Question

1. (A) Explain why environmental services, because they are public goods, are undervalued or priced too low.

(B) Explain briefly, how groups of people (governments) or private individuals were able to increase the amount of environmental quality, by connecting or attaching an environmental service to a private good, showing how revenue from the private good increased the production of the public good. How are providers compensated for supplying the environmental service and who are the sellers buyers?

Answer 1

(A) Explain why environmental services, because they are public goods, are undervalued or priced too low.?

Answer:

Growing populations and an increasing demand for greater material wealth are placing unprecedented pressure on the earth's natural systems. But assigning values to such systems is a difficult process — not least because they are generally thought of as free goods that everyone has a right to use. There is no doubt that 'ecosystem services' (the benefits people obtain from ecosystems) are critical for human well-being. Yet we do little to ensure their sustainability for future generations.

The vast majority of people regarded most ecosystem services as free or valued them at lower prices than they are worth. This is especially true of 'public goods' like fresh air and flood regulation, for which property rights cannot easily be defined because no one can be excluded from benefiting from them and everyone can use them at the same time. Similarly, the true cost of public hazards such as pollution has not been reflected in the market prices of industrial products because natural systems were assumed to absorb and clean all the waste we created. That a decline in ecosystem services has a negative effect on human well-being is now accepted. But burgeoning populations and the increasing demand for greater material wealth is putting unprecedented pressure on the earth's natural systems. Policymakers need to put frameworks in place that will allow realistic values to be placed on these systems.

Answer of Ques. Part-(B) :

Payments for ecosystem services (PES) occur when a beneficiary or user of an ecosystem service makes a direct or indirect payment to the provider of that service. The idea is that whoever preserves or maintains an ecosystem service should be paid for doing so.

Ecosystems—forests, mountains, wetlands, agricultural land, freshwater—provide a variety of services that are economically valuable: fresh water supply for human settlements (e.g. by filtering the water from contaminants); irrigation and power generation; or storm protection and pollination. Ecosystem services are grouped into four main categories: 1. Provisioning services (the products obtained from ecosystems such as food and fresh water); 2. Regulating services (the benefits obtained from the regulation of ecosystem processes such as air quality and pollination); 3. Cultural services (the non-material benefits that people obtain such as spiritual enrichment, recreation, and aesthetic experiences) that directly affect people; and 4. The supporting services needed to maintain other services (such as photosynthesis and nutrient recycling). The provision of such services might require communities living in the proximity of the ecosystem to undertake or not to undertake certain activities. To complete these tasks in the absence of regulatory provision, the communities need a financial incentive. The Payments for Ecosystem Services (PES) is the mechanism that governs these payments. In other words, PES involves a series of payments to land or other natural resource owners in return for a guaranteed flow of ecosystem services or certain actions likely to enhance their provision over-and-above what would otherwise be provided in the absence of payment.

The preparatory process of establishing a PES can be described in the subsequent steps which are followed by the negotiation of the agreements, the actual legal structuring, the financing and the implementation. These are:

1. Identification of the ecosystem services and geographical boundaries;

2. Identification of the sellers/providers and buyers/beneficiaries;

3. Definition of the market and of the price;

4. Determination of the governance, institutional and legal arrangements;

5. Collection of the biophysical data baseline data for the monitoring system.

The functioning of the PES requires the monitoring of the interventions and the disbursement of payments. The efficiency and effectiveness depends on the willingness and capacity of the private actors to pay and on the quality of coordination/collaboration. In absence of the above, the determinant variable is the capacity of the Government to mediate among the buyers and sellers. This capacity to pay is obviously weaker in the poorest and most fragile countries where Official Development Assistance (ODA) has been traditionally used to complement or substitute for the lack of resources.   

Stakeholders

1. The buyer/beneficiary of an ecosystem service: the entity, either an individual/company or the Government that directly benefits from the existence of an ecosystem and is willing/capable to pay for its preservation.

2. The seller/provider of an ecosystem service: Any individual or community whose land use or other decision can influence the provision of ecosystem services. She/he will obtain a payment to undertake or not to undertake (e.g. not exercising certain economic rights) certain activities to preserve the provision of ecosystem services. The payment can thus compensate for a lost income (reduced gains from agriculture) or human labour and capital investment (e.g. planting trees).

3. Public authority: the public authority (often a local entity) might disburse payments and collect mandatory fees and taxes. PES often require the issuance of a law or Government decree/regulation if intermediated or paid by public resources. If PES are negotiated among private parties, the Government usually act as a broker or facilitator.