FOR SERVICES RENDERED
FOR SERVICES RENDERED

The current status and future potential of markets
for the ecosystem services provided by tropical forests

JULY 2004

INTERNATIONAL TROPIC AL TIMBER ORGANIZATION
ITTOInternational Organizations Center, 5th Floor, Pacifico-Yokohama, 1-1-1, Minato-Mirai, Nishi-ku, Yokohama, 220-0012, Japan
Tel 81-45-223-1110 Fax 81-45-223-1111 Email itto@itto.or.jp Web www.itto.or.jp© ITTO 2004

INTERNATIONAL TROPICAL TIMBER ORGANIZATIONITTO

For services rendered
The current status and future potential of markets
for the ecosystem services provided by tropical forests

Sara Scherr, Andy White and Arvind Khare, with
contributions from Mira Inbar and Augusta Molar

ITTO Technical Series No 21
International Tropical Timber Organization
2004

1

ITTO

For services rendered
The current status and future potential of markets
for the ecosystem services provided by tropical forests

ITTO Technical Series No 21
by Sara Scherr, Andy White and Arvind Khare, with
contributions from Mira Inbar and Augusta Molnar
The International Tropical Timber Organization(ITTO) is an intergovernmental organization
promoting the conservation and sustainable
management, use and trade of tropical forest
resources. Its 59 members represent more than
75% of the world’s tropical forests and 90%of the global tropical timber trade. ITTO develops
internationally agreed policy documents to promotesustainable forest management and forest conservation
and assists tropical member countries to adapt suchpolicies to local circumstances and to implement
them in the field through projects. In addition,
ITTO collects, analyses and disseminates data on the
production and trade of tropical timber and funds a
range of projects and other action aimed at developing
industries at both community and industrial scales.
All projects are funded by voluntary contributions,mostly from consuming member countries. Since it
became operational in 1987, ITTO has funded morethan 700 projects, pre-projects and activities valued
at more than US$250 million. The major donors
are the governments of Japan, Switzerland and theUSA. ITTO contact details can be found on theback cover.
This document is a revised version of International
Tropical Timber Council (ITTC) document ITTC(XXXV)/6, which was reviewed by the ITTC in

2

November 2003. It is made available by ITTO aspart of its policy of contributing in a timely manner
to public debate on issues related to the conservationand sustainable management, use and trade oftropical forest resources. See the ITTO website(www.itto.or.jp) for original translations in Frenchand Spanish, or contact the ITTO office.
The authors of this paper are affiliates of a nongovernmental organization, Forest Trends, themission of which is to maintain and restore forest
ecosystems by promoting incentives that diversify
trade in the forest sector, moving beyond exclusive
focus on lumber and fibre to a broader range of
products and services. www.forest-trends.org
Cover photos
Left: Iwokrama International Centre
for Forest Conservation
Top right: Getty Images
Middle right: E. Müller
Bottom right: A. Compost
Back cover: A. Compost© International Tropical Timber Organization 2004
This work is copyright. Except for the ITTO logo,
graphical and textual information in this publication
may be reproduced in whole or in part provided
that it is not sold or put to commercial use and its
source is acknowledged. Although this report wascommissioned by ITTO, ITTO does not necessarily
endorse or support the findings or recommendations
presented herein.
ISBN 4 902045 10 9

ITTO

Foreword
Forest ecosystems perform many services on ourbehalf. They deliver clean water to rivers, lakes anddams, hold soils together, store carbon, and provide
habitat for a large part of the planet’s terrestrial
biodiversity.
Why, then, do we deforest so readily? We haveknocked over hundreds of millions of hectares of
the world’s forests in the last few centuries, anddeforestation – particularly in the tropics – continues
at a substantial rate today. If forests are so valuable,
why do we do this?
The answer is that despite their many acknowledged
services, forests are perceived to have less economic
value than the land on which they stand; in many
places, agriculture simply out-competes forest as
a land-use. Such agriculture may not always besustainable, but immediate economic and financial
imperatives commonly override concern for the moredistant future.
So it is in the humid tropics. The global
community may champion tropical rainforests fortheir extraordinary biological riches, but people atthe forest frontier – small-scale farmers as well aslarger agri-industrial enterprises –are clearing thosesame forests to plant crops and raise animals.
If we want to slow and reverse this process, we needto find ways of making forest a more competitiveland-use. At ITTO we believe that the sustainable
management of natural tropical forests can makegood economic sense – if certain conditions prevail.
In particular, the timber and non-timber forest
products thus produced must be marketable,
and the prices must be the best obtainable on
the open market.
In many forests, though, this still won’t be enough:additional financial inputs will be needed to makesustainable forest management financially viable
and competitive with alternative land-uses.
Where will these inputs come from? The international
donor community, of which ITTO is a part, hasfunded a wide range of forest management projects,
with limited success in raising standards to a point
where the long-term future of the forests concerned
might be secure. But such donor support isdiminishing, and export markets for tropicaltimber products are becoming harder to penetrate.

In recent years people have begun talking about
payments for the ecosystem services that forests
provide. Clean water, for example, is an increasingly
valuable commodity, but the forests have been giving
it to us for free for millennia. If forest-clearing leads
to a reduction in water quality, will downstream users
be prepared to help meet the cost of retaining theforest upstream? A similar question can be posed forcarbon: the clearing and burning of forests releasepotent greenhouse gases into the atmosphere; could
polluters in developed countries pay to help stop this?
Ditto for biodiversity: will those of us who deplore
the loss of biodiversity caused by deforestation beprepared to pay landowners and land-users to keep
the forest intact?
This report, which ITTO commissioned from a teamat Forest Trends, looks into these questions and otherissues surrounding payments for the services renderedby tropical forests. It is the first study of its kind to
focus on tropical forests and as such we hope it will
make a valuable contribution to debate and policy
development in this field.
One of the conclusions reached by the authors isthat while international buyers currently dominate
markets for ecosystem services in tropical countries(small though they are), in the long run the mostimportant markets will be focused domestically.
This may well be true, but it would be unfortunate
if we, the international community, were unable
to contribute to the growth of markets for servicesof global importance, such as carbon storage andbiodiversity conservation.
Perhaps some tropical countries will continue togive us these services for free. But in the absenceof payments, we would have few grounds forcomplaint if the level of service diminishes.
Manoel Sobral Filho
Executive Director
International Tropical Timber Organization

3

ITTO

Acronyms

Acknowledgements

CER

certified emission reduction

CCX

Chicago Climate Exchange

The authors would like to acknowledge the materials
and insights of members of the Katoomba Group,particularly Josh Bishop, Stefano Pagiola, Natasha
Landell-Mills and Nels Johnson. We are also gratefulfor comments from Matt Arnold, Josh Bishop, David
Cassells, Michael Jenkins, Peter May, John Spears,
Steve Johnson and Alastair Sarre.

CDCF Community Development Carbon Fund
CDM

Clean Development Mechanism

ERT

Environmental Resources Trust

ITTOInternational Tropical Timber Organization

NPV

net present valueNGO

non-governmental organization

NTFP

non-timber forest product

PCF

Prototype Carbon Fund

SFM

sustainable forest management

4

ITTO

Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7

Résumé analytique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

Resumen analítico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

2

Reasons for interest in ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

Lack of financial incentives to provide ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

The search for sustainable incomes in the tropical timber industry . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

Need for new means to finance forest conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

Potential contribution to economic development and poverty reduction . . . . . . . . . . . . . . . . . . . . . .

25

Status of main ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27

Types of ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27

Watershed protection services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28

Biodiversity protection services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

Carbon sequestration and storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40

Scale of ecosystem market potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

Benefits and risks to forest owners and producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47

3

4

5

6

Potential benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47

Benefits for different types of producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

Potential risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52Linking ecosystem services markets to rural development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53

Strategic issues for tropical countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

International competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

Legal and regulatory frameworks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

55

Property rights and the politics of protecting ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57

Domestic equity concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59

Institutions to reduce transaction costs and financial risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60

Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62

Current status of ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62Issues to consider when engaging in ecosystem service markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63

Principal gaps in knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64

5

ITTO

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Annex 1ITTO terms of reference for environmental services study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69

Annex 2Tropical cities that manage forests for water services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70Annex 3
Additional resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71

List of figures
1

Tropical timber export trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24

2

Carbon sequestration in the humid tropics by vegetation type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41

3Profiting from investments in ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

48

4Bundling of income streams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49

5Property rights and policy instruments to promote ecosystem services . . . . . . . . . . . . . . . . . . . . . . . .

58

List of tables
1

Major forest ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21

2

Instruments to promote forest ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23

3

Estimated financial flows for forest conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

4Forest Tenure in tropical producer countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

5

Examples of water market payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30

6Types of payments for biodiversity protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37

7Value of payments for biodiversity conservation: selected examples . . . . . . . . . . . . . . . . . . . . . . . . . . .

38

8

Estimated economic value of forests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45

9Potential benefits and threats of ecosystem service markets for local livelihoods . . . . . . . . . . . . . . . .

48

List of boxes
1

The growing number of markets for ecosystem services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22

2

Rough estimates of forest-dependent poor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

3Biophysical relationships that link forests, water and people . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29

4

A new fund to finance forest ecosystem services in Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33

5

New York City pays for watershed management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

34

6Brazil’s value-added tax for conservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38

7

From bioprospecting to botanicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39

8World Bank funds invest in forest carbon projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42

9

Indigenous forest communities in Mexico sell services to auto federation . . . . . . . . . . . . . . . . . . . . .

43

10 Types of compensation mechanisms for environmental services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47

11 Financial contributions of ecosystem services markets to household incomes . . . . . . . . . . . . . . . . . .

50

12 Rural communities in India develop equitable watershed service markets . . . . . . . . . . . . . . . . . . . . .

51

13 China’s ecological compensation scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

56

14 New South Wales, Australia, establishes legal framework for ecosystem service markets . . . . . . . . .

57

6

ITTO

Executive summary
Status of forest ecosystem markets
The past decade has seen the widespread emergenceof markets and other payment schemes for forest
ecosystem services – such as watershed protection,
biodiversity protection and carbon sequestration –around the world. At a global scale, several recent
reviews indicate that these activities are nascent andstill limited in scope and scale, but that they may havepotential to be scaled up to regional, river basin or
national levels with further development. Most of
the activity to test such schemes to date has been indeveloped countries, where biophysical science tends
to be stronger and legal frameworks and institutions
exist that permit the development of moresophisticated markets.
The strong and growing interest in developing thesemarkets is driven by frustrations with traditional
government regulatory approaches, growing
recognition of the limits of protected area approaches
to conservation, societal demands for ecologicallysound products, and the forest-based industry’s needto find additional revenue sources to remain competitive.
Those concerned with conservation and development
hope that such markets can contribute to forest
protection and restoration and become a sustainablesource of new income for the forest-dependent poor
who own and administer an increasingly large shareof the world’s forests. Government officials andindustry and community leaders globally are
beginning to assess their strategic positions in thesemarkets: identifying their opportunities, the strategicrisks of action and inaction, and the implications
for their relative competitiveness. Those who haveexamined these options in depth find there is still aneed for policy assessment and pilot experience to test
instruments and learn jointly with local participants.
The many different types of market and payment
schemes can be organized into four categories:(1) public payment schemes to private forest
owners to maintain or enhance ecosystem services;(2) open trading under a regulatory cap or floor;(3) self-organized private deals; and (4) ecolabellingof forest or farm products, an indirect form of
payment for ecosystem services. There are numerous
examples of each type of market in both developing
and developed countries.

Watershed protection services – such as flow regulation,water quality, water supply and habitat protection– are well recognized and indeed are a primary
motivation for establishing many national parks
and forests. Some 30% of the world’s largest cities
currently depend on forest areas for their water.
Markets for watershed services are site- and userspecific and currently are limited to situations where
the downstream beneficiaries – such as hydroelectric
power generators, irrigators, municipal water systems
and industry – are directly and significantly impacted
by upstream land-use.
Public payment schemes predominate in scale(though not in number), and these payments canmake a significant contribution to local incomes aswell as provide sufficient incentive to maintain forest
cover. In Costa Rica, for example, landholders in
critical watershed areas are paid between US$30
and US$50 per hectare per year and similar levelsof payment are planned in Mexico. In the US,
government payments for ecosystem protection
range from US$25–US$125 per hectare per year.
Self-organized private deals appear to be limited –although information is largely proprietary andthere has never been a full assessment of these typesof transactions. Open trading schemes – such as
wetland mitigation banking – are few, and limited
primarily to developed countries.
The many different biodiversity protection services –such as habitat and species’ conservation, genetic
and chemical information, and ecosystem functions
such as pollination – are increasingly recognized as
critical to many economic sectors, such as commercial
fisheries. Market mechanisms include land markets
for high-biodiversity-value habitat, payments forprivate non-consumptive uses such as ecotourism,tradable rights and credits within a regulatory cap
on habitat conversion, and ecolabelled products suchas shade-grown coffee, herbal medicines and otherbotanicals from natural forests. The trade in theseproduct markets is booming, with medicinals derived
from compounds originally found in forests worth
tens of billions of US dollars a year alone, but thesebenefits are rarely captured by forest peoples.
Although the bioprospecting market is still evolving,it has not yet generated significant direct investment
or payments to local people. A recent global survey
found 72 cases of biodiversity markets in 33 countries,of which 63 were in 28 tropical countries. Over 70%

7

ITTO

of these markets were international. Experts estimatethat in the US alone over US$2 billion have been
invested in easements for habitat conservation overthe past several years.
Of all the forest ecosystem services, carbon
sequestration has arguably drawn the greatest
attention and enthusiasm in recent years. There is
now scientific consensus that human activities havecontributed to global warming and that forests playmajor roles in both overall global carbon emissions
and as a provider of sequestration and storage services.
Market segments in which tropical forests can playa role include reforestation and afforestation within
the Clean Development Mechanism (CDM) of the
Kyoto Protocol (the global cap-and-trade scheme),a range of land-use options that are attractive toinvestors through non-Kyoto trading, and voluntary
payments by emitters to achieve carbon neutrality.
Given restrictions on forest carbon offsets andestimating a value of US$10 per ton of carbon, theCDM is expected to raise at most US$300 million
per year for afforestation and reforestation in thefirst commitment period (2008–2012). Estimates ofthe dollar value of forest carbon trading vary widely
and ultimately depend upon the size of the market,
which in turn depends upon the final rules adopted
under Kyoto, European trading rules, and alternative
schemes implemented by the US.

Key findings
Market characteristics
The total value of direct ecosystem service
payments in tropical countries is presently modest,but has grown dramatically over the past decadeand is significant, particularly to low-income
producers: tropical ecosystem services are not yet
commodities; rather, they behave as niche markets
for products of special value to a narrow range ofbuyers. Ecosystem service payments will generally
cover only a modest share of the costs of sustainable
forest management and will be sufficient to financeforests managed for protection alone only where
opportunity costs are very low – such as in remoteareas where forest production is not economically
viable and land-use alternatives are limited.
Very roughly estimated, the annual value of direct
payments for forest ecosystem markets in tropicalcountries is in the order of hundreds of millions
of US dollars. Indirect payments, via ecolabelled8

products such as certified lumber, tropical tree crop
products and other non-wood forest products, is muchlarger, generating approximately as much as several
billion dollars per year. Together these are significant
but modest relative to the international trade inprimary tropical timber products (logs, sawnwood,
veneer and plywood), which is now approximately
US$8 billion per year, the total trade in all wood
products from tropical countries, some US$20 billion
per year, and the far larger value of domestic woodand non-timber forest product markets. Direct andindirect payments for ecosystem services combined
are approximately the same magnitude as total annual
investments in forest conservation by governments,
philanthropic organizations and intergovernmentalorganizations, which is somewhere between
US$2 billion and US$2.5 billion per year.
Markets for forest ecosystem services are
expected to grow in both developed anddeveloping countries over the next 20 years:
the potential for increased demand and increased
payment for watershed services is immense. Water
demand is projected to double, if not triple, overthe next 50 years, and much of this growth will
be in developing countries. Downstream users arelearning that investments in watershed protection
can be far more economical than investments in newtreatment facilities. Growth in the carbon market
could potentially be large but will depend on still
unpredictable rules of international climate-change
mitigation. Markets for ecolabelled products forexport and for urban consumers in middle-income
countries are likely to be the fastest-growing
component of biodiversity markets.
Governments play a critical role as the principal
direct buyers of many ecosystem services, and as
catalysts for many private-sector direct payment
schemes: since many ecosystem services are public
goods, government intervention is usually required
to make a market. This may entail directly paying
for a service, establishing property rights, or
establishing regulations that set caps and govern
trading schemes. Since these markets are characterizedby high transaction costs to link buyers and sellers
and the lack of specialized market institutions,
government intervention is usually required to assistin addressing these two major constraints to market
development. Indirect payments, via certification
schemes, are dominated by private buyers.

ITTO

Ecosystem service payments will in most cases cover
only a modest – but potentially catalytic – shareof the costs of good forest management: prices of
ecosystem services are generally not sufficient to justify
forest conservation in areas where there are moderate
to high opportunity costs for the land. However,evidence suggests that these payments can have adisproportionate catalytic effect on forest establishment and management. Even modest payments,
reliably paid over a number of years, can provide theincrement to net income that makes forestry enterprises
viable, justifying the restoration of degraded lands
and enhancing the livelihoods of poor people.
Strategic issues
Policy-makers concerned with tropical forests are
beginning to assess their strategic competitive positionvis á vis the option of markets for ecosystem services.
They are keen to understand if and when they shouldseek to compete in global markets, and what kinds ofmarket approaches make sense in their own domestic
contexts. Policy-makers face a set of key issues whentrying to adequately assess and develop these options:
1) property rights and national legal frameworks
are necessary for ecosystem service markets
to develop, yet these are poorly developedin most producer countries: recognizing
property rights and reforming legal frameworks
are often politically contentious and costly, yet
are fundamental to establishing payment schemesof any type. Unfortunately, forest areas indeveloping countries are characterized currently
by overlapping and conflicting claims to land andhistoric tensions over the rights of indigenous andother local communities. In most places it will
be necessary to negotiate political support fromkey stakeholders in order to establish new markets;
2) these markets are not likely to contribute
substantially to poverty alleviation unlessproactive efforts are made to recognize rights
and shape markets to provide equal accessto low-income producers of tropical forest
ecosystem services: as in the development of any
new market, rules governing the market tend
to be set by the more powerful sectors of society
who have the capital and capacity to invest
in designing the rules. To some extent, this isalready taking place in the global carbon market.
The implications of new markets, regulations andecolabelling standards for low-income producers
need to be identified and addressed; and3) new market institutions are needed to reducetransaction costs and financial risks: a major
challenge of ecosystem service market development
is to ensure that critical institutions are established
to reduce transaction costs and to provide
intermediation between buyers, sellers, investors,
certifiers and other key groups in the value chain.
If there is not appropriate action to address thisat both national and international levels, manymarket opportunities will simply fail to materialize,
especially in poorer countries and for poorer
forest producers.
Knowledge gaps
Information about ecosystem service markets
is scarce and the capacity to assess and develop
markets is limited. Progress is hampered by a lackof understanding and political support from key
stakeholders. Few national, state or local government
entities have access to the information needed toshape policy on market design. Most market expertiseis available only in the private sector, generallycompanies and consultants who are motivated by
the opportunity to promote business deals. Where
site-specific design input is commercially available,
pricing of services reflects the fact that most expertiseand most commercial demand is presently found in
the industrialized countries. While technical expertisefor measuring ecosystem services is becoming moreavailable through universities, it is often difficult forgovernments or non-governmental organizations toaccess or apply this in a site-specific project.
To realize the potential of ecosystem service markets
in tropical countries, leading organizations promoting
forest stewardship will need to fill these knowledge
gaps. In particular, policy-makers and program
leaders require:•objective technical assistance to identify theopportunities and risks of using different market
instruments, and designing them to be effective,
efficient and equitable;•

opportunities to exchange experiences,perspectives and lessons with peers in othercountries and regions about the most appropriate
legal and regulatory frameworks;•

practical data on costs of production, transactions,establishment and management of different
market mechanisms; and

9

ITTO

•

capacity-building to develop sophisticatednational expertise in analyzing, designingand implementing ecosystem service markets
in the public, private and civic sectors.

Ecosystem service markets could potentially offer
a powerful new set of incentives for tropical forest
conservation and restoration, and new income
opportunities for forest producers. However, itremains unclear which producers, consumers and10

types of forest resources will be the real beneficiaries
of such market development. It is also unclear underwhat conditions the creation of ecosystem service
markets will be the most effective policy instrument
for achieving forest policy goals. Most markets arestill incipient and their further development will
require concerted government action. The decisions
being taken over the next few years will shape market
effectiveness, efficiency and equity for decades to come.

ITTO

Résumé analytique
Situation des marchés desécosystèmes forestiers
La décennie écoulée a vu l’apparition généralisée demarchés et d’autres dispositifs de rémunération desservices assurés par les écosystèmes forestiers dansl’ensemble du monde : protection des bassins versants,
protection de la biodiversité et piégeage du carbone.
À l’échelle planétaire, plusieurs études récentes
indiquent que ces activités sont encore en herbe etqu’elles restent d’extension et d’échelle limitées; elles
n’en recèlent pas moins la possibilité de s’accroître
pour atteindre le niveau régional, celui d’un bassinhydrographique ou le niveau national avec de plus
amples développements. La majeure partie desactivités visant à mettre à l’essai ces dispositifs ont
eu lieu pour l’heure dans des pays développés où
la science biophysique est souvent plus fortement
développée et où l’existence de cadres juridiques etd’institutions permet le développement de marchés
plus élaborés.
L’intérêt croissant pour ces marchés s’explique parles frustrations que créent les approches régulatrices
traditionnellement suivies par les pouvoirs publics,
la reconnaissance croissante des limites de la formule
des aires protégées pour la protection de la nature,les exigences de produits écologiquement rationnels
qui s’expriment dans la société, et la nécessité pourles entreprises de la filière forêt-bois de trouver dessources de revenu supplémentaires afin de rester
compétitives. Ceux qui ont le souci de la conservation
et du développement espèrent que ces marchés
pourront contribuer à la protection et à la restauration
des forêts pour devenir une source durable denouveaux revenus chez les populations pauvres
tributaires des forêts, ces dernières étant propriétaires
et administratrices d’une part de plus en plus
importante des forêts du monde. Les responsables
des administrations centrales, les chefs de file del’industrie et les leaders d’opinion commencent
dans leur ensemble à prendre la mesure de leurposition stratégique dans ces marchés: cerner lescréneaux, les risques stratégiques que comporte
toute action ou inaction, et les implications quien résultent pour leur compétititivé. Ceux qui ont
procédé à un examen approfondi de ces options
constatent que sont encore nécessaires une évaluation
des lignes de conduite et une mise à l’essai pilote
des instruments, en tirant les enseignements decette expérience avec les participants locaux.

Les nombreux types de marchés et de dispositifs derèglement peuvent être regroupés en quatre catégories:
1) les systèmes de rémunération publique despropriétaires forestiers privés destinés à assurer
le maintien ou à permettre l’amélioration desfonctionnalités des écosystèmes; 2) un commerce
ouvert encadré par une réglementation qui fixe seuils
et plafonds; 3) les marchés de gré à gré auto-organisés;et 4) l’écolabélisation des produits fermiers ou
forestiers, forme indirecte de rémunération desfonctionnalités et services qu’assure l’écosystème.
De chacun de ces types de marché, les exemples
abondent, dans les pays en développement commedans les pays développés.
Les services de protection des bassins versants: larégulation des eaux, la qualité de l’eau, l’alimentationen eau et la protection des habitats sont bien reconnues
et constituent une motivation première à créer
de nombreux parcs nationaux et forêts domaniales.
La consommation en eau de quelque 30% des plus
grandes villes du monde dépend aujourd’hui demassifs forestiers. Les marchés des services que
procurent les bassins versants sont spécifiques aux
sites et aux usagers concernés; ils se limitent pourl’heure aux situations où les éléments bénéficiaires enaval que sont par exemple les générateurs de stationshydroélectriques, les dispositifs d’irrigation, les réseauxmunicipaux d’alimentation en eau courante etl’industrie, ressentent directement et de manière
sensible les effets du mode d’occupation des sols
en amont.
Les systèmes de règlement public prédominent parleur échelle (mais ne sont pas les plus nombreux), et
ces paiements peuvent constituer une contribution
significative aux revenus locaux et fournir ainsi une
incitation suffisante au maintien du couvert forestier.
Au Costa Rica par exemple, on verse des rémunérations
allant de 30 à 50 dollars E-U par hectare et par an
aux propriétaires fonciers des terrains situés dans desbassins versants assurant des fonctions indispensables
et l’on prévoit d’octroyer des rémunérations du mêmeordre au Mexique. Aux Etats-Unis, les paiements
acquittés par les pouvoirs publics pour la protectiondes écosystèmes varient entre 25 et 125 dollars E-U
par hectare et par an. Les marchés passés de gré à gré
paraissent plus limités, bien que les informations dansce domaine demeurent largement sous le sceau dusecret professionnel et que ce type de transaction
n’ait pas fait l’objet d’un recensement exhaustif.

11

ITTO

Les dispositifs de commercialisation ouverte – tel lemitigation banking1 sur zones humides – sont rareset se limitent principalement aux pays développés.
Les nombreux différents services de protection
de la biodiversité que sont la conservation desespèces, l’information génétique et chimique et les
fonctionnalités de l’écosystème dont la pollinisation
se voient de plus en plus reconnus comme
indispensables à de nombreux secteurs de l’économie,
notamment la pêche commerciale. Les mécanismesde marché englobent les marchés fonciers des habitats
à forte valeur de biodiversité, les paiements des usages
privés non consomptibles tels l’écotourisme, lesdroits et crédits cessibles dans un cadre réglementairerégissant les conversions d’habitats, et les produits
porteurs de labels écologiques que sont le café cultivé
sous ombrière, les médicaments naturels et d’autres
produits botaniques tirés des forêts naturelles. Le
commerce sur ces marchés connaît un essor sansprécédent, les médicaments produits à partir demolécules originellement issues de la forêt représentent
une valeur qui se chiffre en dizaines de milliards dedollars par an mais ces avantages ne profitent que
rarement aux populations forestières. Bien que lemarché de la bioprospection soit encore en évolution,
il n’a pas encore engendré d’investissements ou depaiements directs au profit des populations riveraines.
Une enquête mondiale a récemment recensé 72
marchés de la biodiversité dans 33 pays, dont 63 setrouvaient répartis dans 28 pays tropicaux. Plus de
70% de ces marchés sont internationaux. Les experts
estiment que dans les seuls Etats-Unis, plus de deux
milliards de dollars E-U ont été investis dans desservitudes foncières aménagées pour la conservationd’habitats au cours des dernières années.
De tous les services ou fonctionnalités de l’écosystèmeforestier, le piégeage du carbone est sous doute celui
qui a suscité le plus d'attention et d'enthousiasme
1

Le mitigation banking est un instrument de régulation et de coordination
visant à assurer des substitutions entre fonctionnalités non-marchandes
de la nature en assurant un système d’évaluation des substitutions (c.a.d.
déplacement des fonctionnalités dans l’espace) et de financement. Son
objectif est de conserver un nombre stable de fonctionnalités écologiques
sur une zone donnée, comme par exemple la biodiversité, la rétention
des nutriments, les espaces récréatifs, le paysage, la régulation desinondations, etc.. Le dispositif implique que les actions de développement(économique, résidentiel, agricole) ayant des impacts jugés négatifs sur
un ensemble de fonctionnalités, soient compensés, lorsque c’est possibleet écologiquement justifié, par l’achat de crédits de fonctionnalités.
Ces crédits correspondent à des financements d’actions de conservation,
de restauration ou de création de fonctionnalités écologiques (préalables
et dans la même zone de fonctionnement écologique) par des entités
publiques ou privées. C’est un instrument d’évaluation, de mise en œuvre
et de financement des déplacements de fonctionnalité dans l’espace.
D’après G. Geniaux - INRA Ecodéveloppement, 2001.

