The Challenge of Low-Carbon Development - World Bank Internet ...

Figure 4.1Average Annual Forest Commitments400350Commitment ($ millions)300250200150100500IBRD/IDAinvestmentsIBRD/IDADPLsGEFfinancedOthertrust fundsFunding1992–2001 2002–08Source: IEG.Note: DPL = Development Policy Loan; GEF = Global Environment Facility; IBRD = International Bank for Reconstructionand Development; IDA = International Development Association.Costa Rica has led the way in the design and piloting ofmarket-based instruments to enhance the provision of forestenvironmental services. The World Bank has been apartner in this effort since the mid-1990s. By the end ofthe second phase of Bank support for Costa Rica’s PES program,the country will have put in place some 288,000 hectaresof land with environmental service contracts (equal toapproximately 5.6 percent of Costa Rica’s land area), half ofwhich will be financed by funding from service users. Theprogram showed that PES schemes could be accomplishedat relatively low administrative costs. A GEF-commissionedindependent review (Hartshorn, Ferraro and Spergel 2005)found that the program had achieved its output goals. Butit also found that the program had not set up a monitoringprogram adequate to determine impacts.The need for sustainable, long-term financing mechanismsis one of the main lessons that has emerged from the pilotingof PES systems in Latin America. In Costa Rica, the bulkof funding for the PES program comes from an earmarkedfuel tax subject to political decision making; most of thepayments are for limited duration, leaving no incentivefor continued forest care. New financing mechanisms areneeded to increase the long-term sustainability of the program.For instance, the second phase of Bank support forthe PES program in Costa Rica involves a water tariff that isexpected to generate $5 million a year in support of watershedconservation.Specifying whom to pay, and how much, is a major challengefor these programs. The economic logic of the programs requiresrewarding landholders according to the services theyprovide. This runs into scientific and political difficulties.First, the services themselves may be poorly understood andmeasured. A strong folk belief holds that forests generate water,while in fact forests typically are net consumers of water.Second, cost-effectiveness would require targeting paymentstoward forestholders most likely to be dissuadedfrom deforestation, with payment levels tied to the expectedbenefits of conservation. This may conflict with notions ofequity that favor uniform payment rates (as occurred inMexico and Costa Rica) and favors payments to ownerswho are not inclined to deforest. Third, there is pressure totarget PES payments to poor people, thus combining socialand environmental goals. However, poor people may ownrelatively little forest, and the transactions cost of dealingwith many smallholders is a barrier to including them.Targeting and price-setting are majorchallenges for PES programs.Econometric analyses of the early experience of the CostaRica and Mexico programs found that they were disproportionatelytargeted toward lands with little risk of deforestation.In the first four rounds of the Mexican program,52–72 percent of PES contracts were in forests in the bottomtwo quintiles of deforestation risk. However, 72–83 percentwere located in communities in the two highest quintiles ofeconomic marginality (Muñoz-Piña and others 2008).However, one study (Alix-Garcia, Shapiro, and Sims 2010)found that the program may have reduced the probabilityof deforestation by about 10 percentage points. An analysis54 | Climate Change and the World Bank Group