In the March edition of Nature Sustainability, James Salzman, Genevieve Bennett, Nathaniel Carroll, Allie Goldstein, and Michael Jenkin’s “The global status and trends of Payments for Ecosystem Services” looks at the prevalence and structure of incentive-based environmental practices known as Payments for Ecosystem Services (PES). The authors define PES as, “programs that exchange value for land management practices intended to provide or ensure ecosystem services.”

Although the concept of markets to price environmental benefits is not new, the concept of PES is a “recent environment policy instrument” that is slowly but surely gaining traction across the world. According to the authors, in 2015, there were 550 active programs facilitating $36-42 billion dollars in annual transactions. To date, data on the structure, scale, and geographical dispersion of PES programs have been lacking. However, given the influx of new data due to the study, the authors are able to assert that growth in PES implementation, from 2009-2015, is attributable to a greater universe of motivated buyers, motivated sellers, and regulatory certainty made possible by technology that can provide verifiable metrics and lower transaction-cost platforms.

From a public policy perspective, this study’s publication is demonstrative of how environmental policymaking has shifted towards creating systems to incent behavior and practices that improve environmental outcomes.

The concept of misdirected incentives in the context of scarce natural resources is not new. In 1833, British Economist William Forster Lloyd published an essay articulating the “tragedy of the commons,” which was later expanded upon by Garret Hardin in 1968 during the emergence of the modern American environmental movement. The tragedy of the commons identifies the ever-present tension between individual self-interests and scarce environmental resources.

In a modern environmental policy context, it has come to describe the depletion of finite environmental resources such as oceans, forests, and atmosphere by economic actors and nation states. In the 1970s, the United States’ first batch of watershed environmental laws, including the National Environmental Policy Act, Clean Air Act, and the Clean Water Act, created command and control regimes that sought to transfer the cost of the environmental externalities to groups of economic actors.

Transitioning these environmental externalities to regulated entities or “point sources” was the first step toward forcing economic actors to internalize the costs of environmental impacts. However, this initial approach was all stick, no carrot, and left big gaps in addressing critical environmental challenges that couldn’t be measured at the end of a smokestack or drainage pipe.

Over the last 30 years, the deployment of market-based approaches to address acid rain and the success of California’s greenhouse gas marketplace demonstrates that market-based approaches to address pollution or protect ecosystem services are viable policy mechanisms.

The study neatly describes this evolution, “in economic terms, PES seeks to internalize the positive externalities…generated by natural systems, creating incentives for landholder behaviors that ensure service provision.” By naming environmental benefits as “services,” PES adopters are drawing a direct link to pricing natural resources. To evaluate the current standing of PES adoption, the study analyzes three broadly-defined PES categories: compliance PES, user-financed PES, and government-financed PES, in the context of watersheds, biodiversity, habitats, and forest and land-use.

Compliance PES

In a compliance PES system, regulated entities with obligations compensate other actors for services that maintain or enhance the environment in exchange for standardized credits that meet the regulated entities compliance requirements. For the majority of compliance PES programs, it is the government driving demand with mandated limits on pollution and emissions. Examples of these approaches include water quality trading, greenhouse gas emission trading markets, and environmental impact offset credits.

User-Financed PES

A user-financed PES can be organized by individuals, companies, NGOs, or other entities that compensate landowners for conducting activities in their ecosystem. Examples include downstream utility relationships with upstream landowners to reduce erosion and maintain healthy forests.

Government-Financed PES

A government-financed PES occurs when the government compensates third parties to improve ecosystem services that are enjoyed by the public.

Watersheds & PES

The way in which different types of governance structures affect the adoption and deployment of watershed PES systems offers an interesting lens into how and why different PES frameworks thrive. Inherently, a watershed’s diverse user base and clear connection between conservation practices and water quality create the opportunity to provide economic incentives to protect water resources.

Globally, watershed PES systems are the most mature. There were 387 active PES watershed programs in 62 countries, accounting for $24.7 billion in transactions in 2015. Of those 387 programs, over 50% were Chinese government-sponsored ($12.98 billion) and only 31 were classified as compliance PES. There were 29 active programs in the United States covering only $22.2 million dollars in transactions in 2015. Finally, user-financed programs were the most prevalent totaling 212 of the 387 global programs and $717.7 million in transactions in 2015.

Governance Challenges

Currently, compliance PES water quality trading programs only exist in the United States, Australia, and Mexico. In part, this is because “trading systems need robust institutions to provide clear and enforceable rights as well as an accurate and accessible recording system.” These democratic societies also feature individual rights and principles of limited government that the government generally follows. In these arrangements, the environmental laws and statutes create demand and regulatory certainty but rely on the marketplace to fulfill the supply of payments. Alternatively, China’s “unique political and centralized authority” has taken a different and more immediately scalable approach through its government-financed PES. The Chinese government has unilaterally implemented conservation requirements and compensates farmers for adopting practices that improve water quality.

The dichotomy between compliance-based PES regimes and China’s larger government-sponsored PES structure underscores a central tension for the future scalability of PES programs in countries that don’t have central authority structures like China’s. PES, especially compliance PES, are more likely to appear in countries with more statutory limitations, robust interaction between state and federal authorities, and decentralized bureaucracies. These dynamic legal and political environments will rely heavily on verifiable metrics and low-cost transaction institutions in order to scale and deploy PES systems.

At its core, PES implementation is primarily driven by market demand. Demand drivers such as the “perceived scarcity of ecosystem services,” will increase as time goes on. Real world examples stemming from water quality disasters (Flint, Michigan), flood protection (Houston, Texas), climate stability (Key West, Florida), and the loss of biodiversity across the globe are all very real circumstances of why there has been a measurable uptick in concerns relating to ecosystem health and integrity. In sum, these examples drive the authors’ conclusion that there will be more motivated buyers and sellers, thus increasing PES adoption.

Technology is the Answer

However, the authors also approach PES systems with healthy skepticism stating that “spending money, in and of itself, does not guarantee the provision of valuable ecosystem services. For the vast majority of programs, we simply do not know their effectiveness.”

Although it is critical through sober analysis to acknowledge the potential for the misallocation of PES capital, the authors may have missed the key lynchpin towards further PES adoption, namely, the technological innovation that will enable further adoption of PES markets that “are only feasible where metrics are easily assessed.”

Fortunately, innovative technologies allow for environmental benefits to be measured in real time. Further technological innovation will sow confidence in verifiable pollution reduction metrics to facilitate transparent lower transaction cost PES relationships that can be transformed into “enforceable rights” such as credits.

One example of this dynamic is how technology deployed on farms is aiding the creation of environmental markets to address water quality issues from agricultural operations. By focusing on vetting and certifying technologies that are proven, when implemented correctly, to improve water quality, companies such as Newtrient, LLC. are forming the foundation by which PES relationships can be built.

Ultimately, in addition to technological innovation, further PES adoption will require creative policy approaches that can bridge the gaps between disparate legal and policy regimes in the midst of longstanding environmental challenges and will require collaboration across all levels of government to ensure successful implementation and growth.