Nature's marketplace

10th March 2014


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Ram Kumar

Payments for ecosystem services will produce environmental benefits, argues Mark Everard

The deep interdependencies that exist in the natural world between life forms in complex food webs, the climate system and the biogeochemical cycles that make life possible have arisen not by chance but through billions of years of coevolution.

Humanity is no different from any other coevolved species in terms of its interdependence with nature. Yet, the ways humans have used their capacity for innovation to modify and appropriate natural resources for their own ends have stepped beyond the regenerative capacities of the biosphere. And unless we wish to see increasing conflict and declining human potential, our onward evolution has to become a consciously guided process. This is, of course, what sustainable development is all about, but framing it this way adds context and urgency to the easily spoken, if hard-to-realise, mantra of achieving integrated social, environmental and economic progress.

Economic evolution

Contemporary markets are still substantially shaped by the industrial revolution view that progress is synonymous with net wealth creation. At that time, the global population was much lower and there was a perception that nature’s capacity to supply resources and assimilate waste was boundless.

It is true that laws, subsidies and taxes, as well as shifting values and attitudes, have progressively bound the freedoms of the essentially amoral market. Yet most regulations, for example, act retrospectively on decisions that have already been made and address relatively narrow issues, such as control of specific pollutants, infringements of selected human rights, or impacts on particular habitats or communities.

The rise of frameworks for action, particularly the concept of ecosystem services, has opened our eyes to the need for systemic reform of norms and practices. Perpetuation of yesterday’s economic paradigm based on narrow endpoints, such as contribution to GDP, merely reinforces a blinkered view of the wider ramifications of policies and activities on ecosystem services and their human beneficiaries.

For example, evaluating the benefits of a large dam based entirely on the provision of water to largely privileged urban, agricultural and industrial users may remain commonplace in business plans, yet only tell part of the story of its net value to society. Broader analysis of the implications of large dams on the disruption of water flows, sediment, nutrients and organisms, and the drowning or erosion of culturally valued and livelihood-sustaining habitats and landscapes, paints a very different picture that raises questions about equity and net economic benefit when all losses and gains are set on the ledger.

The evolution of economic tools to incorporate the value of natural capital is an absolute necessity if truly sustainable development is to be achieved.

Valuing natural services

Payments for ecosystem services (PES) is an emerging market-based approach with a role to play in bringing into the economy some of the beneficial services of nature that have for too long been overlooked and, as a consequence, often been degraded. Put simply, those whose activities can affect the supply of an ecosystem service may be seen as “providers”, while those who benefit from the service are “buyers”. This enables trade to be established, generally through some form of broker, whereby buyers pay providers to manage ecosystems to protect or enhance the desired service.

PES projects have a long history in developed countries, dating back to agri-environment schemes in the late 1960s and 1970s in the US, and the early 1980s in the EU. Some of the most obvious and long-established PES markets based on payments by water companies to subsidise or compensate land owners for changing how they manage farmland. Such payments help to protect or improve the quality of water that flows through nearby waterways, which means it is cheaper to clean at downstream abstraction points.

A classic, effective and government-sanctioned example is the “upstream thinking” programme in southwest England, through which a proportion of revenue from water bills is recycled as farm management subsidies by the local utility company, South West Water (SWW). This payment is brokered by the Westcountry Rivers Trust (WRT), which works with farms scattered across water catchment areas in an integrated way to help save the utility company money. For example, the scheme is helping farm businesses to:

  • curtail inappropriate agrochemical use;
  • partition clean roof water from dirty yard water;
  • introduce effective wastewater treatment and slurry management options;
  • establish “buffer zones” around wetlands and streams to help reduce stock disease, loss and straying; and
  • install a range of other beneficial measures that are simultaneously advantageous to river health.

Upstream thinking is part of an ongoing partnership between WRT and SWW. It gained government consent under the 2010–15 water industry investment cycle and is expected to generate a 65:1 benefit-to-cost ratio, based on savings in water treatment.

PES has strong support internationally. In 2010, the OECD estimated there were already more than 300 PES or “PES-like” schemes in operation globally, including schemes linked to water supply, carbon sequestration and biodiversity conservation. Interest in PES has since increased substantially. A 2013 study identified 457 published peer-reviewed papers on PES.

REDD+, the UN programme aimed at reducing emissions from deforestation and forest degradation in developing countries, is a truly international PES-based market in which richer nations, which have benefited disproportionately in the past from exploitation of carbon-rich energy sources, can pay for retaining carbon sequestered in forest habitats in emerging nations. This provides developing countries with revenue for the conservation of forests, as well as the rich biodiversity and ecosystems services they contain.

PES also has strong backing in the UK. The government’s 2011 natural environment white paper, The natural choice, emphasised the role of PES in mainstreaming the consideration of natural capital. The white paper initiated a range of Defra programmes, including the production of a PES action plan in 2013. There is also ongoing research into expanding the range of PES beneficiaries, and the environment department has supported a number of PES pilots exploring the potential for such schemes in England and Wales.

