Monetizing the Value of Ecosystem Services – or Not

Environmental economists view the environment as a form of natural capital: Land, water and biodiversity are viewed as assets that mediate the flow of goods and service from ecosystems toward human society. One of that discipline’s most important innovations was to invent the concept of ‘payment for ecosystem services’ (PES), based on the observation that under certain circumstances societies are willing to pay for the provision of goods and services that originate from nature. The Pan Amazon is the most biologically diverse tropical forest on Earth, its forest and soils contain the largest stock of terrestrial carbon, and it is home to the world’s largest freshwater resource. Nonetheless, it has been difficult to discover and implement PES schemes capable of monetizing the value of this enormous natural capital.

The foundation of the modern pharmaceutical industry is based on chemicals derived from plants, fungi, and animals, but the discovery process is long, difficult, and laden with risk. Similar obstacles impede investment by agribusiness; research to discover the economic potential of agrobiodiversity is largely carried out by public institutions. A PES scheme for biodiversity is not an option, because the potential beneficiaries of an undiscovered species have not been identified.

The value of water is easier to estimate, because we consume it on a daily basis; nonetheless, developing PES schemes is difficult because the Amazon has a surplus of water. It is implausible to ask consumers to pay for water, except in a limited number of situations characterized by local scarcity. In all such instances, the connection between provision and consumption is circumscribed to a local watershed. At larger scales, water is viewed as a free resource.

Two recent scientific discoveries provide an opportunity for a novel, continental-scale PES scheme based on rainfall: (1) deep convection, which maintains rainfall over the Amazon and is threatened by deforestation and forest fragmentation; and (2) the South American Monsoon, which transports water from the Amazon to the agricultural landscapes of the subtropics. The combined agricultural economy of the Paraná – Paraguay Basin was reported as approximately $US 200 billion in 2018; productivity losses due to drought stress are common and translate into billions of dollars of lost in revenue. Unfortunately, a PES scheme is unlikely because it would require the transfer of money to Brazil from a less wealthy nation (Paraguay) and from a geopolitical competitor renowned for poor governance (Argentina).

Fortunately, Brazil has the capacity and institutional infrastructure to implement a domestic rainfall-based PES program. The federal government already supports Amazonian states via revenue transfers embedded within the annual budget process; public expenditures are the largest component of the economy in Acre, Amapá, Rondônia, and Roraima. The system could be expanded into a de facto PES system by increasing funding for programs known to support water recycling on frontier landscapes, including forest conservation, reforestation, agroforestry, and low carbon agriculture.

The potential value of forest carbon has motivated all the nations on the planet to create a global PES scheme based on carbon offsets.[1] In 2009, the signatories to the United Nations Framework Convention on Climate Change (UNFCCC) agreed to implement a system referred to as ‘Reducing Emissions from Deforestation and Forest Degradation’ (REDD+). At the time, it was assumed the advanced economies, and possibly China, would agree to mandatory reductions in greenhouse gas (GHG) emissions and the adoption of a cap-and-trade carbon market to generate demand for forest carbon offsets. Unfortunately, the United States failed to adopt a coherent climate change strategy, and the anticipated cap-and-trade compliance market has yet to materialise.

In the intervening period, the countries of the Pan Amazon have invested in a variety of REDD+ initiatives, motivated by the possibility that the US would eventually adopt supportive policies. They were encouraged by multilateral development agencies and civil society groups that provided financial resources to create the necessary institutional infrastructure and to test modalities for investing the revenues from an eventual REDD+ system. This preliminary system has been operating since its inception by generating carbon offsets that have been monetised within a voluntary carbon market or via ad hoc agreements negotiated by multilateral or binational development agencies (Chapter 12).

The Brazilian government integrated its REDD+ policies within its national climate change strategy and elected to monetise emission reductions via the Amazon Fund (Fundo Amazônia). According to the rules established by the REDD+ process, the decline in deforestation between 2005 and 2017 reduced CO2 emissions from the Brazilian Amazon by ~1.5 gigatons. The Brazilian government contends those reductions should be worth ~$US 22 billion based on a projected price of about ~$US 15 per ton of CO2. Donations to the Amazon Fund have totaled $US 1.3 billion, which translates into a carbon offset price of $US 0.86 per ton of CO2. Brazil has pursued policies to reduce deforestation for multiple reasons, including to protect its export markets and respond to a domestic constituency concerned about the Amazon (Chapter 10), but when viewed as investment in REDD+, those policies have not been particularly lucrative.

Brazil’s commitment to the REDD+ system is currently under review by the government of Jair Bolsonaro, who campaigned on a platform of promoting conventional development in the Brazilian Amazon. The two major contributors to the Amazon Fund, the governments of Norway and Germany, suspended their contributions in late 2019 to protest against the change in policy This conflict has revealed different interpretations of the REDD+ agreement: Brazil contends that it should be compensated for past performance, while the donor countries believe their ongoing contribution is based on future emission reductions, or at the very least, a commitment to maintain policies to combat illegal deforestation.

The Andean countries, Guyana and Suriname all participate in REDD+ initiatives organised by the United Nations and The World Bank, as well as in several binational programmes sponsored by individual donor countries. Numerous REDD+ initiatives have been arranged and financed by civil society organisations that have yet to monetise their carbon offsets; presumably, they are holding certificates in anticipation of a future cap-and-trade market. As of 2020, there was no published estimate of their market value, although they report a total surface area of 44 million hectares.

REDD+ has failed to provide the resources necessary to halt deforestation, much less transform the regional economy. This failure is ascribed to the inability of the advanced economies to put a significant price on carbon emissions; however, even if REDD+ revenues were increased, they might not be sufficient to overcome the multiple complex factors that drive deforestation. Even less likely is the prospect for money to be allocated for the reforestation of tens of millions of hectares of degraded pastures that climate modelers assert is needed to stabilise the precipitation regime of the South American continent.