The market for payment for ecosystems services is growing up

Last month, Nature Sustainability published the first global assessment of payment for ecosystem services (PES) programs, led by James Salzman, UCLA Law and UC Santa Barbara Bren School professor, as well as Forest Trends’ Ecosystem Marketplace. The study reveals that what was a policy idea a couple of decades ago rapidly has grown to large-scale schemes that involve businesses, governments, non-profits and other users and during which every year about $36 billion are exchanged for activities that provide or ensure ecosystem services, such as carbon capture, water filtration and biodiversity conservation.

In addition to the total value of PES programs, this new analysis, based on data from Forest Trends’ Ecosystem Marketplace, also tracks the total number, size and geography of programs across three sectors — biodiversity, water and forest carbon. It also analyzes several market types — voluntary, subsidy and compliance — to determine what type of program has been growing the fastest.

One of the earliest, best-known cases illustrating the “Payments for Ecosystem Services” principle is New York City, which, in the early 1990s, began paying for land management in the Catskills watershed to ensure safe drinking water for the city, avoiding the cost of building an expensive water treatment plant.

More than a decade later, programs of this nature have multiplied and evolved, but heretofore had not been studied and analyzed. This new study, therefore, offers some important insights that could shine the light for the way forward.

1. Watershed services payments are up

Payments for watershed services are the largest and most rapidly growing type of payment schemes. They are paying $24.7 billion in 62 countries in 2015, up from $6.7 billion in 2009.

Watershed PES’ rapid growth can be explained in part because beneficiaries of flood protection and clean water often see the local connection between land management in watersheds and these ecosystem services. Also, in a number of countries, the public sector is collecting funds to pay for these programs — for example, through water utilities or government tax programs.

2. Biodiversity payments are down

Payments for ecosystem services that are related to biodiversity are at the opposite end of the spectrum. 

Voluntary PES for biodiversity are the least developed type of payment scheme in terms of overall value and no agencies or institutions collect funds to pay for these programs. On the other hand, compliance markets for habitat restoration conservation are well-developed, transacting an estimated $4.8 billion in 2016.

3. The forest carbon market is next

Because trees play a key role in battling climate change, a number of eyes are on the forest carbon market at all times.

While it is still small compared to payments for watershed services and while there have been a number of fluctuations in this market, political developments — specifically, the implementation of the Paris Agreement — have the potential to drive more and steady activity in this context. To what extent this will happen, however, is in the (still CO2-packed) air.

4. Government regulation is not going away

No matter which type of ecosystem service, regulations and government subsidies play an important role in driving Payments for Ecosystem Services.

By issuing regulation, governments create demand and organize buyers. On the flip side, regulations for PES can exist and be effective only in countries with the governance capacity to issue them and ensure compliance.