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Payments for Environmental Services: Issues and Implications for India

Programmes on payments for environmental services aim to provide economic incentives for the conservation of natural resources. They are expected to generate a continuous flow of environmental services in the long run, along with maintaining their quality. This essay elucidates the conditions required for the successful implementation of PES schemes and considers how well they may do in the Indian context. It foresees a number of formidable challenges in the schemes producing the desired outcomes in India.


Payments for Environmental Services: Issues and Implications for India

Bhagirath Behera, Pulak Mishra, Narayan C Nayak

consumption, making it extremely difficult for them to function efficiently. Markets also cannot function properly if the property rights governing natural resources are poorly defined.


There is thus a need to internalise the externalities so that owners have incen-

Programmes on payments for environmental services aim to provide economic incentives for the conservation of natural resources. They are expected to generate a continuous flow of environmental services in the long run, along with maintaining their quality. This essay elucidates the conditions required for the successful implementation of PES schemes and considers how well they may do in the Indian context. It foresees a number of formidable challenges in the schemes producing the desired outcomes in India.

This paper was written with financial support from the Research Unit on Livelihoods and Natural Resources, Centre for Economic and Social Studies, Hyderabad. The authors are thankful to Gopinath Reddy and V Ratna Reddy for their valuable comments and suggestions.

Bhagirath Behera (, Pulak Mishra ( and Narayan C Nayak (ncnayak@hss.iitkgp. are at the Indian Institute of Technology, Kharagpur.

he importance of maintaining the quality of the environment and the sustainability of natural resources for the well-being of society is well recognised (Dasgupta 2001). Degradation of the environment, followed by an inadequate availability of natural resources, results in a loss of economic output, which affects human welfare. In the past two decades or so, a rapid degradation of environmental resources – deforestation and degradation of forests, a decline in the quality and quantity of water, degradation of land and a loss in biodiversity – has taken place both at the regional and national levels across the globe (Reddy and Behera 2006), threatening the sustainability of the development process and the wellbeing of nations. In addition, environmental pollution, especially in cities and industrial locations, is on the rise. Climatic conditions are changing fast due to increasing emission and concentration of carbon dioxide and other greenhouse gases in the atmosphere (IPCC 2007).

Further, the demand for environmental services has increased significantly with the world population doubling between 1960 and 2000 and the global economy growing by more than six times in the same period. The upshot has been that nearly two-thirds of global ecosystem services are now on the decline (MA 2005). This is largely because market forces have failed to capture environmental services adequately (Panayotou 1993). In many cases, markets tend to ignore costs (and benefits) that accrue to third parties from the actions of two parties engaged in an exchange. These costs (and benefits) are external effects caused by a market failure. Many environmental services are essentially public goods, which are characterised by non-excludability and indivisibility in

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tives to use and manage natural resources in an efficient and sustainable fashion. Payments for Environmental Services (PES) programmes developed by the World Bank (Pagiola 2005), which are being implemented in different countries, especially in Latin America (Pagiola et al 2005), aim to provide economic incentives for the conservation of natural resources.1 These programmes are expected to generate a continuous flow of environmental services in the long run, alongside maintaining their quality. In other words, PES programmes are considered a mechanism to translate external non-market values of the environment into financial incentives so that provisions for such services are ensured (Engel et al 2008).

Implementation of PES schemes in different countries has led to the development of a large body of literature on country-wise experiences (for example, Wunder and Alban 2008; Pagiola et al 2008; Engel and Palmer 2008). Experiences so far seem to vary widely across geographical regions (both within and across countries) depending on the types of schemes and the natural resources they are based on. A deeper understanding of these experiences along with the logical structure of PES can help in designing PES schemes specific to the Indian context.

Figure 1 (p 65) shows that ecosystem managers or owners often receive very few benefits from land use and that this does not encourage them to promote conservation of environmental resources. These benefits are generally less than those that would be received from alternative uses of the land, which, however, are likely to generate negative externalities for people living downstream and receiving a variety of ecosystem services (for instance, water filtration, reduced soil erosion and siltation). Payments by those

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who receive these environmental benefits can make conservation of the ecosystem more attractive to the managers or owners of these resources and induce them to adopt conservation measures.

