Markets for Environmental Services

Markets for ecosystem services are growing, and they are expected to grow faster in the next decade. Yet so far, they predominate as pilot projects[i]. These markets differ in geographic scale, strength and structure of demand, the competitiveness, nature and price of services sold, and the number of transactions. The success of the PES schemes requires a solid understanding of the markets for the environmental services to be sold.[ii] Among the vast environmental services ecosystems provide, the ones that currently stand out for payment systems are watershed protection, carbon sequestration and storage, biodiversity protection and landscape beauty.

i.                     Markets for Watershed Services

Watershed protection has pioneered the use of payment schemes. PES for watershed management usually involves upstream land users and downstream water users. Upstream land users may be paid for, as an example, not to build roads, harvest trees, or other land activities that could affect water quality and quantity for drinking water, irrigation, among others, downstream.[iii]

Using payments for water services can be a tool for poverty alleviation. For example, if downstream water users pay upstream communities to maintain good water quality, their livelihood could be enhanced. PES schemes for watershed protection are increasingly used and have been put in place in several countries, including the United States, Mexico, Colombia, Ecuador, Costa Rica, Honduras and Brazil.[iv]

The institutional and policy framework for payments for watershed protection will depend not only on the size of the watershed but also on the number of providers and users of the service and their social, economic and cultural situation. Small watersheds are easier to manage. As the size of the watershed increases and the number of providers and beneficiaries multiplies, the difficulties emerge: [v]

·          The difficulty of distinguishing the actual watershed services provided by upstream land users/owners.

·          Property rights, which in some countries are not easy to define, are needed to develop markets for water services.

·          PES transaction costs may be very high in case of large watersheds.[vi] 

Markets for watershed services are usually local in scope with most transactions occurring at the watershed level. These markets usually do not involve trading commodities such as water quantity or quality but rather financing land uses that are generating watershed benefits.[vii] Given the local nature of demand and the presence of a limited number of well-organized beneficiaries, it is relatively easy to involve downstream beneficiaries in PES schemes.[viii]Schemes for payments of watershed services include self-organized private deals, public payment schemes and trading schemes.[ix]

ii.                   Markets for Carbon Sequestration


Carbon sequestration for climate change mitigation is seen as a global public service, making it difficult to develop effective payment systems.[x] Most carbon transactions involve international buyers and are very competitive, which leads service providers to reduce transaction costs.[xi]

The United Nations Framework Convention on Climate Change (FCCC) sets an overall agenda for intergovernmental efforts to undertake the challenge posed by climate change.  It recognizes that the climate system is a shared resource whose stability can be affected by industrial and other emissions of carbon dioxide and other greenhouse gases.  The Convention enjoys near universal membership, with 189 countries having ratified. Under the Convention, governments:

-          gather and share information on greenhouse gas emissions, national policies and best practices

-          launch national strategies for addressing greenhouse gas emissions and adapting to expected impacts, including the provision of financial and technological support to developing countries 

-          cooperate in preparing for adaptation to the impacts of climate change.[xii]

The market for carbon sequestration and storage from tropical forests has three major segments:

1.       the Clean Development Mechanism (CDM);

2.       non-Kyoto trading schemes intended for eventual crediting; and

3.       voluntary carbon emission offsets for green organizations and companies.[xiii]

The World Bank’s Prototype Carbon Fund (PCF) was established in 1999 with the objective of providing private and public sector entities an opportunity to finance projects in developing countries and in those countries with economies in transition which could generate greenhouse gas emission reductions. These reductions could then be transferred to the participants assisting them in meeting their obligations under the FCCC. The Fund aims for USD 100-200 million with each public sector participant contributing USD 10 million, and each private sector participant contributing USD 5 million.[xiv]

Carbon sequestration projects must be defined carefully. The creation of carbon markets can involve two environmental risks. One is the risk of replacement of native forests by tree plantations with monocultures, which sequester carbon more quickly. The second environmental risk is financing conservation where no deforestation is occurring, which means forests would have no real value-added in terms of conservation since the forests were protected without payments in the first place.[xv] Carbon sequestration may involve two types of services: active absorption through reforestation or avoided emissions through conservation of forest cover.[xvi]

iii.                  Markets for Biodiversity Protection

The market for biodiversity protection is a new market. Many approaches are emerging to financially remunerate the owners of land and resources for their good stewardship of biodiversity. Market mechanisms to pay for other ecosystem services, such as watershed services, carbon sequestration and landscape beauty, can be designed to conserve biodiversity as well.[xvii]