12chez les acteurs ces dernières années. Les scientifiquess’accordent aujourd’hui à reconnaître que les activités
anthropiques ont contribué au réchauffement
climatique et que les forêts jouent un rôle majeur dansle bilan global du carbone à l’échelle planétaire depar les fonctions de piégeage et de fixation de ce
gaz qu’elles assurent. Les segments de marché danslesquels les forêts tropicales peuvent jouer un rôlecomprennent les reboisements et les boisements prisen compte dans le Mécanisme du développement
propre (MDP) du Protocole de Kyoto (dispositif
mondial de compensation), et un éventail d’options
d’utilisation des terres susceptibles d’attirer lesinvestisseurs par le biais de transactions commerciales
dites « non-Kyoto », ainsi que des versements
volontaires opérés par des émetteurs de gaz à effet deserre dans le but d’équilibrer leur bilan du carbone.
En tenant compte des restrictions imposées aux crédits
d’émission de carbone liés aux forêts, et en retenant
une valeur estimée de 10 dollars E-U par tonne, le
MDP devrait rapporter au moins 300 millions dedollars E-U par an pour les boisements et reboisements
au cours de la première tranche d’engagement(2008-2012). Les estimations de la valeur numéraire
en dollars du commerce du carbone forestier varient
considérablement et cette valeur dépendra en dernier
ressort de la taille du marché, laquelle sera fonction
des règles finales adoptées dans le cadre du Protocole
de Kyoto, des règles européennes de commerce, etdes autres systèmes mis en place par les Etats-Unis.

Principales conclusions
Les caractéristiques du marché
La valeur totale des paiements directs auxquels
donnent lieu les fonctionnalités des écosystèmes
dans les pays tropicaux est aujourd’hui modeste,mais elle a progressé de façon spectaculaire aucours de la décennie écoulée et a atteint un niveau
significatif, particulièrement pour les producteurs
à faible revenu: les fonctionnalités (ou « services »)des écosystèmes tropicaux ne sont pas encore desmarchandises ; elles constituent plutôt des créneauxde marché pour des produits présentant une valeur
particulière auprès d’un spectre limité d’acheteurs.
La rétribution des fonctionnalités des écosystèmesne couvrira qu’une part modeste des coûts de lagestion forestière durable et suffira à financer laseule gestion des forêts aménagées à des fins deprotection là où les coûts de renoncement sont très
faibles – tel est le cas des zones éloignées des centres

ITTO

où la production forestière n’est pas économiquement
viable et où les usages fonciers concurrents sontlimités.

urbaines des pays à revenu moyen soient parmi
tous les marchés de la biodiversité ceux dont lacroissance sera la plus forte.

Très grossièrement estimée, la valeur annuelle despaiements directs sur les marchés des fonctionnalités
forestières dans les pays tropicaux est de l’ordrede quelques centaines de millions de dollars E-U.
Les paiements indirects, par l’entremise des produitsécolabélisés tel le bois certifié, sont beaucoup plus
importants et représentent approximativement
plusieurs milliards de dollars par an. Ensemble,
ces paiements pèsent un certain poids, mais ils
restent modestes au regard du commerce internationaldes produits ligneux tropicaux primaires (grumes,
sciages, placages et contreplaqués, qui se chiffre
aujourd’hui approximativement à 8 milliards dedollars E-U par an, ou au regard du commerce total
des produits dérivés des bois tropicaux représentant
20 milliards de dollars E-U par an, et à la valeurbeaucoup plus importante des marchés nationaux dubois et des produits forestiers non ligneux. Le total
des paiements directs et indirects des fonctionnalitésdes écosystèmes sont approximativement du mêmeordre de grandeur que le total des investissements
annuels effectués dans la conservation forestière par lesgouvernements, les organisations philanthropiques,les organisations intergouvernementales, soit entre
2 et 2,5 milliards de dollars E-U par an.

Les gouvernements jouent un rôle déterminanten tant que premiers acheteurs directs denombreux services des écosystèmes et commeéléments catalyseurs de nombreux dispositifsde rémunération directe adoptés par le secteur
privé. Sachant que de nombreux services desécosystèmes sont des biens publics, l’intervention
des pouvoirs publics est généralement requise pourinstituer un marché. Cela peut prendre la formed’un paiement direct de services, de l’instauration dedroits de propriété ou de réglementations qui fixent
un cadre et régissent les dispositifs de négociation
des effets de commerce. Sachant que ces marchés
se caractérisent par des coûts de transaction élevés
liant acheteurs et vendeurs, et par l’absenced’institutions de marché spécialisées, l’intervention
des pouvoirs publics est généralement requise pouraider à traiter ces deux contraintes majeures dudéveloppement du marché. Quant aux régimesde rétribution indirecte, qui fonctionnent par
l’entremise de systèmes d’écocertification, ils
sont dominés par les acheteurs privés.

Les marchés des fonctionnalités des écosystèmesforestiers sont appelés à croître dans les pays
développés comme dans les pays en développement
au cours des 20 prochaines années. Les possibilitésd’augmentation de la demande portant sur lesfonctionnalités des bassins versants, et celles d’une
progression de leur rémunération, sont immenses.
On projette un doublement, voire un triplement,de la demande d’eau au cours des 50 prochaines années
et une part notable de cette progression s’effectuera
dans les pays en développement. Les utilisateursen aval apprennent que les investissements dansla protection des bassins versants peuvent avoir
une valeur économique bien supérieure aux
investissements dans de nouveaux équipementsde retraitement des eaux. La croissance du marchédu carbone peut être riche de promesses, elle n’endépendra pas moins des règles pour lors impondérables
des dispositifs internationaux d’atténuation duchangement climatique. Il est vraisemblable que
les marchés des produits écolabélisés destinés àl’exportation et aux consommateurs des zones

Le paiement des fonctionnalités des écosystèmesne couvrira dans la plupart des cas qu’une partmodeste, mais potentiellement catalysatrice, descoûts de la bonne gestion forestière. Les prix desservices d’écosystème ne sont généralement pas
suffisants pour justifier la conservation forestière
dans des zones où les coûts de renoncement à la terresont modérés à élevés. Toutefois, des preuves existentque ces paiements peuvent avoir sur l’aménagement
forestier et la gestion forestière un effet catalyseur
disproportionné. C’est ainsi que des paiements,même modestes, effectués à échéances régulières
pendant un certain nombre d’années peuvent
réaliser un incrément de revenu net qui rende lesentreprises forestières viables tout en justifiant larestauration des terres dégradées et en rehaussantle niveau de vie des populations pauvres.
Les questions stratégiques
Les responsables chargés des politiques forestières dansle monde tropical commencent à prendre consciencede leur position stratégique compétitive dans laperspective des marchés des services d’écosystèmes.
Ils se montrent désireux de savoir si et quand ils
devront chercher à entrer en concurrence sur lesmarchés mondiaux, et quel type d’approche de

13

ITTO

marché est le mieux indiqué dans leur sphère
nationale. Les responsables sont ainsi confrontés à
un ensemble de questions incontournables lorsqu’ils’agit de peser ces options en vue d’en tirer parti.
1) Droits de propriété et ossatures juridiques
nationales sont nécessaires au développementdes marchés des services des écosystèmes, orces cadres sont mal développés dans la plupart
des pays producteurs. La reconnaissance desdroits de propriété et la réforme des cadres
juridiques sont souvent politiquement sensibles etcoûteuses, elles n’en sont pas moins fondamentales
pour instaurer des dispositifs de rétribution quel
qu’en soit le type. Malheureusement, les massifs
forestiers des pays en développement se
caractérisent aujourd’hui par des revendications
foncières concurrentielles ou contradictoires qui
s’accompagnent de tensions persistantes touchantaux droits des collectivités autochtones etriveraines. Dans la plupart des cas, il sera
nécessaire de négocier l’adhésion politiquedes acteurs principaux pour pouvoir instaurer
de nouveaux marchés.
2) Il est peu vraisemblable que ces marchés
contribuent de manière sensible à atténuer
la pauvreté si ne sont pas déployés des efforts
de nature volontariste conduisant à unereconnaissance des droits et à donnerconsistance à des marchés qui offrent aux
producteurs à faibles revenus un accèséquitable aux services des écosystèmes desforêts tropicales. Comme dans le développement
de tout nouveau marché, les règles qui régissent
le marché sont trop souvent arrêtées par les secteursles plus puissants de la société qui disposent à lafois du capital et de la capacité de s’investir dansl’élaboration de règles nouvelles. Dans une certaine
mesure, c’est ce à quoi l’on assiste dans le marchémondial des crédits d’émission de carbone. Les
implications que comportent pour les producteurs
à faibles revenus les nouveaux marchés, leursréglementations et les normes d’écolabélisation
doivent être reconnues et traitées.
3) De nouvelles institutions de marché
sont nécessaires pour réduire les coûts destransactions et les risques financiers. Un desenjeux majeurs du développement du marché desservices des écosystèmes consiste à faire en sorteque soient en place les institutions indispensables
pour réduire les coûts des transactions, et

14qu’intervienne un courtage entre acheteurs,
vendeurs, investisseurs, certificateurs et autres
catégories maîtresses dans la chaîne de la valeur.
Si rien d’utile n’est fait en ce sens, au niveau
national comme au niveau international, denombreux créneaux de marché ne seront tout
simplement pas présents au rendez-vous, et ceparticulièrement dans les pays pauvres et pourles producteurs forestiers désavantagés.
Des connaissances lacunaires
L’information sur les marchés des services desécosystèmes est parcellaire et la capacité de jauger
les marchés et de les développer est limitée. Les progrès
sont freinés par le défaut de compréhension chez lesacteurs clés et leur absence d’adhésion au concept.
Rares en effet sont les entités nationales, étatiques
ou les collectivités territoriales qui disposent desinformations nécessaires pour se déterminer sur laforme que doivent prendre ces marchés. Le savoirfaire et la maîtrise de ces marchés restent entre lesmains du secteur privé, à savoir des sociétés et desconsultants motivés par des perspectives de conclure
des transactions. Là où des apports conceptuels
spécifiques aux sites sont disponibles, les prix
pratiqués pour les services visés traduisent le fait quela majeure partie des connaissances spécialisées etde la demande commerciale se trouve aujourd’hui
dans les pays industrialisés. Alors que la maîtrise
technique permettant de mesurer les fonctionnalitéset services des écosystèmes est diffusée par lesuniversités, il est souvent difficile aux administrations
nationales et aux ONG de l’appliquer dans un projet
spécifique à un site donné.
La réalisation des potentialités des marchés desservices des écosystèmes dans les pays tropicaux passe
par l’élimination de ces lacunes dans les connaissances
et par l’information que doivent assurer les grandes
organisations oeuvrant en faveur d’une gestion
raisonnée des forêts. C’est ainsi que les responsables
politiques et les chefs de programmes devront :•se doter d’une assistance technique objective qui
leur permette de déterminer les perspectives et lesrisques qui s’attachent à l’utilisation d’instruments
de marché différents, et d’élaborer ces instruments
dans un souci d’efficacité, d’efficience et d’équité ;•avoir la possibilité d’échanger des expériences,
des points de vue et des enseignements avec leurs
homologues dans d’autres pays et régions sur lescadres juridiques réglementaires les mieux adaptés ;

ITTO

•

disposer de données concrètes sur les coûts
de production, ceux des transactions et sur
l’instauration et la gestion des différentsmécanismes de marché ;•renforcer les capacités et se doter des moyens dedévelopper une maîtrise nationale sophistiquée
qui permette l’analyse, la conception et la mise en
oeuvre de marchés des services des écosystèmes
dans les secteurs public, privé et la société civile.

Les marchés des services des écosystèmes recèlent
la possibilité d’un ensemble d’incitations fortes à laconservation et à la restauration des forêts tropicales,
et sont porteurs de nouvelles perspectives de revenus

pour les producteurs forestiers. Toutefois, on ne voit
pas nettement quels producteurs, consommateurs,
et types de ressources forestières seront les vraisbénéficiaires du développement de ces marchés.
On ne voit pas non plus clairement dans quelles
conditions les marchés des services des écosystèmesà créer seront les instruments politiques les plus
efficaces pour la réalisation des objectifs forestiers.
La plupart des marchés en sont encore à leur débutet leur futur développement nécessitera une action
concertée des gouvernements. Les mesures que l’on
prendra dans les prochaines années décideront del’efficacité, de l’efficience et de l’équité de ces marchés
pour les décennies à venir.

15

ITTO

Resumen analítico
Situación de los mercados de servicios
de ecosistemas forestales
En los últimos diez años, se ha registrado por todo
el mundo un gran surgimiento de mercados y otros
sistemas de pago de servicios ecosistémicos tales comola protección de cuencas hidrográficas, la protecciónde la biodiversidad y el secuestro de carbono.
En el ámbito mundial, varios estudios realizados
recientemente indican que dichas actividades seencuentran en la etapa inicial y que todavía sonde envergadura y escala limitadas, pero que pueden
tener el potencial de extenderse a nivel regional,
de cuenca o nacional con un mayor desarrollo.
A la fecha, la mayor parte de la actividad realizada
para probar dichos sistemas ha tenido lugar en países
desarrollados, donde los conocimientos científicosbiofísicos suelen ser mayores y existen los marcos
jurídicos e institucionales que permiten el desarrollo
de mercados más sofisticados.
El enorme y creciente interés observado para
desarrollar dichos mercados está impulsado por lafrustración causada por los enfoques reguladores
gubernamentales tradicionales, el reconocimiento cadavez mayor de las limitaciones de los sistemas de áreas
protegidas con respecto a la conservación, la demanda
de productos ecológicamente racionales por parte dela sociedad, y la necesidad que tienen las industrias
forestales de encontrar fuentes suplementarias deingresos para poder mantener su competitividad.
Todos aquéllos dedicados a la conservación y aldesarrollo esperan que dichos mercados puedancontribuir a la protección y restauración forestal
y convertirse en una fuente sostenible de nuevos
ingresos para las poblaciones pobres que dependen
de los bosques y que son propietarias de una porción
cada vez mayor de los bosques del mundo y se
encargan de su administración. Los funcionarios
gubernamentales y los líderes industriales ycomunitarios están comenzando a evaluar su posición
estratégica en estos mercados: identificando sus
oportunidades, los riesgos estratégicos de la accióno inacción, y las repercusiones de su relativa
competitividad. Quienes han examinado estas
opciones en detalle consideran que sigue existiendola necesidad de una evaluación de las políticas y deexperiencias piloto para probar instrumentos yaprender junto con los participantes locales.

16

Los numerosos tipos de mercados y sistemas de pagodiferentes pueden clasificarse en cuatro categorías:(1) sistemas públicos de pago a los propietarios
forestales privados para mantener o aumentar losservicios ecosistémicos; (2) comercio libre conforme
a un límite reglamentario superior o inferior;(3) transacciones privadas organizadas
independientemente; y (4) etiquetado ecológico de los
productos forestales o agrarios, una forma indirecta
de pago por los servicios ecosistémicos. Existen
numerosos ejemplos de cada tipo de mercado en
los países en desarrollo y desarrollados.
Los servicios de protección de cuencas hidrográficas– tales como la regulación de caudales, calidad del agua,suministro de agua y protección de hábitats – estánampliamente reconocidos y, por cierto, representan
una motivación primaria para establecer muchos
parques y bosques nacionales. Aproximadamente el
30 por ciento de las ciudades más grandes del mundo
dependen actualmente de los bosques para su
suministro de agua. Los mercados de servicios decuencas hidrográficas son específicos para el sitio
y el usuario, y actualmente están limitados a lassituaciones en que los beneficiarios “corriente abajo”,
tales como los generadores de energía hidroeléctrica,
irrigadores, sistemas municipales de suministrode agua y la industria, reciben el impacto directo
e importante del uso de las tierras “corriente arriba”.
Los sistemas públicos de pago predominan por su
escala (pero no por su cantidad), y dichos pagos
pueden efectuar una contribución importante a
los ingresos locales y ofrecer también un incentivo
suficiente para mantener la cobertura boscosa. En
Costa Rica, por ejemplo, los terratenientes en zonasde cuencas hidrográficas de importancia crítica reciben
entre US$ 30 y US$ 50 por hectárea por año y en
México se están planeando pagos de escala similar.
En los Estados Unidos, los pagos del gobierno porla protección de ecosistemas oscilan entre US$ 25 y
US$ 125 dólares por hectárea por año. Los tratos
privados organizados independientemente parecen
ser limitados, aunque la información es en su mayor
parte de dominio privado y nunca se ha efectuado
una evaluación completa de este tipo de transacciones.
Los sistemas de comercio libre, tales como los bancos
de mitigación para humedales, son poco numerosos
y están limitados principalmente a los países
desarrollados.

ITTO

Los muchos y diversos servicios de protección de labiodiversidad – tales como la conservación de hábitats
y especies, información genética y química, y funciones
ecosistémicas como la polinización – están cobrando
un creciente reconocimiento por su importancia
crítica para muchos sectores de la economía, tales
como las pesquerías comerciales. Los mecanismos demercado incluyen mercados de tierras para hábitats
de gran valor de biodiversidad, pagos para usos no
consumistas tales como el ecoturismo, derechos
y créditos comerciables dentro de un máximo
reglamentario por conversión de hábitat, y productos
con etiquetado ecológico tales como el café cultivado
bajo sombra, plantas medicinales y otros productosbotánicos provenientes de bosques naturales.
El comercio en estos mercados de productos estáprosperando; por ejemplo, los fármacos derivados
de compuestos encontrados originalmente en losbosques tienen un valor de miles de millones dedólares estadounidenses por año, pero estos beneficios
rara vez llegan a los pueblos de los bosques. Pese a laevolución del mercado de bioprospección, todavía noha generado cantidades importantes de inversiones
directas o de pagos para las poblaciones locales. Unaencuesta mundial realizada recientemente reveló 72
casos de mercados de biodiversidad en 33 países, 63
de los cuales se encontraban en 28 países tropicales.
Más del 70 por ciento de estos mercados eraninternacionales. Los expertos estiman que en
EE.UU. solamente, en los últimos años, se han
invertido más de 2.000 millones de dólares enservidumbres para la conservación de hábitats.
De todos los servicios del ecosistema forestal, elsecuestro de carbono es el que ha despertado el mayor
entusiasmo e interés en los últimos años. El consenso
científico actual es que la actividad humana hacontribuido al calentamiento del planeta y que losbosques tienen una función primordial tanto en lasemisiones mundiales de carbono como en la prestaciónde servicios de secuestro y almacenamiento del mismo.
Los segmentos del mercado en que los bosquestropicales pueden tener una función incluyen laforestación y reforestación conforme al Mecanismo
de Desarrollo Limpio (MDL) del Protocolo de Kyoto(el sistema mundial de límite máximo y comercio),y una diversidad de opciones de uso de la tierra
que son de interés para los inversores por medio delcomercio no sujeto al Protocolo y los pagos voluntarios
por los responsables de las emisiones para lograr
la neutralidad con respecto al carbono. Dadas las
restricciones impuestas en las compensaciones

forestales de las emisiones de carbono y la estimaciónde un valor de US$ 10 por tonelada, se anticipa que
el MDL generará un máximo de 300 millones dedólares por año para actividades de forestación yreforestación en el primer período de compromiso(2008-2012). Las estimaciones del valor dólar que
representa el comercio de carbono forestal son muy
diversas y, en definitiva, dependen de la magnituddel mercado, la cual a su vez depende de las normas
finales aprobadas con arreglo al Protocolo de Kyoto,las reglamentaciones comerciales europeas y lossistemas alternativos aplicados por EE.UU.

Conclusiones principales
Características del mercado
Actualmente, el valor total de los pagos directos
por servicios ecosistémicos en los países tropicales
es limitado, pero ha aumentado drásticamente enel último decenio y es importante especialmentepara los productores de bajos ingresos: los serviciosde los ecosistemas tropicales todavía no son productos
básicos; más bien se comportan como mercados
especializados de productos de valor especial para
un grupo limitado de compradores. Los pagos por
servicios ecosistémicos, en general, cubrirán sólo una
pequeña parte de los costos de la ordenación forestal
sostenible y serán suficientes para financiar bosquesmanejados únicamente con fines de protección,
donde los costos de oportunidad son muy bajos, por
ejemplo, en zonas remotas en las que la producción
forestal no es económicamente viable y las alternativas
de uso de la tierra son limitadas.
En términos muy generales, el valor anual de los pagos
directos a los mercados de servicios de ecosistemas
forestales en los países tropicales es del orden delos cientos de millones de dólares estadounidenses.
Los pagos indirectos por medio de productos con
etiquetado ecológico, tales como la madera certificada,los productos de cultivos forestales tropicales y otros
productos forestales no maderables, son mucho
mayores y generan aproximadamente varios miles
de millones de dólares cada año. En conjunto
representan cifras importantes, pero son modestas
en comparación con el comercio internacional deproductos primarios de maderas tropicales (trozas,
madera aserrada, chapas y madera contrachapada),
que representan actualmente unos 8.000 millonesde dólares estadounidenses por año, el comercio
total de productos de madera de los países tropicales,de un valor de 20.000 millones de dólares al año,

17

ITTO

y el valor mucho más elevado de los mercados
nacionales de madera y productos forestales nomaderables. Los pagos directos e indirectos porla totalidad de servicios ecosistémicos son deaproximadamente la misma magnitud que las
inversiones anuales totales en la conservación
forestal efectuadas por gobiernos, organizaciones
filantrópicas y organizaciones intergubernamentales,
que oscilan entre 2.000 y 2.500 millones de dólares
estadounidenses por año.
Se anticipa que en los próximos veinte años, losmercados de servicios de ecosistemas forestales
aumentarán tanto en los países en desarrollocomo en los países desarrollados: existe un enorme
potencial para aumentar la demanda y los pagos por
servicios de las cuencas hidrográficas. Se prevé que lademanda de agua se duplicará, o incluso triplicará,en los próximos 50 años y buena parte de dichoaumento se producirá en los países en desarrollo.
Los usuarios de los sectores de la producción y laindustria están aprendiendo que las inversiones hechas
en la protección de cuencas hidrográficas pueden
resultar mucho más económicas que las inversiones
en nuevas instalaciones de tratamiento. El desarrollodel mercado de carbono tiene un gran potencial,pero dependerá de normas aún imprevisibles demitigación del cambio climático a nivel internacional.
Es probable que los mercados de productos con
etiquetado ecológico para exportación y para
consumidores urbanos de países de ingresos medios
constituyan el componente de crecimiento másacelerado de los mercados de biodiversidad.
Los gobiernos cumplen una función deimportancia crítica como principales compradores
directos de muchos servicios ecosistémicos y como
catalizadores para muchos sistemas de pago directodel sector privado: dado que muchos servicios
ecosistémicos son bienes públicos, en general senecesita la intervención del gobierno para constituir
un mercado. Ello puede implicar el pago directode un servicio, el establecimiento de derechos depropiedad o la instauración de reglamentos que
fijen topes máximos y rijan los sistemas decomercialización. Puesto que estos mercados están
caracterizados por elevados costos de transacción
para vincular a compradores y vendedores y por
la falta de instituciones de mercado especializadas,
normalmente requieren la intervención del gobiernopara ayudar a superar estas dos limitaciones
importantes del desarrollo del mercado. Los pagos

18

indirectos, por medio de sistemas de certificación,
están principalmente en manos de compradores
privados.
En la mayoría de los casos, los pagos de servicios
ecosistémicos cubren sólo una parte reducida
de los costos de la ordenación forestal racional,
pero dicha parte tiene potencial para actuar decatalizador: en general, los precios de los servicios
ecosistémicos no son suficientes para justificar laconservación forestal en zonas en que los costos deoportunidad de la tierra son moderados o elevados.
No obstante, todo parece indicar que dichos pagos
pueden ejercer un efecto catalizador desproporcionadamente elevado en el establecimiento y laordenación de los bosques. Incluso pagos modestos,efectuados de forma fiable durante varios años,
pueden llevar a un aumento de los ingresos netos
que permita la viabilidad de las empresas forestales,justificando así la restauración de las tierras
degradadas y mejorando los medios de sustentode la población pobre.
Cuestiones estratégicas
Los responsables de la formulación de políticas
relativas a los bosques tropicales están comenzando
a evaluar su posición competitiva estratégica con
respecto a la opción de mercados de servicios
ecosistémicos. Les interesa enormemente saber sideben procurar competir en los mercados mundiales,y cuándo hacerlo, así como qué tipo de enfoques
comerciales son razonables dentro de su propio
contexto nacional. Se enfrentan así a una serie decuestiones fundamentales en sus esfuerzos por evaluarcorrectamente y promover estas opciones:
1) los derechos de propiedad y los marcos
jurídicos nacionales son necesarios para
permitir el desarrollo de los mercados deservicios ecosistémicos, pero en la mayoría delos países productores no están correctamenteestablecidos: con frecuencia, el reconocimiento
de los derechos de propiedad y la reforma de losmarcos jurídicos son actividades costosas y muy
discutidas a nivel político, pero son fundamentales
para el establecimiento de los sistemas de pago detodo tipo. Lamentablemente, las zonas forestales
de los países en desarrollo, en la actualidad,
están caracterizadas por reivindicaciones detierras superpuestas y conflictivas y por tensiones
históricas con respecto a los derechos de lospueblos indígenas y otras comunidades. En laITTO

mayoría de los lugares, será necesario negociar
el apoyo político de los interesados clave para
poder establecer nuevos mercados;
2) es poco probable que estos mercados efectúen
una contribución sumamente importante a la
reducción de la pobreza, a menos que exista
un gran empeño por reconocer los derechos
y formar mercados con miras a brindar un
acceso equitativo a los productores de servicios
de ecosistemas forestales tropicales de menores
ingresos: como suele suceder con el desarrollo
de todo mercado nuevo, las reglas que rigen el
mercado suelen estar determinadas por los sectores
más poderosos de la sociedad, que tienen el capitaly la capacidad para invertir en la formulaciónde las reglas. En cierta medida, esto ya está
sucediendo con el mercado mundial del carbono.
Es preciso identificar y examinar las repercusiones
que tienen los nuevos mercados, lasreglamentaciones y las normas del etiquetado
ecológico para los productores de bajos ingresos; y3) se necesitan nuevas instituciones comerciales
para reducir los costos de transacción y losriesgos financieros: uno de los principales
desafíos del desarrollo del mercado de servicios
ecosistémicos es garantizar el establecimiento
de instituciones cruciales a fin de reducir loscostos de transacción y brindar una intermediación
entre compradores, vendedores, inversores,
certificadores y otros grupos de importancia
clave en la cadena de valor. Si no se toman
medidas apropiadas para ello a nivel nacionale internacional, muchas oportunidades demercado simplemente no se concretarán,especialmente en los países más pobres y paralos productores forestales de menores ingresos.
Brechas de conocimientos
Es poca la información existente sobre los mercadosde servicios ecosistémicos, y la capacidad de evaluacióny desarrollo de mercados es limitada. El progreso se ve
impedido por la falta de comprensión y apoyo político
de los principales interesados. Pocas entidades
nacionales, estatales o municipales tienen acceso
a la información necesaria para dar forma a lanormativa en materia de diseño de mercados.
La mayoría de los conocimientos expertos sobre
el mercado existen solamente en el sector privado,
generalmente en compañías y consultores motivados
por la oportunidad de promover negocios comerciales.
En los casos en que se comercializan diseños parasitios específicos, el precio de los servicios refleja elhecho de que la mayoría de los conocimientos y dela demanda comercial se encuentran actualmente
en los países industrializados. Si bien se observa
un aumento en la disponibilidad de conocimientos
técnicos para la medición de servicios ecosistémicos
por medio de las universidades, el acceso o aplicación
en un proyecto específico suele ser difícil para losgobiernos u organizaciones no gubernamentales.
A fin de concretar el potencial de los mercadosde servicios ecosistémicos en los países tropicales,será preciso que las organizaciones líderes que
promueven la gestión forestal cubran dicha brechade conocimientos. En particular, los responsables
de la formulación de políticas y los coordinadoresde programas necesitan:•

asesoramiento técnico objetivo para identificar las
oportunidades y los riesgos del uso de diferentes
instrumentos de mercado, y formularlos de modoque sean eficaces, eficientes y equitativos;•

oportunidades para intercambiar experiencias,
perspectivas y lecciones con sus pares de otros
países y regiones sobre los marcos jurídicos ynormativos más apropiados;•

datos prácticos sobre los costos de producción,
transacciones, establecimiento y administraciónde diferentes mecanismos de mercado; y•aumento de capacidades con el objeto dedesarrollar sofisticados conocimientos nacionales
en materia de análisis, diseño y aplicación demercados de servicios ecosistémicos en los sectores
público, privado y civil.

