beyond it landowners have gone and reward them accordingly. Doing this rewards desired outcomes and encourages the production of more of them. But determining this threshold is fraught with difficulty because it is not always obvious when an owner is exceeding regulatory requirements, nor is it easy to measure or otherwise determine the extent to which they are doing so. Certain incentive programs administered by the federal government have incorporated the idea of tiered compensation for landowners into their operation to address this very problem, with some success.
Once what is going to be paid for is established, thought must be given to delivering the payment. One-time payments offer resource-owners a lump sum in exchange for a long-term guarantee of service (like conservation easements). Such an arrangement provides temporal stability. But it also requires a relatively large amount of investment up-front and is difficult to modify if conditions and needs change. Multiple or annual payments for services do not provide the same level of stability. But multiple payments do cost less upfront and offer administrators the ability to adapt to changing conditions with greater ease, as they are not locked into long-term or permanent contracts. A program for buying ecosystem services must consider what its priorities are, and will be, before selecting an option for delivering payment. This process is laden with difficulty as the criteria for making such a determination depends on funding sources that may be outside of their control. 

Implementation Challenges

The major implementation challenge for ecosystem payments is in making them strategic. Governments can pay more to get what they want where and when they want it, but at what point does it become too expensive? Also, there is no guarantee that landowners will participate regardless of price. Extending the logic of the market, and the profit motive of private land-owners, it becomes apparent that they will only provide needed services until other more lucrative options emerge, so the government must be careful in assessing other policies to ensure that the payments model remains competitive.

A second implementation challenge involves contract management. If payments of this sort are similar to other situations in which the government looks to the private sector to supply public benefits, then no small amount of expertise will be required to manage them. This will require administrative structures and budgetary allotments that may be significant. Third parties, like land trusts, may oversee some of these programs efficiently and effectively. Yet, their presence complicates administration and requires complex contractual arrangements related to public goals.

A final implementation challenge, which really applies to all conservation and restoration efforts, involves our limited knowledge about the environment. While huge strides have been made towards understanding the complex natural systems public policy often seeks to conserve, our knowledge remains incomplete. The direct and indirect relationships between actions and outcomes are not as predictable as most interested in conservation would like. This uncertainty creates disagreement over best practices and creates the additional risk that, even if design and implementation are close to perfect for any given policy, it may still not produce the outcomes we desire.

Global Problems and Local Markets

One macro-level problem that must be addressed in this conversation is the effect of large-scale environmental changes on private landowners who are participating in market-based policies. The likelihood that climate change, non-point pollution, and other human-induced global environmental factors will impact the outcomes produced by private landowners participating in these policies is increasing. This leads us to a couple of questions: Should these landowners be responsible for the impact these factors have on the services they are providing? Are they simply part of the cost of doing business, or should they be given relief from the liabilities created by these factors? A mitigation banker seeking to preserve wetlands in Puget Sound may eventually face the combined impacts of water pollution from in-land sources, temperature increases from global warming, and perhaps even acid rain from the rapid industrialization of China. In short, these factors could make the maintenance of a wetlands bank extremely expensive over the long-term and may facilitate its collapse. Without some sort of protection, few from the private sector will be inclined to take the risks inherent in developing banks or providing services, or those that do may proceed under the pretense that failure is likely. In either case, the banking and payments models will not provide for the long-term preservation of biodiversity in Washington.

-
Next. . .