Markets for biodiversity services exist at a local, national and international scale. They can therefore resemble carbon or watershed markets. According to Pagiola et al. (2002), the variety of biodiversity services generates a multiplicity of demands that increase the complexity of creating payments systems. As is the case of watershed services, biodiversity services are not sold directly. Instead, specific land uses that are thought to protect species, ecosystems or genetic diversity are sold.[xviii]

iv.                 Markets for landscape beauty

Landscape beauty services are primarily associated with the cultural value given to a specific site. Landscape beauty services may involve the protection of natural heritage sites, coral reefs, cultural sanctuaries, or traditional livelihoods.[xix]

According to Mayrand and Paquin (2004), few PES schemes involve the provision of these types of services, which are difficult to quantify and evaluate due to their cultural foundations. Payments for preserving biodiversity and landscape beauty often come from conservation NGOs or local businesses involved in ecotourism. Most payments are based on site-specific negotiations or reformed entrance fees. More recently, the establishment of community-based ecotourism operations and joint ventures has allowed land stewards to tap tourists’ demand directly for land conservation purposes.[xx]

v.                   Markets for Bundled Services 

Bundled services are found where different environmental services are sold from a single land area. Markets for bundled services share features with markets for environmental services that are incorporated in the bundle. The services can be sold in merged bundles (in which case it is impossible to separate the services) or in shopping basket bundles (where specific services can be bought and land users sell different services to buyers).[xxi]

Merged bundles are easier to manage and reduce transaction costs in the PES scheme. However, they are less effective since merging services makes it impossible to target payments to individual services. The shopping basket approach is therefore better designed to maximize returns, but also more complex to manage and more costly.[xxii] The bundled services approach has been used by The Nature Conservancy in Belize, Bolivia, Costa Rica and Paraguay to bring additional revenues for biodiversity protection by promoting the sale of carbon offsets in biodiversity-rich locations. It was also used by Costa Rica’s national power and light company.[xxiii]



[i] Jenkins, M, S. Scherr, and Mira Inbar. Markets for Biodiversity Services: Potential Roles and Challenges. Environment 46, No. 6. July, 2004. Washington, D.C.

[ii] Mayrand K. and M. Paquin. 2004. Payments for Environmental Services: A Survey and Assesment of Current Schemes. Unisfera International Centre for the Commission of Environmental Cooperation of North America, Montreal, p.9

[iii] Asia-Pacific Forestry Commission (APFC). Payment for Environmental Services (Secretariat Note), 21st Session. February, 2006. Dehradun, India p. 2

[iv] Mayrand K. and M. Paquin. 2004. op cit p.11

[v] Ibid p. 2-3

[vi] Asia-Pacific Forestry Commission (APFC). op cit p. 2-3

[vii] Pagiola, S. et al. 2002. “Making Market-based Mechanisms Work for Forests and People” in Pagiola, S et al. 2002. op. cit. p. 264.

[viii] Mayrand K. and M. Paquin. 2004. op cit p.10

[ix] Asia-Pacific Forestry Commission (APFC). 2006. op cit p. 3

[x] Pagiola, et. Al., 2002 in Asia-Pacific Forestry Commission (APFC). 2006.

[xi] Mayrand K. and M. Paquin. 2004. op cit p. 12

[xii] “United Nations Framework Convention on Climate Change” available online at <http:\\>

[xiii] Scherr, S., A. White and Arvind Khare. 2004. For rendered services: The current status and future potential of markets for the ecosystem services provided by tropical forests. ITTO Technical Series 21, July. International Tropical Timber Organization, Yokohama p.41

[xiv] FAO.2000. Carbon Sequestration Options Under the Clean Development Mechanism. World Soil Resources Report 92. Rome

[xv] Mayrand K. and M. Paquin. 2004. op cit.  p. 13

[xvi] Ibid p.4

[xvii] Jenkins, M, S. Scherr, and Mira Inbar.2004. op cit  p.36

[xviii] Pagiola, S. et al. 2002. “Making Market-based Mechanisms Work for Forests and People,” in Pagiola, S. et al. 2002. op. cit. p. 264.

[xix] Mayrand K. and M. Paquin, 2004. op cit p.4

[xx] Landell-Mills, N. 2002. Marketing Forest Environmental Services – Who Benefits?Gatekeeper Series no. 104. IIED. London p.10

[xxi] Ibid

[xxii] Landell-Mills, N. and L. Porras. 2002. How Can Markets for Environmental Services be Pro-poor? Forestry and Land Use Program (FLU), IIED, London. p. 185.

[xxiii] Ibid








This page was last updated on Wednesday December 20, 2006.