• Buyers of Environmental Services
• Main markets
• Future trends

Future trends and recommendations to increase demand (16)

The two global environmental service markets - carbon emission reductions and biodiversity conservation - appear to have the greatest potential for bringing new streams of finance into the agricultural sector.

There is little doubt that concern over and awareness of the costs of environmental degradation will continue growing, but it is less clear to what extent this will result in increased funds to pay for environmental services.

The private sector is an important source of potential increases in external funding for PES programmes, mostly in developed countries: one important indicator is the increasing importance of sound environmental management as a core business strategy for companies (e.g. insurance companies are increasingly noticing links among environmental management and returns on investment. They are thus offering incentives for climate-aware actions such as carbon emissions credit guarantees and other new renewable energy-related insurance products that seek to engage more companies in carbon offset projects and carbon emissions trading markets). Consumers are increasingly interested in the environmental performance of companies (e.g. as documented through certification). Regulators are exploring more innovative approaches to environmental regulation for carbon offsets as well other environmental services.

The two global environmental service markets - carbon emission reductions and biodiversity conservation - appear to have the greatest potential for bringing new streams of finance into the agricultural sector (including forestry).

The need to offset carbon emissions is clearly generating the greatest expectations. The potential of this market to be a source of payment flows to agriculture by regulation depends on three main factors: the extent to which the overall market size will expand - which in turn depends on the fate of international agreements to reduce emissions -, the types of activities allowed as emission offsets, and the comparative attractiveness of carbon credits from agriculture vis-a-vis other sources, for example energy conservation projects. Carbon assets from Land Use, Land-use Change and Forestry (LULUCF) remain at a very low implementation level. Their regulatory complexity and limited market access to the EU is likely to limit their demand (at least from private compliance buyers and their intermediaries). On the other hand, the proven community benefits and competitive cost may result in some additional demand from public buyers, including European governments (17).

Developments in the voluntary market are equally important. Even though the overall market is smaller, the share of emission offsets from land use change is much higher. Voluntary markets may consider less complex and costly ways to manage permanence risk than the current approach of temporary credits under the CDM. Large classes of LULUCF assets including soil sequestration, fire management and avoided deforestation, among others, remain attractive opportunities to promote sustainable development in Africa and in other natural resource-based economies, but are still systematically excluded from the CDM and other regulatory markets (18).

The global market for biodiversity conservation is less active than that of carbon emissions. An important determinant of the future prospects will be the extent to which biodiversity conservation is linked with economically significant problems such as preventing or limiting the transmission of diseases or reducing the incidence and impacts of natural disasters and related costs. To the extent that maintaining various forms of biodiversity can be found to reduce these costs, the value and demand for these services will increase.

Two forces might boost demand for biodiversity services delivered by small farmers. First, philanthropic buyers, especially large conservation NGOs, are likely to increase the use of conservation payments and conservation easements because the establishment of new nature reserves has become more contentious in many regions. Second, corporations might seek to enhance their corporate image and/or respond to regulations by offsetting the biodiversity impacts of their activities. The development of markets for agricultural products certified against environmental standards (e.g. organic agriculture) is another important potential source of growth of demand for biodiversity conservation services, fuelled by consumers' concerns about the quality and safety of foods but also about the environmental and social impacts of agricultural production.

A final question to be considered is to what extent PES programmes for watershed services - with primarily local benefits - will grow. Imposing large fees on low income urban populations for drinking water is not likely to be politically or economically feasible. However in situations where water users are already bearing heavy costs associated with the degradation of watershed services, the demand and willingness to pay for watershed services may be substantial. Clearly, much depends on the degree to which changes in agricultural practices can actually improve watershed services and along with that, can move forward the state of scientific knowledge about that relationship.

Payments for Environmental Services from Agricultural Landscapes - PESAL
is a project funded by the FAO Netherlands Partnership Programme © FAO 2008