Current Status and Future Potential of Markets for the Ecosystem Services of Forests: An International Overview Sara J

1. Current Status and Future Potential of Markets for the Ecosystem Services of Forests: An International Overview Sara J. Scherr, Forest Trends USFS Global Forestry Forum, Oaxaca, Mexico January 2004

2. Major Forest Ecosystem Services • Watershed Protection Services(e.g. regulate flow, maintain water quality, regulate water table) • Biodiversity Protection Services(e.g. conserve habitat and species, genetic and chemical information) • Climate services (stabilize microclimates, sequester carbonto mitigate global warming) • Landscape Quality (beauty, cultural value) • Agricultural Services(pollination, control of pests, soil fertility, decomposition of wastes, windbreaks)

3. Conventional Instruments to Conserve Ecosystem Services Assumption that ecosystem services are public goods that require public management… • Direct public management of forests • Public regulation of private forests • Technical assistance to forest owners/managers • Fiscal and price incentives/penalties

4. Reasons to Develop Markets for Ecosystem Services Forest Owners and Managers • Financial compensation needed to manage for ecosystem services • Concern about the sustainability of commercial timber production (tropical timber export value down $40% since 1990) • Desire to reduce cost of compliance with environmental regulations

5. Reasons to Develop Markets for Ecosystem Services Ecosystem Service Users, Policymakers • Scarcity of ecosystem services needed for private goods • Inadequate means to finance forest conservation • Difficulties of direct public management and regulation • Increased demand from consumers, investors • Need for landscape-scale management outside PAs • Potentials for economic development

6. Types of Markets and Payment Schemes • Self-organized private deals Buyers: Companies, urban conservationists • Public payments to private land and forest owners to protect or manage ecosystem services Buyers: General revenues, user taxes or transfers • Open trading of environmental credits under a regulatory cap or floor Buyers: Private industry, land developers • Eco-labeling of forest or farm products Buyers: Green consumers, investors, entrepreneurs

7. Compensation Mechanisms to Producers • Direct payments to individual producers • Direct payments to producer associations • Provision of social services and infrastructure • Price premiums for products • Financing investments to improve management • Technical assistance and support for commercialization • Projects of community ecotourism • Expansion of rights over natural resources Source: Rosa et al. 2003

8. Types of Watershed Protection Markets Self-Organized Private Deals Private entities pay for private services (little government involvement) • Perrier-Vittel protected key aquifers by paying farmers US $230/ha/yr. (7 yrs) to reforest sensitive infiltration zones, build modern facilities, and switch to organic agriculture • Large agricultural producers in the Water Users Association in the Cauca Valley, Columbia pay fees of US $1.5-2/litre to finance watershed protection in upland areas • Conservation easements paid by Land Trusts, The Nature Conservancy

9. Types of Watershed Protection Services Open Trading Schemes In response to government regulations, landowners either comply directly, or buy compliance credits from others • Pilot project of the New South Wales State Forest Service, in which downstream irrigation farmers purchase transpiration credits (US $40/ha/yr for 10 years) from State Forests of NSW, to reforest state land upstream • Regulated factories in the Midwestern United States pay nearby farmers US $5-10/ha to reduce their emissions

10. Types of Watershed Protection Services Public Payment Schemes Government or public sector institution pays for watershed services • New York City maintains the high quality of 1.2 billion gallons/day by compensating farmers in the Croton and Catskill watersheds US $40 million to adopt sustainable farming and conservation practices * Mexico’s watershed payments program – US$20 mln • China’s Ecological Compensation Scheme- 1 bln yuan to 65 counties

11. Status of Watershed Protection Markets Review of 62 Cases • Private sector accounts for 65 percent of sellers and 60 percent of buyers • 44 percent of all payment mechanisms are intermediary-based transactions • 68 percent of markets are local, 11 percent are national, 3 percent are international • Most markets are emerging, while most mature markets exist in developed countries (e.g. U.S.A.) Source: Landell-Mills and Porras, 2002, IIED.

12. Types of Biodiversity Protection Markets Land Markets for High-Biodiversity Habitat Privately owned conservation areas that build on consumer demand for housing and vacation in biodiverse environments • Conservation communities, private parks, land donations to the national park system, eco-real estate, ecotourism, and private administration of government conservation lands in Chile • Eco-real estate development in Costa Rica

13. Types of Biodiversity Protection Markets Payments for Biodiversity-Conserving Use or Management Paying landowners to manage their assets to achieve biodiversity or species conservation • In Switzerland, “Ecological compensation areas” use farming systems compatible with biodiversity conservation and include 8 percent of all agricultural land • The Value-Added tax in Paraná, Brazil, which is used to encourage the expansion of private and public protected areas, which has an estimated value of US $150 million

14. Types of Biodiversity Protection Markets Payment for Private Access to Species or Habitat Private sector demand for biodiversity in the form of payments for access to particular species or habitats that function as “private goods” • Ecotourism companies pay forest owners for the right to bring tourists into their lands to observe wildlife • Payments to hunt or fish on private lands

15. Types of Biodiversity Protection Markets Tradable Rights and Credits within a Regulatory Framework • The Wetland Mitigation Program in the United States, allows developers to draw from a bank of ‘mitigation’ credits to offset damage to wetlands; credits cost US $7500 - $100,000/acre • Tradable development rights within habitat types being piloted in Brazilian Amazon

16. Types of Biodiversity Protection Markets Biodiversity-Conserving Businesses Consumer and investor decisions informed by conservation values. Eco-labeling schemes advertise or certify that products were produced in ways consistent with biodiversity conservation. • The Sustainable Agriculture Initiative (SAI), a coalition of multi-national commercial food producers (Nestle, Dannon, Unilever and others) source commodity supply from producers who protect biodiversity. • FSC certified over 100 million hectares of forest by 2002 • The Rainforest Alliance labeling of agricultural crops grown in ways that conserve forests and biodiversity

