Payments for Ecosystem Services: A Primer

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We’re expecting to write a lot about the idea of paying Vermont farmers for ecosystem services this year. It seems best to start with a general overview, a framework for placing the future articles in context. Here’s that overview:

The basic argument behind Ecosystem Service Payments is that if you farm in certain ways you can not only minimize negative impacts on the environment but in fact improve the environment through “ecosystem services”. However, there isn’t a marketplace incentive (aka money) to put in the extra effort for that positive impact. . . or at least not enough of an incentive. If we created those incentives then perhaps farmers would save the world.

 

It’s not a bad argument, quickly we can see some of the questions that need to be solved to move from this basic logic structure to a point where ecosystem payments are making their way to farmers at enough volume to have a major impact on the planet. And that “on the planet” statement is itself a judgment call - other perspectives focus first on farm viability, but since we’re being very theoretical here, why not go for the big goal and save the world too? 

Measuring Services

First off, we need decide what services count towards payment. Carbon sequestration in soils tends to be the first example cited, but that’s just one of many possible services. Pollinator habitat, biodiversity, providing buffers against flooding, anything related to water quality, those are some of the other options. It’s important to note here that we’re not considering compliance with rules against doing harm to be a “service” - for example, if the Agency of Agriculture works with farms to help them reach new standards for manure management to improve water quality, the environment is better in the end, but that’s only hitting the baseline. Different groups draw the line between service and ‘refraining from doing something you shouldn’t be doing in the first place’ differently, but a line does exist. 

 

In an ideal world a service receiving payment 1.) would always have a quantifiable positive impact on the environment; 2.) we would be able to measure how a farmer’s practices led to that impact (in other words we know cause and effect); 3.) we’d be able to measure how much we as a society value that impact. Those ideal-world measurements represent a level of omniscience that seems unlikely even in the world of economic modeling, which functions primarily through assuming unlikely omniscience. For our purposes, we’ll simply recognize that which services get measured and how we measure them are elements that will need careful negotiation. There will be additional articles on all three of those points in the future. 

Paying for Services

 

Once you have the services of interest, then comes building the payment structure. We’ve put a starting value on the service through the magical negotiations in the previous paragraph (see how easy policymaking is when you’re just writing short articles? It’s really easy). That’s not quite the same thing as setting a price, which in turn is not the same as figuring out who will pay the price and how the payment will occur. Those are the next questions. The easiest starting point to answer them is by identifying how much existing payment mechanisms already reimburse, or could reimburse, for ecosystem services.  

 

Existence Value: Some services that farmers provide to the world come about simply as a part of having farms exist. A farm field, through the fact of not being a parking lot, can be habitat for songbirds, for example. We reflect some of this existence value through advantageous tax and regulatory systems, such as Current Use. If a farmer changed their mowing patterns to improve the songbird habitat, then that might be considered an ecosystem service beyond the threshold value of existing as a farm. 


Grants and Loans: Some ecosystem services benefit the environment and also benefit the farm economically-- for example through improved yields, higher quality products, fewer inputs required for production and/or resilience to extreme weather. Sometimes those benefits to the farm are delayed, requiring an investment upfront and then several years before the returns appear. Grants or favorably structured loans tend to be the preferred tool for recognizing that timing mismatch.


Eco-Labels: Some ecosystem services are paid for, at least partially, through consumers who seek out eco-friendly labels like grassfed or organic. Some people argue that these labels should have a more sophisticated ecosystem-focused option; we see that in the regenerative agriculture movement right now. One big limitation is that there’s a lot of these labels vying for the attention of consumers. The money they return to a farmer relies on an ability to capture that consumer attention and continue to grow the pool of consumers willing to pay a modest amount extra for ecological benefits. A pure ecosystem service label might be particularly hard pressed in this situation as food labels often win customers through a claim of direct personal health benefits in addition to environmental concerns. Another major limitation is that they’re tied to food (or other consumer good) production and sales. . . which doesn’t elegantly account for farms where the best outcome is to reduce the volume of production in a new mix of land use patterns.


