The Past, Present and Future of Payments for Ecosystem Services – Biodiversity

Last week, I reported on a workshop at the Rockefeller Foundation’s Bellagio Center on the future of Payments for Ecosystem Services, summarizing the key findings for watershed PES programs.  Today’s post describes biodiversity.

The central idea of PES is straightforward. Many of the benefits provided by the environment are not captured by markets. If landowners received compensation from beneficiaries for the valuable ecosystem services they provide such as water purification, carbon sequestration, or storm buffering, their land management practices would be very different. At the simplest level, the goal of a PES approach would be to combat deforestation by making trees more valuable standing than cut down.

In many respects, watershed and biodiversity PES could not be more different. Payments schemes for watershed services are found all over the globe and growing both in terms of transaction value and geographic coverage. By contrast, biodiversity PES remains nascent and challenging. Much of this is due to the nature of the benefits. In watershed PES, those who benefit from clean water and flood protection are discrete, fairly easy to identify, and understand why the services of water filtration and flood buffering are important to their self interests. The beneficiaries of biodiversity, however, are generally diffuse and the benefits often indirect and nonmonetary. Who benefits from biodiversity? In many respects, we all do. Moreover, water utilities already exist and can collect fees for service provision at low cost. There is no similar institution for biodiversity.

The key findings from our workshop are set out below:


• Compliance biodiversity offsets remain geographically limited and demanding

The most common form of biodiversity PES is that of offsets, where harm to a species population or habitat in one place is compensated by habitat restoration and maintenance somewhere else. The overall goal is to achieve no net loss and preferably a net gain of biodiversity on the ground with respect to species composition, habitat structure, ecosystem function and people’s use and cultural values associated with biodiversity. Compliance offsets represent an important conservation mechanism in a small number of developed countries but has not spread to other countries. Two-thirds of the operating biodiversity offset or compensation programs are concentrated in North America and Australia/New Zealand. By contrast, no compliance-driven programs are in operation in Africa. Both the EU and the UK appear to be backing off mandatory offsets in favor of voluntary schemes.

The concentration of mandatory offsets in developed countries is not surprising. These programs require strong regulatory systems, adequate data collection and analysis, and robust compliance monitoring as well as the political will to make them effective. These programs also take time to develop. The United States and Australia have the most developed programs and it took them decades to develop the appropriate policy measures, tools and information.


• Voluntary biodiversity offsets still emerging

Voluntary biodiversity offsets were largely unknown just a decade ago. A growing number of one-off projects have been undertaken by companies for reasons ranging from social corporate responsibility to risk management in a wide range of companies but the total number remains small, particularly those with independent verification.

The leading actor in this field has been the Business and Biodiversity Offsets Program.  Their development of standards in 2012 created a common text and set of expectations. But much work still remains to bridge this gap between policy and implementation capacity. Going forward, much will depend on better understanding of the costs involved in order to assess the business case for a “social license to operate.” It’s important to note that there has been strong opposition to biodiversity and carbon offsets from NGOs worried about endorsing habitat destruction and harming local communities dependent on the areas affected by development.


• Access to capital represents an emerging opportunity to drive no net loss

In 2012, The International Finance Corporation revised its Performance Standard 6. Projects above $10 million must put in place mitigation measures for their impacts on natural habitat “designed to achieve no net loss of biodiversity where feasible.”  When working in critical habitat, mitigation should “achieve net gains of those biodiversity values for which critical habitat was designated.” Similar standards have been adopted by the Equator Principles,  a voluntary code of conduct for over 80 of the world’s largest banks, the European Bank for Reconstruction and Development, the European Investment Bank, and the World Bank’s Operational Policy 4.04. These international financial institutions provide capital for a significant amount of development activity that impacts habitats around the world. If implemented, these policies could greatly increase the number of projects with no net loss conditions. The standards are recent, however, and it’s too early to tell whether they will be followed in the field, much less how stringently.

Access to other sources of capital may also be an important part of the story. China has been active in the development area, for example, extending significant loans in developing countries without any environmental conditions. Only one Chinese bank has adopted the Equator Principles. If development banks do apply no net loss conditions strictly, borrowers may simply look elsewhere for more flexible capital.


• Co-benefits matter

While the role of market-based mechanisms for biodiversity conservation remain limited, properly designed PES for water and carbon can deliver significant biodiversity co-benefits. Indeed, this has been an important part of the REDD+ discussions in recent years.