Context

Payments for environmental services (PES) are a means of creating a market in environmental/ecosystem services.

They link those who value a given service with those who can provide it. Most early PES initiatives were in Latin America, which remains the region with the most PES schemes, followed by Asia, and lastly Africa (figure 1).

Payments for watershed functions seek to link upstream land use and management with downstream water use and management to realize benefits for upstream and downstream participants in the scheme and others in the area – not to mention for the environment. The ideal is a voluntary agreement between at least one buyer and one seller of ecosystem services (or land-use changes presumed to provide an ecosystem service). PES schemes have become increasingly popular with donors over the last few years; yet despite their widespread application, by their nature they are not primarily intended as a tool for poverty reduction – but they may be tailored to this purpose.

From IFAD’s perspective, the problem is that poor rural people lack the prerequisites for participation in PES. Often, they do not have secure land tenure, rewards are easily usurped by the elite, and they lack the assets (human capital, natural resources, etc.) to provide the level of service needed to yield the desired impacts. Part of the solution to this stubborn dilemma may be to eschew PES schemes that simply seek market creation. Rather than clinging to economic principles, develop a variant of PES that builds on the reality faced in rural areas. This means allowing for market support, subsidies and a means of directing PES benefits to poor people – in short, developing pro-rural-poor PES.

Main challenges

 ‘Market creation’ is the market-based incentive ideally employed for PES. It involves putting an economic value on environmental services and bringing together willing buyers and providers – examples include emissions trading, nutrient trading, wetland mitigation and PES. Yet the goal of market creation is exactly what may impede PES schemes from being pro-rural-poor. If they are indeed intended to be pro-rural-poor, then it is arguably necessary to depart from the economic tenets of PES (figure 2).

Watershed-based PES schemes are not, by definition, pro-poor. They are not intended for this purpose, they are intended to secure watershed functions such as downstream water supply. If they are to be made to fit into a poverty-reduction box, they must be tailored to fit this role. The ideal of PES is to link those who value ecosystem services with those who can provide them so as to create a market. In the context of developing countries, poor rural people may not be the best vehicle to achieve this end.

The bottom line is that if donors and governments are willing to accept a compromised version of PES in order to target poor rural people, then PES schemes for watershed services can indeed benefit them – but PES might not be the right name for such schemes.

IFAD approaches

Intersectoral management is a relatively new, holistic approach that offers a promising framework for better understanding and pro-poor mobilization of potential development synergies. In IFAD’s approach to water, this theme is not central, but is considered a holistic element in strengthening poor rural people's livelihoods and resilience. IFAD investment approaches to water-related interface management take into account the country-specific structures of the rural political economy. In so doing, they support the development of pro-poor, community-based natural resource management (NRM) institutions, which in turn improve farmer-led agriculture, natural resource technologies, and the sharing of knowledge of these achievements.

When planning a watershed PES scheme intended to benefit poor rural people, several assumptions must be tested against the ‘new rurality’. For instance, the likelihood that upstream land users will benefit from PES does not necessarily mean that there will be a substantial impact on poverty. Across many watersheds, a large proportion of the population may be poor, but this will not be true everywhere; and the poorest people may not be the ones who receive the payments.

Institutional approaches

• Make secure land tenure a prerequisite for participation in PES schemes – pro-poor or otherwise – and provide for it. The poorest people are almost always landless. The creation of legal and institutional frameworks that allow poor rural people to participate and that ideally provide secure land tenure will often be incentive enough to encourage initial participation.
  
• Facilitate an effective and impartial legal system to ensure that would-be participants can enter into contractual PES arrangements with confidence. Ideally, PES schemes should be formally recognized by the country’s legal and institutional framework, but this is not essential.
  
• Reduce transaction costs by concentrating service providers into groups. Groups of service providers or consumers have a more effective voice in negotiations than do individuals; they are better able to monitor compliance; and they can more easily accept or make payments.
  
• Establish a strong, independent intermediary between service providers and consumers in order to: ensure that water resource allocations are properly monitored and assessed; assist in the resolution of disputes; and, most importantly, provide a mechanism for the regular transfer of payments.

Technical approaches

• Assess demand as a first step in setting up a PES scheme. There must be sufficient demand for the service, and would-be participants must have the capacity to provide it. In parallel with assessing demand, planners can discover which types of incentives (payments, rewards) are most likely to encourage and sustain the participation of service providers.
  