Marketplaces for Ecosystem Services

We come next to the option of building a market specifically for ecosystem services. This has appeal because it has the flavor of creating new money -- you aren’t tacking a few bucks onto individual customers’ grocery bills, instead you’re building a place for people to trade ecosystem services on their own merit.  


This path has been trod before, for example with greenhouse gas emissions. In fact, Vermont participates in one of the original markets for controlling greenhouse gases, called RGGI. There are different approaches these markets can take. In the case of RGGI, the participating states set a cap on how much CO2 their utilities can emit, they then auction off the allowances for CO2 production, and use the proceeds to invest in clean energy innovation. The auction is the mechanism by which price is set, no outside entity needs to determine how much it’s worth to be able to produce CO2 - and the price moves as the costs of technology required to remove CO2 from the power production process moves. Other markets allow businesses that are removing CO2 from the atmosphere, for example by planting trees, to sell that reduction. These carbon offsets are sold to companies that need help getting below a regulatory cap, or want to tout  “carbon neutral” production, or maybe to environmental investors who want to “retire” the credit so that no one can use it to offset production. 


A lot has been written on these marketplaces. For a quick sense of it, here is a case study of how RGGI works and here is a pretty extensive overview of what can go wrong in markets focused on offsets


One big consideration in the marketplace schemes is that you cannot escape the need to deal with the negative side of environmental impact. We’ve left the world of all carrots. In an example comparable to RGGI, let’s say we allot land owners a certain amount of water pollution each year (an amount which totals less than what they currently contribute) and those farmers who are improving water quality through their practices could sell the value of that improvement to farmers who need a bit more wiggle room under the cap. That rewards the farmers with improvements, but you need to force the hand of all the other farmers to make it work. We could duck our limit-setting responsibility by establishing a market to sell the offset or by focusing on helping farmers access markets outside of Vermont. Somebody somewhere needs to set a restriction on pollution or other ecosystem disservices, though, because that’s what creates the scarcity that gives value to the offset. And somebody somewhere needs to manage a lot of data to do this right, data that tells us a value has actually been created (how much carbon got locked in the soil for example) and that manages the trading on those marketplace. It shouldn’t be surprising that in the world of services that are largely invisible to the person paying for them, there would be a high risk of unscrupulous characters - food labels have dealt with this for years. 


Finally, we’ve already assumed away many of the complicating factors in putting together these marketplace systems, but we need to recognize a final important complicating factor - time. All marketplaces get complicated by time, that’s why interest rates exists. In this case you’ve got even more complications. Some ecosystem interventions have an immediate impact, some take longer - consider the example of Nitrogen and Phosphorus, both harmful when out of balance in a lake, but Phosphorus has a much longer residence time in lake sediments creating a legacy problem. Some interventions have a positive impact that lasts, while some can be reversed, often in moments - think of paying for carbon sequestration by trees, only to have those trees burned to clear space for farmland, as we’ve seen in other carbon markets. And remember we’re layering this onto agricultural markets, where one year can be a banner year, while another can see devastating droughts or flooding or other events that wipe out local crops. That fickleness applies even if you don’t have a crop. If a farmer does everything right to hold their soil in place, but the watershed around them conspires with dramatic weather to still wash everything away. . . that’s not just a loss in agricultural production, it’s also a loss in the ecosystem service payments. We already see how insurance systems affect environmental practices, it’s another market to take into consideration when designing this one.  

Silver Bullets

It’s almost like there are no silver bullets. 

 

Here’s the good news, and it’s pretty good, even if we don’t create a market for ecosystem services, simply exploring the options has positive effects. The first steps in setting up payment schemes were quantifying ecosystem services. If we know what environmental benefits are possible through farming and we measure how farmers can increase those benefits, then we can offer them tools that didn’t previously exist. Some of changes to farming practices can be cost neutral, some might improve their bottom line. Recent projects such as Open TEAM and Indigo Agriculture are running with the idea that more data, better managed always means better farming. Plus we should never discount the relationship shift that’s possible - the idea of ecosystem services provides a framework that can bring more farmers to the table to work with environmentalists towards shared goals. For all these reasons, the journey is important . . . and if we reach the destination, then so much the better. 


Do you like basic overviews of complicated policy topics? Then you’ll love last year’s project, a primer on Milk Pricing.