Previous Page Table of Contents Next Page

Session 3b: Forests and the environment

Payments for environmental services from forests

Rodel D. Lasco and Grace B. Villamor1

There is considerable interest in payments for environmental services (PES) in the context of forest ecosystems worldwide. In this paper, we briefly review the status and issues associated with four of the most common environmental services with ongoing payment schemes. These include watershed protection, carbon sequestration and storage, biodiversity protection and landscape beauty. In general, while many PES schemes are being implemented there are still many social, technical, economic and policy issues that have to be resolved if genuine PES are to be attained. Finally, we present three cases of PES (watershed protection) from the Philippines to illustrate the issues involved.

Keywords: payments for environmental services, carbon sequestration, watershed protection, biodiversity protection, landscape beauty, the Philippines


Payments for environmental services, or PES, is one way of describing remuneration mechanisms for the provision of environmental services. Wunder (2005) described the PES concept in the following manner: A voluntary transaction in which a well-defined environmental service (ES), or land use likely to secure that service is “bought” by at least one ES buyer from at least one ES provider and if, and only if, the ES provider secures ES provision, i.e. conditionality. Other groups have used different labels for the concept: “markets for environmental services” — the Katoomba Group and the International Institute for Environment and Development (IIED); “rewarding for environmental services” — the World Agroforestry Centre for the RUPES Program (Rewarding the Upland Poor for the Environmental Services they provide); and “compensation for environmental services” used in the comparative framework of Rosa et al. (2003). Whichever term is used, they all involve the development of remuneration mechanisms for the environmental service being provided.

Forest ecosystems, particularly in the tropics, provide a full range of environmental services on which all life depends. These include provision of food, fuel, building materials and freshwater; climate regulation; flood control; nutrient and waste management; maintenance of biodiversity; and cultural services, to name a few. To date, there are four main environmental services dominating the markets — carbon sequestration and storage; biodiversity protection; watershed protection; and landscape beauty.

Although PES has existed in developed countries for a long time, the concept remains poorly tested in developing countries. The following sections give an overview of each environmental service at global and local levels.

Global perspective

Large PES schemes tend to be government driven, working at the state and provincial levels (e.g. in Australia, Brazil, China and the United States), the national level (e.g. in Colombia, Costa Rica and China) and the international level (e.g. the EU). Large schemes can also involve PES markets created by regulation, such as carbon sequestration markets created by the Kyoto Protocol (WWF 2006).

PES systems work best when services are visible and the beneficiaries are well organized; when land-using communities are well structured, have clear and secure property rights, strong legal frameworks and are relatively wealthy or have access to resources (Unisfera International Centre) and if they are consistent with the assessment of Wunder (2006).

Watershed protection

Watershed protection is an environmental service that has pioneered the use of payment schemes. Payments for watershed management typically involve payments to upstream land users for improving or stabilizing land use in the catchment (FAO 2006). Table 1 shows that public payments for watershed protection represent the largest market for watershed services globally (Scherr et al. 2007).

Table 1. Estimated size of payments for watershed services

Ecosystem payment types Estimated current size of payments globally (US$ per annum) Estimated current size of payments in developing countries (US$ per annum)
Compliant water quality US$7million Size and volume in developing countries unknown, but likely minimal, due to requirements for legislative infrastructure and strict enforcement.
Voluntary private sector watershed management payments US$5 million (many public PES are partially private like Costa Rica ~ 30% private electrification funds, also, Ecuador, public utility revenues). Costa Rica ~ 30% private electrification funds, also Ecuador, public utility revenues. Environmental Safety and Health in Costa Rica operates independent of the Fonda Nacional de Finaciamentio and invests roughly US$45 000 a year in protecting the watershed.
Government-mediated watershed PES US$1 000 million (New York City ~ US$150 million, WRP US$240 million, EQUIP estimate 50% for water- related services ~ US$500 million); Mexico programme Mexico programme: US$18 million; Costa Rica programme: US$5 million; China programme: US$43 billion across ten years (programme apparently has many problems); South Africa programme: R600 million per year, US$65 million.

Source: Ecosystem Marketplace (2006).

The major problem is a lack of clarity about the impact of different land uses on water (Kaimowitz 2004). Until recently, suppliers of watershed services have generally lacked leverage for demanding payment; however, this is improving with new government regulations for improved water quality in more developed countries, as well as improved buyer understanding of the benefits provided by watersheds and the growing threats they are facing (Grieg-Gran and Bann 2003).