Los mercados de servicios ecosistémicos ofrecen la
posibilidad de toda una nueva gama de poderosos
incentivos para la conservación y restauración de losbosques tropicales y nuevas oportunidades de ingresospara los productores forestales. No obstante, aún noestá claro qué productores, consumidores y tipos derecursos forestales serán los verdaderos beneficiariosdel desarrollo de tales mercados. Tampoco está claro
en qué condiciones será más efectiva la creaciónde los mercados de servicios ecosistémicos como
instrumento normativo para el logro de las metasde la política forestal. La mayoría de los mercados
aún son incipientes y su desarrollo ulterior exigirá
la acción concertada de los gobiernos. Las decisiones
que se tomen en los próximos años determinarán
la eficacia, eficiencia y equidad de los mercados
por décadas.

19

ITTO

20

ITTO

1 Introduction
The many ecosystem services provided by forests –watershed protection, biodiversity conservation andcarbon sequestration, for example (see Table 1) – aregaining increasing attention from governments andthe forest industry, as well as from private citizens.
People are becoming aware of the dangers and costsof allowing forest services to be degraded or lost.
Forest degradation and conversion can have local
impacts, such as floods and landslides, as well as
broader impacts, such as global climate change.
This growing awareness is drawing attention to
the economic benefits of healthy forest ecosystems,
benefits that until recently have often been taken
for granted. Indeed, as human demands increase
and natural resources become scarcer, those whobear the costs of degradation – such as downstream
water utilities, local governments, private insurers andsociety as a whole – are exploring opportunities toreduce these costs. Forest owners are beginning to seek
compensation for the costs of maintaining healthy
forests. The linkage between degraded ecosystems,
rural poverty and human health is also becoming
more apparent.
At the same time, there is greater awareness of thelimitations of government protection and regulatory
approaches to forest conservation. Approximately
15 million hectares of natural forest were lost eachyear during the 1990s, the vast majority of it intropical countries (FAO 2001). Frustration withtraditional approaches is spurring action by a broad
range of stakeholders. Private companies, individuals,
non-governmental organizations (NGOs) andcommunities are getting involved, driven by
the desire to reduce costs, capture new income,
improve public relations, manage risks and protect
current well-being. This action is being backed
up by a willingness to pay for the protection of
ecosystem services.
A recent global survey found almost 300 new cases of
payments in all continents (See Box 1). For example,
a private Costa Rican utility company voluntarily
pays into a fund that provides money for private
upstream landholders to increase forest cover.
This reduces sedimentation, thus providing
sufficient water flow for hydroelectricity generation.
In Paraguay, AES, an international power company,
paid US$2 million to form a protective reserve forone of South America's last remaining areas ofundisturbed dense tropical forest. This helps to1

Table 1 Major forest ecosystem services
•
•
•
•
•
•
•
•
•
•
•
•
•

Purification of air and water
Regulation of water flow
Detoxification and decomposition of wastes
Generation and renewal of soil and soil fertility
Pollination of crops and natural vegetation
Control of agricultural pests
Dispersal of seeds and translocation of nutrients
Maintenance of biodiversity
Partial climatic stabilization
Moderation of temperature extremes
Wind breaks
Support for diverse human cultures
Aesthetic beauty and landscape enrichment

Source: Daily 1997

offset carbon emissions. In Karnataka State, India,
farmers have formed a fund with the assistance ofan NGO, the Government of India and the Swiss
Agency for Development Cooperation to help otherlocal farmers with watershed protection activities suchas regenerating forest and maintaining fallow land.
Increasingly, public authorities – particularly when
faced with budgetary crisis – require those who mostobviously benefit from ecosystem services to provide
financing. This is the case in Colombia, for example,
where hydroelectric and water utilities are requiredby law to allocate a fixed percentage of revenues to an
ecosystem fund. The fund pays private landowners forwatershed management and purchases hydrologicallysensitive lands for management by government
agencies. In addition to direct-investment approachesof this nature, some governments are experimenting
with new fiscal approaches. In Brazil, a number ofstates have pioneered a new tax allocation system
under which a percentage of state tax goes directly tomunicipalities that actively protect watershed areas.
Despite this flurry of interest and activity, payments
and markets for ecosystem services are a nascentactivity. The innovations remain limited in scale,scope and impact. While this reflects a growing
global trend, it is not yet clear what promise markets
for ecosystem services hold for tropical forest countries
and industries. Most of the activity to date has been
in more developed countries – where biophysicalscience tends to be stronger and legal frameworks andinstitutions permit more sophisticated markets todevelop. That being said, a number of interestingcases are under way in developing countries andmarkets are evolving quickly and often in seemingly
unpredictable ways.

21

ITTO

Box 1 The growing number of markets
for ecosystem services
A global review of markets for forest environmental services conducted in 2001 identified
over 280 cases of actual and proposed payments. These include 75 deals for carbon
sequestration, 72 for biodiversity conservation,
61 for watershed protection, 51 for landscape
beauty and 28 for sales of ‘bundled services’.
These cases were drawn primarily from developing countries in the Americas, the Caribbean,
Africa, Asia and the Pacific.
The study suggests an impressive expansionof markets and also highlights the tremendous
variety of market structures. Schemes differ
according to the number and type of participants involved, the payment mechanisms
employed, the degree of competition and theirlevel of maturity.
Source: Landell-Mills & Porras 2002

Tropical forest producers in the legal trade arebattling to remain competitive with illegal operatorsand natural forest producers are losing market shareto fast-growing plantations – many outside tropicalareas. While there is growing demand for certified
wood, certification often raises costs without bringing
greater returns. The legal tropical industry is searchingfor new ways to reap financial returns from theirforests and remain viable enterprises. Some
environmental groups hope that markets forecosystem services will provide forestry with
sufficient additional income to compete more
effectively with alternative land-uses, such as
soybean farms in the Brazilian Amazon or oil palm
plantations in Malaysia, and to finance large-scale
restoration of degraded forest lands.
These great but uncertain expectations are driving
producer country governments to investigate theirinterests and options in these markets. Most of theinterest, finance, and – at least in the case of carbon– definition of market rules to date has originated in
the more developed, temperate countries. What isin this for tropical developing countries? Can they
design and influence markets so that they can benefit
fairly? Will these markets be a significant source of
new financing – or will this pass as another fad,
distracting from more fundamental obligations?

22

At the same time, industrialized country governments
are beginning to assess their own interests andexposure. Will they be expected to finance thecosts of protecting globally significant biodiversity?
Will their industry remain competitive if producer
country industry rights itself? Will they be expected
to finance the costs of building legal and regulatoryenvironments in developing countries to permit
fair market trade?
And, of course, indigenous communities and otherlow-income forest people have their own interestsand concerns. Will these markets be used as wedges
to further alienate them from their traditional lands?
Or could perhaps these markets be a driver forincreased tenure security and incomes?
The purpose of this paper is to take a modest step
towards helping policy-makers assess these questions
by providing a preliminary assessment of the status
and potential for markets for ecosystem services tocontribute to tropical forest conservation. The termsof reference are provided in Annex 1. Data on thesemarkets are difficult to attain, either because they are
proprietary or because the market is evolving quickly
and no data on these topics are collected regularly bygovernments or intergovernmental organizations.
The analysis depends upon the limited available
secondary literature and on information and materials
provided by colleagues in the Katoomba Group,
a network of global innovators in ecosystem service
markets. A more substantive analysis will require
an organized effort to collect new primary data.
Section 2 of this paper reviews the diverse reasonsfor growing interest in ecosystem service markets
in tropical countries. Section 3 assesses the status ofmarkets for the major ecosystem services: biodiversity
conservation, watershed protection and carbon
sequestration and storage. Section 4 assesses emerging
markets from the perspective of forest owners andproducers, including commercial timber producers,
forest and farming communities, and government
forest agencies. Section 5 steps back from thedescriptive assessment of these markets to raise someof the important strategic issues facing tropicalcountries in positioning themselves to participate(or not) in ecosystem service markets. This addresses
issues of international competitiveness, legal andregulatory frameworks, property rights and thepolitics of protecting ecosystem services, domestic
equity concerns, and the need to build institutions
to reduce transaction costs and financial risks.
Key findings on the scale and characteristics of,and potential future markets for, forest ecosystemservices, and challenges for their future development,
are summarized in Section 6.

ITTO

2 Reasons for interest in
ecosystem service markets
Historically, it has been the responsibility of
governments to ensure access to ecosystem services
where these are scarce relative to demand. The main
instruments have been direct forest management bygovernment agencies, regulation of private forest use,
public investment to improve private management,or targeted taxes and subsidies (Table 2). But inrecent decades several factors have stimulated thoseconcerned with tropical forest ecosystem services
to begin exploring ways to create market-based
instruments. These factors include: lack of financial
incentives for providing forest ecosystem services;concern about the sustainability of commercial
timber production in natural tropical forests; theneed to find new means to finance forest conservation;and the potential contribution of such markets tolink environmental management to economic
development and poverty reduction.

Lack of financial incentives
to provide ecosystem services
Most ecosystem services are considered ‘public
goods’ – positive benefits resulting from good
forest management that can be enjoyed by all.
Under present property rights and institutions,those forest managers responsible for providing

benefits cannot exclude the beneficiaries fromenjoying the service (‘non-excludable’), and thebeneficiaries are not in competition with one
another (‘non-rival’). This undermines the formationof markets, since beneficiaries have no incentive to
pay suppliers. Thus, in most of the world, forest
ecosystem services are not traded in markets andhave no ‘price’. The failure of forest owners andproducers to capture financial benefits fromconserving ecosystem benefits leads to the overexploitation of forest resources and the undersupply of ecosystem services.
Thus, where the opportunity costs of forest land for
agricultural enterprises, infrastructure and humansettlements are higher than the use or income valueof timber and non-timber forest products (NTFPs),
forest will be cleared. Such income cannot usually
generate enough income to forest owners tojustify natural forest conservation. In some cases,
deforestation occurs because of perverse policy andinstitutional incentives – such as credit, agriculturaland logging subsidies – or land tenure rules (Nasi etal. 2001). But even in the absence of perverse public
policies, forest environmental services would still be
under-supplied by the market, in most cases due totheir nature as ‘externalities’ or ‘public goods’. Forest
owners and producers ignore the value of ecosystemservices in making decisions about land-use andmanagement because they receive little or no
direct benefit from them.

Table 2 Instruments to promote forest ecosystem services
Lead actors

Instrument

ExamplesWho pays?

Government

Public direct managementof forest resources

National forests and forest
protected areas

Government (taxpayers)

Government

Regulation of private
forest resource management

Harvest permits, rules
on logging methods

Private forest owners& managers

Government

Support services for forest
owners/users’ own initiatives

Technical assistance programfor forest owners to improve
management

Government or NGOs

Government

Public pricing policies to reflectecosystem costs and benefits

Lower tax rate on forested land

Mixed; indirect incentive(outcome not measured)

Government/marketOpen trading deals undera regulatory cap or floor

Carbon trading under
the Kyoto Protocol

Consumers or producers
subject to cap (least cost)

Government/marketPublic payments to private
land and forest owners tomaintain or enhance
ecosystem services

Agro-environmental payments
for forest conservation
easements on farms

Government

MarketSelf-organizing private deals

Payments by a waterbottling company to
upstream watershed managers

Private company, NGO,
community (user)

MarketEcolabelling of forest
or farm products

Forest certification

Consumer, intermediary

23

2

ITTO

Economists and others have argued that mechanisms
are needed by which forest and other resource owners
are rewarded for their role as stewards in providing
ecosystem services. Anticipation of such income
flows would enhance the value of forest assets andthus encourage their conservation. Compared toprevious approaches to forest conservation, marketbased mechanisms promise increased efficiency andeffectiveness, at least in some situations. Experience
with market-based instruments in other sectors has
shown that such mechanisms, if carefully designed
and implemented, can achieve environmental
goals at significantly less cost than conventional‘command-and-control’ approaches, while creating
positive incentives for continual innovation andimprovement. Where the benefits and costs ofconservation vary spatially, market-based instruments
seek out and concentrate on higher-benefit cases(Pagiola et al. 2002).

The search for sustainable incomesin the tropical timber industry
The tropical timber trade has undergone dramatictransitions in the last decade. According to ITTO
(2003), the export value of primary products (logs,
sawnwood, veneer, and plywood) from natural forests
in ITTO producer countries has declined some 40%– from US$13 billion to US$8 billion per year since1990 (Figure 1). At the same time there has been
rapid growth in secondary products exported –up some 200% since 1990, from US$1.5 billion to
US$5 billion, and in plantations – up from 28 million
to over 60 million hectares. Plantation products are
the majority basis for the secondary product industry,and plantation products (including pulp, paper andreconstituted panels) now constitute the majorityof the value of the aggregate tropical timber trade.

Figure 1 Tropical timber export trends
18.0
16.0
14.0

US$ billion

12.0

SPWP

10.0
8.0
6.0

ITTO primary products

4.0
2.0
0.0
1990

1991

1992

1993

1994

1995

1996

1997

ITTO primary products

ITTO primary products = plywood, sawnwood, veneer, logs
Source: ITTO (2003)

24

1998

1999

2000

2001

2002

SPWP

SPWP = secondary processed wood products: furniture,moulding, woodwork, etc – excludes pulp, paper andreconstituted panels

ITTO

Table 3 Estimated financial flows for forest conservation (US$)

Sources of finance

Sustainable forest
management(early 90s)

Sustainable forest
management(early 2000s)

Protected areas(early 90s)

Protected areas(early 2000s)

Official development
assistance2 billion–
2.2 billion

1 billion–
1.2 billion

700 million–
770 million

350 million–
420 million

Public expenditureNA

1.6 billion

NA

598 million

Philanthropy*

85.6 million

150 million

NA

NA

Communities**

365 million–730 million

1.3 billion–2.6 billion

NA

NA* Under-estimates self-financing and in-kind NGO contributions** Self-financing and in-kind contributions from indigenous and other local communities. Estimated community-managed forests in 1990: 100 million hectares.
NA = not available

Source: Khare (2003)

During the same period, the problem of illegal
logging, the largely stagnant prices for tropicaltimber products from natural forests, the widespreadgovernment practice of subsidizing plantations,and increasing standards of practice, have all madesustainable production from natural forests afinancially challenging proposition. Legal producers
from natural forests are finding it difficult to competewith illegally harvested wood and plantation products.
In this climate, legal producers with natural forests are
eagerly searching for additional sources of revenue.

Need for new means to financeforest conservation
Until recently, the financing and management of
natural protected areas remained the responsibilityof the public sector. There are presently 102,102
protected areas worldwide, covering an area of
18.8 million km2, of which 17 million km2, or 11.5%of the Earth’s terrestrial surface, are forests. Two-thirdsof these have been assigned to an IUCN management
category of protection. However, over the last few
decades, severe cutbacks in the availability of publicresources have undermined the effectiveness of suchstrategies, and budgets for government protection andmanagement of forest ecosystem services are declining(Table 3). Land acquisition and compensation for lostresource-based livelihoods are both often prohibitively
expensive. For example, it has been estimated that
US$1.3 billion would be required to compensate
people fully in just nine Central African parks (Cernea& Schmidt-Soltau 2003). At the same time, public
responsibility for nature protection is shifting withprocesses of devolution and decentralization. Protectedareas in the tropics are mostly dependent for financing
on international public or private donors. But the
donation-driven model is not sustainable, either
economically or environmentally (Swingland 2002).

Sovereignty is an issue, as about 30% of private forest
concessions in Latin America and the Caribbean
and 23% in Africa are already foreign-owned.
Moreover, the dominant model of excluding
people from natural habitats which are targeted
for conservation disenfranchises them. In India,
for example, 30 million people are targeted forresettlement from protected areas (Khare et al. 2000).
An estimated 240 million rural people live in theworld’s high-canopy forest landscapes. Population
growth in the world’s remaining ‘tropical wilderness
areas’ is twice the global average (Cincotta &Engelman 2000). In Latin America, for example,
80% of all forests are located in areas of medium
to high human population density (Chomitz 2003).
Over a billion people live in the 25 biodiversity‘hotspots’ identified by Conservation International;in 16 of these hotspots, population growth is higher
than the world average (Cincotta & Engelman 2000).
There is an urgent need to identify alternative
conservation systems that respect the rights of forest
dwellers and owners and that address conservation
objectives in the 90% of forests outside public
protected areas. Markets for ecosystem services
potentially offer a more efficient and lower-cost
approach to forest conservation.

Potential contribution to economic
development and poverty reduction
Roughly a quarter of the world’s poor and 90% of
the poorest depend substantially on forests for theirlivelihoods (World Bank 2001; see Box 2). In China,
most forests are found in officially designated ‘poor
countries’ (Lele et al. 2002). In India, two-thirds offorests are in economically poorer tribal areas; some
100 million people are estimated to be forest dwellers,
while another 275 million live in the vicinity of

25

ITTO

forests (Kumar & Saxena 2002). Finding new sourcesof forest income for these populations is importantfor economic development and poverty reduction,
as well as to conserve forests as populations continue
to rise, as is predicted in low-income tropical countries.
Moreover, as a result of public forest tenure reforms
worldwide, indigenous and other rural communities
now own or control a quarter of all natural forests
in tropical developing countries, and this share is
projected to double by 2020 (Table 4; White &Martin 2002). Agroforestry on small-scale farms andcommunity forest plantations are also expanding

rapidly and offer opportunities to promote patterns ofagricultural development that also enhance ecosystemservices. A major challenge is to translate these assets
into new streams of income and wealth at a time
when prices for timber, pulpwood and other products
are relatively stable or declining. Markets for ecosystemservices could potentially provide financial benefits
from the sale of ecosystem services, improved humancapital from associated training and education, andstrengthened social capital due to investment inlocal cooperative institutions.

Box 2 Rough estimates of forest-dependent poor
Grouping

Estimated population

Indigenous peoples who depend primarily on natural (usually closed
canopy) forests for their livelihoods (hunting, gathering, shifting cultivation)

60 million

Rural people who live in or at the margin of natural forests or woodlands
who rely on the forest as a safety net or for supplemental income

350 million

Smallholder farmers who grow farm trees or manage remnant
forests for subsistence and income

500 million–1 billion

Artisans or employees in formal or informal forest-based enterprises

45 million

Estimated total

0.955–1.455 billion

Sources: Calibre & SCC (2000); Krishnaswamy & Hanson (1999)

Table 4 Forest tenure in tropical producer countries
Country

BrazilDemocratic Republic of Congo
Indonesia
Peru
India
Sudan
MexicoBolivia
Colombia
Tanzania
Myanmar
Papua New Guinea
Cameroon
Central African Republic
Gabon
GuyanaTotal
Source: White & Martin (2002)

26

Public land (million hectares)

Private land (million hectares)

Administeredby government

Reserved forindigenous &community groups

Indigenous/
community

Individual/
firm

423.7
109.2
104.0
no data
53.6
40.6
2.75
28.2
no data
38.5
27.1
0.8
22.8
22.9
21.0
30.9
926.05

74.5
0.0
0.6
8.4
11.6
0.8
0.0
16.6
no data
0.4
0.0
0.0
0.0
0.0
0.0
0.0
112.9

0.0
0.0
0.0
22.5
0.0
0.0
44.0
2.8
24.5
0.0
0.0
25.9
0.0
0.0
0.0
2.8
122.5

57.3
0.0
0.0
no data
5.2
0.0
8.3
5.4
no data
0.0
0.0
0.0
0.0
0.0
0.0
0.0
76.2

ITTO

3 Status of main ecosystemservice markets
The past decade has seen the widespread emergenceof systems of financial payments for ecosystemservices (Landell-Mills & Porras 2002). This section
provides an overview of the types of ecosystem service
markets. It then describes, for the major ecosystemservices (watershed protection, biodiversity protection,and carbon sequestration and storage), the types of
payment mechanisms being used, some examples,the scale of current markets, and the potential formarket growth. The final sub-section considers theoverall scale of ecosystem service markets relative toother forest financial flows. The discussion touches
upon critical strategic issues related to international
competitiveness, legal frameworks, the politics of
ecosystem service markets, equity concerns, and thechallenges of institutional development. These issues
are addressed in detail in Section 5.

Types of ecosystem service markets
Four broad types of market mechanisms forecosystem services can be distinguished, in declining
order of the level of government involvement:
1) public payments to private land and forest
owners to maintain or enhance ecosystemservices: in this system, governments determine
what ecosystem services are priorities forprotection, and pay landowners or managers
directly to manage their land and forest for thispurpose. Examples of public payment instruments
include: permanent conservation easements(guarantees that such land will not be logged
or farmed); contract farmland set-asides forconservation (such as North American andEuropean set-aside programs); programs to
co-finance investments in afforestation orsustainable forest management (SFM); andpayments for the confirmed presence ofendangered wildlife species. Generally, payments
are made to individual landholders, but may
also be paid to common-property forest ownergroups or organized watershed users. Payments
may be standardized or negotiated individually;2) open trading under a regulatory cap or floor:
in this system, a government defines a mandatorylevel of a specific ecosystem service to be provided,
but to achieve this level the regulated party
can choose either to comply directly with therequirement or to pay others – who are in aposition to supply the service more cheaply –to do so. Essentially, government regulation
creates demand, but independent buyers andsellers can respond flexibly by trading with one
another. For example, to ensure no-net-loss ofhigh-biodiversity wetlands, a system of ‘tradable
development rights’ may be put in place. Then
any land developer who wishes to convert awetland must pay another landowner to restore
a similar type and quality of wetland. Anotherexample is carbon emission offset trading,whereby carbon polluters face a regulatory
cap on emissions that they can meet either
by reducing their own emissions or by paying
other parties to do so or to sequester anequivalent amount of carbon;
3) self-organized private deals: this approach
involves direct, usually closed, transactions
between offsite beneficiaries of forest services andforest landholders responsible for the services.
Instruments include the purchase of development
rights to land and direct payment schemes forecosystem services. For example, a company sellingbottled water may pay upstream landowners
to use best management practices on theirland to ensure their supply of quality water.
A conservation NGO may pay the owners ofhigh-biodiversity-value forest for a long-term‘conservation concession,’ analogous to alogging concession, to be managed explicitly
for conservation. Government agencies may
play a minor role in facilitating such deals
through appropriate contract law; and4) ecolabelling of forest or farm products:
the fourth approach is also handled by private
actors, but the payment for ecosystem services
is embedded in a traded product. Producers
sell forest or farm products produced undermanagement systems certified to enhance forest
ecosystem services. Products are sold to consumers
who prefer to support suppliers who are goodenvironmental managers. But there need be no
direct transaction between the consumer and the
producer of ecosystem services; rather, third-party
certification or marketing agents are involved.
Examples include Forest Stewardship Council
wood and non-wood product certification, and‘salmon-safe’ labelled products from farmers in
the northwest US that maintain forest protectionof waterways important for salmon.

27

3

ITTO

The actual payments for ecosystem services to forest
owners or producers for providing ecosystem services
may take various forms: direct payment of a fixedsum, a fixed sum per hectare, or a fix sum per unit ofecosystem service produced; payment of a premium
on farm or forest products sold; payment to acommunity or cooperative which in turn distributes
income or services to its members; or payment
to a third-party provider of technical assistance,
infrastructure or other services.

Watershed protection services
The hydrological services of forests are among themost valuable of the many ecosystem services fromforests – and indeed many if not most national parks
and forests have often been justified in part basedon their water benefits, as have many government
regulations limiting private land-use. Unfortunately,
the relationship between forest cover and the
production of ecosystem services is complex, variable
and in general not very well understood.2 Although
the relative importance of the ecosystem services
will depend upon the interests of landowners anddownstream beneficiaries, in general the mostimportant services include the regulation of water
flow, maintenance of water quality, control of erosion
and sedimentation, and maintenance of aquatic
productivity. These services are described in moredetail in Box 3.
Rationale for financial approaches
Public-sector agencies have traditionally made mostinvestments in watershed management, but that
may be changing. Typically, funds for watershedmanagement and protected areas come fromgovernment general revenues and are not basedon the value of water that these areas provide.
This approach has been effective in some places,
but there are also serious limitations. One problem
is that many governments have serious revenue
shortfalls caused by ineffective tax systems or
depressed economies. Burgeoning social welfare
demands compete with public-sector investments inprotected areas and natural resources management;
the latter have actually declined in many countries
during the past decade. A related problem is thatusing general revenues may not be equitable sincesome people and businesses use much more water
than do others.
2

The complex relationships between forests and the production of
ecosystem services, and of the many persistent myths regarding these
relationships, are covered in Pagiola et al. (2002), Kaimowitz (2000),
Johnson et al. (2001), Chomitz and Kumari (1998), and Calder (1998).