Figure 1: The Logical Structure of PES

Conversion to pasture Forest conservation Forest conservation with service payment(s) Benefits to ecosystem managers Minimum payment Payment(s) Payment for service Maximum payment Reduced water services Loss of biodiversity Carbon emissions Costs to down-stream populations and others

Source: Engel et al 2008.

Although it appears to be quite simple and straightforward, this structure of the PES mechanism may not address all kinds of environmental problems. This is because ecosystems may be mismanaged for a variety of reasons and PES may not be a solution to all of them (Pagiola 2003). For example, ecosystems may be managed badly because of lack of properly defined property rights over natural resources, inadequate awareness or information about land use practices, and insufficient provision of credit facilities to land users (Engel et al 2008). In the absence of clearly defined property rights, ecosystem managers cannot exercise their authority over resources, thereby making management decisions unfeasible. Here, the ecosystem belongs either to no one or to the state, leading to open access. In such situations, the best solution would be to assign appropriate property rights. Similarly, if ecosystem mismanagement is due to inadequate information and awareness about land-use practices, the appropriate solution would be to provide access to education and promote awareness to help the owners of the ecosystem. On the other hand, if ecosystem managers are not able to adopt certain land-use practices that would generate extra benefits because of a lack of access to credit facilities, the government must make efforts to provide sufficient credit. The sources of market failure can easily be resolved with the help of policy intervention and use of a PES mechanism may not be required in such cases.

A review of the existing literature on PES highlights two important issues.2

First, the application of the PES mechanism as a market-based instrument to internalise the externalities has grown considerably over the last one decade or so. Second, the growing popularity of PES schemes and the high expectations associated with them do not match outcomes, as can be seen when one analyses their strengths and weaknesses. It is observed that PES schemes differ substantially from one

another and this can be attributed to differential adaptation of PES concepts in different ecological, socioeconomic and institutional conditions. One of the important strengths of PES schemes is supply and demand side innovations for environmental conservation. Historically, environmental conservation has been viewed as a losing proposition because of a lack of effective demand from buyers, who regard conservation outcomes as generally falling under the category of public goods. The innovation of PES schemes has made environmental conservation a winning proposition by creating buyers and sellers for it. However, the efficiency of PES depends on sellers who can continuously supply ecological services to buyers, which is known as conditionality (Wunder et al 2008). This conditionality tends to be violated when sellers of ecological services face high transaction and opportunity costs, and a host of other socio-economic and institutional factors (Landell-Mills and Porras 2002).

Global Experience

Experiences from the important PES schemes/projects across various countries suggest that the design and implementation of PES and/or PES-like programmes are quite different and largely location specific. The scale of the programmes depends mainly on the political and administrative will of governments. For instance, China’s Sloping Land Conversion Programme (SLCP) has been a phenomenal success because of food and other subsidies that the government has been providing Zhang et al 2008). Similarly, in the case of Los Negros, Bolivia, the local government has contributed a large sum of money on behalf of individual irrigators to service providers (Asquith et al 2008). On the other side, PES initiatives by individual users and service providers as well as non-governmental organisations (NGOs) have also been quite successful (Adhikari 2009). It is worth noting that the outcomes of PES are to an extent dependent on ecological conditions, as well as the nature and quantum of services that the ecosystem provides.

Inadequate Incentives

A review of PES-like cases in India highlights the potential for widespread implementation of PES programmes in the country (Gupta 2009; Adhikari 2009). It appears that the government and NGOs working at the community level need to identify ecological contexts where both service users and providers cannot only be easily identified, but also be encouraged to negotiate the trading of environmental services. Further, ecosystem management institutions in India have failed to manage resources largely because of the lack of adequate incentives. Linking these institutions to PES-like schemes may prove to be effective and their programmes can then be adopted across different resources and locations in the country. A few lessons can be drawn from the international experience when it comes to institutional innovation for successfully adapting PES programmes to the Indian context. For example, China’s SLCP programme shows how projects under the National Rural Employment Guarantee Act (NREGA) in India can be conceived to provide incentives to households involved in ventures that are environmentally degrading to cut down on their activities to benefit society at large. In this way, one may see the National Rural Employment Guarantee Scheme (NREGS) as having immense potential to facilitate the successful design and implementation of PES programmes in the country.