There are also scientific doubts about forest–water linkages. To be workable, it has been suggested that simple approaches are needed to make payments, such as a flat rate per unit area, that are not necessarily linked to the actual service provided (Kaimowitz 2004). In some societies, access to water is seen as a fundamental right (FAO 2006). The development of markets for water requires defining property rights, which in many countries is not a trivial issue. There is also concern that payment systems may exclude access to water by the poor.

In the case of large watersheds with many users, the transaction costs for PES can be very high (FAO 2006). Intermediary organizations are usually needed to link producers and users. This is true especially in watersheds where institutions are weak and where development of PES for water can be costly. Finally, there is the question of whether the market is a better mechanism for delivering watershed services than the tried and tested regulatory systems. The literature provides little insight on this issue. Most studies offer superficial reviews of economic, social and environmental benefits with virtually no assessment of costs.

Carbon sequestration and storage

Parallel to the rise in concern about climate change, there is also considerable interest in the role of forests for carbon sequestration and storage. Under the Kyoto Protocol’s Clean Development Mechanism (CDM) only afforestation and reforestation (A/R) projects — carbon sequestration — are allowed for the first commitment period. However, payments for conserving existing forests (carbon storage) under the so-called REDD (reducing emissions from deforestation and degradation) were among the key issues under discussion at the United Nations Framework Convention on Climate Change (UNFCCC) conference in Bali in December 2007.

During the first commitment period of the Kyoto Protocol, the use of carbon credits from CDM forestry projects is limited to at most 5 percent of the respective countries’ 1990 emissions. This is estimated to amount to about 231 million carbon credits. However, some Annex I countries have refrained from the use of credits from CDM forestry so actual demand will be much lower (Table 2).

The World Bank is the largest buyer of forestry CDM credits, with the BioCarbon Fund having compiled a portfolio of candidate projects that are estimated to deliver up to 22 million carbon credits. The BioCarbon Fund has bought carbon credits from forestry projects for US$3.75– 4.35/tonne CO2-e for carbon removals in a forestry project until the end of the Kyoto Protocol’s second commitment period in 2017.

As of August 2007, more than 750 CDM projects had registered in the UNFCCC but only one is an A/R project. There are several factors that account for the slow uptake of forestry projects under the CDM. First is the high transaction cost — estimated at up to US$200 000 for a regular project — which is beyond the reach of potential proponents from developing countries. Second, base financing for tree planting is also substantial and is usually lacking in developing countries. For example, in the Philippines the official cost of reforestation by government projects is US$1 000/hectare for three years. Third, proceeds from carbon credits are typically not enough to cover the full cost of tree plantation establishment. Thus, A/R projects will only be profitable if they are combined with other forest products such as wood and fruits. Fourth, in many developing countries, technical capacity is weak in designing and implementing A/R CDM projects. This is partly due to limited experience in carbon sequestration projects.

Table 2. Overview of potential buyer countries with their 1990 emissions; EcoSecurities’ expectations as to the inclination to buy carbon credits from forestry CDM

Country Total 1990 emissions MT CO2-e Likely to use 5% of 1990 emissions MT CO2-e Uncertain 5% of 1990 emissions MT CO2-e Unlikely to use 5% of 1990 emissions MT CO2-e
Japan 1 173 59    
Spain 261 13    
Italy 429 21    
Ireland 31   2  
Finland 54 3    
Austria 59   3  
Germany 1 012     51
Belgium 113     6
Netherlands 168     8
Canada 457     23
Denmark 52   3  
Portugal 42 2    
Sweden 61 3    
Switzerland 44   2  
United Kingdom 584     20
Greece 82   4  
Total 4 623 101 13 117

More recently, several sectors have been advocating payments for avoiding deforestation in developing countries under the so-called REDD, perhaps in the post-2012 Kyoto Protocol period. This is in recognition that deforestation, mainly in the tropics, accounts for 20 percent of all greenhouse gas emissions (Denman et al. 2007). However, “the design and implementation of REDD policies will be neither simple nor straightforward, given the complexity of the social, economic, environmental and political dimensions of deforestation. Many of the underlying causes of deforestation are generated outside the forestry sector, and alternative land uses tend to be more profitable than conserving forests” (Kanninen et al. 2007).

Biodiversity protection

Payments for biodiversity protection exist at the local, national and international scale. International organizations, foundations and conservation NGOs are major buyers of biodiversity conservation services. Scherr et al. (2007) estimated financial payment for biodiversity protection services to be highest for ecosystem services associated with land use and land-use change, if the conservation easements are included (Table 3). The market for biodiversity conservation is highly segmented and a number of different payment systems exist, including: purchase of high-value habitat (including “debt-for-nature swaps”), payment for access to species or habitats, payment in support of management to conserve biodiversity, tradable rights and support for biodiversity conservation business.