28

There is also growing recognition that traditional
watershed management projects, which rely either on
regulatory approaches or subsidies to encourage theadoption of soil conservation techniques on private
lands, have generally not proved effective (Kaimowitz
2000). Meanwhile, watersheds continue to degrade
and most water-users around the world pay less thanit costs to provide the service. Given these problems,
investors and policy-makers around the world are
exploring alternative, more effective and lower-cost
approaches to achieve watershed management goals(Tognetti 2001, Trust for Public Lands 1997).
Types of payment schemes and examples
The desirability and potential for financial incentive
mechanisms for watershed management varies widelyfrom place to place. Differences in the nature of theservice provided, who supplies it, who receives it,
how economically important it is, and what legal
and regulatory systems are in place are just a few ofthe factors that shape payment schemes. The maingroups of beneficiaries include hydroelectric power
generators, municipal water supply systems, irrigation
systems, industrial users, and populations in floodprone areas (Pagiola et al. 2002).
In most situations, forest-owner responsibilities toprotect ecosystem services are poorly defined, as are
the rights to be compensated for providing them.
This is complicated by the difficulty of tracing
the origin of the ecosystem service as one moves
downstream. Furthermore, water-related ecosystemservices are often thought of as public goods flowing
from a mixture of private and public lands, for which
downstream beneficiaries may thus be reluctant topay. For these reasons, governments often retain an
important or even predominant role in protecting
water-related ecosystem services. Still, a variety of
economic tools, including markets and other financial
mechanisms, are being used to help restore, maintainand enhance water-related ecosystem services onforestlands. Diverse examples are presented in Table 5.
Self-organized private deals: in some situations,private entities have developed their own mechanisms
to pay for watershed protection with little or nogovernment involvement. These cases are more
likely to be found where an ecosystem approach canprovide water services at a lower cost than traditional
treatment investments, where private interests needwater quality or flow that goes beyond regulatory
standards, or where there is no effective regulatory
system in place. Financing is from private sources but

ITTO

Box 3 Biophysical relationships that link forests, water and people
The biophysical relationships between forests and water are highly variable from one location to anotherdepending on climate, soils and vegetation types; there is no substitute for site-specific information.
The following are a few simplified basic relationships to keep in mind.
Forests can slow the rate of runoff in a watershed: forest vegetation takes up water and delays thetime to soil saturation (after which water pools or runs off the land into the nearest watercourse). Forest
soils also usually have a higher water storage capacity than non-forest soils (Falkenmark et al. 1999).
The more complex structure of the forest ground surface and underlying soil allows more efficient soil
infiltration compared to a deforested watershed. By slowing the rate of runoff, forests may help tominimize flooding in smaller watersheds (although they will not influence large-scale flooding).
Forests can reduce soil erosion and sedimentation of waterways: interception of rain and snowfall byforest canopies means that less water falls on the ground compared to a deforested watershed. Understorey
forest vegetation and leaf litter protects the soil from the impact of rain that does fall through the
canopy. Extensive root systems help hold soil more firmly in place and resist shallow-seated landslides
compared to clear-cut or heavily disturbed watersheds. Sedimentation levels in forested watersheds are
generally lower than in nearby agricultural or urbanized watersheds, but the degree depends on soil
types, topography and climate (Falkenmark et al. 1999).
Forest soils filter contaminants and influence water chemistry: forest soils are more waterlogged thanother soils (except wetlands) and contain more nutrients, allowing them to filter out contaminants(Falkenmark et al. 1999). Clearing and cultivating forest soils tends to greatly accelerate decomposition andrelease large amounts of nutrients that leach into groundwater, surface water runoff, and streams. For
example, streams in agricultural areas in temperate regions typically have nitrate levels ten times higher
than streams in nearby forested watersheds (which is also partly the result of fertilizer applications).
Forests reduce the total annual water flow in a watershed: contrary to popular opinion, forests
generally reduce the total annual streamflow (Calder 1998). This is because trees consume water fortranspiration, which is then evaporated back into the atmosphere. In general, trees consume more water thanother types of vegetation, including grasses and annual crops. The degree to which forests reduce streamflow,
however, depends on various factors. For example, shallow-rooted trees tend to use less water than deeprooted trees. Young regenerating forests tend to use much more water than mature and old-growth forests.
Forests can increase or decrease groundwater recharge: forest cover can lower groundwater recharge
because more precipitation is intercepted by vegetation and returned to the atmosphere through evapotranspiration. In some areas, however, removal of forest cover can result in a crusting of the soil surface
that reduces or prevents water infiltration and groundwater recharge (Falkenmark et al. 1999).
Forest loss shifts aquatic productivity: forest cover plays an important and complex role in sustaining
aquatic productivity (Revenga et al. 2000). Trees shade waterways and moderate water temperatures.
Woody debris provides fish with habitat while leaves and decaying wood provide nutrients to a widearray of aquatic organisms.
Forests may influence precipitation at a large regional scale, but the effect of forest cover on rainfall
in most areas is limited: the distribution of forests is a consequence of climate and soil conditions – notthe reverse. Some evidence suggests that large-scale deforestation has reduced rainfall in China and someclimate models indicate that extensive forest losses in Amazonia and Central Africa could lead to a drier
climate (Institute of Hydrology 1994). Still, afforestation is not an effective strategy to increase rainfall(Kaimowitz 2000).
Source: Johnson et al. (2001)

29

30

Regularity of waterflow for hydroelectricity
generation

Improvements of baseflows and reduction of
sedimentation in
irrigation canals

Reforestation but little
impact because program
focuses on agriculture

Cauca River, Colombia:
associations of irrigators’
payments

Improved water quality

Reduction ofwater salinity

United States:
nutrient trading

Australia: irrigators
financing upstream
reforestation

Trading schemes

Qualitydrinking waterFrance: Perrier
Vittel’s payments
for water quality

Self-organized private deals

Name of case study

Water-related
ecological service
provided

Table 5 Examples of water market payments

New South Wales
State Forests (state
government agency)

Point-source pollutersdischarging below
allowable level; non-point
source polluters reducing
their pollution

Upstream forest
landowners

Private upstreamowners of forest land

Upstream dairy
farmers andforest landholders

Supplier

An association ofirrigation farmers

Polluting sources
with discharge above
allowable level

Associations of irrigators;
government agencies

Private hydroelectricutilities, Government of
Costa Rica and local NGO

A bottlerof naturalmineral water

Buyer

Water transpiration credits
earned by State Forests
for reforestation andsold to irrigators

Trading of marketable
nutrient reduction
credits among industrial
and agricultural
polluting sources

Voluntary paymentsby associations andgovernment agencies
to private upstream
landowners; purchaseby agency of lands

Payments made byutility company via a
local NGO to landowners;
payments supplemented
by government funds

Payments by bottler to
upstream landowners
for improved agricultural
practices and forreforestation of sensitive
infiltration zones

Instruments

Large-scale reforestation,
including planting ofdesalination plants, trees
and other deep-rooted
perennial vegetation

Limited impact onforests; mainly theestablishment oftrees in riparian areas

Reforestation, erosion
control, springs andwaterways protection,and development ofwatershed communities

Increased forest coveron private land;
expansion of forests
through protection
and regeneration

Reforestation but little
impact because program
focuses on agriculture

Intended impacts
on forests

Irrigators pay US$40/hectare/year for ten years
to NSW State Forests. Revenues are used by State
Forests to reforest on private and public lands.
Private landowners receive an allowance butrights remain with State Forests.

Incentive payments of US$5–10 per acre

Association members voluntarily pay a water use feeof US$1.5–2/litre on top of an already existing water
access fee of US$0.5/litre. The total investment
was over US$1.5 billion between 1995–2000

Landowners who protect their forests receive
US$45/hectare/year, those who sustainably
manage their forests receive US$70/hectare/year,
and those who reforest their land receive
US$116/hectare/year.

Vittel pays each farm about US$230 per hectare
per year for seven years. The company spent an
average of US$155,000 per farm or a totalof US$3.8 million

Payment

ITTO

Regularity of waterflow for industrial uses;
regularity and water
purity for drinking water

Rehabilitation of private
and public areas forwatershed protection

Reduction of soil erosion;
improvement of water
quality and regularityof stream flow

Columbia: environmental
services tax (eco-tax) forwatershed management

State of Paraná,
Brazil: public
redistribution mechanism

US: conservation
reserve program

Owners of cropland andmarginal pasture lands

Municipalities andprivate landowners

Private landowners
and municipalities

Upstream landowners

Supplier

Source: Johnson et al. (2001), Perrot-Maître and Davis (2001), Pagiola (2002)

Purification of
New York City’swater supply

Water-related
ecological service
provided

New York City: watershedmanagement program

Public payment schemes

Name of case study

Table 5 (continued)

US Departmentof AgricultureState of Paraná

Industrial water users
and municipalities

Water users taxed by
New York City with
supplemental funds
provided by federal,state and local
governments

Buyer

Conservation easements;
restoration cost-shareagreements; yearly rental
payments to landowners
for engaging inconservation; additional
incentive payments

Public-sector redistribution
mechanism: State provides
additional funds to thosemunicipalities withprotected areas and whichharbour watersheds that
supply neighbouringmunicipalities

Eco-tax on industrial
water users; payments
by municipalities andwatershed authorities
to landowners

Taxes on water user;
New York City bonds;
trust funds; subsidies;
logging permits;differential land-use
taxation; development
rights; conservation
easements; developmentof markets

Instruments

Though the programis directed at farms,
advantages to trees aremany: tree-planting,
strips, riparian buffers,
grassed waterways, field
windbreaks, shelter belts,
living snow fences,and establishmentof bottomland timber

Rehabilitation of
degraded forest areas

Improved forest
management;
expansion of forests

Adoption of low impact
logging; retirement ofenvironmentally sensitive
land from agricultural
production; forest
regeneration

Intended impacts
on forests

Farmers receive US$125/hectare/year and arecompensated for 50% of costs to establish approved
conservation practices. Total government cost:
US$1.8 billion/year

US$170/hectare

NA

Dairy farmers and foresters who adopted best
management practices were compensated with
US$40 million, which covered all their additional costs.
Foresters who improved their management practices(such as low impact logging) received additional
logging permits for new areas, and forest landowners
owning 50 acres or more and agreeing to commit toa ten-year forest management plan are entitled to an
80% reduction in local property tax

Payment

ITTO

31

ITTO

may take various forms, including user fees, transfer
payments, land purchases, cost-sharing arrangements,
and/or low-interest credit.
In France, for example, the most important water
sources for Perrier-Vittel, the world’s largest bottler ofnatural mineral water, are in heavily farmed watersheds
where nutrient runoff and pesticides threaten theaquifers the company relies on. Perrier-Vittel foundthat reforesting sensitive infiltration zones, financing
farmers to build modern facilities, and switching toorganic farming practices are cheaper than building
infiltration plants.
In Colombia, large agricultural producers in the
Cauca Valley assess their own fees through theirwater users’ association in order to finance watershedmanagement practices in upland areas and thereby
improve base flows and reduce sedimentation in
irrigation canals. These practices include reforestation,
erosion control on steep slopes, land purchases andprotection agreements for springs and stream buffers,
and economic development in upland communities.
Neither case required legal or regulatory reform;
rather, the contracts were based on intensive
negotiations between the potential buyer andseller of water services. A critical factor affecting
their performance was that both efforts developed
a participatory process early on to negotiate theactions and payments. Public-sector institutions
played support roles in both cases. In the PerrierVittel case, a government research agency helped
finance and conduct research that led to the program.
In Colombia, a regional public development agency
carries out some of the watershed management
activities and provides technical assistance tolocal communities and landowners carrying
out watershed protection.
Open trading schemes: trading schemes are
beginning to emerge in countries with stronger
environmental regulation, where government sets
either a very strict water quality standard or a cap on
total pollution emissions. In most cases, individual
facilities or landowners have a defined maximum
allowable amount of emissions they can release.
The opportunity for trading requires the government
to say, in effect, that it does not care who takes action
as long as the overall standard is met or the cap is notexceeded. Emission credits are earned based on the
production of emissions lower than the set standard
and companies and landowners can make economic
decisions as to whether it is cheaper to lower theiremissions or to buy credits from others who havebeen able to do so.

32

In the US, for example, highly regulated factories(or point sources) that must spend large sums on
pollution control technologies to comply with theirlimits on nitrogen and other organic pollutants arepaying unregulated farmers (or non-point sources)in the Midwest to reduce their emissions. Trading
allows those factories seeking to reduce their emissions
to find the most cost-effective means of doing so.
And, since the farmers can often achieve significant
reductions at a fraction of the cost to factories,
pollution standards can be met at less cost to factories
and to the community as a whole. In Australia, landclearing has exacerbated salinization problems inmany parts of the Murray-Darling Basin. This occurs
because the lost vegetation no longer takes up waterand transfers it back to the atmosphere, so watertablesrise and bring dissolved mineral salts to the surface.
New South Wales State Forests, a state government
agency, recently launched a pilot project in which
downstream irrigation farmers are purchasingtranspiration credits from State Forests, who areplanting trees on state land upstream (Brand 2002).
This pilot project is designed to test the possibilityof generating a new market in water transpiration
to benefit irrigation farmers and other water users.
If the pilot is successful, farmers, other water users
and governments could purchase units of transpired
water from landowners who planted forest or restored
native vegetation. The next step in establishing thistrading scheme would be for the government toestablish forest cover targets for individual landowners
or watershed areas.
Financing for trading schemes typically comes fromthose companies or landowners that have found thatbuying credits or units from other sources is cheaper
than changing their own processes to comply with theregulatory limitation. Authority for trading schemes,
however, must come from state, federal or local
regulatory agencies. A strong regulatory system andeffective monitoring systems are key requirements
for any trading scheme.
Public payment schemes: in public payment
schemes, government or a public-sector institution
pays for the watershed service. Financing can comefrom various sources, including general tax revenues,
bond issues, or user fees. Payments are made to
private landowners and private or public resource
managers. Box 4 discusses one recent national
scheme developed by Mexico.

ITTO

Box 4 A new fund to finance forest ecosystem services in Mexico
The Government of Mexico recently announced the creation of a new, US$20 million fund to pay Indigenous
and other communities for the forest ecosystem services produced by their land. Indigenous and othercommunities own approximately 80% of all forests in Mexico – totaling some 44 million hectares – ascollectively-held private land. The Mexican Forestry Fund has been under design since 2002, guided bya consultative group with government, NGO and industry representatives. The purpose of the Fund is topromote the conservation and sustainable management of natural forests, leverage additional financing,
contribute to the competitiveness of the forest sector, and catalyze the development of mechanisms tofinance forest ecosystem services. Operational manuals are being prepared and priority conservation sites
have already been identified. The Fund proposes to pay US$40/hectare/year to owners of deciduous
forests in critical mountain areas and US$30/hectare/year to other forest types.

New York City’s watershed management programis an alliance between federal, state and municipal
governments to protect water quality in the Croton
and Catskills watersheds that supply the city’s ninemillion residents with some of the highest quality
drinking water in the United States (Box 5). In Brazil,
the state of Paraná has an ecological tax to financepayments to those municipalities that take action
either on their own or in cooperation with private
landowners to protect watersheds (see Box 6).
In both cases, intensive negotiations between
downstream and upstream governments, businesses
and citizens’ groups were necessary to establish thesemechanisms. Significant changes in the regulatoryenvironment were also needed to enable downstream
beneficiaries to pay for watershed improvements inupper watersheds. Because of the public goods natureof hydrological services, publicly financed transfer
payments are likely to remain the most common
financial mechanism used to protect water-related
ecosystem services.
Current status of watershed service markets
Demand is the main driver of watershed markets
and the private sector dominates their establishment.
Landell-Mills and Porras (2002) found that in 62
cases of watershed protection markets in 22 countries(24 cases in eleven tropical producer countries),
the private sector accounted for 65% of sellers and
60% of buyers of watershed services. Private investors
included companies for whom watershed properties
are a key input to their production capabilities,
companies who are required to offset their waterpollution, and private home-owners who use waterfor everyday functions. Still, governments are themost influential buyers of watershed services.
Agencies such as water boards and electricity

suppliers have the most defined interest in
maintaining water flow and quality. Although
individual landowners are the primary sellers ofwater services, governments also play a role inmaintaining supplies.
Of the various types of watershed payment
mechanisms, Landell-Mills and Porras (2002)
found that intermediary-based transactions are mostcommon, accounting for 44% of all mechanisms
employed among the 62 cases. Intermediaries either
have significant local knowledge or are establishedspecifically to manage the transaction process
and include NGOs, government agencies andcommunities. Intermediary-based transactions
are used as a way of pooling demand and for risksharing and fundraising.
Of the cases studied by Landell-Mills and Porras(2002), 68% involved local markets while only 11%
were national and 3% were international. In larger
markets, downstream beneficiaries of watershedproperties are less willing to pay for upstream
water protection and, where watersheds crosspolitical boundaries, other types of risks may
prevent payments from occurring. The majorityof markets are characterized as emerging, while themost mature markets rest in developed countries,
most notably the US.
As indicated in the examples given above, benefits
are highly variable from one watershed to the next.
In many watersheds, the opportunities for watershed
protection payments do not yet exist or are extremely
limited. This is especially true in remote, very large,or sparsely settled watersheds and in countries withpoorly defined or ineffective legal and regulatory
frameworks. In other places, the opportunity isthere but its development is hindered by a lack of

33

ITTO

Box 5 New York City pays for watershed management
Three watersheds serve nine million people in New York City and surrounding suburbs. The watersheds
are 830,000 hectares in size (nearly the size of Delaware) and deliver 1.2 billion gallons of water per day.
New York City has historically had high-quality drinking water. It was able to avoid the water-related
problems that plagued most other cities until the 1980s, when suburbanization, destructive road construction,and highly concentrated farming activities polluted major watersheds.
City commissioners initially turned to filtration as the solution to clean up non-point source contamination,
but it would cost US$4–6 billion dollars annually to filtrate just one watershed. Initial calculations showedthat a comprehensive program of watershed protection would cost far less than filtration, would maintainwater quality even more effectively, and would produce numerous other benefits. Instead of paying toclean up the results of degrading the water, the City decided to invest in preserving the 200 km2 of rural
Catskill environment that was responsible for providing it with the world’s best urban water. Farmers
and City commissioners met and developed a plan that would best suit both actors.
Termed ‘whole-farm planning’, the program requires the City to pay both the operating costs of the program
and the capital costs for pollution control investments on each farm as an incentive to farmers to join.
Farmers then administer the program through a self-selected Watershed Agricultural Council, which
provides the technical assistance needed to custom-design pollution control measures for each farm,maximizing their effectiveness and minimizing their cost. The measures are selected for their pollution
control benefits and are also designed into and integrated with farmers’ business plans and management
practices. Thus, farmers not only solve their pollution problem cost-free, but they also gain significant
ancillary benefits as well. Five years after implementation, 93% of all farmers were participants in the
program. Whole-farm planning successfully reduced watershed pollution loads and enabled the City to
avoid the multi-billion dollar cost of filtration.

information about the source of the ecosystem service
and who exactly benefits from it. Even where thisis known, the beneficiaries of the service may havelittle interest in paying for a service they now believe
they are getting for free.
Hydroelectric generators, municipal water systems,
irrigators and industrial users, rather than the general
population, are the most likely beneficiaries to pay
for watershed services – since their relationship to
the service is more direct, regular and predictable.
A variety of innovative financing mechanisms arebeing used in watershed management, but transfer
payments from downstream water users to upstream
stakeholders for ecosystem conservation are themost common approach and account for the largest
current source of financing by far. These systems do
not involve the direct buying and selling of services
per se, but rather the ‘selling’ of land-uses thatgenerate those services. Overall, there is no blueprintthat fits all situations: mechanisms tend to be siteand user-specific, depending on the nature of theecosystem services, the number and diversity of
stakeholders and the legal and regulatory
framework in place.

34

Self-organized private deals are few, are likely tooccur when the water services provided are private
goods (drinking-water supply, electricity, agricultural
products), and will be limited to the particularwatersheds upstream of their investment where astrong link between land-use actions and watershed
service can be demonstrated. These deals tend to takeplace only if the monitoring and transaction costs
are covered by the market price received or can be
subsidized. Trading schemes are rare – especially indeveloping countries – but growing, and privatesector participation in trading schemes stems from
opportunities for large cost savings.
Scope for increased demand
The future scope for using financial incentives toencourage the conservation of forest watersheds –particularly in developing countries – is potentiallyhuge for at least three reasons. First, the global
demand for clean water is immense. The global
population tripled in the last 100 years, but water
use increased sixfold. Most population estimates
project that the global population will grow by
two billion over the next 30 years and anotherone billion in the subsequent 20 years – and virtually

ITTO

all of this growth will take place in developing
countries. These trends suggest that water demand
will either double or triple current use over the next
50 years. In India, for example, urban and industrial
use is projected to increase 135% over the next
40 years (Dudley & Stolton 2003).
Second, the majority of the world’s population lives
downstream of forested watersheds, making them allsusceptible to the costs of watershed degradation.
One rough estimate is that about 13% of the world’s
land area is currently needed to protect water supplies
for the global population – an area that will growwith population. These downstream populations,and their interest in reducing vulnerability, flooding
and degradation are likely to grow with educationand spending power. Already, some 40% of the world’s
largest cities rely on protected areas and multipleuse forests for their drinking water (Dudley &Stolton 2003); this includes 19 of the largest cities
in the tropics (Annex 2). Payments for afforestation
and agroforestry establishment may be justified
in many more watersheds where forests were
historically cleared.
Third, investments in sustainable watershedmanagement are often substantially cheaper thaninvestments in new water supply and treatment
facilities. By investing approximately US$1 billion
in land protection and conservation practices,
New York City has avoided spending US$4–6 billion
on filtration and treatment plants (Echavarria &Lochman 1999). Other cities in the United States –Portland, Oregon; Portland, Maine; and Seattle,
Washington – have found that every US$1 invested
in watershed protection can save anywhere from
US$7.50 to nearly US$200 in costs for new filtration
and water treatment facilities (Trust for Public Lands
1997). In South Africa, removing thirsty alien tree
species in Cape Town’s watershed and restoring native
vegetation produces water at a fraction of the costof water delivered through diversion or reservoir
projects (Gelderblom & van Wilgen 2000).

Biodiversity protection services
Biodiversity is defined as the variability among livingorganisms in terrestrial, marine and other aquatic
ecosystems and the ecological complexes of which
they are part. Components of biodiversity include
genetic variability within species, populations ofspecies, ecological communities, ecosystems andlandscapes. Lowland and montane tropical rainforests
probably hold more than 65% of all terrestrial species,
while tropical woodlands hold a high share of all
dryland species (Wilson 1992). Conservation ofthis diversity requires provision for all species andecological communities of adequate natural andmanaged habitat to provide nesting sites, protective
cover, clean water, breeding territory, food sources inall seasons, predator-prey balance, and the presenceof interdependent species (such as pollinators). While
human intervention serves to protect biodiversity
in many tropical ecosystems, biodiversity is widely
threatened by deforestation, fragmentation, forest
degradation and pollution. Annually, an estimated14.2 million hectares of tropical forest are lost to
deforestation (FAO 2001).
Barbault and Sastapradja (1995) estimate that loss
rates of tropical forest of just under 1% per annum
could result in 1–10% of the world’s species being
lost over the next 25 years.
Scientific studies indicate that biodiversity cannot
be conserved by a small number of strictly protectedareas. Conservation must be conceived in a landscapeor ecosystem strategy that links protected areas within
a broader matrix of land-uses that are compatible
with and support biodiversity conservation in situ
(Agius 2001, McNeely & Scherr 2003).
Benefits of biodiversity protection
Biodiversity performs a wide range of services,
including:•providing habitat conditions that support
diverse wild plant, animal and microorganism
populations of economic, subsistence or
cultural value: for example, wild animals
account for 25% of protein requirements inWest Africa and as much as 75% in Congo;
in Botswana 50 different species account for
40% of protein consumption. Wild species are
the source of traditional medicines basic to thehealth care of about 80% of people in developing
countries. Over 5000 species of plants andanimals are used for medicinal purposes in
China alone. In dry ecosystems, open woodlands
are critical sources of fodder for livestock herds(Kerkhof 2000). The health of natural freshwaterand coastal fisheries is strongly affected byadjacent forests;

35

ITTO

•

maintaining ecosystem functioning:
research indicates that increased species’ diversity
generally provides more opportunities for species’interactions, which in turn improves the rates
of resource use that govern ecosystem efficiency
and productivity. Species’ diversity may increase
the reliability of ecosystem function, especially
under conditions of dynamic environmental
change. Many of these functions are critical toagriculture and forestry. Bats, bees, beetles andother insects are the principal pollinators of fruit
trees, most important oil crops, coffee, coconut
and major staple food crops including potato,
cassava, yams, sweet potato, taro and beans(Prescott-Allen & Prescott-Allen 1990).
Worldwide declines in pollinator populations
threaten both the yields of major food crops
and the biodiversity of wild plants. For example,
the estimated cost to North American farmers
from the one-quarter decline in wild and domestic
honeybees since 1988 is US$5.7 billion peryear (Buchmann & Nabhan 1998). Ecosystem
functions are also critical for controlling humanand livestock disease vectors (Weinhold 2004);•

conserving genetic and chemical informationof potential future utility: for example, the seedindustry (the leading user of genetic resources)
constantly seeks new genetic material to improve
plant yields and performance, and draws on
sources of genetic material from the wild.
In 1993 in the US, 57% of the top 150
prescription drugs contained at least one major
active compound from biological resources.
2–10% of the crop protection product market
of US$30 billion was developed from natural
genetic material (Landell-Mills & Porras 2002).
The combined commercial worth of all genetic
materials has been estimated at US$500–800
billion per year (ten Kate & Laird 1999);•

providing insurance against future change:for example, the greater resilience of diverse
environments and species may be required
to adapt to climate change;•

providing spiritual, aesthetic and culturalvalues: for example, nature tourists dependent
on access to biodiverse habitats and wild species
comprise 40–60% of all international tourists.
Nature tourism is increasing at a rate of 10–30%
a year. UK nature and beach tourism generates£14 billion per year – 3.5 times the annual levelof public farm subsidies (Pretty 2002); and36•

ensuring the continued existence of wildorganisms as legitimate claimants on earth’s
resources: some conservation advocates andinvestors are driven by ethical, philosophicaland religious imperatives to conserve biodiversity.
Many consumers of ‘biodiversity-friendly’
products and investors in biodiversity-friendly
companies are motivated by these concerns.
The socially responsible investment community
uses environmental screens that often include
biodiversity protection. Socially screened portfolio
assets in the US surpassed the US$2 trillion markin 2001 (SIF 2001).

