Conclusions

Although market-based instruments for ecosystem services are relatively new mechanisms, they have emerged as strong candidates for addressing a number of problems such as ecological externalities, incentive incompatibility, information asymmetries, market failure, and provisioning of local public goods. During the past decade, a large sum of money has been invested in carbon sequestration, watershed protection, and biodiversity conservation through voluntary initiatives of the private sector, pilot activities of financing agencies, and applied research programs in the developing world (UNDP/London School of Economics and Political Science (LSE) 2005). Despite the growing interest and a mounting body of literature on PES, there are still glaring gaps in the theory's predictions and actual situations, particularly how different factors affect the PES outcomes. This review paper aimed to fill this gap, drawing on available case studies, both regional and international, in order to understand the factors that are necessary for adoption and sustainability of markets for environmental services.

This review has come to the realization that designing PES schemes is a complex task and that there are no simple prescriptions or blueprints for optimal designs. The difference in the success of PES schemes could be understood by examining institutional, socio-economic, biophysical, and contextual factors associated with the individual scheme. Perhaps one important message from this review is that PES is likely to be more successful where there are secure property rights to land and forest resources as well as enabling policies that promote community-based approaches to natural resource management. The argument of tenure security consistently emerged in all the case studies. However, this conclusion obviously needs to be approached with some caution. Although the adoption of PES schemes could be linked to reforming existing property rights, all reforms can create both winners and losers. The agents who benefit from such a change will have a larger stake as a result of the reform, but new systems of property rights may impose a corresponding disincentive effect on others. This is particularly true in cases where communities are enjoying greater access to common pool resources, but such traditional rights could be threatened due to the formalization of property rights for the sake of establishing markets for environmental services.

Another principle message that emerges from this review is that PES schemes will benefit greatly from capacity-building support and availability of information. The aim of capacity building is to raise awareness of market-based approaches to environmental services, develop legal instruments, and provide training on technical aspects of implementation. Access to information was critical and education programs have increased awareness in downstream communities about the potential impacts of land-use change in the upper watershed. Equity and transparency in decision making in payment schemes are additional areas where capacity-building support should be directed. Political economy aspects of the program such as getting support from dynamic and innovative leaders at local, regional, and national levels, and from politicians, the administration, and civil society (who can act as champions for innovative approaches) should be an integral component for designing markets for environmental services.

Credible intermediary institutions can play an important role and, in this review, their support was a key ingredient for success. Adoption of PES was higher in cases where there is the presence of NGOs and civil society institutions, particularly community-based organizations. Moreover, factors such as markets, access to credit, and appropriateness of proposed technology appear to be critical. Building trust between buyers and sellers is also important. Even where there is initial lack of support, PES initiatives should seek to create a policy dialog among different actors. A well-informed dialog may involve multiple components, all having a foundation in local engagement and consultation. Greater inclusiveness and transparency of the program design helps improve program effectiveness, strengthen links between producers and beneficiaries, reduce the enforcement costs, and improve outcomes. Further, the gender dimension of PES, such as consultation with women members for ensuring their participation in all aspects of PES design, is very crucial.

Promoting synergy between poverty reduction and environmental conservation goals could help achieve equity and sustainability. Further, credible scientific information, particularly the hydrological regime within the watershed, became apparent and demonstrated in the case studies. For example, market-based instruments could work well where there is an established link between land-use practices in the upper watershed and downstream provisioning of ecosystem services. Finally, PES schemes should be informed by good valuation studies that link payment options with increased environmental service provisions.

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