Payments for Ecosystem Services: Getting Started. A Primer - UNEP

Section 3: A Step-by-Step Approach to Developing PES Deals
How do you assess marketable financial value?
The price for an ecosystem service is ultimately determined by what the buyer
is willing to pay and what the seller is willing to accept and deliver. In regulated
markets, this ‘willingness to pay’ is often mandated, while in voluntary PES deals it is
negotiated.
Negotiations can include a range of reasons for setting a price, such as:
• Economic value or the quantifi cation of economic benefi ts of the services from
a societal point of view (both direct and indirect),
• Financial value which is a combination of:
– the actual private fi nancial benefi ts to specifi c actor(s) that can be
estimated based on the costs of replacing an ecosystem service if it were
damaged or not available
– the costs to the landowner of making needed resource management
changes, such as costs of planting trees
– the costs of developing the transaction, including creating baseline
documentation of current ecosystem services status, developing a plan for
changing practices to improve ecosystem service fl ows over time, etc.
• Relative costs of alternatives such as the cost of building a water treatment
plant versus investing in natural ecosystem service-based fi ltration,
• Market or transaction price which is partly a refl ection of perceived risks and
uncertainty as well as bargaining power or the existence of co-benefi ts, and
• Pricing of similar deals.
Many factors determine the price that buyers are willing to pay for an ecosystem
service, as well as the price at which a seller is willing to deliver the same service. The
degree of competition in both supply and demand is, of course, key.
Buyers will tend to seek the lowest-cost suppliers of services, though there is growing
interest in — and a premium placed on — the ‘co-benefi ts’ from some PES deals,
such as conservation of habitat, poverty alleviation, and other factors. That is, there
is a growing number of buyers who are looking for deals that have proven benefi ts to
the surrounding community or that have been endorsed by a credible NGO, thereby
reducing the risk that the transaction will be labeled ‘greenwash.’ In these cases,
while cost is important, it is secondary to the ‘quality’ of the product or even the ‘story’
associated with the PES deal.
In most current deals and markets for ecosystem services, potential supply is likely
to outstrip market demand, suggesting that prices will typically be fairly low. A case
in point is carbon: the market value (i.e. the price paid for a CO2 credit) varies
depending on whether one is selling into the US market, where compliance is almost
always voluntary, or into the European Union market, which is driven by a need to
comply with the Kyoto Protocol. This price is determined by the interaction of supply —
and the marginal cost of providing an offset and bringing it to market — and demand,
which includes the marginal cost of reducing emissions to meet mandatory caps or
the perceived public relations benefi t of buying voluntary offsets.
In some cases (and these may be rare), valuation studies can help generate demand
for a service. However, in no case should valuation studies be confused with the
actual price of an ecosystem service. 1
1
Perhaps the most well-established use of valuation methods to determine “marketable value” is in the area of
park entry fees and hunting licenses.
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