Market mechanisms
The market for biodiversity protection can becharacterized as a ‘nascent market’. Many approaches
are emerging to remunerate financially the owners
and managers of tropical forest resources for their
good stewardship of biodiversity (Table 6).
Diverse examples are listed in Table 7.
Land markets for high-biodiversity-value habitat:
national governments (public parks and protectedareas), NGO conservation organizations (eg the
Nature Conservancy) and individual conservationists
have long paid for the purchase of high-biodiversityvalue forest habitats. Direct acquisition can be
expensive, as underlying land and use values arealso included. Local sovereignty concerns arise
when buyers are from outside the country or eventhe local area, or where extending the area of noncommercial real estate reduces the local tax base.
New commercial approaches – such as throughconservation communities, ecotourism-based land
protection projects and the eco-real estate projects
being organized in Chile (Corcuera et al. 2002) –are being developed to encourage the establishmentof privately owned conservation areas. These build
on growing consumer demand for housing andvacation in biodiverse environments.
Payments for biodiversity-conserving use or
management: a lower-cost approach to securingconservation is to pay only for the biodiversity services
themselves by paying landowners to manage theirassets so as to achieve biodiversity or species’
conservation. Probably the largest-scale payments
for land-use or management agreements aregovernment agro-environmental payments madeto farmers in North America and Europe forreforesting conservation easements and management
contracts aiming to conserve aquatic and terrestrial

ITTO

Table 6 Types of payments for biodiversity protection
Purchase of high-value habitat• Private land acquisition (purchase by private buyers or NGOs
explicitly for biodiversity conservation)• Public land acquisition (purchase by government agency
explicitly for biodiversity conservation)
Payment for access to species or habitat• Bioprospecting rights (rights to collect, test and use genetic
material from a designated area)• Research permits (right to collect specimens, takemeasurements in area)• Hunting, fishing or gathering permits for wild species• Ecotourism use (rights to enter area, observe wildlife,
camp or hike)
Payment for biodiversity-conserving management• Conservation easements (owner is paid to use and manage
defined piece of land only for conservation purposes; restrictions
are usually in perpetuity and transferable upon sale of the land)• Conservation land lease (owner is paid to use and manage
defined piece of land for conservation purposes, for defined
period of time)• Conservation concession (public forest agency is paid tomaintain a defined area under conservation uses only;
comparable to a forest logging concession)• Community concession in public protected areas (individuals
or communities are allocated use rights to a defined area offorest or grassland in return for commitment to protect thearea from practices that harm biodiversity)• Management contracts for habitat or species’ conservation
on private farms, forests, grazing lands (contract that details
biodiversity management activities and payments linked tothe achievement of specified objectives)
Tradable rights under cap-and-trade regulations• Tradable wetland mitigation credits (credits from wetland
conservation or restoration that can be used to offset obligationsof developers to maintain a minimum area of natural wetlands
in a defined region)• Tradable development rights (rights allocated to develop only
a limited total area of natural habitat within a defined region)• Tradable biodiversity credits (credits representing areas of
biodiversity protection or enhancement that can be purchasedby developers to ensure they meet a minimum standard of
biodiversity protection)
Support biodiversity-conserving businesses• Business shares in enterprises that manage for biodiversity
conservation• Biodiversity-friendly products (ecolabelling)

wildlife habitat (OECD 1998). In Switzerland,‘ecological compensation areas’ using farming
systems compatible with biodiversity conservation
have expanded to include more than 8% of total
agricultural land. In the tropics, diverse approaches
include: nationwide public payments in Costa Rica
for forest conservation (Chomitz et al. 1999);
and payments by conservation agencies, such as
the conservation concessions being negotiated byConservation International (Rice et al. 2001),
and forest conservation easements negotiated bythe ‘Cordão de Mata’ project with dairy farmers
in Brazil’s Atlantic Forest in exchange for technicalassistance and investment resources to raise crop andlivestock productivity (McNeely & Scherr 2003).
Some countries that use land taxes are using tax
policies in innovative ways to encourage the expansionof private and public protected areas, as illustrated
in Box 6 for Brazil.
Payment for private access to species or habitat:
private-sector demand for biodiversity has tended
to take the form of payments for access to particularspecies or habitats that function as ‘private goods’ butwhich in practice serve to cover some or all of thecosts of providing broader ecosystem services.
Pharmaceutical companies have contracted for‘bioprospecting rights’ in tropical forests (Box 7).
Ecotourism companies have paid forest owners forthe right to bring tourists into their lands to observewildlife, while private individuals are willing to
pay forest owners for the right to hunt, fish orgather NTFPs.
Tradable rights and credits within a regulatory
framework: multi-actor markets for ecosystemservices have been established successfully – notably
for sulphur-dioxide emissions, farm nutrient
pollutants and carbon emissions – by creating rights
or obligations within a broad regulatory framework.
Developing such markets for biodiversity is more
complicated because specific site conditions matterso much. The US has operated a wetlands’ mitigation
program since the early 80s in which developers
seeking to destroy a wetland must offset that bybuying mitigation credits. A variant of this approachis being designed for conserving forest biodiversity
in Brazil by permitting flexible enforcement of thatcountry’s ‘50% rule’, which requires landholders
in Amazon forest areas to maintain half of theirland in forest, as well as in other regions wherelesser proportions of land are set aside for forest
use (Chomitz 2002). Careful designation ofcomparable sites is required. Another approach underdevelopment in Australia is biodiversity credits.

37

ITTO

Table 7 Value of payments for biodiversity conservation: selected examples
Payment scheme

CountryType of payment/commodity
Fund to finance diverse groups
to protect biodiversity

Estimated value

Critical Ecosystems Partnership(World Bank, Conservation International,
Global Environment Facility)

Developing
countries

US$150 million
capitalization

Ejido financing of local Pas –7 million hectares

MexicoBOCOSA Project (Osa Penninsula)

Costa Rica

Payments to farmers to conserve
their lands

US$24/
hectare/year

Payment for environmental services

Costa Rica

Compensation to forest owners forthe ecosystem services of their lands,
as included in 1996 Forest Law

US$221–344/
hectare/year
Total: US$14
millionShade-grown coffee

Mesoamerica

Coffee trees grown among othertrees, enhancing biodiversity

US$5 billion
for sale ofshade-growncoffee in US alone

Privately protected areas

Chile

Private investments in land conservation
including: private parks, land donations
to national park system, conservation
communities, eco-real estate andecotourism, and private administrationof government conservation lands

NA

Wetland banking

US

Developers who have mitigated off-site
draw from bank of ‘mitigation’ credits
to offset damage to wetlands as
development is implemented

US$7,500–
100,000/acre(cost of banking
credits)

Bioprospecting

Worldwide

Biodiversity prospecting, primarily
pharmaceutical, to market products
and conserve forests

US$17.5 billion(natural-productdrugs)

Ecological value-added tax

BrazilMechanism that compensatesmunicipalities that have conservation areas.
Stimulates improvement of existing areas
or creation of new areas

US$150 million(Parana State)
US$45 million(Minas Gerais)

US$14 million

Box 6 Brazil’s value-added tax for conservation
Brazil has been actively promoting its protected areas as critical instruments for biodiversity conservation andwatershed protection. Yet results have often been unsatisfactory. Strict government regulations restricting
forest exploitation and requiring property owners to rehabilitate degraded areas have limited the profitabilityof the forest sector. Furthermore, lax enforcement has provided an incentive for landowners to disregard
those regulations that have proven expensive to follow.
In 1991, the General Assembly of the State of Paraná passed a law requiring that 5% of the revenues it received
from the Circulation of Goods and Services (ICMS), an indirect tax charged on the consumption of goods
and services, be distributed according to environmental standards. 2.5% was to go to those municipalities withconservation units or protected areas and the other 2.5% to municipalities that supply water to neighbouringmunicipalities. The transfer is basically a compensation for the opportunity cost of development foregone
by environmental protection but it is not calculated according to scientifically established relationships
between forest cover and water improvement. The municipalities are in competition with other municipalities
within Paraná for the ecological ICMS. The more areas within the municipalities that are involved in
ecological activities, the more revenues the municipalities will receive from the State. But the more thatthe ecological tax motivates municipalities to expand protected areas, the less each such protected area will beworth at the margin, because the overall tax base expands slowly. Furthermore, the new tax revenues are
not earmarked for activities that improve environmental protection locally. An innovative protected area
quality ranking system has made the scheme – now adopted in over ten Brazilian states – more effective.
Sources: Perrot-Maître & Davis (2001), May et al. (2002)

38

ITTO

Box 7 From bioprospecting to botanicals
Bioprospecting was viewed throughout the 1990s as a major potential source of financing for biodiversity
conservation. The pioneering agreement between Costa Rica’s National Institute of Biodiversity (INBio) andMerck for generalized research on tropical botanical species from a highly biodiverse set of ecosystems
has not been followed by other company-country partnerships of this nature, where direct payments
were agreed on a per hectare basis based on calculated returns from identifying new pharmaceuticals.
Rather, the conservation potential of bioprospecting is coming from more indirect returns from the largerole played by natural products and their derivatives – botanicals – as key active ingredients in high-value
drugs. While a few countries have tithed financial earnings from bioprospecting to conservation, in mostcases financial investments have taken place in parallel as a result of recognition of the importance ofconservation for its multiple benefits, including the market.
Local and national benefits of partnerships are thus coming indirectly from sustainable economic activities
based on raw material supply, capacity-building and support for biodiversity science, country capacity toundertake research and develop its own biodiversity, and diverse spin-off benefits to research institutions,
local businesses and others. For example, while the National Cancer Institute maintains a joint venturewith the government of Sarawak for research into two potential anti-cancer compounds, which provides
Sarawak with flexible benefit-sharing arrangements over time, the Institute has abandoned a similararrangement in Cameroon, and another pharmaceutical bioprospecting venture, Shaman Pharmaceuticals
in the Amazon, has folded.
The importance of botanicals in medicine continues to be enormous. Natural products or entities
derived from natural products made up eleven of the 25 best-selling drugs in 1997, with a 1997 value of
US$17.5 billion. Between 10 and 50% of the ten top-selling drugs of each of the top 14 pharmaceuticalcompanies are either natural products or entities derived from natural products.
There are also high values in other industries – seed, crop protection, horticulture, botanical medicine,
personal and cosmetic care, and biotechnology sectors. The next generation of issues relate to establishingadequate legal frameworks, recognizing indigenous intellectual property rights, and creating multiple
layers of access and benefit-sharing.
Source: Laird & ten Kate (2002)

In this system, legislation creates new property rights
for private landholders who conserve biodiversity
values on their land; such landholders can sell
resulting ‘credits’ to a common pool. The law also
creates obligations for land developers and others
to purchase those credits. The approach requiresthat the ‘value’ of the biodiversity unit can betranslated into a dollar value (Agius 2001).
Biodiversity-conserving businesses: conservation
values are beginning to inform consumer and investor
decisions. Ecolabelling schemes are developing thatadvertise or certify that products were produced inways consistent with biodiversity conservation. The
global trade in certified organic agriculture was worth
US$21 billion worldwide in 2000 (Clay 2002).
International organic standards are expanding tolandscape-scale biodiversity impacts. The Rainforest
Alliance and the Sustainable Agriculture Network
certify coffee, bananas, oranges and other products
grown in and around high-biodiversity-value areas.

The Sustainable Agriculture Initiative is a coalitionof multi-national commercial food producers (Nestle,
Dannon, Unilever and others) who are seeking tosource commodity supply from producers who areprotecting biodiversity. In 2002, over 100 million
hectares of forest were certified as well-managed(a fourfold increase over 1996), although only 8%of the total certified area is in developing countries,
and most of that is in temperate forests.
Current market demand
Available data suggest that biodiversity protection
services are presently the largest market for ecosystemservices. A McKinsey-World Resources InstituteNature Conservancy team estimated the annualinternational finance for conservation (protecting
land from development) market at $2 billion,
with the forest component a large share of that.
The buyers are predominantly development banks
and foundations in the US and Europe (Arnold &Jenkins 2003; see Table 3).

39

ITTO

In their study of 72 cases of markets for forest
biodiversity protection services in 33 countries(63 cases in 28 tropical developing countries),
Landell-Mills and Porras (2002) found that themain buyers of biodiversity services (in declining
order of prevalence) were private corporations,international NGOs and research institutes, donors,
governments and private individuals. Of these cases,
73% were international markets, and the rest were
distributed among regional, national and local buyers.
International and many national actors demanding
biodiversity protection services tend to focus on
the most biodiverse habitats (in terms of species’
numbers), or those perceived to be under thegreatest threat globally (high number of endemic
species where habitat area has greatly declined).
Most of the private corporations identified in theLandell-Mills and Porras (2002) study were interested
in biodiversity-friendly companies, horticulturalcompanies concerned with ecosystem services, or
pharmaceutical bioprospecting. Such private payments
are usually site-specific. Local actors more commonly
focus on protecting species or habitats of particular
economic, subsistence or cultural value. Developmentof market-based conservation for tropical forest
biodiversity is most advanced in Latin America.
Although the highest overall level of expenditure on
conservation is found in Africa, very little of this ischannelled through market or payment schemes.
Projected growth in market demand
The fastest-growing component of future market
demand for biodiversity services from tropicalforests is likely to be in the ecolabelling of crop,
livestock, timber and fish products for export andfor urban consumers in middle-income tropicalcountries. Pressures continue to increase on majorinternational trading and food-processing companies
to source from suppliers who are not degrading
ecosystem services (Clay 2002). Demand for organic
farm products is increasing at 20% per year, and theinternational organic movement is strengthening
standards for biodiversity conservation (IFOAM
2002). Voluntary biodiversity offsets are also a
promising source of future demand, as many large
companies are seeking ways to maintain their ‘license
to operate’ in environmentally sensitive areas, andoffsets are of increasing interest to them.
The cost of and political resistance to land acquisition
are rising. The construction of biological corridors
in and around production areas is an increasingly

40

important conservation objective, while many of themost important sites for biodiversity conservation
are in more densely populated areas with highopportunity costs for land. Thus, we are likely to
see a major shift from land acquisition to various
types of direct payments for easements, land leases
and management contracts.

Carbon sequestration and storage
There is now a scientific consensus that humanactivities, including fossil fuel combustion, industrial
processes, and land-use change, have led to risinglevels of greenhouse gases, most notably carbon
dioxide, in the atmosphere. The increased rate
and magnitude of these gases have manipulated the‘greenhouse effect’, a natural system that regulates
the earth’s temperature regime, to warm the earth.
During the 20th century, the warmest in the past
600 years, global temperatures increased by 1 degree
Fahrenheit. The ten warmest years have all occurredin the past fifteen years, the 1990s being the hottest
decade on record. Experts expect more variable andextreme climatic events. Both regional and global
assessments have indicated the profound impacts
that climate change will have on water supplies,
agricultural productivity, biodiversity and humanhealth. While reducing global fossil-fuel emissions
is essential to mitigate climate change, forest cover andmanagement can also play an important role in both
mitigation and adaptation – with a financial valuethat tropical forest producers may be able to capture.
Value of carbon sequestration and storage
Forests play an important role in the carbon cycle
by absorbing carbon dioxide and releasing oxygento the atmosphere through the natural process ofphotosynthesis. Carbon dioxide is converted tocarbon (sequestered) and stored in the woody
tissue (biomass) of the plant (Figure 2). The rate at
which carbon is sequestered varies by the site, age,management and species’ characteristics of the forest.
Because tropical deforestation, forest fires and otherland-use change contribute approximately 20% of
global carbon dioxide emissions, forestry activities –to sequester carbon by promoting forest establishment
and growth, or to avert the loss of standing forest
resources from land-clearing, disease or fire – could
potentially be an important strategy for slowing
climate change. Forestry can also play an importantrole in strategies to adapt to climate change.

ITTO

Figure 2 Carbon sequestration in the humid tropics by vegetation type
350
Primary forest
300

Carbon (tonnes/hectare)

250

Logged forest

200
150
100

Shifting
cultivation

Complexagroforestry

Simpleagroforestry

50

Crops, pastures,and grasslands

0
-50
-100

Land-use category

Source: Tomich et al. (2001)

Market mechanisms
Because fossil-fuel emissions account for the majority
of total emissions, international policy action on
climate change has emphasized emission reduction
from such sources, including energy, transportation
and waste. Forestry investment has been seen
primarily as a flexibility mechanism by whichcarbon polluters could lower their costs bycomplying with part of their emission reduction
targets through forest-based carbon sequestration.
The market for carbon sequestration and storage
from tropical forests has three major segments:
the Clean Development Mechanism of the Kyoto
Protocol; non-Kyoto trading schemes intended foreventual crediting; and voluntary carbon emission
offsets for green organizations and companies.
The Kyoto Protocol: at the Earth Summit in Riode Janeiro in 1992, the United Nations Framework
Convention on Climate Change was signed andthe issue of climate change came to the forefrontof international environmental discourse. In 1997,
the convention produced the Kyoto Protocol,
requiring industrialized nations to reduce theirgreenhouse gas emissions by 5% below 1990 levels
by 2012. These (referred to in the Protocol as‘Annex I’) countries thereby set national standards

to place caps on company emissions and establish aframework by which they may trade their emission
credits. In order to reduce emissions at least cost,
the Protocol provides three flexibility mechanisms:
international emissions trading, allowing Annex I
countries to trade emission permits; joint
implementation, allowing Annex I countries to earn
emission reduction units through projects in otherAnnex I countries; and the Clean Development
Mechanism (CDM), allowing the generation ofcertified emission reductions from either energy orforestry projects in non-Annex I developing countries.
The CDM provides an opportunity for industrialized
nations to meet part of their obligation for emission
reductions (up to a maximum of 1% of their 1990
emission level for each of five years). Companies
and agencies obliged to meet national greenhousegas emissions’ reduction requirements can doso at a lower cost than domestic abatement whileproviding host countries with an additional sourceof investment finance. The CDM will go into effectfollowing Russia’s ratification of the Kyoto Protocol,
should that occur. At this time, only projects of‘afforestation’ and ‘reforestation’ are eligible for the
CDM in its first commitment period of 2008–2012.
‘Afforestation’ is defined under Article 3 of the Kyoto

41

ITTO

Protocol as the conversion of land, which has had no
previous forest cover for at least 50 years, to forest,
while ‘reforestation’ is defined as the planting offorest on land which previously had forest but
was seriously degraded. These may include diverse
types of projects: agroforestry, community forest
plantations, agroforest establishment, forest
restoration, and large-scale industrial forest
plantations. Other forest project types may or
may not be included in future commitment periods,
including fire control, improved forest management,
and forest protection.
The rate at which carbon is sequestered varies by
the site, age, management and species’ characteristicsof the forest. The Kyoto Protocol administers credit,
called a certified emission reduction (CER), for each
metric tonne of carbon dioxide reduced. CDM
projects must meet strict criteria for the certification
and registration of CERs. These include baseline
forest cover, ‘additionality’ of carbon sequestration,
the level of verified carbon emission offsets, andcontribution to sustainable development. These
add significantly to the transaction costs of projects.

Rules governing the CDM are still being debatedbut should be finalized in 2004. Several dozen
pilot forest carbon projects have been establishedto develop experience and methodologies for carbon
projects, including under several World Bank
carbon funds described in Box 8.
Non-Kyoto market trading: although the US failed
to sign the Kyoto Protocol, Americans largely support
its fundamental cap-and-trade structure. Voluntary
systems have developed in the shadow of Kyoto,encouraging US businesses, municipalities anduniversities to make verifiable reductions in theirgreenhouse gas emissions while developing trading
partnerships. Such programs have emerged as analternative market for domestic carbon trading, suchas the Partnership for Climate Action, the Chicago
Climate Exchange (CCX), and the Environmental
Resources Trust (ERT). They have encouraged
investment in projects that grow and conserve
forests, creating carbon offsets for companies.
Additionally, many US states have taken action
independent of the federal government, initiatingreforestation, afforestation and conservation schemes
as part of their climate action plans.

Box 8 World Bank funds invest in forest carbon projects
The World Bank has launched three funds to invest in projects for reducing industrialized greenhouse gas
emissions while promoting sustainable development and engaging public and private partnerships. The funds
buy cost-effective CERs in developing countries as part of the CDM and in economies-in-transition underjoint implementation. They have established a unique interface of carbon asset creation, private project
finance, and intergovernmental market regulation.
The Prototype Carbon Fund (PCF) began operations in April 2000 and by June 2002 had contributions of
US$180 million from six investing countries and 17 companies. The fund has allocated US$90 million
to date (October 2003), primarily in renewable energy and energy efficiency projects. Two years after thecreation of the PCF, the World Bank launched the Community Development Carbon Fund (CDCF)
and the BioCarbon Fund. Because high transactions costs involved with the Kyoto Protocol have led tosignificant bias towards large-scale projects, poorer rural communities have been left out of the carbon
market. The CDCF seeks to work with local intermediaries to lower transaction costs and enhance the livesof the poor through carbon financing. With a target size of US$100 million, the CDCF will finance smallscale projects with specific community development benefits. Such projects include renewable energy, energy
efficiency, methane capture, and agroforestry.
The BioCarbon Fund buys CERs from land-use, land-use change and forestry projects admissible under the
Kyoto Protocol and for diverse carbon sequestration and conservation projects under emerging alternative
or voluntary carbon management programs. The fund’s target size is US$100 million and it will target
agricultural and forestry projects that enhance other ecosystem services, such as biodiversity and watershed
protection, while improving the livelihoods of local people. Example projects include conservation
agriculture – such as shade-grown coffee, agroforestry to restore degraded areas, improved agricultural
practices, such as shifting from subsistence farming to organic agriculture – and reforestation. The fundis also looking into bundling projects in order to achieve optimum benefits for all stakeholders.
Sources: Prototype Carbon Fund (2003), Biocarbon Fund (2003)

42

ITTO

Box 9 Indigenous communities in Mexico sell carbon services to auto federation
The Scolel Té project has allowed companies, individuals or institutions willing to offset their greenhousegas emissions to buy emission reductions from agricultural and forestry projects in Chiapas, Mexico’s poorest
state. Buyers, including the International Federation of Automobiles, purchase credits from a local trust
fund called Fondo BioClimático, which provides small-scale farmers with the technical assistance needed
to switch from swidden agriculture to agroforestry. Local actors help farmers create plans for systems thateither combine crops with trees or enrich fallow lands. All plans are assessed for maximum social, economic
and climate sequestration potential. The fund supports projects including live fences, shade-grown coffee,
plantations, tree-enriched barren areas, and the intercropping of forestry and agricultural crops. The projects
are independently verified and certified by the Société Générale de Surveillance. These activities all provide
substantial income to farmers to cover the costs of implementing new farming systems, to purchase foods
and medicines, and to improve households. The new system has utilized traditional knowledge to makesignificant contributions to agriculture, biodiversity and livelihoods.
Source: Orlando et al. (2002)

The CCX, which planned to begin trading in
October 2003, has developed a comprehensive setof guidelines to foster emissions’ trading between
participating entities. They include International
Paper, American Electric Power, Ford Motor
Company, the City of Chicago, and Tufts University.
Participants must reduce their emissions to a level
below their average between 1998 and 2001 andmay invest in offset projects in the US, Mexico
and Brazil. Offset activities include both forest andsoil sequestration as well as agricultural methane
conversion.
Retail ‘green’ markets: a third component of
the carbon market is in voluntary payments bycompanies, individuals and organizations who wish
to be environmentally responsible by making theiractivities ‘carbon-neutral’. Such buyers undertake aninternal ‘carbon accounting’ to then reduce emissions
or purchase emission offsets. A number of companies
and NGOs (such as the NGO Future Forests) have
set up forest carbon projects in developing countries
to serve this market by producing carbon offsets.
Within the ERT, a non-profit which pioneers markets
for environmental protection, the Ecolands programfacilitates transactions between landowners andbuyers who wish to buy carbon offsets and also invest
in wildlife conservation and/or watershed restoration.
ERT worked with the Rocking C Ranch to measureand sell carbon credits from the reforestation ofsouthern Oregon riparian forest to the Oregon
Climate Trust. In addition to trading sequestrationrights, the project improved vital fish habitat andled to an enhanced forest management plan.

The rigour of the carbon accounting in these projects
is variable, but increasingly buyers will demand
quality comparable to that in Kyoto-compliant
projects. An example of a transaction in this market
is the Scolel-Te project in Mexico, funded by theInternational Automobile Federation (Box 9).
There are a number of ongoing efforts to develop
criteria and standards for ‘high-quality’ forest carbon
projects that would be guaranteed to have significant
positive impacts on rural livelihoods and on
biodiversity conservation. Such ‘gold standard’carbon may sell at a higher price or be preferredby some buyers.
Current market demand and prices
for carbon credits
Of the 75 payment schemes in 27 countries (29payment schemes in 15 tropical producer countries)
for forest-based carbon offsets surveyed by LandellMills and Porras (2002), 20 were registered as joint
implementation projects under the Kyoto Protocol,
while the rest were independent schemes. Twenty-fourof the cases reviewed were in Latin America, while
only five occurred in Africa. Unlike the other markets,the carbon market has given rise to a series ofancillary services such as investment funds, advisory
services, insurance and legal counsel. The private
sector dominates the market as a buyer of carbon
credits, and its role is growing as supplier andintermediary. Most reviewed trades wereinternationally brokered.

43

ITTO

The growing international concern for global climaticchange is the driver of the carbon market. National,
regional and local emissions’ standards, as well aspressure from NGOs and insurance companies,
have all been catalysts for action in the market.
Most carbon exchanges are currently in an early stageof development, but their heightened emergence,along with ancillary services to reduce transaction
costs, demonstrate the increasingly sophisticatednature of the carbon market.
Given restrictions on forest carbon trading throughthe CDM, it is possible to estimate the upper boundof potential income flows through that mechanism.
If we assume a value of US$10/tonne of carbon, themaximum level would be US$300 million per year
during the first commitment period of 2008–2012.
This is based on the fact that land-use, land-use
change and forestry can account for no more than 1%of the 5% decrease in emissions required for Annex
I countries. Given the difficulty of establishingprojects, the level is likely to be much lower. Few
data are available on the value of carbon trades
through the non-Kyoto and green retail markets,and much of this is proprietary. Estimates of the
per-tonne price of carbon negotiated on these deals
range from US$3 to US$40. The average deal in
the World Bank’s Biocarbon Fund (see Box 8) was
US$3.88/tonne of carbon dioxide (US$14.23/tonneof carbon) between 1996 and 2002.
Market projections
As global commitments to reduce and offset
emissions rise in later commitment periods, and withthe eventual launch of binding US strategies, thedemand for forest carbon offsets is likely to increasesignificantly. In July 2003 the European Parliament
voted to approve the rules surrounding the world’s
first international market in greenhouse gases, theEuropean Emissions Trading System. This market,
expected to become operational in January 2005, willaffect some 10,000 installations across 25 countries,
instantly creating a market that some experts estimate
could be worth around US$29.6 billion per year,
although most of this would be for energy projects.
Observers of the non-Kyoto markets note that they
have been surprised by recent increases in the numberof companies and other organizations seeking tooffset their ‘carbon footprints’.
A major question for tropical forest producers,
however, is whether they will be in a competitive
position to supply this demand. They will facecompetition from non-tropical forests and fromnon-forest sources of carbon sequestration and44

mitigation. On the other hand, it seems likelythat any realistic global strategy to mitigate climatechange will eventually need to focus attention
explicitly on reducing the 20% of forestry-related
emissions, both by reforming policies and by paying
for such emission reductions.
While at this time, the non-Annex I (developing)countries contribute a modest share of total carbon
emissions, it is estimated that in the near future they
will account for a majority of emissions. A long-term
global strategy to mitigate climate change must
therefore ultimately involve the ‘Annex II’ developing
countries. If (when) these countries makecommitments to reduce or offset emissions, national
markets for forest carbon could grow rapidly.
Niles et al. (2003) estimate that over the next 20
years, 48 major tropical and subtropical developing
countries have the potential to reduce the atmosphericcarbon burden by about 2.3 billion tonnes of carbon
if all types of biocarbon projects are eligible. Givena price of US$10/tonne of carbon and a discountrate of 3%, this mitigation would generate a netpresent value of about US$16.8 billion collectively
for these countries. This would require a significant
global effort on more than 50 million hectares toimplement carbon-friendly practices in agriculture,
forestry and on previously forested lands. Such agoal would probably imply shifting from a projectto a program-based approach. Pretty et al. (2003)
calculate that the carbon benefits of 40 sustainableagriculture and natural resource management
projects in China and India alone provide offsets
potentially worth US$324 million at US$5/tonneof carbon. Present international dialogue has not
yet reached a point where it can enable therealization of this opportunity.