Costa Rica is considered a country that has carried out some of the most successful PES experiments (Pagiola and Platais 2007). However, several positive outcomes notwithstanding, PES schemes in Costa Rica are not free from potential threats and difficulties. The major challenges include lack of

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knowledge of and demand for environmental services (Wunder 2005), improper valuation of environmental services (Pagiola et al 2005), high opportunity costs (Porras and Hope 2005), insecure land tenure, high transaction costs, inadequate access to technical assistance (Pagiola 2005), and the market price of environmental services (Hope 2005). Yet, PES schemes in Costa Rica have the potential of becoming successful environmental conservation strategies along with benefiting the poor and society at large, provided the major threats and critical issues are effectively addressed.

Conditions for Successful PES

Although the outcomes of PES schemes so far seem to be mixed and it would be too early to come to any definite conclusion on their efficacy, they have tremendous potential for slowing down environmental degradation, conserving environmental resources, and improving the livelihoods of the marginalised sections of society. Some of the key factors that might promote and/or hinder the success of PES schemes are as follows.

  • Flexibility in the scheme for a particular environmental service across countries or across regions within the same country helps in incorporating the requirements of a particular market. This also facilitates replication of a successful model with necessary modifications in accordance with different ecological conditions.
  • A PES scheme is likely to be successful when its services are clearly visible and both the beneficiaries and the land users (suppliers of environmental services) are well organised, along with clearly defined and secure property rights over environmental resources. This requires a strong legal framework under which the newly created market for environmental services can effectively function. However, such a legal structure should not be in conflict with market forces.
  • Broadly, existing PES schemes can be classified into three groups: user-financed; government-financed; and hybrid.3 Userfinanced PES schemes are likely to perform better than government-financed ones because conditions such as clearly defined property rights, low transaction costs, the consideration of environmental services as private or club goods, and the
  • involvement of a small number of actors are satisfied.4 Besides, most governmentfinanced PES schemes are much like any other subsidised government programme, which totally relies on government funding. The government buys environmental services from sellers for other beneficiaries and there is no direct contact between the users and the sellers to lead to a principal-agent relationship between the executives and the suppliers/users of environmental services. As a consequence, state-financed PES programmes may suffer from the problems of informationasymmetry and rent-seeking. When this happens, the sustainability of PES schemes suffer.

  • Proper assessment of environmental services generation and their appropriate valuation is a critical issue in most PES schemes. In many cases, it is seen that a PES scheme generates more than one environmental service, but is accounted only for a specific service. Moreover, clear and consensual scientific evidence to link land uses to the provision of services is missing in many cases. This can potentially undermine the effectiveness of environmental service markets.
  • Market-based instruments can function well only when there is an established link between land-use practices in the upper watershed and downstream provisioning of ecosystem services through an effective information dissemination network. In addition, the success of PES schemes is also conditioned by insights from good valuation studies that can link payment options with increasing provisions for environmental services.
  • The effectiveness of PES schemes largely depends on the nature of contracts that sellers and buyers of environmental services are bound to. It has been suggested that flexible, ongoing and open-ended contracts can go a long way towards making the schemes effective (Barton et al 2009). Since PES schemes are relatively new and the process of learning and experimentation is an ongoing one, an open-ended contract provides enough scope to correct constraints.
  • Potential benefits in excess of costs will make PES schemes sustainable in the long run. Hence there is always the need to substantially reduce transaction costs so that the schemes are economically viable for both sellers and buyers (Wunder et al 2008). The experiences of some developing
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    countries suggest that if start-up costs are very high, either the government or some donor agency will have to step in to fund the PES scheme in the initial period (Alix et al 2008). While this may work in the initiation phase of a project, its sustainability in the long run would require mobilising enough resources from its own sources.

