What are Payments for Environmental Services?

So why am I in Bolivia? I mentioned this thing called Payments for Environmental Services in my very first post, promising I would tell you later what that means. So, per request, here goes.

The basic idea behind payments for environmental services (also called payments for ecosystem services - fortunately they both have the same acronym, PES) is that the environment provides services, such as carbon sequestration and storage, regulation of water flow, and biodiversity protection, that benefit society as a whole. Because those who own the land providing these useful services do not reap the full benefits, they don't fully account for environmental services when they make land management decisions. Environmental services are what economists call "public goods," and they tend to be underprovided if those who provide them are not adequately compensated.

For example, say I own a forest upstream from your farm. When I clearcut the trees along the side of the river, you may experience flooding, sedimentation, and/or water scarcity. Sorry, not my problem.

But what if you offer to pay me not to cut down trees along the river? Say I'd get $1,000 from selling timber or whatever agriculture replaces my forest, but my clearcutting causes $2,000 in losses for your farm - well, if you paid me, say, $1,500 not to clearcut, we'd both be better off. Hooray for economics! Everyone wins!

Why is this such a good idea?
-It's voluntary - I can accept your money and change my land use, or I can choose not to. It doesn't infringe on property rights.
-It's efficient - it prioritizes land that provides the most valuable services (and these services can include biodiversity/species protection, not only services that are economic inputs).
-It's sustainable, because it's based on the self-interest of service users, not external donors and NGOs.
-It compensates landowners for something they provide for society as a whole. For those who like econ jargon, it "internalizes the externalities," in this case positive externalities.

In case you want to read more, FAO has some good information on PES.

So that's the theory. Sounds like you don't even need us pesky NGOs and grad students here, the invisible hand will do all the work! Right? More on this in a later post....