Scale of ecosystem market potential
Ecosystem service markets are certainly expanding
rapidly. But to what extent do they represent a major
new market for tropical forest owners and users of
ecosystem services? We consider here estimates of theactual economic value of these services, the current
scale of impacts on income and forest conservation,and the projected future scale of such impacts.
Economic value of ecosystem services
Table 8 presents a summary by Pearce andPearce (2001) of the range of recent estimates ofthe economic value of ecosystem services from ahectare of tropical forest, assuming that non-market
ecosystem values are actually captured through some

ITTO

Table 8 Estimated economic value of forests (US$/hectare/year unless otherwise stated)
Forest good or service

Tropical Forests

Temperate Forests

TimberConventional logging
Sustainable
Conventional logging
Sustainable

200–4,400 (NPV)
300–2,660 (NPV)
20–44030–266

Fuelwood

40

–

NTFPs

0–100

Small

Genetic information

0–3,000–

Recreation

2–470 (general)
750 (forests near towns)
1000 (unique forests)

80

Watershed benefits

15–850

10 to +50

Climate benefits

360–2,200 (gross present value)

90–400 (afforestation)

Biodiversity (other than genetics)?

?

Amenity–

Small

Non-use values

Not available

70?

Option values

2–12

12–45

Existence values

4,400 (unique areas)-4000 to + 700 (NPV)NPV = net present value
Source: Pearce & Pearce (2001)

market creation mechanism. The dominant values
are carbon storage and timber (though timber value
must be adjusted for loss of carbon in harvest wood).
Conventional, unsustainable logging is more
profitable than sustainable timber management.
Other values do not compete with carbon andtimber unless the forests have some unique features(in themselves or as habitat for unique species)
or are subject to potentially heavy demand due
to proximity to towns.
This analysis does suggest that valuing the ecosystemservices would indeed have a huge impact on forest
conversion. Converting primary forest to any otheruse other than agroforestry or very-high-value
timber extraction is likely to fail a cost-benefit test.
Converting secondary forest to logging, crops
and ranching could make economic sense, whileconversion to agroforestry makes a lot of economic
sense assuming that most of the ecosystem services
are retained (Pearce & Pearce 2001).
Current scale of markets
A rough back-of-the-envelope estimate suggests thatthe current value of international, national and local
direct payments and trading markets for ecosystemservices from tropical forests could be worth several

hundred million dollars per year, while the value ofcertified forest and tropical tree crop products may
reach as much as a billion dollars. While this is a large
and significant amount, it represents a small fractionof the value of conventional tropical timber and otherforest product markets. For example, by comparison
the total value of tropical timber exports is
US$8 billion (including only logs, sawnwood, veneer
and plywood), which in turn is a small fraction of thetotal wood exports and domestic timber, pulpwood
and fuelwood markets in tropical countries.
NTFP markets are far larger still (Scherr, White &Kaimowitz 2001). The total value of international
trade in NTFPs is US$7.5–9 billion per year, withanother estimated US$108 billion in processed
medicines and medicinal plants (Simula 1999).
Domestic markets for NTFPs are many times larger(eg domestic consumption accounted for 94% of
the global output of fresh tropical fruits in 1995-2000;
FAO 2000). Nonetheless, these rough figures arequite interesting when compared with the scaleof public and donor forest conservation financesummarized in Table 3. There is no way to know
at this time how much total area of tropical forests
receives financial benefits from these markets.

45

ITTO

At this time, national government agencies are thelargest-scale buyers of watershed services; conservation
agencies (especially international) and overseas
consumers of certified products are the leading
buyers of biodiversity services; developed country
utilities, private companies and NGOs are theleading buyers of carbon services.
Projected future scale of markets
It seems certain that the scale of markets for ecosystemservices will grow rapidly. If the Kyoto Protocol isratified, the CDM is implemented with relatively
flexible rules, and the US develops a parallel carbon
trading scheme, the market for carbon could expand
dramatically, especially as obligations increase after
the first commitment period.

46

Increasing water scarcity will result in more watershed
service payments, especially around large urban areas,
irrigation areas, etc. However, it is not necessarily thecase that this will lead to natural forest conservation
and afforestation unless the biodiversity services arealso valued.
The growth in payments for biodiversity services
will be greatest in high- and middle-income countries
and to protect natural assets of especially highbiodiversity value. It is still not clear that funding
from conservation agencies and governments will beavailable for dramatically higher levels of payments.
The greatest opportunities may lie in changing
standards for agricultural production, although thiswill initially impact mainly on areas that produce
commodities for export.

ITTO

4 Benefits and risks to forest
owners and producers
It is important for individual producers to understandthe opportunities and threats of markets for ecosystemservices before deciding to participate. It is also
important for rural communities to play a proactiverole in the design of markets wherever possible andto have in place local institutions that can help tonegotiate fair deals with buyers that will not only
provide individual producer benefits but also support
community goals for landscape development.

Potential benefits
Payments for ecosystem services can potentiallybenefit forest owners and producers by increasing
forest income, encouraging sustainable production,
increasing the scale and value of forest assets, andproviding non-income livelihood and community
social benefits (Box 10).
Financial benefits
Like any type of market, markets for ecosystemservices present both opportunities and risks fortropical forest owners and producers (Table 9).
The degree of competition in both supply anddemand will, of course, determine the prices paid forthese services. Buyers will tend to seek the lowestcost suppliers of services. In most current markets,
potential supply far outstrips market demand,suggesting that prices will typically be fairly low.

Box 10 Types of compensation mechanisms
for environmental services• Direct payments to individual producers• Direct payments to producer associations• Provision of social services andinfrastructure• Price premiums for products• Financing inversions for improving
management• Technical assistance and support
for commercialization• Projects of community ecotourism• Expansion of rights over natural resources
Sources: Rosa et al. (2003), Scherr et al. (2001)

A major benefit for producers from regular, direct
ecosystem service payments (from easements,
concessions, access payments, etc) is the reliabilityof income, given that other income sources fromforestry, farming and tourism, etc, are typicallyquite variable from season to season or year to year
(Figure 3). Experience to date with ecolabellingand certification is more variable. In some markets,
there is a sizable premium that more than makes up
for the expenses of certification. In forest certification,
premiums have tended to be modest (0–30%) andthe major economic impact has been from preferredmarket access (Molnar 2003).
Because many ecosystem payments will provide only
supplemental income, it makes sense to consider theirrole as a catalyst or enabling mechanism for adopting
better management practices. Even a modest level ofpayment, reliably paid over many years, can provide
the increment to net income that makes a sustainable
forest enterprise viable, justify the restoration of
degraded forest, or increase resource-use efficiency.
For low-income producers in tropical countries, evensmall increments to income can function as a strong
incentive for conservation. Figure 4 illustrates how
payments for ecosystem services would be able toprovide the incremental income to make SFM
in the Colombia lowlands profitable.
Some producers may be able to sell several ecosystemservices from the same forest. The Landell-Mills andPorras (2002) study found 17 cases in the tropics ofbundled environmental services. Most of these mixed
carbon sequestration and biodiversity protection, andsold the two together. A few cases used the ‘shoppingbasket’ approach that is economically more efficient
but is more difficult to implement under conditionsof incomplete markets.
Non-financial benefits
Producing for ecosystem service markets can provide
non-income benefits to forest owners and producers.
Producing and protecting ecosystem services foroutside buyers may have important co-benefits for
locally-valued ecosystem goods and services, such as:
higher-quality local water supplies; the establishmentof new forest resources such as fuel, medicines
and wild game; and improved air quality due toa reduction in forest fires. New or healthier forest
resources may also help to reduce landslides andcontrol soil erosion and sedimentation.
Payments made to community organizations canfacilitate social investment and may help to protect
forest-based cultural heritage. Participation in
payment-for-ecosystem-services schemes canbuild local capacity for enterprise management

47

4

ITTO

Table 9 Potential benefits and threats of ecosystem service markets for local livelihoods
Potential contributions of ecosystem service markets to reduce rural poverty• Establish higher productivity and more sustainable farming and forest systems for local livelihoods (biomass, water, biodiversity services)• Provide cash income that can be used by local people for consumption or investment purposes (from ecosystem service payments,
increased gathering of products for sale, improved enterprise productivity)• Restore the local ecosystem services of forests and agroforestry, such as watershed maintenance, pollinator species and soil control• Provide a resource for community social investment• Contribute to improved business and market organization in local communities• Provide training and technical assistance and improve environmental knowledge and appreciation
Potential threats of ecosystem service markets to local livelihoods• Loss of rights to land, harvest products or environmental services. If a project infringes upon the sovereignty of local people, their rights
to access the resources or services that the land provides could be lost
• Loss of land ownership rights. In the case of a large entity purchasing land for the objective of selling ecosystem services, local
ownership claims may be ignored• Loss of employment when local forest harvesting rights are excluded for ecosystem service protection• Loss of control and flexibility over local development options and directions, where easements or long-term contracts specify a narrow
range of management alternatives

Figure 3 Profiting from investments in ecosystem services

Traditional
forest investments

Conservation-based
forestry investments
15%

Conservation &ecosystem services
Timber income,including certification

Timber60%

35%

Asset appreciation

40%

50%

Asset appreciation

CarbonWater rights
Conservation
Hunting/fishing
Ecotourism
Plants incl. medicinal
Fruits and nuts
Fibres and rattans
Glues
Oils
SpicesValue-added products(timber & non-timber)

A long-term commitment to conservation and sustainable forest
management can increase asset returns by 15-25% from:• higher inventory levels• reduction of risk from pests & disease outbreaks• higher valuations of older stands • reduction of risk from government regulation on timber flows• biodiversity preservation

Source: Pacific Forest Trust (based on a number of US forest companies), in Arnold & Jenkins (2003)

and development, marketing and social organization.
Markets may spur the formalization of resource tenure
and the clarification of property rights over ecosystemservices. Moreover, payments for ecosystem services
explicitly recognize forest managers for their roleas environmental stewards, which can potentiallystrengthen their position in negotiations with
beneficiary groups.

48

Benefits for different typesof producers
The opportunities and threats of markets forecosystem services will play out differently forcommercial timber producers, forest communities,
farming communities and government forests.

ITTO

Figure 4 Bundling of income streams

8
Productive
activities

7
6
5

Surplus forsecurity andstability

Options

Poverty4

Hypotheticallegal income
acceptable fora campesino family

32Legal multifunctional land-use

Environmental
services

Forestry, agroforestry,and silvopastoral
systems

Ecotourism

Illegal crops0

Traditionalfarming systems

1Time(years)

Productivearea

Source: Adapted from Villa Lopera, A. (2000). Figure 2. Hypothetical behaviour of rural producer facing different rural productive activities
and average income potential from CDM forest projects. In Analisis preliminary de beneficios colaterales.

Commercial timber producers
Whether forest management for timber or nontimber forest products is compatible with supplying
ecosystem services depends very much on the specificservice to be delivered and on biophysical conditions.
Ecosystem services are typically quite compatible withthe production of NTFPs, but carbon sequestration,for example, will commonly compete with income
from timber produced on the same piece of land.
Many producers report that managing forests forecosystem services (for example, to comply withtimber certification requirements) has resulted ingreater efficiency of production (Conroy 2001).
Forest owners with more limited resources willcommonly wish to produce multiple outputs(Scherr et al. 2001). Timber companies can often
benefit from the diversification of income sources,
and some private companies have reported earning
more than 10% of their income from ecosystemservice payments. Advances in forest ecology arealso beginning to identify a wider range of forest
management systems that will produce higher levelsof ecosystem services than conventional systems,
especially for carbon and watershed services.

Modifying forest management in order to protect
or enhance ecosystem services may affect the asset
value of forests. Where systems lead to enriched
forest stands or enhanced value for recreation,
tourism or other forms of access, asset value may
increase substantially. Where permanent easements
or long-term leases prevent other economic uses,
asset value may decline.
Forest communities
Local forest communities who rely heavily on
their forest resource asset for income may welcome
ecosystem service payments as part of a ‘portfolio’ ofincome streams. Business strategies will usually seek
to ensure both subsistence security and sustainable
income in the face of market risks and uncertainties.
Biodiversity payments intended to achieve the full
protection of endangered habitats (land acquisition,
permanent easements, and long-term leases) must
typically pay the full opportunity cost of the
productive value of the land; otherwise, landowners
will not relinquish their rights. In remote areas,that value may be a fairly low. Elsewhere, available
payments for watershed, biodiversity or carbon

49

ITTO

services will not necessarily compensate for the fullopportunity costs of leaving the land or forest out of
productive use, nor cover the entire cost of adopting
management systems that protect ecosystem services.
Moreover, given poorly developed market institutions,transaction costs can be very high, so that forest
producers will typically receive payments that aremuch less than the original buyer pays for the service(see next section). These modest payments are
therefore most attractive to producers who are alreadymanaging ecosystem services fairly well and thus incur
few additional costs. Indeed, forest communities who
have a strong historical record of forest biodiversity
conservation and management have recently argued
that they should be remunerated for good stewardship.
Many payment schemes, however, tend to target
producers with the most destructive practices,
creating a problem of perverse incentives.
An advantage for poorer and more remote forest
communities is that, unlike conventional forest
and agricultural markets, they can potentiallysell ecosystem services even with poor market
infrastructure, weak market institutions andunreliable access to external inputs. Some observers

also suggest that for indigenous communities withouta market-oriented culture, ecosystem service markets
offer a greater opportunity than forest-productmarkets (Richards 1997). At this time, payments forthe conservation of globally important biodiversity
and for region-specific watershed protection services
are the most likely source of payments for such forests.
There is also an emerging dialogue within theinternational indigenous peoples’ community (andto some extent, the rural development community),
especially in Latin America, that sees a primary rolefor indigenous and rural communities as the stewardsof nationally and globally important ecosystemservices. In order to realize such a role, however,the structure of ecosystem service payments andmarkets needs to be shaped to reward goodstewardship, rather than focusing, as it currently
does, on modifying the behavior of ‘bad actors’.
Farming communities
Ecosystem service payments are, at present,
a potentially more important tool for forest ecosystem
restoration than for the conservation of standing
forest. The effective demand for ecosystem services

Box 11 Financial contributions of ecosystem service markets to household incomes
Payments for ecosystem services can contribute to rural livelihoods in both economic and non-economic
ways, but there are currently few data demonstrating the extent to which they increase household incomes.
Farmers’ annual income is directly affected by market forces for the crops they produce. The annual incomeof farmers participating in the Scolel Te project in Chiapas, Mexico, ranges from US$800–US$3000,
depending primarily on coffee and corn. Carbon payments also vary depending on the size and land-use
system of land registered into the project. Farmers in Scolel Te generally receive US$8 per tonne of carbon
sequestered; in a year they sequester anywhere between 13 and 2,000 tonnes of carbon. Therefore,carbon payments have been estimated in the range US$120–$16,000 per farmer.
Forty-four percent of surveyed New York Catskill farmers participating in the Water Agricultural Program
maintained that watershed payments had enhanced their economic well-being. In Costa Rica, ecosystemservice payments rewarded farmers a total of US$57 million in 1997–2001; however, one survey ofparticipants in the Costa Rican scheme showed that for three-quarters of respondents these payments
accounted for less than 10% of individual family income.
The bigger point surrounding payments for ecosystem services is that while they may be small andvariable compared to household income, they continue to have significant impacts on the livelihoods ofparticipants. Almost all of the farmers surveyed in New York had other sources of income outside farming.
Watershed payments provide them with additional economic benefits, such as infrastructure improvements
and marketing assistance, which help to increase the net worth and efficiency of watershed farms. Carbon
payments in Scolel Te are, unlike crop prices, consistent sources of capital for farmers investing in moresustainable land-use systems and livelihoods. Ecosystem service payments provide a form of financial
stability that allows households to make sound investments in their futures while continuing to work fortheir primary revenues.
Sources: Orrego (2003), Rosa et al. (2003), Pagiola et al. (2003)

50

ITTO

tends to be greater in areas of higher population
density, where a higher share of the natural forest
has been converted to other uses and where thescarcity factor has increased the financial value of
ecosystem services. The current structure of the
carbon market focuses only on tropical afforestation
and reforestation. Higher population density
favours the formation of local watershed protection
organizations that may be able to negotiate local or– if federated – regional ‘deals’ (Scherr et al. 2001).
The establishment of agroforestry systems (together
with afforestation in critical areas of watersheds) offers

a way of enhancing ecosystem services in regions ofannual cropping and of creating biological corridors
to enable wildlife movement across agriculturallandscapes (Box 11). Poor rural communities thatare suffering from resource degradation are also
beginning to become buyers of ecosystem services,
paying other nearby landowners and communities
to protect critical water sources and waterways. Box
12 describes an example of such a system in India.
Product certification for crops produced in ways that
protect biodiversity and water quality is likely to
become increasingly important for farmers producing

Box 12 Rural communities in India develop equitable watershed service markets
The gradual siltation of Sukhna Lake, a popular recreation site in the city of Chandigarh, and fears of its
complete disappearance, led to the development of a watershed project in the village of Sukhomajri in thestate of Haryana in India. One side of Sukhomajri Hill drained into Sukhna Lake and the other side drained
into Sukhomajri village, where runoff water flooded and destroyed agricultural lands. The Central Soiland Water Conservation Research and Training Institute (CSWCRTI) regenerated both watersheds byconstructing conservation structures (check-dams and gully plugs) to stop the flow of silt. When the raincame, the check-dams filled with water presented an opportunity for the irrigation of the fields below;
three additional check-dams were constructed to take advantage of this opportunity. The village people
were asked to refrain from allowing their grazing animals into either the Sukhomajri watershed or the
Sukhna Lake watershed. CSWCRTI investment in runoff ponds compensated the village for providing
Chandigarh with the environmental service of protecting the hillside in the Sukhna Lake watershed.
In Sukhomajri, a problem quickly emerged: the runoff ponds provided the irrigation water to only aminority of landowners with holdings below the pond. However, others in the village, including thelandless, had no incentive and stood to lose if they were forced to abandon the hillside as a grazing
resource. The stand-off was eventually resolved by a simple but ingenious solution that ensured that allhouseholds would benefit from eliminating grazing in the watershed. First, pipes were laid so that mostfields in the village would receive water. More importantly, all households, both landed and landless,would share equally in the ownership of water in the catchment ponds. Moreover, water rights would be
tradable so that landless villagers could either sell their share to landowning households that could use it
for irrigation, or hire cropland and utilize their water share directly.
The Hill Resource Management Society (HRMS), with representation from each household, has become
the main instrument for managing the system. Anyone who requires water from the pond buys it from
HRMS, which in turn distributes the proceeds equally among its members. In addition to water, villagers
also have shared rights to collect Bhabber grass growing in the watershed. This system has become so
successful that Sukhomajri became the first village in India to be charged income tax on the value of biomassgrown on common lands. Siltation in Sukhna Lake declined by 95%, saving the city of Chandigarh
about US$200,000 annually in dredging and related costs. Vegetative cover on the hillside increased
from 13 trees per hectare to 1292 trees per hectare, increasing the value of forest to an estimated US$20
million capable of generating at least US$700,000 per annum. In the 1990s the forest yielded nearly
US$3000 worth of grass annually. Other benefits accrued in the form of increased milk and crop yield.
The Sukhomajri case involves two upstream/downstream environmental relationships with two separate
institutional arrangements. The first involves the relationship between Sukhomajri and the City of
Chandigarh and the second involves the relationship between upstream and downstream land-users within
the village. In both cases, a form of market mechanism was utilized to secure the provision of environmental
services in the form of soil conservation to prevent the siltation of downstream water bodies.
Source: Kerr (2002)

51

ITTO

for export. Government regulations mandating the
production of certified crops are being introduced
in many countries to protect critical watersheds
where land-use is dominated by agriculture.
Certification may not bring net additional income
but may be necessary to access major markets or to
produce legally.
Government forests
Despite the active pace of forest devolution over the
past 15 years, 75% of forests in developing countries
continue to be controlled by governments (as well as
much land designated officially as forest that has notrees). What role will payments for ecosystem services
play in managing and conserving these forests?
A preliminary analysis suggested that it will bedifficult for public land managers to charge forpublic goods, given that the public has already paid
through taxes. However, it may be possible to charge
companies and other specific users of private goods(for example, through bioprospecting agreements, orfor the management of a specific watershed providing
a commercial bottling plant). Public forests may also
be positioned for biodiversity protection payments forinternationally-valued biodiversity, and for payments
for carbon sequestration from afforestation on public
lands. Especially in carbon markets, public lands
will be competing directly with private land- andforest-owners, which may create political concerns.

Potential risks
In areas where land and forest tenure are notformalized, politically powerful groups may claim
lands belonging to the poor in order to receive
ecosystem service payments. Given the lack of formal
legislation in many countries regarding ownershipof the ecosystem services themselves, it is possiblethat local people could be coerced to modify land
and forest management in ways that reduce theirown incomes, while payments for ecosystem services
are made to other actors. Where the poor are
dependent upon forests they do not own for food,
fuel, building materials and medicines, the ‘locking
up’ of those forests for conservation easements orconcessions could reduce food security, access to
medicines, employment and income earned fromharvesting forest products. There is a danger that52

such rules will limit potentially positive changes inlivelihood choices, such as among indigenous peoples
in the Peruvian and Brazilian Amazon who are
required by law to remain collectors of subsistence
fruits in their ancestral domains. In some cases thelong-term implications of these contracts are notclear to local people.
Local people need to be involved in negotiating thespecifics of use and management contracts, to avoid
the risk that critically important local ecosystemservices may be lost. For example, afforestation ofa local watershed with fast-growing tree plantations
for carbon sequestration could dry up local water
sources. If the performance of watershed services
is measured in terms of water flow, there may be
incentives in a drought year to divert water from
irrigating local crops to increase downstream water
delivery. To address equity concerns, it is essentialthat the poor have a voice in setting market rules(Rosa et al. 2003). Easements, concessions, longterm land leases and management contracts may
lock forest owners into particular management
commitments for long periods of time. This reduces
their flexibility to respond to new economic
opportunities and threats. As prices change overtime, payments for ecosystem services and income
from new management systems may no longer
cover opportunity costs.
Where payments are dependent upon the deliveryof specific ecosystem outcomes, factors outside
producers’ control (such as the spread of fire froma neighbour’s land, disease, extended droughts,
the introduction of invasive species) may resultin a failure to achieve contractual obligations andin non-payment. All producers participating in
payment-for-ecosystem-services’ schemes thus needto have some type of insurance strategy. Formal
insurance policies are little used in tropical forestry,
although new insurance products are being
developed for large-scale companies (Cottle &Crosthwaite-Eyre 2002). Alternative approaches
must be used to mitigate performance risk, suchas self-insuring by implementing the new use or
management practices over a larger area of land
than is actually contracted.

ITTO

Linking ecosystem service
markets to rural development

to make such contributions and to reflect the wide
range of local values of ecosystem services (Rosa et
al. 2003).

Local producers and communities rely on ecosystemservices for their livelihoods and, as pressureson ecosystems intensify with population growthand economic development, will increasingly haveto manage resources for the provision of ecosystemservices. It is important that the capacity ofcommunities to plan for ecosystem service provision
is strengthened as regional, national and international
markets for ecosystem services evolve so thatparticipation in markets contributes to livelihood
security rather than threatens it. Compensationfor ecosystem services can be designed creatively

Increasingly, the ecosystem services performed byforests will be rewarded in the landscape mosaics
found in agricultural ecosystems. Thus, ecosystemservices will need to be evaluated and managed
as part of this broader system, often calling on
improvements in agricultural, grazing and otherland management systems to complement
afforestation and forest conservation. If ecosystemservice markets can be shaped to support andassisting in financing this process, there could
be important benefits for rural development.

53

ITTO

5

5 Strategic issues fortropical countries
Market-based instruments for ecosystem services aredeveloping most rapidly in high-income, temperate
countries. The development of international
conservation finance, environmental certificationand international carbon trading schemes – all verymuch concerned with protecting or utilizing tropicalforest resources – have thrust low- and middleincome tropical countries into these fast-evolving
ecosystem service markets. The decline in publicbudgets for forestry and conservation, meanwhile,
has encouraged domestic advocates to actively explore
financial opportunities in ecosystem service markets.
With a few notable exceptions (such as Colombia andCosta Rica), tropical developing country governments
have not yet begun to position their countries
strategically in these markets. In fact, there areimportant strategic issues to consider, with
implications for public policy and investment.
These include:•international competitiveness;•legal and regulatory framework;•

property rights and the politics
of protecting ecosystem services;•

domestic equity; and•reducing transaction costs and financial risks.

International competitivenessAt present, the biggest buyers of tropical forest
ecosystem services are in the industrialized countries,
and, with the exception of watershed services, that is
likely to remain the case for at least the next decade.
To what extent will tropical countries be able tocompete in these markets, and what will determine
competitiveness? To what extent should countries
invest in the institutional developments required tomarket tropical forest ecosystem services? What is thelikely payoff? To what extent are developing country
governments being asked to invest in international
public goods? Although the low-income countries
are often the richest in terms of biodiversity, carbon
storage potential, and watershed services, they may
suffer similar disadvantages in these markets as they
do in international product trading.

54

Biodiversity markets
The three principal international markets forbiodiversity will likely be for certified timberand other ecolabelling, direct payments for highbiodiversity-value forest conservation, and nature
tourism. These markets behave very differently.
In certified timber and crop markets, the principal
service ‘commodity’ being sold is the guaranteethat biodiversity has not been harmed by logging
or farming. Producers from industrialized countries
compete directly with those from the tropicalcountries, except in some niche markets for highvalue tropical fruits, beverage crops (coffee, tea, cocoa)
and certain timber species grown in natural tropicalforests. Tropical producers, especially in low-income
countries, are at a competitive disadvantage. Timber
certification systems are not yet well adapted totropical forest conditions and especially not for
non-industrial producers. The process of crop
certification is just beginning, but could potentiallypose serious market disadvantages for tropical andespecially low-income producers. Until certification
standards are so adapted, and greater efforts are madeto support the certification process, that disadvantage
will continue. In many parts of the tropics, land
tenure insecurity and other factors will continue
to limit certification. Many international buyers do
not support the logging of tropical forests, yet theseenterprises are in many places essential to makeecologically sustainable forest management
financially viable.
In the direct payment market for tropical forest
conservation values, tropical countries have few
developed-country competitors. Countries andforest owners with very high-biodiversity-value
resources (endangered species, high endemic
species, etc) may have considerable capacity tonegotiate with international buyers, regardlessof national market or institutional conditions.
Such areas are, however, likely to be a relatively
small share of the total tropical forest area,
although possibly important in a few countries.
In the nature tourism market, tropical countries
will compete sharply with one another for buyers.
Biodiversity value will be only one of many factors
determining competitiveness, most of which will
relate to the availability of investment andinfrastructure, marketing, and other factors,
including landscape beauty.

