Farmers could receive millions of pounds towards farming methods that reduce flooding, provide clean water and restore wildlife, according to a report from think tank Green Alliance and the National Trust. Payments for ecosystem services (PES), also known as payments for environmental services (or benefits), are incentives offered to farmers or landowners in exchange for managing their land to provide some sort of ecological service. They have been defined as "a transparent system for the additional provision of environmental services through conditional payments to voluntary providers.*"
From 2011-2013, Defra commissioned 11 Payments for Ecosystem Services (PES) pilot projects over two rounds of funding. These included projects designing practical schemes as well as supporting research that could underpin development. The pilot projects have demonstrated many different applications of the PES concept, ranging from projects that focussed on payments for a narrow range of ecosystem services (e.g. the Hull Flood Risk project and projects focussing primarily on water quality in the Fowey River and Poole Harbour) to landscape-scale “place-based” PES schemes:
The River Fowey (Listeni/ˈfɔɪ/ foy; Cornish: Fowi) is a river in Cornwall, England, United Kingdom. It rises at Fowey Well (originally Cornish: Fenten Fowi, meaning spring of the river Fowey) about 1-mile (1.6 km) north-west of Brown Willy on Bodmin Moor, not far from one of its tributaries rising at Dozmary Pool and Colliford Lake, passes Lanhydrock House, Restormel Castle and Lostwithiel, then broadens at Milltown before joining the English Channel at Fowey.
A targeted reverse auction investing in farm infrastructure to improve water quality in the Fowey river. A targeted auction significantly increased the value for money with which funds can be allocated to projects (environmental improvements per £), estimated at between 20-40% greater value for money compared to a fixed-price, advisor-led scheme10. According to South West Water, the Fowey Auction and Peatland Code pilots have strengthened the case for catchment-based investment in the next investment cycle (2015-20) for water companies.
Evaluation of the Fowey auction highlighted the complexity of auction design. Although value for money was shown to compare favourably to an advisor-led approach, there was room for improvement. For example, farmers were allowed to apply for a number of different capital investments but their bids were evaluated as a whole; they either got all the investments or none. A better alternative would have treated each investment as a separate bid; this might have encouraged bids for projects that were of little benefit to the farm business but would deliver more substantial water quality improvements (and therefore be reflected in higher grant rates requested). The report noted issues over ‘additionality’- some of the capital investments may be taken forward in the absence of funding. In addition, the post auction survey revealed that while competition had played a role in keeping bids down, some farmers would have accepted lower amounts than bid for, demonstrating that the auction was not able to drive out all the ‘surplus’. Finally, the evaluation highlighted that auction-based mechanisms would not be preferred in all situations compared to an advisor-led scheme and it was important to understand the context so that the appropriate mechanism is designed.
In the Fowey pilot, beyond South West Water as the main buyer of water quality improvements in the Fowey, awareness among other potential downstream beneficiaries was very low.
The Fowey pilot considered whether the PES should have an input-based (action) or outcome-based design. While an outcome based design - making payments conditional on the levels of water quality improvement resulting from the actions – has clear advantages, the evaluation report highlighted a number of serious difficulties which meant that this approach would be impractical. These challenges include the highly variable nature of water pollution outcomes depending not only on farmer actions but also a variety of stochastic natural processes. The Cotswold pilot proposed inputbased payments but also is exploring further ideas around retaining a proportion of funds that could be put into a ‘risk fund’, which might pay out to either party if certain conditions were breached. This output based aspect can act as an incentive if there was a guaranteed payment after an agreed number of years for good behaviour, or increased certainty for a particular buyer.
From the USA: In Jamestown, Rhode Island, United States, farmers usually harvest the hay in their fields twice a year. However, this practice destroys the habitats of many local grassland birds. Economists from the University of Rhode Island and EcoAssets Markets Inc. raised money from residents of Jamestown who were willing to help the birds. The range of investments was between $5 and $200 per person for a total of $9,800. This money was enough to compensate three Jamestown farms for the cost of reducing their yearly harvests and getting their hay from another source. In this way, the birds have sufficient time to nest and leave the grounds without being subject to a hay harvest. In this example, the farmers benefit because they only have to harvest their fields once a year instead of twice, and the contributors benefit because they value the lives of the birds more than the money they contributed to the project.
*Tacconi, L. (2012). Redefining payments for environmental services. Ecological Economics, 73(1): 29-36.