  • Scope for multiple sources of revenue is an important factor for the success of PES schemes (Mayrand and Parquin 2004). This is true particularly in the case of government and/or hybrid types of PES schemes where a funding crunch can hamper the sustainability and effectiveness of the schemes to a large extent. Multiple sources of revenue can help in reducing uncertainty in the flow of financial resources.
  • A continuous provision of environmental services is a prerequisite for the success of PES schemes in the long run and, hence, the conditionality of constant supply of environmental services should be attached to sellers. Close monitoring of compliance with contracts and changes in the land-use pattern is very crucial in this regard. Further, this can make environmental service buyers accountable and responsive to environmental service sellers and thereby ensure an equitable contribution to the schemes. However, monitoring vast areas of land effectively imposes a huge cost on enforcement agencies and this could make schemes economically unviable and limit their sustainability (Wunder et al 2008).
  • Lack of transparency and trust between buyers and providers may hinder the success of PES schemes (Wunder 2008). For instance, miscommunication and/or lack of adequate information about schemes can create a sense of fear in the minds of environmental service providers that their lands will be appropriated by the agency at a later date (Wunder 2008). When this happens, service providers may be discouraged and the scope for environmental services could be limited.
  • When PES schemes are implemented, particularly in common lands or when it is necessary to bring all the landowners under new land-use norms, lack of consensus on the part of the landowners or stakeholders may obstruct the progress of the schemes (Wunder 2008). In such circumstances, an incentive structure, along with a transparent agreement on land-use and an effective
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    regulatory mechanism, is very important. While the incentive structure will encourage people to have a consensus, the agreement and regulation, which will prevent misuse and misappropriation of land, will protect property rights and interests.

  • On many occasions, PES schemes are designed and implemented largely on the basis of scientific generalisations without the necessary empirical support (Landell-Mills and Porras 2002). It is often found that there is a great degree of uncertainty and a disconnect between conservation activities undertaken and their ecological outcomes. The absence of a link between upstream land use practices and their corresponding effects on downstream environmental outcomes may discourage people from paying for environmental services.
  • Effective and sustainable changes in the land use pattern require environmental service providers to be provided with adequate technical assistance. Several studies have found environmental service providers have inadequate access to technical assistance (for example, Pagiola et al 2008). This may make the land use pattern sub-optimal and pose a significant threat to the environment.
  • Arbitrary setting of charges for environmental services in isolation of demand conditions and economic valuation of the resources are prevalent in some markets. Here, the failure to estimate the prices of the environmental services properly may act as a disincentive to users. Instead, PES schemes with a targeted payment approach are likely to be more successful than those with a flat-rate payment system (Alix-Garcia et al 2008).
  • Environmental services may suffer from the problem of improper identification of users and the services themselves (Wunder and Alban 2008). Sometimes, schemes are executed without proper monitoring or control. In such cases, improper identification may result in inappropriate pricing and in centives, limiting the success of the schemes.
  • Adoption of PES is higher when NGOs and civil society institutions, particularly community-based organisations, are pre sent (Adhikari 2009). Such institutions can help in building trust between buyers and sellers, particularly when there is an initial lack of a formal policy dialogue among different actors. Such involvement in all activities by
  • NGOs will go a long way towards successful implementation of PES schemes.

    • Greater inclusiveness and transparency of a programme helps to improve its effectiveness, strengthens links between producers and beneficiaries, reduces enforcement costs, and enhances outcomes. Further, the gender dimension of PES, such as consultation with women members and ensuring their participation in schemes, is also very crucial

    PES in India: Emerging Issues

    With degradation of natural resources and an increasing demand for environmental services in India, perhaps the time has come to adopt market-based instruments like PES to protect the environment. Given the vast array of natural resources, their importance in the development process, and diverse ecological conditions, India has tremendous scope for adopting PES-like schemes to fulfil the objectives of both conservation of the environment and promotion of local livelihoods and social security. Some initiatives for this have already been taken by local NGOs and community-based organisations.

    However, the factors identified to be important for the success of PES schemes and the essential policy supports may not be easily available in the Indian context. PES schemes are likely to be more successful where there are secure property rights over land and forest resources, as well as policy supports that promote communitybased approaches to natural resource management. In this connection, a critical challenge that India is likely to encounter is insecure and ill-defined property rights over a major part of its natural resources related to a large number of environmental services. While the majority of India’s ecosystem management institutions operate under state ownership of natural resources, most of them have failed to achieve their targeted objectives primarily because of a lack of active participation by the local people in their programmes. This, in turn, has been because of insecure property rights and a lack of enabling policy support. For example, the Joint Forest Management Programme could not last long mainly due to lack of de jure property rights over forest resources (Behera and Engel 2006). Therefore, successful adoption of PES schemes in India requires reforming the existing provisions of property rights. Given the country’s complex socio-economic and political set up, such reforms will create both winners and losers and hence conflict of interests.