ITTO

Carbon markets
Until such time as the tropical countries establish
obligations for carbon emission reductions, themain buyers of carbon in those countries will beinternational, through the CDM, through retail‘green’ markets, and through whatever mechanisms
emerge for the US. Unlike other ecosystem services,carbon sequestration is site-neutral. It will thus behave
as a classic commodity, forced to compete primarilyon the basis of price and to struggle with tradebarriers. The latter are already evident. Emission
offsets based on forest carbon in the CDM havebeen capped and important types of forest carbon
projects are not eligible. It is likely that any US system
will favour domestic rather than foreign producers
of carbon offsets. CDM projects are burdened witha large number of regulatory requirements andprocedural hurdles that are not required for forestry
projects in developed-country emission trading
schemes or joint implementation projects.
Nonetheless, it still seems likely that tropicaldeveloping countries will be able to compete on
the basis of low cost. In many places, the cost of
producing carbon offsets is indeed quite low due togood conditions for forest growth, low opportunity
costs and low labour costs. Where carbon projects
have significant co-benefits, many of the production
and transaction costs may be offset by other income
flows or investment sources. However, there will
be potentially stiff competition among the tropicalcountries. The critical factors in competition arelikely to be institutional: those countries that canmobilize carbon trading in areas with secure tenure,secure investment environments, good availability ofbusiness service providers, etc, will likely out-compete
the others. This means that the greatest opportunities
will be in middle-income developing countries,
unless low-income countries do very strategicplanning to identify investment opportunities
and strengthen support.
Strengthening capacity
Participation in some ecosystem markets requires
a fairly high level of production, marketing or
information management skills, and may be
unsuitable where key actors do not have those skills.
Producers need a high level of business skills tonegotiate private deals effectively. Public institutions
must have adequate human capacity to implement
regulatory schemes effectively. Private businesses andmarket agents need to have the capacity to handle

complex organizational demands for instruments
such as trading permits. In order to compete ininternational markets for ecosystem services, or toattain an adequate level of efficiency in domestic
markets, there will need to be much greater
investment in human and institutional capacity.
A strong argument can be made for a much greaterrole for developed countries in supporting capacitybuilding for ecosystem service markets, especiallyfor markets primarily serving developed-country
buyers. International assistance may be essential
in order to attract the necessary level of private
investment.

Legal and regulatory frameworks
For the majority of ecosystem services that are‘public goods’, the creation of markets requires
proactive efforts on the part of governments andnon-government actors. While purely private
payment schemes require a minimal public legal
framework, public schemes often require a fairly
complex set of rules. Strategies to develop ecosystemservice markets need to be integrated into broader
resource planning frameworks.
Laws and regulations
Product certification schemes require little, if any,
special public legal framework, although they canbenefit from supportive public policies, such as
the exemption of certified producers from public
environmental regulations. However, the rules andprocedures for certification, including criteria andstandards, and procedures for verification, must be
developed and agreed upon by private buyers, tradersand NGOs. As argued by Meidinger et al. (2001),
certification thus functions in many ways as a formof civic environmental regulation, although to a large
degree the rule-making to date has been limited toa narrow range of elite environmental groups andwestern scientists.
Direct buyer-seller deals require from the government
only adequate contract law and legal services toprovide contract enforcement and, ideally, clear legal
guidelines as to who ‘owns’ ecosystem services andwho has the right to sell them. For example, somecountries have claimed carbon rights for the state, sothat private sellers cannot receive payment without
government authorization. Due diligence requiresthat buyers ensure that sellers have legal rights to theland or forest covered by the contract. Dependingon the institutional and legal environments inwhich they are operating, contracts may be quite

55

ITTO

Box 13 China’s ecological compensation scheme
China’s Ecological Compensation Fund remunerates organizations, collectives and individuals thatmanage forests for the ecological services provided by forests. The program was developed in response toincreasingly lax forest protection standards, because forest caretakers were disproportionately bearing thecosts of public forest benefits and were, therefore, becoming poorer. In 1996, the Ministry of Financedeveloped an initial plan to issue payments for the public services provided by forests, such as watershed
maintenance, salinity control and soil management. It was incorporated into the National Forest Law in1998 and became ready for implementation in 2000.
The plan focuses on the protection and management of protected and special-use forests, subsidizing
afforestation, reforestation and forest management activities and supporting ranging, fire prevention,
insect prevention and resource monitoring. Farmers are compensated 5 yuan/mu/year (1 mu = 0.0667
hectares). Pilot implementation has allocated 1 billion yuan to 65 counties and national-level nature
reserves in eleven provinces including Hebei, Heilongjiang, Fujian, Shandong, Liaoning, Anhui, Jinagxi
and Xinjiang. China’s program has led to better forest protection in recent years, but also needs further
improvements. Landowners often lack a good understanding of their rights and obligations under the
program and complain that subsidies are half what they should be. Funding is drawn primarily from thefiscal budget but as yet has not been collected from all the public beneficiaries of forest ecological services.
Source: Sun (2002)

simple and flexible or detailed and binding withclauses on non-compliance. Private contracts forpermanent conservation easements need to beformally recorded in public land records.
Public payment schemes require legislative
authorization to allocate budgets and set
administrative rules and responsibilities. Such rules
define what services are to be purchased, who iseligible to be a supplier, the terms of payment,
performance standards and monitoring procedures,and procedures in case of breach of contract. Examplesof recently established public payment schemes intropical countries include the Mexico example inBox 4, and China’s Ecological Compensation Fund(Box 13). In Mexico, clear legal tenure of forest ejidos
and communities has facilitated the initiation of
payments and markets for ecosystem services.
Instruments that rely on formal contracts and reliable
contract enforcement will require a well-functioning
legal system. Mechanisms to assess and address
liability in case of non-performance are required.
In Guatemala, for example, markets for watershed
services needed plans to offer three times the area
to ensure the delivery of contracted services to theinvestor.
To establish open trading markets, governments
must first establish regulations creating a market
for ecosystem service credits by legally mandating

56(and enforcing) a group of buyers for such credits,such as carbon polluters in carbon markets or landdevelopers in biodiversity markets. Governments
must then specify what types of ‘commodities’ (forexample, types of habitat in specific ecosystems) canbe traded and set the ‘rules of the game’ for trading thecredits. One of the few jurisdictions to establish an
extensive legal and regulatory framework for trading
has been New South Wales, Australia (Box 14).
Land-use planning
While international buyers currently dominate
markets for ecosystem services in tropical countries,
over the long run their most important markets will bedomestically focused. To the extent that market-type
instruments can reduce the overall cost of providing
critical ecosystem services and increase the efficiency
and effectiveness of providing them, it is desirable topromote their use domestically. A little-asked questionis whether the types of market rules and institutions
that are being developed for international markets
are the most suitable and cost-effective for domestic
markets. It may be that less stringent, more easily
measured or locally developed indicators would be
more suitable. More flexible and informally negotiatedcontracts may sometimes be more appropriate for
local agreements.

ITTO

Box 14 New South Wales, Australia, establishes legal framework for ecosystem service markets
Over the past 200 years, approximately 95 million hectares of forest and woodland vegetation in Australia
have been cleared for pastoral grazing and agricultural cropping. As a result, Australia’s forest and land-use
sector was a net emitter of carbon dioxide in 1990, the baseline year of the Kyoto Protocol. About 15–
20% of Australia’s greenhouse gas emissions arise from the on-going clearance of forests and woodlands.
Dryland salinity, caused by this deforestation, continues to threaten millions of hectares of productive
farmland and the water supplies of some major cities. It is important from a socioeconomic perspectivethat land-use changes take place in areas where marginal cropping or grazing activities are currently
occurring. Changing these areas back into forestry can help to diversify regional economies and will
increase the long-term economic product in many areas.
Pioneering efforts have been made to support the commercialization of ecosystem services from forests toachieve these goals. In late 1998, the New South Wales (NSW) state parliament passed carbon-rights’legislation that allows investors to record ownership of the rights to carbon sequestration in forests onland titles. Most recently, in January 2002, the Government of NSW indicated that, as part of its goal of
reducing greenhouse gas emissions by 5% per capita from 1989–1990 levels, it would impose a penalty
of 10–20 Australian dollars per tonne of excess emissions. The government also indicated that carbon
sequestration credits could be used as offsets against this commitment and released a detailed position
paper on the carbon-credit accounting, registry and trading systems.
Source: Brand (2002)

Over the long term, ecosystem service markets intropical countries should serve as one element inmeeting the broader objective of securing ecosystemservices critical to sustainable development.
Landscape-scale planning and the coordinatedmanagement of natural resources is needed thatencourages the efficient, equitable and integrated
provision of diverse ecosystem services and products.
Markets should be promoted where and how they
can contribute most effectively to those objectives.
For example, Binning and Moles (2001) describe indetail an example in Australia that emphasizes theprovision of ecosystem services to support the local
economy and local consumer needs. The discipline
imposed by markets for ecosystem services – in termsof their requirements for explicit information on
supply, demand, price, cost and management impacts– can potentially contribute to better overall
resource management.
Stakeholder participation, negotiation andinstitution-building are critical in all strategies –self-organized private deals, trading schemes andpublic payment schemes. While some initiatives
have succeeded well by organizing formal alliances
between users and suppliers, such alliances are as
yet uncommon.

Property rights and the politics
of protecting ecosystem services
Introducing market mechanisms into ecosystemmanagement raises important and difficult questions
about ethics, equity and politics. Issues include who
has rights to ecosystem services, the political balance
between landholders and beneficiaries of ecosystemservices, and potential public resistance to market
mechanisms.
Rights to ecosystem services
Of fundamental importance is the distributionof rights and responsibilities. Do landowners havethe right to pollute water, emit carbon or destroy
biodiversity? Do consumers have a right to cleanwater, smoke-free air or a biodiverse ecosystem? In
most situations, people adhere both to legal/formal
systems of rights and to customary/informal rights.
Should landowners be paid to provide what theymight already have a moral and legal responsibility
to protect? Will the use of market tools
disproportionately benefit certain groups who
may be responsible in the first place for the decline
in water quality and supply? Clearly defined rights
and responsibilities are an important factor in theuse of market tools to protect ecosystem quality.
The degree of confidence to attach to these tools
will be determined by the integrity of the legal andregulatory systems that support the allocation of rights,
as well as by public attitudes about fairness and equity.

57

ITTO

For example, if citizens have a right to high-quality
water they may be unwilling to pay landowners for
improving degraded water quality. In this situation themarket opportunity may be limited to transactions
among landowners as they seek the most cost-effective
ways of meeting their responsibilities. Beneficiaries
might be willing to pay landowners for measurable
water quality improvements if the government has notdefined water quality standards, has no monitoring
system in place, or lacks enforcement capacity.
On the other hand, if landowners have the rightto pollute, changing their behavior may requirecompensation from downstream users. These
decisions are not technical – they are political.
In many tropical countries, property rights on land
and forest are far from settled, much less rights tobenefit from the sale of ecosystem services. Resolving
such tenure questions is an essential first step insetting up markets for ecosystem services.
Political balance between landholders
and beneficiaries

objectives. For some cap-and-trade schemes,
governments must either be powerful enough toimplement change despite important opponents, orbe able to negotiate consensus. If governments are
too weak to regulate effectively using conventional
regulatory mechanisms, they will often be too weak toregulate a cap-and-trade system for ecosystem services.
An attractive feature of ecolabelling mechanisms isthat they do not generally rely on coercion of either
buyer or seller, and can often be implemented without
public policy action. Political acceptance of a policy
instrument will require that beneficiaries be willing
to lobby for action.
The decisions about which among the possible
ecosystem service suppliers should be paid are also
political. There is a serious ‘moral hazard’ issue forecosystem service payments that are made primarily
to ‘bad actors’ so they will mend their ways. Strategies
are needed that will explicitly reward good husbandryin the past and present, as well as in the future.
Public resistanceThe choice of policy instrument with which toprotect ecosystem services will often be heavily
influenced by political realities. One key factor is thepower of landholders relative to ecosystem service
users (Figure 5). Where the rights of landholders arevery strong, regulatory approaches may be difficult
to implement. Where the rights of service users arevery strong, they may demand that forest landholders
absorb all the costs of meeting environmental

Major political resistance has arisen in many
countries to the commercialization of some services,
as illustrated in ongoing World Trade Organization
negotiations about including services under thatorganization's umbrella. Many feel that services
such as water are so basic that they are a public
responsibility. Much of the high-visibility debate
has been about the privatization of downstream

Figure 5 Property rights and policy instruments to promote ecosystem services

STRONG

Ecolabelling schemes
Private deals

Producer rights

Public payments for ecosystem services
Community credit and technical assistance for land-use change
Trading under a regulatory cap
Taxes and subsidies
Public regulation
Public management
Informal claims

WEAK
WEAK

58

Consumer rights

STRONG

ITTO

water distribution services and markets for water
itself as a commodity (as distinct from watershed
protection services), and the establishment oflarge-scale private conservation areas.
There has been a very mixed reaction fromindigenous communities to the development of
ecosystem markets, due to concerns about theirpotential loss of sovereignty, use and access rights,
their weak position in market negotiations, andthreats to local culture posed by the commercializationof important natural values. In the case of carbon, forexample, indigenous people and local communities,
supported by civil society groups such as the Amazon
Alliance in Ecuador and the Amazon Working Groupin Brazil, participated actively at the conferencesof the parties to the United Nations Framework
Convention on Climate Change in the Hague andMarrakesh. While some community groups havepointed out the risks of forests in the CDM (eg Forumof Indigenous Peoples 2000), others emphasize thepotential benefits, provided safeguards are included(eg Declaration of Brazilian Civil Society on the
Relation Between Forests and Climate Change
2000; Amazonian Indigenous Forum 2001).
Ecosystem markets that involve public payments or
cap-and-trade markets, where they are implemented,
will need to address these debates carefully and involve
diverse stakeholders in their design. Public oversightof private deals may also be required in many places
to ensure that ecosystem services previously available
to the public are not diverted to private benefit.

Domestic equity concerns
How emerging markets for ecosystem services impact
on poor people is an important ethical issue. But
equity concerns also affect economic efficiency, since
the exclusion of certain groups from markets hinders
the ability of those markets to ensure that the lowestcost supplier is rewarded and that all consumers aresupplied. Moreover, if markets exacerbate inequalities,
they can undermine social stability. The long-term
viability of markets for ecosystem services depends
on retaining the support of key local stakeholders,
including low-income landowners and users.
Thus, it is important to make sure that newmarkets include low-income producers andreduce potential livelihood threats.

Participation of low-income producers
in markets for ecosystem services
Without proactive effort, there will be a tendency tofavour large-scale landowners in ecosystem service
markets. Experience to date shows that compensation
for reduced forest use or access has gone primarily towealthier and more powerful forest users. Costa Rica’s
impressive system for forest ecosystem service
payments imposed a minimum land area requirement
for participation that effectively excluded the poor.
Commodities may de facto exclude the poor where
their design is incompatible with important local
land-uses, or incompatible with subsistence security.
Since governments and large-scale private landowners
control a majority of tropical forest area, in many sites
they will control a majority of forest (or afforestation)sites of high ecosystem value. To be credible, markets
must be set up to deliver specified services, and thus
it is problematic and probably not sustainable todesign such markets explicitly to deliver payment
flows to low-income forest owners, if largeholders
are in fact the principal suppliers of those services(Pagiola 2002).
However, under many circumstances it does makesense to direct payment flows to the poor. In many
parts of the world (the Philippines, parts of Central
America and the Kenyan highlands, for example),
low-income farmers actually dominate land-use
in upper watersheds and should be the principal
beneficiaries of watershed service payments. In thecase of biodiversity conservation, there is considerable
opportunity for mobilizing service payments toindigenous communities who have historically
been good stewards of biodiversity (Molnar 2003).
If largeholders are responsible for the past deteriorationof ecosystem services, regulation is an alternative
approach for these groups, as they have the capacity
to self-finance improved resource management(if politics permit). Then, public payments could
be reserved for low-income producers who require
supplemental finance to make land managementchanges.
Low-income producers may, in many cases,
have potential comparative advantages in supplying
ecosystem services. These include: control overenvironmentally critical resources, local presence that
improves protection against exploitation by outsidegroups, in-depth local ecological knowledge, a longterm commitment to their territory, and/or lower
opportunity costs for land and labour. An especially

59

ITTO

strong case can be made for structuring markets forcarbon sequestration to benefit low-income farmers
and forest producers. Carbon can be sequesteredin almost any type of site. The highest rate ofsequestration per hectare is found in fertile, humid
areas where trees grow most rapidly, but carbon
payments are made per ton of carbon sequestered,
not per hectare. Thus, sequestration investments can
go to areas most in need of ecosystem restoration,
increased farm productivity, or forest benefits
for the poor.
Designing market mechanisms
to reduce livelihood threats
As discussed in Section 4, it is important to design
ecosystem service markets so that they do not threaten
the livelihoods of vulnerable groups. Even where
there are no technical, legal or institutional barriers
to the participation of low-income people in ecosystemservice markets, they are at a disadvantage incompeting with other potential suppliers, muchas they are in forest product markets. Inequity may
result from inadequate skills and education, a lackof scientific understanding of ecosystem services,inadequate finance, poor market information, lackof market contacts, weak bargaining power, weak
producer organizations, or a lack of access to businessservices. Proactive efforts can usefully address these
constraints in the building of new ecosystem service
markets (Rosa et al. 2003; Scherr et al. 2001).
In designing new market instruments, it is important
to consider potential impacts not only on participating
low-income producers and other households that rely
on lands and forests affected by market schemes, butalso on poor consumers of critical ecosystem services.

Institutions to reduce transaction
costs and financial risks
The financial benefits realized by ecosystem service
market suppliers are likely to be far lower than theprice paid by buyers. Because these are very newmarkets, there has been little development of theintermediary institutions found in mature markets
to reduce what are called ‘transaction costs’. If suchmarkets are to deliver real benefits, governments,
civil society and producer organizations need to
pay particular attention to developing institutions
to reduce these transaction costs and the level offinancial risk.

60

Transaction costs and risks
Transaction costs include the cost of attracting
potential buyers (such as establishing ecosystemservice potential), costs of working with project
partners (such as negotiating with project participants
and capacity-building), and costs of ensuring thatparties fulfill their obligations (such as contractdevelopment and enforcement, legal costs andinsurance, and monitoring of ecosystem services).
In cases where buyers are physically and socially remotefrom sellers, a chain of intermediaries may be required
for the transfer of funds. One preliminary assessment
suggests that transaction costs in forest carbon projects(presently the most complex market) absorb morethan 50% (and in some cases more than 90%) of
the value of total payments made, while the forest
producer directly receives only the residual (Niles
et al. 2003). The effectiveness of ecosystem service
markets will be greatly diminished without aggressive
action to reduce transaction costs.
To develop payment systems, technical experts,
producers and buyers must agree on the biophysicallinkages between land-uses and ecosystem service
benefits, and develop suitable methods for measuringand monitoring the provision of the service. Pagiola
et al. (2002) identified the lack of good information
over land-uses and services as the ‘Achilles heel’ of
payment schemes. People do not tend to willingly
part with their money unless they are confident
that they will receive something of equal value
in return.
Institutions to reduce transaction
costs and risks
Institutional innovations are thus needed to reducetransaction costs. As costs such as project design,
management and certification are characterized
by economies of scale, project size has an important
effect on unit costs. Where highly specialized expertiseis needed intermittently or for limited periods –to design ecosystem monitoring methods, forexample, or to develop service contracts – specializedcompanies, public agencies or experienced NGOs
can provide necessary business services. Intermediarygroups with expertise in community organization
can take responsibility for local project management
and mediation between investors and local people.
Because carbon can be sequestered in almost any site
(unlike more site-specific biodiversity and watershed
services), area-based projects (sometimes called

ITTO‘bubble projects’) can be designed in which an entire
jurisdiction commits to a defined increase in forest
cover or area of forest protected. This increases
land-use flexibility and is especially useful forlandscape mosaics dominated by non-contiguous
forest patches (Smith & Scherr 2002).
Transaction costs can be greatly reduced bydeveloping projects in communities where there are
already active local organizations and participatory
development programs in place, with community
representatives already selected and authorized tonegotiate with outsiders. For example, organizedindigenous communities in El Salvador have done
their own diagnostic studies of local needs andpriorities and are actively marketing specificecosystem services from specific areas in a way
designed to contribute to meeting those priorities(Rosa et al. 2003). If critical ecosystem services arefound in areas with little organization, NGOs or
public agencies with an interest in co-benefits may
be willing to cover selected transaction costs for thelevel of community organization needed for payments
for ecosystem services.
The participation of smaller-scale forest producers inecosystem service markets also requires institutionalinnovations to reduce marketing costs and reducerisks to outside buyers and investors. As somemarkets mature, more open trading systems will
begin to replace closed deals, and producers, buyers
and investors will develop cooperative institutions.
Intermediary organizations will attract investorsby ‘bundling’ projects within a country or region
to market carbon offsets, biodiversity credits orwatershed services.

Many market schemes require the organization,
training and management of large numbers ofpeople to develop management standards, assign
values to credits, provide technical assistance to designinterventions, negotiate contracts, and monitor andverify compliance. Technical specialists and landusers need to work jointly to define the appropriate‘commodity’ that reflects clear, verifiable links
between forest management and ecosystem service
output, and to develop alternative performancestandards where there is an imperfect understandingof ecosystem functions.
Trading deals require master registries for thejurisdiction in which obligations and credits arerecorded. Secondary markets for such credits may
be established in security exchanges. In many cases,
existing institutions, such as financial services, legal
services and other business-support services must
acquire specific knowledge and skills to work inecosystem service markets.
Projects may be pooled together in a ‘mutual fund’type arrangement to significantly lower transaction
costs and the risk of individual project failure, and tooffer specialization. For example, the independent
non-profit Face Foundation has developed a portfolio
of five projects in five countries, affecting 135,000
hectares that are sequestering 82 million tonnes ofcarbon (Emmer & Verweij 2000). The World Bank’s
Prototype Carbon Fund, BioCarbon Fund andCommunity Development Carbon Fund are otherexamples. National and local environment trust
funds could also pool investments.

61

ITTO

6

6 Key findings
This initial global overview of markets for the
ecosystem services of tropical forests draws some key
conclusions, identifies critical issues, and highlights
gaps in knowledge and information that need to beaddressed if tropical forest producers are to move
forward aggressively to benefit from these markets.

Current status of ecosystemservice markets
Current ecosystem service markets present four key
features that shape opportunities for tropical forest
countries.
1. The total value of direct ecosystem service
payments in tropical countries is presently
modest, but has grown dramatically over the
past decade and is significant, particularly
to low-income producers.
The total value of direct ecosystem service payments
for tropical forests is probably in the order of several
hundred million US dollars annually, a relatively
small percentage of the total value of the tropicalwood products’ trade of approximately US$20 billion.
Ecolabelling markets, including certified lumber,crops, livestock products, and fish, appear to be
worth several billion US dollars annually (Clay 2002).
Though limited now, the aggregate value is likely torise fairly rapidly over the next two decades, and its
share of the total income from tropical forests may
rise even faster if trends in tropical timber exports
continue to stagnate.
While international markets for ecosystem services
receive the greatest attention, it is likely that only
payments for globally important biodiversity,transboundary watershed management andinternational carbon trading will involve
international payments. The vast majority of
payments in the future for watershed conservation,
biodiversity conservation and carbon sequestration
or storage will be domestic. Nonetheless, the shapeof domestic markets will be heavily influenced by
the designs, methods and rules being developed forinternational trade.
Water and biodiversity markets are characterized byhighly location-specific value, highly fragmented
demand, high variation in price and a limited numberof buyers – all characteristics of niche markets. It is
unlikely that this will change much in the foreseeable
future. Rather, the number of niche opportunities

62

will expand greatly as interest and experience expand
in using this instrument and as more standardized
institutions are put in place to reduce the cost oftransactions. Carbon sequestration and storage,
by contrast, could eventually become a true global
commodity – with fully interchangeable products.
The developing countries that will be able to compete
will be those with good governance systems, biologicalconditions for lower-cost plantation establishment
and forest restoration, and positive legal frameworks.
For the present and for some years to come,however, the carbon market will continue to behavemuch more as a niche market and will probably
continue to do so until the major internationaland national mechanisms are fully implemented
and intermediary institutions develop.
2. Markets for forest ecosystem services are
expected to grow, in both developed anddeveloping countries, over the next 20 years.
Demand and payment for the watershed servicesof tropical forests is expected to intensify as water
demand grows in developing countries anddownstream users realize the economic benefits ofwatershed protection programs. Ecolabelled products
are the fastest growing segment of biodiversity
markets, with much of the market focused among
middle-income countries. Growth in the carbon
market will depend on the status of the internationalrules and debate concerning climate-change
mitigation.
3. Governments play a critical role as theprincipal buyers of many ecosystem services
and as catalysts for many private-sector
direct-payment schemes.
Government agencies (federal, state, municipal) arelikely to be the principal direct buyers of ecosystemservices in many tropical countries, and will be thecatalysts to bring in foreign buyers and investors andto build the market institutions needed for domestic
private actors to become engaged. Important new
public funds are being set up to finance ecosystemservices (such as in Mexico and China, etc). Carefulattention needs to be paid to designing such funds tomake sure that they support broader policy objectives,
do not create disincentives for good but unpaid
conservation behaviour, and explicitly addresspossible equity concerns. Indirect payments forecosystem services – via certification schemes – aredominated by private-sector actors. Conservation
NGOs are key players in biodiversity payments intropical countries.

ITTO

It is notable that forest officials or forest industry are
generally not the main actors driving the developmentof forest ecosystem markets. Rather, the main actors
are the potential buyers: carbon-emitting utilities in
the case of carbon, municipalities in the case ofwatershed services, and conservation agencies in
the case of biodiversity protection services. The
forestry community has been more reactive. Yet inmany cases the forest sector is over-estimating thepotential size of the market and under-estimating
the institutional developments required for them towork effectively and equitably. Forest industry andpolicy-makers would benefit by taking more of aleadership position to shape these markets as theygrow and to actively cultivate potential buyers.
4. Ecosystem service payments will in most cases
cover only a modest – but potentially catalytic– share of the costs of good forest management.
Ecosystem service payments will not usually be
sufficient to justify forest conservation in areas where
there are even modest opportunity costs for the land.
For this reason, governments will find it most rational
to concentrate on catalyzing a market-based
mechanism where investment will go to the mostcost-effective sites and opportunities. The tendency
of present models to channel scarce investment
resources to actors engaging in negative behaviouror in sites with less economic potential is in directconflict with the opportunities for bundlingecosystem service market payments to make ongoing initiatives – certified timber or ecotourism
enterprises, organic or bird-friendly crop andperennial cultivation – viable and sustainable.

Issues to consider when engaging
in ecosystem service markets
While markets for ecosystem services are growing
steadily and can be expected to grow even more
rapidly in the next decade, a number of issues limit
their potential contribution to forest incomes andecosystem service provision.
1. Property rights and national legal frameworks
are necessary for ecosystem service markets
to develop, yet these are poorly developedin most producer countries.
Few countries have established systems of rights
over or market regulations for ecosystem services,or thought through equity implications. It is

important to consider who will make the rules inemerging markets; in many cases, other sectors will
be most influential. Forest producers and civil society
need to take a proactive role to ensure that the rules
support the public interest. Otherwise, favoured
industries and groups will take low-hanging fruit,leaving few development opportunities.
The idea of paying for basic ecosystem services isstill a new one for most people around the world,and not always a welcome one. Underlying someof these concerns are real potential problems ofaccountability, transparency and equity in the
structure of new markets. Political debate andnegotiation with a wide range of stakeholders
is essential to build an appropriate policy andregulatory framework within which private-sector
actors can conserve forest ecosystem services
effectively and efficiently.
2. These markets are not likely to contribute
substantially to poverty alleviation unlessproactive efforts are made to recognize rights
and shape markets to provide equal accessto low-income producers of tropical forest
ecosystem services.
There are important reasons to involve low-income
forest producers in these markets. These include
the opportunity to address problems of income
generation and poverty alleviation, and the factthat smallholders and traditional forest dwellers are
more responsive to small payments, making thesemore cost-effective. Investments by NGOs can havean important role in building capacity and organizing
low-income producers and communities to reducetransaction costs. Legal and policy analysis is alsoneeded to ensure that low-income producers arerecognized as the owners of the ecosystem services
that they generate.
3. New market institutions are needed toreduce transaction costs and financial risks.
A major challenge of ecosystem service market
development is to ensure that critical institutions are
established to reduce transaction costs and to provide
intermediation between buyers, sellers, investors,
certifiers and other key groups in the value chain.
If appropriate action is not taken to address this at
both national and international levels, many market
opportunities will simply fail to materialize, especiallyin poorer countries.