Biodiversity funding from traditional sources like bi- and multilateral green aid has declined sharply in recent years. This decline has been attributed to both the disappointment of donors’ experiences with the result of biodiversity-oriented development assistance and an incremental shift in general priorities from the environment towards poverty alleviation (Wunder 2006).

Table 3. Estimated size of payments for biodiversity services

Ecosystem payment types

Estimated current size of payments globally (US$ per annum)

Estimated current size of payments in developing countries (US$ per annum)

Regulatory driven species offsets (including US Conservation Banking)

US$45 million in the US; programme just started in Australia and possibly similar programme in France, size unknown.

Unknown how many species offsets are driven by environmental impact assessment (EIA) regulation in developing countries.

Land trust, conservation easements

(expenditures by NGOs for conservation).

US$6 000 million in US alone

Size and use of easements in developing countries unknown. Roughly US$2 billion/year (McKinsey-WRI-TNC).

Voluntary biodiversity offsets (offsets outside the regulatory framework).

US$20 million for offsets

Probably some 50% of the global market

Government conservation payments and biodiversity offsets.

US$3 000 million - just flora-and fauna-oriented programmes (not including water and soil conservation)

Costa Rica: Over US$14 million; current global expenditures on protected areas are estimated at approx. US$6.5 billion/year

Source:Ecosystem Marketplace (2006).

Despite significant progress, most payments for biodiversity services remain nascent and, to a large degree, experimental. Major constraints to market development remain such as significant transaction costs associated with setting up and implementing trade. Most biodiversity conservation services are intangible, making them difficult to package for sale, and they are rarely consumed by a clearly identifiable clientele. Threshold effects in the service supply (e.g. forest areas below a certain size will fail to deliver the demanded biodiversity) make it difficult to portion out services to individual buyers (Grieg-Gran and Bann 2003).

Landscape beauty

The demand for this service is both at national and local scales. So far governments have been the main suppliers of landscape beauty services through the creation of protected areas or the protection of natural or cultural heritage sites. There are no global estimates of the scale of PES for landscape beauty and recreation. The Ecosystem Marketplace estimates that US$1 billion is spent annually on ecologically responsible tourism (a small share of the huge total market of “nature tourism” — 20 percent of all tourism — that relies for its value on natural resource assets).

The market for landscape beauty services is still relatively immature, mostly dominated by government provisions and characterized by below-cost pricing (Grieg-Gran and Bann 2003). Indeed, payments for beauty have been slow to develop. Tour operators have taken landscape beauty as a free input and protected area managers are rarely sought to capture consumers’ willingness to pay. This situation is unsustainable and many scenic locations are threatened.

Watershed services payments: cases from the Philippines

Watershed functions are considered to be the first environmental service to be recognized for payment due to their immediate relevance to people (van Noordwijk et al. 2005). Communities from different parts of the world benefit from watershed properties such as water flow regulation, water quality maintenance, erosion and sediment control, water table regulation and maintenance of aquatic habitats. Countries such as Colombia, Ecuador and Costa Rica are among various countries with established payment schemes for such functions.

In the Philippines, under the Rewarding Upland Poor for Environmental Services (RUPES) Program, some of the conditions for developing payments for the watershed services mechanism have been described and analysed.

Bakun Watershed, Benguet2

Bakun is the home of the Kankaney–Bago indigenous tribe and the first indigenous area in the country to be awarded the Certificate of Ancestral Domain Title (CADT). The CADT is a product of decades of struggle by the indigenous peoples in the Philippines for recognition of their unique culture and property rights (Espaldon in press). The CADT covers 29 000 hectares of land area in the Cordillera ranges of the northern Philippines. The Bakun indigenous people (mainly close-knit members of the Kankaney–Bago tribe) are predominantly poor and 90 percent of the local people are engaged in rice and vegetable farming. Despite being underprivileged, the Bakun people have a rich socio-cultural heritage. Their indigenous way of life governs how they relate with the land, the forests and among themselves. They manage and utilize natural resources using indigenous knowledge systems and practices.

Bakun Watershed is the main source of domestic water supply for the local community. More importantly, it is the source of irrigation water for rice fields and the expanding vegetable farms in the area. Four major rivers and several tributaries drain the watershed area; two of the rivers are currently supporting the operation of the Luzon Hydropower Corporation (LHC) and the Northern Mini Hydro Corporation (NMHC).