    Agents with greater access to information and institutional provisions may benefit in a larger way from the policy reforms through rent-seeking. In addition, defined and secure property rights may also become disincentives for landowners to use natural resources in an optimal manner, resulting in increasing inequality in society (Adhikari 2009). It is, therefore, necessary to develop an appropriate institutional framework that can restrict rent-seeking by agents because of information asymmetry. This should be combined with an incentive structure to encourage landowners to make optimum use of resources. In India, as a large section of landless and marginal people depend on de facto state-owned natural resources and/or village common lands for their daily livelihoods, initiating PES schemes requires tenure-based rights over land to ensure long-term access to land and to thus develop markets for environmental services.

    PES schemes help in strengthening land rights (for instance, temporary rights established through frontier activities) through informal tenure security (Adhikari 2009). For example, in the Bungo watershed in Indonesia, biodiversity services were supported by providing land use rights over forest frontier activities5 (Adhikari 2009). One can expect similar outcomes in the Indian context provided the schemes are made location-specific and the necessary policy support is extended. In addition, informal institutions at the community level may help to adopt conservation measures as well as to reduce transaction costs by increasing local participation. A large body of literature on forest and other natural resource management in India indicates the existence of such informal institutions (Behera 2009) and the possible benefits that could be obtained from such collective approaches.

    However, the bigger challenge in India will be to organise large numbers of small landholders and alter their land-use pattern. There are two fundamental issues involved. First, wherever large landholders are involved, PES schemes are likely to perform better vis-à-vis small landholders because communicating with a fewer number of large landholders is much easier

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    than doing so with a large number of small landholders. The latter makes the decisionmaking process more complicated. Second, with increasing group size, more effort and time are required in organising the landowners and implementing capacity-buildschemes can be a very difficult proposition and the existing socio-economic, religious and political differences are likely to limit the effectiveness of the schemes.


    Science Basis (Cambridge: Cambridge University Press).

    Landell-Mills, N and I T Porras (2002): Silver Bullet or Fools’ Gold? A Global Review of Markets for Forest Environmental Services and Their Impact on the Poor, International Institute for Environment and Development, London, uk/iied/docs/flu/psf_silvbullet.pdf, accessed on 29 September 2009.

    ing measures, making the entire process very costly and the economic feasibility of the schemes uncertain. Besides, for small landholders, the benefits of economies of scale do not work out and they may not receive as much worth as their larger counterparts under PES schemes. So, the constraints related to ensuring profitability through adoption or modification of land uses should be adequately addressed if PES schemes are to be designed that take into account the interests of small landholders. It is very important to enhance the acceptability of PES schemes among poor and small landholders because their participation will be low if payments are not sufficient to meet the costs associated with socially and environmentally acceptable land-use practices (Pagiola 2002).

    Failure to adopt technology the right way will hinder returns, particularly under uncertain and imperfect market conditions (Wunder et al 2008). But in the absence of a well-functioning rural credit market, adoption of modern technology may not be easy because such technologies can be expensive. In addition, the adoption of technology requires adequate skills and knowledge that can only be promoted through education and training. Unfortunately, a vast majority of Indian farmers are illiterate and/or semi-skilled. Hence the provision of easy access to credit markets and sufficient technical and extension services to farmers are a prerequisite for successful implementation of PES schemes.

    Broader Participation

    Finally, the success of PES schemes requires the participation of a broader section of society, especially women, for adopting market-based approaches. But, traditionally, Indian society consists of socially and economically heterogeneous people within an age-old caste system and a diverse religious framework. Social heterogeneity is further accentuated by persisting gender inequality. Ensuring the participation of all sections of the people from such a diversified society in PES

    1 According to Wunder (2005), PES is a voluntary transaction where a well-defined environmental service (ES) is bought by an ES buyer (minimum of one) from an ES provider and the ES buyer does so if and only if the ES provider over time secures the conditional provision of that service.

    2 For the details on the review, see Behera et al (2010).

    3 Here, both the government and the users or a third party such as NGOs and/or international/ national donors are involved.

    4 In government-financed PES schemes, most of the ES are public goods with a lack of clearly defined property rights and the involvement of a large number of actors, which makes the schemes less effective.

    5 These forest frontier activities include plantation of cash crops such as rubber, cinnamon and other tree crops. Planting of these cash crops facilitates the adoption of PES schemes, which, in turn, provide a sufficient basis for farmers to claim permanent land rights in areas where PES schemes are functional.


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