17. Status of Biodiversity Protection Services Review of 72 Market Cases: • Private corporations are the main buyers of biodiversity protection services • 73 percent are international markets, 6 percent are regional, and 8 percent are local • Most of the private corporations were interested in eco-labeling schemes for crops or timber, investment in biodiversity-friendly companies, horticultural companies concerned with ecosystem services, or pharmaceutical bioprospecting. Private payments are usually site-specific. Source: Landell-Mills and Porras, 2002.IIED,

18. Carbon Sequestration Potential Above-Ground Time-Averaged and Total Soil Carbon(0-20 cm) for sites in the humid tropical lowlands of Brazil, Cameroon and Indonesia

19. Types of Carbon Markets The Kyoto Protocol Requires industrialized countries to reduce their emissions 5 percent below 1990 levels. Has 3 “flexibility mechanisms”: Emissions Trading, Joint Implementation, the Clean Development Mechanism * The Biocarbon Fund of the World Bank will buy carbon offsets from forestry projects for CDM (target: $100 mln) * Sinks trading in various national programs in Europe; controversy for European Emissions Trading System (potential $29.6 bln) * Sequestration eligible up to 20% of emissions obligation; agriculture eligible only in developed countries; averted deforestation ineligible 2008-2012 (CDM - $300 mln/yr?)

20. Types of Carbon Markets Non-Kyoto Market Trading U.S. voluntary systems developed in the shadow of Kyoto, encouraging businesses, municipalities, and universities to make greenhouse gas reductions and to develop trading partnerships • The Chicago Climate Exchange (CCX) fosters emissions trading between entities such as International Paper, American Electric Power, and the Ford Motor Company. Participants may invest in offset sequestration projects in the U.S, Mexico, and Brazil. • Many U.S. states now setting carbon emissions targets

21. Types of Carbon Markets Retail “Green” Markets Voluntary payments by companies, individuals and organizations who wish to be environmentally responsible, by making their activities “carbon-neutral” • Tufts University was the first university to voluntarily pledge greenhouse gas reductions according to Kyoto standards; Swiss-re was the first re-insurance company • Future Forests develops forest carbon projects to produce offsets for voluntary buyers

22. Status of Carbon Markets Review of 75 Market Cases: • Concern over global climate change is the main market driver, but debates about role of ‘sinks’ • The private sector is the principle buyer of carbon and also plays a dominant role as seller and intermediary • Difficult to build institutions for international cap & trade markets • Potentially huge market if serious action to mitigate climate change and full potential of sinks realized -- potential 2.3 bln tC, on 50 mln hectares-$16.8 bln NPV ($10/t C, 3% discount rate) • Price estimates $3-40 per ton carbon (BCF – avg $14.3/ton)

23. Potential Benefits To Producers • New, often more regular, flows of income (15-25% +) • Portfolio diversification • Serves as a catalyst or enabling mechanism for adopting better management practices • Asset appreciation (pest & disease control, higher inventory level) • Locally-valued ecosystem goods and services, e.g., water, fuel, medicines, wild game, improved air quality • Social investment, such as preserving forest-based cultural heritage and encouraging enterprise management and development

24. Potential Risks to Producers • Loss of economic use options • Loss of land and forest ownership or access if value of resource rises • Loss of local ecosystem services (e.g. if afforestation of a local watershed for carbon sequestration dries up local water) • Contractual obligations if failure due to factors outside producers’ control (spread of fire from a neighbors, disease, extended droughts, invasive species); insurance strategies are crucial

25. Overall Trends • The total value of ecosystem service payments is presently small (< timber, NTFPs), behaving more as niche markets than commodities • The scale of markets is expected to grow rapidly, particularly within domestic economies • Governments play a critical role as direct buyers of forest ecosystem services, and as catalysts for many private sector direct payment schemes • Ecosystem service payments will in most cases cover only a modest share of the costs of good forest management, but can catalyze change

26. Strategic Issues Equity concerns * Without proactive effort, ecosystem service markets will favor large-scale landowners • Market mechanisms may threaten livelihoods • Weak negotiating power of low-income groups • Payments tend to go to “bad actors” Difficulties of measuring performance • Defining the service (e.g., “biodiversity”) • Relation of management to ecosystem services • Measuring management, outcomes relevant to payment

27. Strategic IssuesPolitical Economy Challenges: Relative Power, Resistance ● Ecolabeling ● Private Deals ● Public Payments ● Technical Assistance, Credit ● Cap & trade Producer Rights ● Taxes & subsidies ● Public Regulation ● Public Management Consumer Rights

28. Strategic Issues Institutional Requirements • Intermediary organizations to manage carbon payments, bundle small-scale projects, etc. • Strong local institutions to negotiate, manage • Innovations to reduce marketing & transaction costs, risks • New services: certifiers, monitors, brokers, etc. • Strong government enforcement and oversight for public payments, cap & trade • Strong market organization in eco-labeling (COC) • Institutions for landscape-scale coordination

29. Strategic Issues Legal and Regulatory Framework • Requires clear legal guidelines as to who “owns” ecosystem services and who has the right to sell them • Direct buyer-seller deals require contract law • For public payment schemes, legislative authorization to allocate budgets and set administrative rules • To establish open trading markets, governments must create a market for ecosystem service credits, by legally mandating (and enforcing) a group of buyers

30. Strategic Issues Competition: Who will benefit? • International competition for biodiversity (global importance), carbon offsets (price) • National competition: only resources of especially high ecosystem value • Local services: limited capacity to pay • For public payments, need to finance through tax revenue, user fees