63

ITTO

New market institutions are also needed for technicaldesign and monitoring, registers, the setting of rules
and standards and other key activities that must be
adapted to particular markets. Efforts must also bemade to ensure that the specialized rules for certain
markets do not act to negate the potentials fromother markets, at local, national or international
scales. For example, it is important that criteria
and standards for certified timber and other formsof ecolabelling are consistent where forest owners
pursue multiple goals.

Principal gaps in knowledge
Ecosystem service markets could potentially offer
a powerful new set of incentives for tropical forest
conservation and restoration, and new income
opportunities for forest producers. Watershed,biodiversity and carbon-service markets will almost
certainly continue to develop rapidly. However, itremains quite unclear which producers, consumers andtypes of forest resources will be the real beneficiaries
of market development. It is also unclear under what
conditions the creation of ecosystem service markets
will be the most effective policy instrument forachieving forest policy goals. Most markets are still
incipient and their further development will requireconcerted government action. Decisions taken overthe next few years will shape market effectiveness,
efficiency and equity for decades to come.
Yet few national, state or local government entities
in tropical countries have access to the informationneeded to shape policy on market design. While
there are some public-sector sources of informationand capacity-building (eg from the World Bank,
FAO, etc), the scale of these efforts is very small andmost input is generic rather than tailored to nationalor local requirements. Most market expertise isavailable only from the private sector, generallycompanies and consultants who are motivated by theopportunity to promote business deals. Where sitespecific design input is commercially available, thepricing of services reflects the fact that most expertiseand commercial demand are presently found in theindustrialized countries. While technical expertisefor measuring ecosystem services is become moreavailable through universities, it is often difficultfor governments or NGOs to access or apply thisin a site-specific project.

64

In particular, policy-makers and program
leaders require:•objective technical assistance to identify theopportunities and risks of using different typesof market instruments, and for designing them
to be effective, efficient and equitable;•

opportunities to exchange experiences,perspectives and lessons about the use and designof ecosystem service markets with peers in othercountries and regions;•insights for the design of appropriate legal andregulatory frameworks, and the assignment ofproperty rights around ecosystem services;•

practical data on producer costs for managing
ecosystem services, market transaction costs, andthe costs of establishing and operating different
types of market mechanisms;•

better documentation of the biophysical linkages
between land-uses and ecosystem service benefits,
and suitable methods for measuring andmonitoring the provision of services;•

objective analysis to synthesize the practicallessons being learned from functioning markets;•

objective analysis for the site-specific designof market rules and institutions; and•capacity-building to develop national
sophisticated expertise in analyzing, designingand implementing ecosystem service markets
in the public, private and civic sectors.

ITTO

References
Agius, J. 2001. Biodiversity credits: creating
missing markets for biodiversity. Environmental
and Planning Law Journal 18(5): 481–504.
Amazonian Indigenous Forum 2001. Resolutionof the Amazonian Indigenous Forum on Climate
Change. 11 October 2001. Manaus, Brazil.
Arnold, M. & Jenkins M. 2003. The Business
Development Facility: a Strategy to Move
Sustainable Forest Management and Conservation
to Scale. A Proposal to the IFC Environmental
Opportunity Facility. Forest Trends, Washington,
DC, USA.
Barbault R. & Sastrapradja, S. 1995.
Generation, maintenance and loss of biodiversity.
In: Heywood, V & Watson, R. (eds) Global
Biodiversity Assessment. United Nations
Environment Programme, Cambridge, USA.
Biocarbon Fund 2003. www.biocarbonfund.org,
19 August 2003.
Binning, C. and Moles, P. 2001. Markets for
Biodiversity Products and Services. Presentation at
Katoomba Working Group III, Teresopolis, Brazil.
Brand, D. 2002. Investing in the environmental
services of Australian forests. In: Pagiola,S., Bishop, J. & Landell-Mills, N. (eds) Selling
Forest Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.

Chomitz, K. 2003. Forest cover and population
density in Latin America. Research notes tothe World Bank; Washington, DC, USA.
Chomitz, K. 2002. Baseline, leakage andmeasurement issues: how do forestry andenergy projects compare? Climate Policy 2(1).
Chomitz, K. & Kumari, K. 1998. The domestic
benefits of tropical forests: a critical review.
World Bank Research Observer 13(1).
Chomitz, K., Brenes, E. & Constantino,
L. 1999. Financing environmental services:
the Costa Rican experience and its implications.
The Science of the Total Environment 240(1).
Cincotta, R. & Engelman, R. 2000. Nature’s Place:
Human Population and the Future of Biological
Diversity. Population Action International,
Washington DC, USA.
Clay, J. 2002. Community-based Natural Resource
Management within the New Global Economy:
Challenges and Opportunities. A report preparedby the Ford Foundation. World Wildlife Fund,
Washington, DC, USA.
CONAFOR 2003. Presentation given at the
Mexican Forestry Expo, 8 August 2003.
Guadalajara, Mexico.
Conroy, M. 2001. Can Advocacy-Led Certification
Systems Transform Global Corporate Practices?
Evidence and Some Theory. PERI Working Paper
No DPE-01-07. University of Massachusetts,
Amherst, USA.

Calder, I. 1998. Water Resource and Land-Use Issue
Issues. SWIM Paper No3. International Water
Management Institute, Colombo, Sri Lanka.

Corcuera, E., Sepulveda, C. & Geisse, G. 2002.
Conserving land privately: spontaneous markets
for land conservation in Chile. In: Pagiola,S., Bishop, J. & Landell-Mills, N. (eds) Selling
Forest Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.

Calibre & SCC 2000. Number of Forest-Dependent
People. A feasibility study for the UK Department
for International Development Forestry Research
Programme. Calibre Consultants and theStatistical Service Center, University ofReading, UK.

Cottle, P. & Crosthwaite-Eyre, C. 2002.
Insuring forest sinks. In: Pagiola, S., Bishop,
J. & Landell-Mills, N. (eds) Selling Forest
Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.

Cernea, M. & Schmidt-Soltau, K. 2003.
Biodiversity Conservation versus Population
Resettlement: Risks to Nature and Risks to People.
Paper presented at the Conference on Rural
Livelihoods, Forests and Biodiversity, held inBonn, Germany, on 19–23 May 2003.

Daily, G. 1997. Nature’s Services: Societal
Dependence on Natural Ecosystems.
Island Press, Washington, DC, USA.

Buchmann, S. & Nabhan, G. 1998. Attracting
native bees and other pollinators to restoration
projects. Restoration Ecology 6(1).

65

ITTO

Declaration of Brazilian Civil Society on the
Relation between Forests and Climate Change
and Expectation at the 6th Conference of
the Parties to the United Nations Framework
Convention on Climate Change. Belém, Brazil,
24 October 2000.
Dudley, N. & Stolton, S. 2003. Running Pure.
World Bank/World Wildlife Fund, Washington,
DC, U.S.A.
Echavarria, M. & Lochman, L. 1999. Policy
Mechanisms for Watershed Conservation:
Case Studies. The Nature Conservancy.
Arlington, Virginia, U.S.A.

ITTO 2003. Annual Review and Assessment of World
Timber Situation 2002. ITTO, Yokohama, Japan.
Johnson, N., White, A. & Perrot-Maître, D. 2001.
Developing Markets for Water Services from Forests:
Issues and Lessons for Innovators. Forest Trends withWorld Resources Institute and the Katoomba
Group, Washington, DC, USA.
Kaimowitz, D. 2000. Forestry assistance and tropicaldeforestation: why the public doesn't get what it
pays for. International Forestry Review 2: 225–231.
Kerkhof, P. 2000. Local Forest Management in the
Sahel. SOS Sahel, London, UK.

Emmer, I. & Verweij, J. 2000. Carbon offsets andtransactions costs in Face projects. Presented at
the international workshop on ‘Capturing theValue of Forest Carbon for Local Livelihoods’,
Bellagio, Italy, 14-18 February 2000.

Kerr, J. 2002. Sharing the benefits of watershedmanagement in Sukhomajri, India. In: Pagiola,S., Bishop, J. & Landell-Mills, N. (eds) Selling
Forest Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.

Falkenmark, M., Andersson, L., Castensson,
R., Sundblad, K., Batchelor, C., Gardiner, J.,
Lyule, C., Peters, N., Pettersen, B., Quinn, P.,
Rockstrom, J. & Yapijakis, C. 1999. Water: A
Reflection of Land Use. Swedish Natural Science
Research Council. Stockholm, Sweden.

Khare, A., Sarin, M., Saxena, N., Palit, S., Bathla,S., Vania, F. & Satyanarayana, M. 2000. Joint
Forest Management: Policy Practice and Prospects.
International Institute for Environment andDevelopment, London, UK.

FAO 2000. Global Forest Products Outlook Study.
Food and Agriculture Organization of the United
Nations, Rome, Italy.

Khare, A. 2003. Study on Sources and Amountsof Financing for the Forestry and Conservation
Sector. Unpublished report for Forest Trends,
Washington, DC, USA.

FAO 2001. State of the World’s Forests. Food andAgriculture Organization of the United Nations,
Rome, Italy.
Forum of Indigenous Peoples 2000. Declarationof the First International Forum of Indigenous
Peoples on Climate Change held 4–6 September
2000 in Lyon, France.
Gelderblom, C. & van Wilgen, B. 2000. South
Africa’s Working for Water Program. Paper prepared
for World Resources Institute’s Critical Flows
Project by Council for Scientific and industrial
Research. Capetown, South Africa.
IFOAM (International Federation of Organic
Agriculture Movements) 2002. IFOAM 2002
World Organic Congress. Available atwww.cog.ca/ifoam2002
Institute of Hydrology 1994. Amazonia: Forest,
Pasture, and Climate. Institute of Hydrology,
Walllingford, UK.

66

Krishnaswamy, A. & Hanson, A. 1999. Our Forests
Our Future. Summary Report of the World
Commission on Forests and Sustainable
Development. Cambridge University Press,
Cambridge, UK.
Kumar, N. & Saxena, N. 2002. India’s forests:
potential for poverty alleviation. In Lele, U. (ed).
Managing a Global Resource: Challenges of Forest
Conservation and Development. World Bank Series
on Evaluation and Development, Vol 5. Transaction
Publishers, New Brunswick, USA.
Laird, S. & ten Kate, K. 2002. Linking biodiversity
prospecting and forest conservation. In: Pagiola,S., Bishop, J. & Landell-Mills, N. (eds) Selling
Forest Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.

ITTO

Landell-Mills, N. & Porras, I. 2002. Markets for
Forest Environmental Services: Silver Bullet or
Fool’s Gold? Markets for Forest Environmental
Services and the Poor, Emerging Issues. International
Institute for Environment and Development,
London, UK.
Lele, U., Viana, V. & Verissimo, A. 2002. Brazil’s
forests: managing tradeoffs among local, national,
and international interests. In Lele, U. (ed).
Managing a Global Resource: Challenges of Forest
Conservation and Development. World Bank
Series on Evaluation and Development, Vol 5.
Transaction Publishers, New Brunswick, USA.
May, P., Neto, F. Denardin, V. & Loureiro,
W. 2002. Using fiscal instruments to encourageconservation: municipal responses to the‘ecological’ value-added tax in Parana andMina Gerais, Brazil. In: Pagiola, S., Bishop,
J. & Landell-Mills, N. (eds) Selling Forest
Environmental Services: Market-based Mechanisms
for Conservation and Development. Earthscan
Publications, London, UK.
McNeely, J. & Scherr, S. 2003. Ecoagriculture:
Strategies to Feed the World and Conserve Wild
Biodiversity. Island Press, Washington, DC, USA.
Meidinger, E., Elliott, C. & Oesten, G. (eds) 2001.
Social and Political Implications of Forest
Certification. Forstbuch Verlag, RemagenOberwinter, Germany.
Molnar, A. 2003. Alternative Conservation Strategies:
Conserve What and for Whom? Unpublished paper
for Forest Trends, Washington, DC, USA.
Nasi, R., Wunder, S. & Campos, J. 2001.
Forest Ecosystem Services: Wherefore Art Thou?
Discussion paper prepared for the Global
Environment Facility. Center for International
Forestry Research and Centro Agronomico
Tropical de Investigacion y Ensenanza,
Jakarta, Indonesia.
Niles, J., Brown, S. Pretty, J. Ball, A. & Fay, J. 2003.
Potential carbon mitigation and income indeveloping countries from changes in use andmanagement of agricultural and forest lands.
In: Swingland, I. (ed) Capturing Carbon andConserving Biodiversity: The Market Approach.
Earthscan Publications, London, UK.

OECD (Organization for Economic Cooperation
and Development) 1998. The Environmental
Effects of Reforming Agricultural Policies. OECD,
Paris, France.
Orlando, B., Baldock, D., Canger, S., Mackensen,J., Maginnis, S., Socorro Manguiat M.,
Rietbergen, S., Robledo, C. & Schneider, N.
2002. Carbon, Forests, and People: Towards theIntegrated Management of Carbon Sequestration,
the Environment, and Sustainable Livelihoods.
IUCN The World Conservation Union,
Cambridge, UK.
Orrego, J. 2003. Personal communication to
Mira Inbar, 11 September 2003.
Pagiola, S. 2002. Paying for water services in Central
America: learning from Costa Rica. In: Pagiola,S., Bishop, J. & Landell-Mills, N. (eds) Selling
Forest Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.
Pagiola, S., Bishop, J. & Landell-Mills, N. (eds) 2002.
Selling Forest Environmental Services: Market-based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.
Pagiola, S., Arcenas, A. & Platais, G. 2003. Ensuring
the poor benefit from systems of payments forenvironmental services. Paper presented at theWorkshop on Reconciling Rural Poverty
Reduction and Resource Conservation:
Identifying Relationships and Remedies, held at
Cornell University, Ithaca, USA, 2–3May 2003.
Pearce, D. & Pearce, C. 2001. The Value of Forest
Ecosystems: A Report to the Secretariat for theConvention on Biological Diversity. University
College London, London, UK.
Perrot-Maître, D. & Davis, P. 2001. Case Studies
of Markets and Innovative Financial Mechanisms
for Water Services from Forests. Forest Trends,
Washington, DC, USA.
Powell, I., White, A. & Landell-Mills, N. 2001.
Developing Markets for Ecosystem Services ofForests. Forest Trends, Washington, DC, USA.
Prescott-Allen, R. & Prescott-Allen, C. 1990.
How many plants feed the world? Conservation
Biology 4:4.

67

ITTO

Pretty, J. 2002. Agri-Culture: Reconnecting People,
Land, and Nature. Earthscan Publications,London, UK.
Pretty, J., Ball, A., Xiaoyun, L. & Ravindranath,
N. 2003. The role of sustainable agriculture
and renewable-resource management in reducing
greenhouse-gas emissions and increasing sinks
in China and India. In: Swingland, I. (ed)Capturing Carbon and Conserving Biodiversity:
The Market Approach. Earthscan Publications,London, UK.
Prototype Carbon Fund 2003.
www.prototypecarbonfund.org. 19 August 2003.
Revenga, C. Brunner, J., Henninger, N., Kassem,
K. & Playner, R. 2000. Pilot analysis of Global
Ecosystems: Freshwater Systems. World Resources
Institute, Washington, D.C. October.
Richards, M. 1997. Common property resource
institutions and forest management in Latin
America. Development and Change 28(1).
Rice, R., Sugal, C., Ratay, S. & da Fonseca, G. 2001.
Sustainable Forest Management: A Review ofConventional Wisdom. Advances in Applied
Biodiversity Science No 3. Center for Applied
Biodiversity Science, Conservation International,
Washington, DC, USA.
Rosa, H., Kandel, S. & Dimas, L. 2003.
Compensation of Environmental Services for
Rural Communities: Lessons from the Americas
and Key Issues for Strengthening Community
Strategies. PRISMA, San Salvador, El Salvador.
Scherr, S., White, A. & Kaimowitz, D. 2001.
Making Markets Work for Forest Communities.
Forest Trends, Washington, DC, USA.
SIF (Social Investment Forum Industry Research
Program) 2001. 2001 Report on Socially
Responsible Investment Trends in the United States.
SIF, Washington, DC, USA.
Simula, M. 1999. Trade and Environmental Issues
in Forest Production. Environment Division
Working Paper. World Bank. Washington,
D.C., U.S.A.
Smith, J. & Scherr, S. 2002. Forest Carbon and Local
Livelihoods: Assessment of Opportunities and Policy
Recommendations. Occasional Paper No. 37.
Center for International Forestry Researchand Forest Trends. Bogor, Indonesia.

68

Sun, C. 2002. Reflections on China’s Forest
Ecological Compensation Fund. In Xu Jintao
and Ulrich Schmitt, eds. Workshop on Payment
Schemes for Environmental Services: Proceedings,
pp. 28-30. CCICED Task Force on Forests andGrasslands. China Forestry Publishing House.
Beijing, China.
Swingland, I. (ed) 2002. Capturing Carbon andConserving Biodiversity: The Market Approach.
Earthscan Publications, London, UK.
ten Kate, K. & Laird, S. 1999. The Commercial
Use of Biodiversity: Access to Genetic Resources
and Benefit-Sharing. Earthscan Publications,London, UK.
Tognetti, S. 2001. Creating Incentives for River
Basin Management as a Conservation Strategy:
A Survey of the Literature and Existing Intiatives.
World Wildlife Fund, Ecoregion Conservation
Strategies Unit, Washington, DC, USA.
Tomich, T., van Noordwijk, M., Budidarsono,S., Gillison, A., Kusumanto, K., Murdiyarso,
D., Stolle, F. & Fagi, A. 2001. Agriculturalintensification, deforestation and theenvironment: assessing tradeoffs in Sumatra,Indonesia. In: Lee, D. & Barrett, C. (eds)
Tradeoffs or Synergies? Agricultural Intensification,
Economic Development and the Environment.
CABI Publishing, Wallingford, UK.
Trust for Public Lands 1997. Protecting the Source.
Strategies for Watershed Protection. Trust for Public
Lands, New York, USA.
Villa-Lopera, A. 2000. Analisis preliminary debeneficios colaterales. Paper presented at theInternational Workshop on Capturing the Valueof Forest Carbon for Local Livelihoods, Bellagio,
Italy, 14–18 February 2000.
Weinhold, B. 2004. Infectious disease: the humancosts of our environmental errors. Environmental
Health Perspectives 112(1).
White, A. & Martin, A. 2002. Who Owns theWorld’s Forests? Forest Trends, Washington,
DC, USA.
Wilson, E. 1992. The Diversity of Life. Harvard
University Press, Harvard, USA.
World Bank 2001. Recommended Revisions to
OP 4.36: Proposals for Discussion. World Bank,
Washington, DC, USA.

ITTO

Annex 1ITTO terms of reference forenvironmental services study
The paper should set out the main issues of
relevance to tropical forests for various environmental
services. It should give an overview of the current
status and future potential of markets and trade ofenvironmental services provided by tropical forests.
The paper should:•

set out the conventional wisdom, contemporary
understanding and views, as well as uncertainties
that still exist in the field of marketability ofenvironmental services;•

identify markets in services flowing from forests,
with particular reference to environmental services,and global biodiversity benefits, including theirrelation to tropical-timber producing forests;•

explore issues, potentials and constraints ofemerging environmental service markets, including,inter alia, carbon, water and bioprospecting;•analyse environmental services internalized
by forest owners/managers versus externalbenefits; and•identify and describe instances where
remuneration for environmental services
has contributed to the economic and financial
viability of sustainable forest management.

69

ITTO

Annex 2Tropical cities that manage forests for water services
City
Bogotá, Columbia

Protected area is source of water
Chingaza National Park (50,374 ha)

Brasília, Brazil

Brasilia National Park (28,000 ha)

Brisbane, Australia

Brisbane Forest Park:
D’Aguilar National Park (2,050 ha)

Cali, Columbia

Farallones de Cali National Park (3,200 ha)

Cape Town, South Africa

Cape Penninsula National Park (29,000 ha)
Hottentots Holland Nature Reserve (24,569 ha)

Caracas, Venezuela

Guatopo (122,464 ha)
Macarao (15,000 ha)
Avila National Park (85,192 ha)

Dar es Salaam, Tanzania

Udzungwa Mountain National Park (190,000 ha)
Seleous Game Reserve (5,000,000 ha)
Mikumi National Park (323,000 ha)
Kilombero Game Controlled Area (650,000 ha)

Durban, South Africa

Ukhlahlamba-Drakensberg Park (242,813 ha)

Harare, Zimbabwe

Robert Mcllwaine Recreational Park (55,000 ha)
Lake Robertson Recreationa Park (8,100 ha)

Jakarta, Indonesia

Gunung Gede Pangrango (15,000 ha)
Gunung Halimun (40,000 ha)

Johannesburg, South Africa

Maluti/Drakensberg Transfrontier Park
Ukhlahlamba-Drakensberg Park (242,813 ha)

Maracaibo, Venezuela

Perijá National Park (295,288 ha)

Medellín, Columbia

Alto de San Miguel Recreational Parkand Wildlife Refuge (721 ha)

Mumbai (Bombai), India

Sanjai Ghandi National Park (8,696 ha)

Nairobi, Kenya

Mount Kenya National Park (58,800 ha)
Biosphere Reserve (71,759 ha)Santiago, Chile

The Santiago Foothills have beenclassified as an ‘ecological conservation
area.’ The forests supply potable waterfor part of the municipal district of La
Reina: about 20% of potable water inrequirements for Santiago.

Santo Domingo,
Dominican Republic

Armando Bermudez National Park (76,600 ha)
Juan B. Perez Rancier National Park (40,900 ha)
Jose del Carmen Ramirez National Park (73,784 ha)
Nalga de Maco National Park
Ebano Verde Scientific Reserve (2,310 ha)

Singapore

Bukit Timah (2,796 ha)

Yangon, Myanmar

Source: Dudley & Stolton (2003)

70

Multiple-use forest is source of water

The forested watershed of the two dams,
Gyobu and Phugi, which supply drinking
water to Yangon, are managed by the
Forest Department of Myanmar, which
carries out forest conservation activities,
i.e. restoration, in the watersheds.

ITTO

Annex 3
Additional resources
The sources listed below provide additional
insight into the development of markets forforest ecosystem services.
General information on ecosystemservice markets
Landell-Mills, N., & Porras, I. 2002. Markets for
Forest Environmental Services: Silver Bullet or Fool’s
Gold? Markets for Forest Environmental Services andthe Poor, Emerging Issues. International Institutefor Environment and Development, London, UK.
Pagiola, S., Bishop, J. & Landell-Mills, N. 2002.
Selling Forest Environmental Services: Market-Based
Mechanisms for Conservation and Development.
Earthscan Publications, London, UK.
Powell, I., White, A. and Landell-Mills, N. 2001.
Developing Markets for Ecosystem Services of Forests.
Forest Trends, Washington, DC, USA.
The Katoomba Group: the Katoomba Group is aninternational working group composed of leading
experts from forest and energy industries, research
institutions, the financial world, and environmental
NGOs, all dedicated to facilitating strategic
partnerships that can launch green forest productsin the marketplace: www.katoombagroup.org
World Conservation Union (IUCN): the IUCN
is a partnership of non-governmental organizations,scientific institutions, and government agencies
that work to apply sound ecosystem management
to demonstrate how to sustain livelihoods for those
directly dependent on natural resources. IUCN has
been actively engaged in restoring ecosystems andregenerating people’s lives, economies and societies:
www.iucn.org
Resources on carbon sequestrationand carbon trading initiatives
Smith, J. & Scherr, S. 2002. Forest Carbon andLocal Livelihoods: Assessment of Opportunities andPolicy Recommendations. CIFOR Occasional Paper
No 37. Center for International Forestry Research,
Bogor, Indonesia.
Swingland, I. (ed) 2002. Capturing Carbon andConserving Biodiversity: the Market Approach.
Earthscan, Sterling, Virginia, USA.

Biocarbon Fund: initiated by the World Bank Groupand the Prototype Carbon Fund, the Biocarbon
Fund provides carbon finance to demonstrate andtest carbon sequestration projects in forest andagricultural ecosystems. It aims to deliver costeffective emission reductions while promoting
the conservation of biodiversity, the reductionof poverty, and opportunities for adaptation
to climate change: www.biocarbonfund.org
United Nations Framework Convention on
Climate Change: this convention was signed
at the 1992 Earth Summit in Rio de Janeiro andfrom it came the Kyoto Protocol, which requires
cooperating nations to abide by stringent reductions
in greenhouse gas emissions. To achieve reductions atleast cost, the Kyoto Protocol involves two flexibility
mechanisms: emissions trading and the Clean
Development Mechanism: www.unfccc.int

Information on watershed
protection services
Johnson, N., White, A. & Perrot-Maître, D. 2001.
Developing Markets for Water Services from Forests:
Issues and Lessons for Innovators. Forest Trends withWorld Resources Institute and the Katoomba Group,
Washington, DC, USA.
Ramsar Convention on Wetlands: signed in Ramsar,
Iran, in 1971, the Ramsar Convention on Wetlands
is an intergovernmental treaty which provides theframework for national action and international
cooperation for the conservation and wise useof wetlands and their resources: www.ramsar.org
World Water Council: an international water
policy think-tank, The World Water Council wasestablished in Marseille, France in 1996. It aims topromote awareness and build political commitment
on critical water issues at all levels, including thehighest decision-making level, to facilitate theefficient conservation, protection, development,planning, management and use of water:
www.worldwatercouncil.org
Information on biodiversity protection services
Convention on Biological Diversity: this convention
was established at the 1992 Earth Summit in Riode Janeiro to conserve the earth’s rapidly vanishingbiodiversity. It aims to do this by promoting theconservation of biological diversity, the sustainable
use of its components, and the fair and equitable
sharing of benefits from its the use: www.biodiv.org

71

ITTO

72

FOR SERVICES RENDERED
FOR SERVICES RENDERED

The current status and future potential of markets
for the ecosystem services provided by tropical forests

JULY 2004

INTERNATIONAL TROPIC AL TIMBER ORGANIZATION
ITTOInternational Organizations Center, 5th Floor, Pacifico-Yokohama, 1-1-1, Minato-Mirai, Nishi-ku, Yokohama, 220-0012, Japan
Tel 81-45-223-1110 Fax 81-45-223-1111 Email itto@itto.or.jp Web www.itto.or.jp© ITTO 2004

INTERNATIONAL TROPICAL TIMBER ORGANIZATION