PES is not without its critics, however. Market-based approaches are seen by some as commodifying nature and creating a mechanism to override conservation concerns. Guardian columnist George Monbiot, for example, says PES appoints the land owner as also the owner and instigator of the wildlife, the water flow, the carbon cycle, the natural processes that were previously deemed to belong to everyone and no one.

Nevertheless, many conservation organisations see opportunities, welcoming PES as a tool for negotiating funding for programmes with conservation outcomes, but which also yield a range of other beneficial services. Recognition of the value of multiple ecosystem services, by linking them into a package demonstrating their cumulative benefit to society, may also enable PES to be used to drive more sustainable management, demonstrating and expanding net public value arising from existing subsidy and investment mechanisms.

Perhaps the most compelling argument in favour of PES, and other mechanisms valuing the services of nature, is that in the absence of valuation the default value in decision making is precisely zero.

Although it may be uncomfortable for some environmentalists to go beyond arguments about the inherent value of nature, a preservationist approach has clearly failed. This is often seen in media outrage about how “a few newts” have halted a prestigious development or, more commonly, that “all this special pleading would be nice if it didn’t halt real development”. Recognising newts, other organisms, their habitats and the services they provide as beneficial to economic activities, health and wellbeing presents a far more compelling case for action.

Paying for supporting services

Early implementation of PES has opened up markets for a range of services. However, the primary purpose of the ecosystem services framework is not to cherry-pick additional benefits provided by nature. This would simply replicate the errors of the past in that it would overlook implications for the wider spectrum of connected services, associated beneficiaries and supporting ecosystems. Rather, it recognises that ecosystems services are, as the name suggests, a system of interconnections.

Further evolution of the PES agenda has to be mindful of the multiplicity of benefits, which are protected, enhanced or degraded as a result of human activities. It is particularly important to be mindful of supporting services, which include processes that cycle nutrients, form soil, regenerate habitat and otherwise maintain the viability and resilience of ecosystems to provide benefits. An ecosystem approach must aim to optimise net benefit across all services and their beneficiaries, rather than maximising one or a few services at the cost of others, such as the consequential damage wrought by dredging for floodwater conveyance.

Acting at the ecosystem scale is challenging for markets and governance arrangements because they are still mainly focused on narrow interests. Take, for example, a traditional five-year farmland lease under which the tenant has every incentive to maximise crop or grazing yield and none to prevent long-term erosion, or protect the fertility and viability of the soil.

Parallels can be drawn with unconstrained opencast mining, which disrupts water flows, releases sequestered carbon, damages landscapes and wildlife, and reduces the net benefit of the habitat to society and the value of the asset to its owner. Even a PES-driven approach has the potential to “mine” ecosystems for a single service if broader ecosystem-wide considerations are not factored into its design. Multi-tier PES considerations must, therefore, be brought to the fore and could involve:

  • bundling – a single buyer, or consortium of buyers, pays for the full package of ecosystem services;
  • layering – multiple buyers pay separately for discrete ecosystem services; or
  • piggy-backing – one or a few ecosystem services are sold, while the benefits provided by other services accrue to users free of charge.

Progressive examples of PES around the world are beginning to use the language of “environmental services”, recognising that all services, or at least a significant core of them, such as biodiversity, water quality and carbon storage, can be maintained through common management practices. This is increasingly seen in tropical forest conservation where a key “anchor” service, for example water quality, is paid for as a basis for the conservation of forested uplands, achieving many additional ecosystem service benefits. The upstream thinking example in southwest England is similar, with SWW having a primary interest in water supply, yet measures brokered by WRT encourage land use practices that are equally beneficial to fish health, biodiversity, regional character, ecotourism value and farm viability.

What PES can and cannot do

PES is a useful new tool to bring more ecosystems services into markets. It is no panacea, however. It does not replace statutory regulation protecting the environment – rigorous enforcement of which is necessary to ensure obligations are met – since PES is inherently a voluntary market approach over and above that baseline.

A more cynical – but perhaps accurate – view is that PES is a “sticking plaster” for more profound market failure, introducing new elements for consideration as we move towards a market that genuinely integrates economic progress with protection or enhancement of ecosystems essential for social wellbeing. As the tenant farmer example demonstrates, the market itself has to evolve radically to ensure that land managers and other players in society are rewarded for their contributions to multiple services, or constrained from damaging them.

PES has a role to play not merely in securing the narrow interests of buyers and sellers in ecosystem services-based markets, but as a potential path towards a new economic paradigm. In particular, PES provides a mechanism through which fragmented policy areas, and their ring fenced budgets, can be combined to invest in ecosystem protection or restoration.

Policymakers increasingly recognise, for example, that green infrastructure techniques can offer a range of benefits simultaneously, including: enhanced drainage; more green spaces for nature and recreation; mitigation of noise pollution and visual blight; reductions in airborne pollutants with substantial public health benefits; and enhanced aesthetics, all of which increase real estate values.

PES may provide an opportunity to combine management and financial resources to achieve greater cumulative benefits by optimising ecosystem services outcomes through cheaper, low-input solutions. PES may also become a powerful mechanism to accelerate the necessary integration of traditionally “siloed” interests, helping shift cultural norms so that the scythe of natural selection will sweep less harshly on our pathway to a sustainable future.

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