Do Costa Rica's payments for environmental services work?
September 17, 2007

While Costa Rica is now known as a world leader for conversation policies and ecotourism, the Central American country had some of the world's highest deforestation rates prior to establishing its reputation. Clearing for cattle pasture and agriculture destroyed much of the country's biodiverse rainforests in the 1960s and 1970s.

In the 1990s Costa Rica set a new course; one that sought to unlock the value of its ecosystems. While ecotourism was the most obvious path, Costa Rica also pioneered the development of payments for environmental services ("PSA" or pagos por servicios ambientales). In 1996 the country established a program to compensate landowners for keeping forests intact and reforesting degraded areas. A new study, published in Conservation Biology, examines these efforts and concludes concludes that while the program pioneered the institutionalization of a policy that can and likely will create meaningful incentives, to this point in Costa Rica, given other policies, it appears to have had little impact on deforestation.

Deforestation rates in Costa Rica, 1960-2005. Modified from Sanchez-Azofeifa et al 2007. Image by R. Butler.
While the results show little impact on deforestation rates up to this point, a careful consideration of this case provides insight on how that could have happened and how impact could be increased, at a time when ecosystem payments are increasingly on the minds of policymakers, with the world's tropical countries seeking compensation in the form of carbon credits for protecting their forests.

Some details from the paper:

Payments under the PSA program:
  • conservation: $210/ha ($519/acre) in equal installments over 5 years
  • reforestation: $537/ha ($1326/acre), with 50% paid the first year, 20% the second year, and 10% over the following 3 years
  • forest management: $327/ha in equal installments over 5 years.
PSA program rules:
  • PSA contacts create a legal easement that remains with the property if it is sold (i.e. transferable)
  • Landowners transfer carbon offset rights to the national government, which can then sell these offsets on any international market. The landowner does not sell carbon credits directly, instead receiving payment from the government.
  • Individuals were restricted to registering 2-300 hectares of land per year. Indigenous groups could register up to 600 ha/year while coalitions acting through local nongovernmental organizations had no limits.
PSA program funding:
    The primary funding for the original PSA program was supposed to come from a 15% consumer tax on fossil fuels, of which the program would collect a third, but the Ministry of Finance rarely delivered that amount. In 2001 a new law was passed, assigning 3.5% of tax revenue directly to the PSA program. The reduced rate "increased actual transfers from the Ministry of Finance" and by 2003 tax revenues provided an average of $6.4 million/year to the program. Funding also comes from voluntary contracts with private hydroelectric producers, who pay for watershed services. Carbon trading "was expected to provide significant funding through sales of certified tradable offsets. However, no significant market for carbon abatement has emerged. The only sale has been to Norway, which consisted of $2 million in 1997 for 200 million tons of carbon sequestration." Further funding came through a World Bank loan and a Global Environmental Facility (GEF) grant.
Financial returns from the program:
    Average returns from PSA ranged from US$22 to US$42/ha/year before fencing, tree planting, and certification costs. The main competing land use -- cattle ranching -- shows returns from US$8 to US$125, "depending on location, land type, and ranching practices," according to the authors. "One measure of cattle-ranching returns is the cost of renting 1 ha of pasture. In Cordillera Central, in the heart of Costa Rica, pasture rental ranges from US$20 to US$30/ha/year."
Program's results:
  • During the first phase of the PSA program (though 2000) some 300,000 ha of primary, secondary, or planted forest received funding. The mean project size was 102 ha, while the largest project was 4025 ha. The stated land area restrictions were not closely enforced.
  • The number of participants entering the program decreased from 1997 to 2000. The authors say this was "probably because funds were not delivered as expected."
  • "Payments for conservation alone were larger than the management, but conservation contracts had the lowest payments per unit area. Reforestation and management contracts generally held steady over the years, whereas conservation payments fell (e.g., >$20 million in 1997; almost $12 million in 1999; and <$4 million in 2001).
  • Deforestation rates had already dropped significantly by the 1990s, due to other factors (including establishment of protected areas and commodity prices) and it was unclear whether the PSA program had much of an impact on forest clearing: "With or without controlling for these other deforestation-driving variables, the level of PSA contracts in an area never generated significant statistical results concerning a reduction in the country's deforestation rate." The authors add that the PSA program was not explicitly intended to reduce deforestation in Costa Rica and that future programs could specifically target this goal.
Opening the door for environmental payments in other places

Costa Rica's experiment "opens the door" for future PSA programs in other parts of the world, say the researchers.

"We believe Costa Rica's pioneering effort opens the door to further successful PSA programs. The evaluation of its first phase provides important conservation lessons for developing countries interested in similar policies and for new global policies," they conclude.

CITATION: G. Arturo Sanchez-Azofeifa, Alexander Pfaff, Juan Andres Robalino, and Judson P. Boomhower (2007). Costa Rica's Payment for Environmental Services Program: Intention, Implementation, and Impact. Conservation Biology. DOI: 10.1111/j.1523-1739.2007.00751.x

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CITATION: (September 17, 2007).

Do Costa Rica's payments for environmental services work?.