Forests Sourcebook - HCV Resource Network

NOTE 2.3
Innovative Marketing Arrangements:
Payments for Environmental Services
Forests can provide a wide variety of benefits outside
their boundaries. The main categories of such benefits
are as follows:
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Watershed protection. Forests play an important role in regulating
hydrological flows and reducing sedimentation.
Changes in forest cover can affect the quantity and quality
of water flows downstream, as well as their timing, in both
positive and negative ways. A clear understanding of these
impacts is crucial for ecologically sound forest land use
planning.
Biodiversity conservation. Forests harbor an important
part of the world’s biodiversity. Loss of habitat (such as
forests) is a leading cause of species loss.
Carbon sequestration. Forests and forest soils contain
large stocks of carbon, sequestering it from the atmosphere
and playing a vital role in climate regulation.
Because these are benefits enjoyed by people outside the
forests, forest managers—whether local communities or
logging companies—have no external financial incentive to
take them into account in forest management decisions.
Forest loss or degradation can cause adverse impacts on
those who benefit from these forest services—creating
scope for arrangements in which the users of the services
compensate forest managers for managing forests in ways
that generate the desired services. This is the basis of the
Payments for Environmental Services (PES) approach.
The PES approach is a market-based approach to conservation
financing based on the twin principles that those who
benefit from environmental services (such as users of clean
water) should pay for them, and that those who contribute
to generating these services should be compensated for providing
them. The approach thus seeks to create mechanisms
to arrange for transactions between service users and service
providers that are in both parties’ interests, thus internalizing
what would otherwise be an externality. The basic logic
of the approach is illustrated in figure 2.3.
Figure 2.3
The Simple Economics of Payments for Environmental Service
$/ha
Conversion to pasture
Conservation
Conservation with
service payment
Benefits to
forest managers
Costs to downstream
populations
Payment for service
Source: Pagiola and Platais (2007).
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