Bakun receives payments for water functions from two hydroelectric companies, the LHC and the NMHC. These payments are mandatory taxes, which are predetermined under the Philippine Energy Law of 2001 (Republic Act No. 7638).

Based on the said policy, the host communities benefit through the electrification fund, livelihood development and watershed rehabilitation funds and possible employment. Moreover, several scholarships and internships are offered for the students from the host communities in Bakun. These payments or compensations are paid to the Municipal Government of Bakun, which identifies where and how to distribute the money for the welfare of the community.

Furthermore, a Memorandum of Agreement among the Province of Benguet, the LHC and the National Power Corporation (NPC) was prepared to implement the Local Government Code and its implementing regulations on the payment of realty tax and national wealth tax. This is equivalent to 1 percent of the gross revenue of the power plant for the utilization of water to be paid to the local government unit (LGU) based on the following sharing scheme: province (20 percent), municipality (45 percent) and barangay(35 percent) (Espaldon in press).

Water levy for the rehabilitation of Baticulan Watershed, Negros Occidental3

Baticulan Watershed is located within the boundary of San Carlos City, Negro Occidental. It lies between the towns of Palampas and Rizal, covering 428 hectares. Due to shifting cultivation in the watershed, soil erosion and flooding have become serious problems in the nearby lowland.

The widespread degradation on the uplands of Baticulan Watershed urged the City Government of San Carlos, Negros Island to incorporate in the City Ordinance No. 37 series of 2004, “An ordinance regulating the operation of the City Waterworks of the City and creating the Watershed Development and Protection Fund, and for other related purposes.” It is a special levy for an environmental fee of 0.75 pesos on every cubic metre of water billed. The proceeds go to a special account known as the “Watershed Development and Environmental Protection Fund” that supports the implementation of the Master Development Plan (MDP) of the city. The concept of this fund is that inherent with the use of water are the negative externalities incurred in the production and consumption of water. The price of water should include the cost of externalities to address the negative impacts on the environment. It is estimated that the budget allocation per annum for the project is approximately 1.2 million pesos. The ordinance took effect after one year.

Local water consumers composed of households, local industrial firms and small-scale farmers pay the said amount, while the City Waterworks Department (CDW) automatically deducts the environmental fee and puts it in a special account. Section 3 of the ordinance specifies the disbursement of the environmental fee, in that funds accrued in the Watershed Development and Environmental Fund can only be disbursed in conformity with the Implementing Rules and Regulations governing the said funds to be submitted by the CDW and approved by the Sanggunian (council).

A Memorandum of Understanding between the City Government of San Carlos and the San Carlos Development Board, Inc was prepared and signed to leverage these funds for watershed rehabilitation.

Sibuyan Island4

Sibuyan Island is the second largest island of Romblon Province with a total land area of approximately 45 600 hectares, 75 percent of which are forested (van de Veen 2004). In the southern half of the island, watershed arrangements and payment mechanisms for two watersheds, namely the Cantingas and Panangcalan watersheds, are being developed.

Both these watersheds provide environmental services, which benefit both the upland and lowland dwellers. The ecosystem services provided by these watersheds (Sibuyan Report unpublished) are:

Among these environmental services, the mitigation of flood occurrence and the sustained production of good quality water for drinking and recreational purposes are the most important.

The World Wildlife Fund (WWF) Philippines developed payment schemes in collaboration with the LGU of San Fernando and Sibuyan Mangyan Tagabukid, an indigenous tribal organization. Since 2000, the WWF has been working towards providing livelihood strategies for the Mangyan Tagabukid, the main indigenous group in the area. Beginning in 2005, both the LGU of San Fernando and the WWF have each set aside 350 000 pesos (or US$8 536.60 at the time of writing) for the “Cantingas Water Fund” to finance watershed management in Panangcalan and Catingas watersheds respectively. Following the example of Baticulan Watershed, the LGU is presently drafting an ordinance for a water levy.

Environmental fees for the use of these services are currently charged in the area. For example, in Panangcalan Watershed, each household reportedly pays 15 pesos per month to the office of the municipal engineer to use the water system. In Cantingas Watershed, a total of 560 hectares of riceland were reportedly irrigated at a cost of 360 pesos/hectare/year to be added to the water fund.

Some of the key lessons that have emerged from the Philippines experience are:

Concluding remarks

PES schemes hold considerable promise for compensating forest communities for the environmental services that they help to provide. The prospect of using market forces to benefit millions of poor farmers is a very attractive concept. However, there are many challenges that constrain the fulfilment of this potential. Researchers and policy-makers need to interact closely to find the way forward. The promise of PES is too good an opportunity to miss to address the twin goals of poverty alleviation and environmental conservation.