• Technically assess, monitor and evaluate the likely effects of introducing PES. In the planning stages, appropriate measurement, testing and modelling should be used (e.g. hydrographs, remote sensing and allocation models) to determine the likely effects of the proposed land-use change on downstream water quality and quantity. Moreover, these techniques can help identify which households and communities need to participate in order to achieve the desired downstream results – optimizing, rather than maximizing, participation.
  
• Monitor schemes independently once they are implemented. It is important that land-use management and downstream water quality and quantity are independently monitored at regular intervals by an independent intermediary trusted by both buyers and sellers.
  
• Reward service providers for land management changes. That is, reward upstream land and water users for their actions, not for the outcomes of the changes made, since it is not certain that changes to upstream land management will yield the desired effects downstream.

Investment approaches

• Invest in smaller-scale schemes, which are more likely to benefit poor people, being more easily managed and monitored.
  
• Build capacity and invest in education; both are crucial to PES schemes. Once ecosystem services are assigned an economic value, both service providers and consumers will assign a market value to these services, which may, in turn, lead to more efficient use of the resource.
  
• Package payments as incentives or rewards, such as credit, vouchers for school fees or livestock. Direct money payments for services rendered may not always be ideal or even desired by service providers.
  
• Provide start-up investment. This is essential to ensure that the pro-poor PES schemes actually work and, in particular, that poor groups and households are able to and will participate.
  
• Provide funding for ongoing subsidies and market support. Donors and participating agencies must be willing to face the likely need for such support (e.g. demand augmentation) (figure 2).

IFAD case study

Green water credits in Kenya

Over the last two and half decades, most of Kenya’s cropland has lost its topsoil, while the population has doubled, boosting demand for power and water. Green water credits (GWC) offer a tried and tested means of providing Kenya with food, water and power security. GWC are payments or rewards for water and land management services provided by farmers, which in turn benefit downstream users by providing them better-quality water and a more reliable supply. World Soil Information (ISRIC) will begin a full-scale GWC project in the near future (Proof-of-Concept of a Global Mechanism to Pay Rainfed Land Users for Water Management Activities), based on extensive testing and piloting in Kenya.

In the GWC proof of concept, focus groups were organized to give voice to land users. Water user groups and other institutions in the sector shared their views of existing institutional capacities.

Much was learned from these sessions and filtered into the current project design. Leaseholds were identified as one of the best means of providing GWC participants with secure land tenure, in order to ensure that the project is pro-rural-poor. In addition, the Kenyan hydroelectric company, KenGen, was identified as an ideal GWC partner: they have a clear incentive to pay, a long-term commitment to the scheme, and the financial resources needed.

The project’s policy will be to encourage group rather than individual participation, and the Government of Kenya has attempted to decentralize water provision and operation and maintenance responsibilities, while providing an enabling policy and regulatory environment.

The promise of GWC Kenya can be measured anecdotally by the Government’s desire to scale it up to the national level. This does not testify to the scheme’s pro-poor impact (which will have to wait for eventual assessment), but it does indicate the demand for such an approach.

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Topic sheet author: Alasdair Cohen  

Peer reviewed by:  Marcela Quintero (CGIAR)

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References

• Cohen, A. 2008. Prerequisites and semantics: The challenges of implementing pro-poor payments for watershed services. Technical Background Report: Rural Poverty Portal. Rome: IFAD.
  
• Dent, D., and J. Kauffman. 2007. The spark has jumped the gap: green water credits proof-of-concept. Wageningen, the Netherlands: ISRIC – World Soil Information.
  
• FAO. 2004. Payment schemes for environmental services in watersheds. Rome: Food and Agriculture Organization of the United Nations.
  
• Pagiola, S., A. Arcenas and G. Platais. 2005. Can payments for environmental services help reduce poverty? An exploration of the issues and the evidence to date from Latin America. World Development 33: 237-253.
  
• Pfaff, A., S. Kerr, L. Lipper, R. Cavatassi, B. Davis, J. Hendy and G.A. Sanchez-Azofeifa. 2007. Will buying tropical forest carbon benefit the poor? Evidence from Costa Rica. Land Use Policy 24: 600-610.
  
• Wunder, S. 2005. Payments for environmental services: Some nuts and bolts. Jakarta: Center for International Forestry Research (CIFOR).