Denman, K.L., Brasseur, G., Chidthaisong, A., Ciais, P., Cox, P.M., Dickinson, R.E., Hauglustaine, D., Heinze, C., Holland, E., Jacob, D., Lohmann, U., Ramachandran, S., da Silva Dias, P.L., Wofsy, S.C. & Zhang, X. 2007. Couplings between changes in the climate system and biogeochemistry. In S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. Averyt, M. Tignor & H.L. Miller, eds. Climate change 2007: the physical science basis,pp. 499–587. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, United Kingdom and New York, NY, United States, Cambridge University Press.

Espaldon, M.V. In press. Looking through the eyes of the future: the RUPES Bakun, Benguet, Philippines. Bogor, World Agroforestry Centre.

Food and Agriculture Organization (FAO). 2006. The new generation of watershed management programmes and projects. A resource book for practitioners and local decision-makers based on the findings and recommendations of an FAO review. FAO Forestry Paper 150. Rome, FAO.

Grieg-Gran, M. & Bann, C. 2003. A closer look at payments and markets for environmental services. In P. Gutman, ed. From goodwill to payments for environmental services, a survey of financing options for sustainable natural resource management in developing countries. WWF Macroeconomics for Sustainable Development Programme Office.

Gutman, P. 2005. What are PES? Opportunities and obstacles to implement pro-poor PES projects. Presentation, 15 December 2005.

Kaimowitz, D. 2004. Forests in the pressure of global policy making. In C. Baines, ed. Forest research crossing border,67–69. Joensuu, Finland, European Forest Institute. EFI Proceedings 50.

Kanninen, M, Murdiyarso, D., Seymour, F., Angelsen, A., Wunder, S. & German, L.2007. Do trees grow on money? The implications of deforestation research for policies to promote REDD. Bogor, Indonesia, CIFOR.

Rosa, H., Kandel, S. & Dimas, L. 2003. Compensating for environmental services and rural communities. San Salvador, El Salvador, Programa Salvadoreno de Investigacion sobre Desarrollo y Medio Ambiente.

Scherr, S., Milder, J.C. & Bracer, C. 2007. How important will different types of compensation and reward mechanisms be in shaping poverty and ecosystem services across Africa, Asia, and Latin America over the next two decades? ICRAF Working Paper No. 40. Nairobi, Kenya, World Agroforestry Centre.

Unisféra International Centre.2004. Payments for environmental services: a survey and assessment of current schemes. Karel Mayrand and Marc Paquin for the Commission for Environmental Cooperation of North America, Montreal, September 2004.

van de Veen, H.2004. How to care for the casualties of conservation? Labouring to improve livelihoods on Sibuyan Island, Philippines. Gland, DGIS-WWF.

Van Noordwijk, M., Villamor, G., Beria, L. & Lasco, R. 2007. Bridging supply and demand for the environmental services upland people can provide through sustainable rewards: lessons from RUPES.Paper presented during the national policy forum on Costing for Environmental Services: Implications to Policy, 9 March 2007. Quezon City, Philippines, Innotech.

Villamor, G.B., Cruz, R.V., Lasco, R.D. & Sanchez, P.A. 2006. RUPES: payments for watershed functions — application of Rapid Hydrological Appraisal (RHA) in Bakun Watershed, Philippines.Paper presented during the 1st eSURED meeting on International Water Resource Management, Quezon City.

Villamor, G. & Lasco, R.D. 2007. Water levy as financial scheme for watershed protection – a city government initiative to rehabilitate the Baticulan watershed, Philippines. Paper presented at the International Forum on Water Environmental Governance in Asia. Bangkok, Thailand.

Villamor, G. & Lasco, R.In press. Rewarding upland people for forest conservation: lessons learned and experiences from the case studies in the Philippines. Journal of Sustainable Forestry.

Wunder, S. 2005. Payments for environmental services: some nuts and bolts. CIFOR Occasional Paper No. 42. Jakarta, Indonesia, CIFOR.

Wunder, S. 2006. Are direct payments for environmental services spelling doom for sustainable forest management in the tropics? Ecology and Society, 11(2): 23.

World Wildlife Fund (WWF). 2006. Payments for environmental services: An equitable approach for reducing poverty and conserving nature.

1World Agroforestry Centre (ICRAF), Khush Hall, IRRI Campus College, 4031 Laguna, Philippines. E-mail:

2From Villamor et al.(2006).

3 From Villamor and Lasco (2007).

4From Villamor and Lasco (in press).

Previous Page Top of Page Next Page