Silver bullet or fools’ gold? A global review of markets for forest environmental services and their impact on the poor Natasha Landell-Mills and Ina T. Porras March 2002 A research report prepared by the International Institute for Environment and Development (IIED), London. A component of the international collaborative research project steered by IIED: Instruments for sustainable private sector forestry Copies of this report are available from: Earthprint Limited, Orders Department, P.O. Box 119, Stevenage, Hertfordshire, SG1 4TP, UK. e-mail: [email protected] http://www.earthprint.com For enquiries – Tel: +44 1438 748111 Fax: +44 1438 748844 e-mail: [email protected] Background case study material is available from: Forestry and Land Use Programme, International Institute for Environment and Development, 3 Endsleigh Street, London, WC1H 0DD, UK. Tel: +44 20 7388 2117 Fax: +44 20 7388 2826. E-mail: [email protected] http://www.iied.org Correspondence should be addressed to: Natasha Landell-Mills or Ina T. Porras, Environmental Economics Programme, International Institute for Environment and Development (IIED), 3 Endsleigh Street, London WC1H 0DD, UK. Tel: +44 20 7388 2117; fax: +44 20 7388 2826. E-mail: [email protected] or [email protected]. Citation: Landell-Mills, N and Porras, T. I. 2002. “Silver bullet or fools’ gold? A global review of markets for forest environmental services and their impact on the poor”. Instruments for sustainable private sector forestry series. International Institute for Environment and Development, London. Design: Eileen Higgins Cover photo: Ina T. Porras Illustrations on chapter pages: © Christine Bass Printed by Russell Press, Nottingham, UK. Printed on Sovereign Silk 115gsm, 100% chlorine free. Instruments for Sustainable Private Sector Forestry is a project coordinated by the London- based International Institute for Environment and Development (IIED) and is supported by the UK Department for International Development and the European Commission. The Instruments for Sustainable Private Sector Forestry series derives from this project. Other studies in the series to date are: • Foreign portfolio investment and Sustainable development: a study of the forest products sector in emerging markets. Maryanne Grieg-Gran, Tessa Westbrook, Mark Mansley, Steve Bass and Nick Robins. 1998. • Privatising sustainable forestry: a global review of trends and challenges. Natasha Landell-Mills and Jason Ford. 1999. • Economic instruments for tropical forests: the Congo Basin case. Alain Karsenty. 2000. • Certification’s impacts on forests, stakeholders and supply chains. Stephen Bass, Kirsti Thornber, Matthew Markopoulos, Sarah Roberts, Maryanne Grieg-Gran. 2001. • Raising the stakes: impacts of privatisation, certification and partnerships in South African forestry. James Mayers, Jeremy Evans and Tim Foy. 2001. • Production, privatisation and preservation in Papua New Guinea forestry. Colin Hunt (editor). 2002. • The New Foresters: The role of private enterprise in the Indian forestry sector. Suchil Saigal, H. Arora, and S.S. Rizvi, 2002. • Getting the private sector to work for the public good: instruments for sustainable private sector forestry in China. Lu Wenming, N. Landell-Mills, Liu Jinlong, Xu Jintao and Liu Can. 2002. Forthcoming reports in this series will include: • Company-community forestry partnerships: from raw deals to mutual gains. James Mayers and Sonja Vermeulen. 2002. • Instruments for sustainable private sector forestry in Brazil: an analysis of needs, challenges and opportunities for natural forest management and small-scale plantation forestry. Virgilio Viana, Peter May, Lucineide Lago, Olivier Dubois and Maryanne Grieg-Gran. 2002. These studies are available from Earthprint Limited at the above address. Contents Executive summary i Acknowledgements xii Acronyms xiii 1 Introduction 1 1.1 What this report is about and why it is important 1 1.2 Moving beyond the “government versus market” debate 2 1.3 This study – key questions and methodology 3 1.4 Structure of this report 5 2 Market failure and creation: a conceptual framework 7 2.1 Why markets for forest environmental services fail and why this matters 7 2.2 Seeking a solution: from state provision to market creation 9 2.3 Do markets offer a solution? 11 2.4 Assessing market arrangements: developing a framework for analysis 19 2.5 This survey 24 3 Markets for biodiversity conservation 25 3.1 Overview of biodiversity case studies 26 3.2 Biodiversity market form 26 3.3 Driving the development of markets for biodiversity protection 53 3.4 Biodiversity market evolution 56 3.5 What biodiversity markets mean for welfare and poverty 58 3.6 Constraints to biodiversity market development 62 3.7 Summary 68 4 Markets for carbon offsets 71 4.1 Carbon offset deals reviewed 73 4.2 Carbon offset market form 74 4.3 Drivers for carbon offset markets 88 4.4 Carbon market evolution 92 4.5 What carbon offset markets mean for welfare and poverty 94 4.6 Constraints to carbon market development 101 4.7 Summary 109 5 Markets for watershed protection 111 5.1 Watershed protection markets reviewed 112 5.2 Watershed protection market form 112 5.3 Drivers for watershed market development 136 5.4 Watershed market evolution 138 5.5 What watershed markets mean for welfare and poverty 141 5.6 Constraints to watershed market development 145 5.7 Summary 151 6 Markets for landscape beauty 153 6.1 Landscape beauty markets reviewed 155 6.2 Market form 156 6.3 Drivers for market development 170 6.4 Landscape beauty market evolution 172 6.5 What markets mean for welfare and poverty 173 6.6 Inequity as the most important constraint to market development 179 6.7 Summary 180 7 Bundling forest environmental services 183 7.1 Insights from theory 183 7.2 Examining the evidence 184 7.3 Summary 191 8 Overview and some recommendations 193 8.1 Overview – distilling broad lessons 194 8.2 Markets and the poor – pitfalls and opportunities 211 Annexes Annex 1: Glossary 221 Annex 2: List of cases reviewed 225 References 237 Executive summary Market-oriented approaches to environmental management are increasingly common in all sectors of the economy. Forestry is no exception. As forestry sectors around the world open their doors to growing private sector participation, governments have been increasingly attracted to market-based instruments as a new set of tools for guiding private investment. Of the many instruments available to policy-makers, by far the most ambitious to date is the development of markets for forest environmental services, such as carbon sequestration, biodiversity conservation, watershed protection and landscape values. Markets are thought to offer an efficient mechanism for promoting and financing forest protection and sustainable forest management. However, policy-makers’ enthusiasm for market development is not matched by practical understanding. Very little guidance is available on the mechanics of market evolution, or on the consequences of markets for human welfare. Unanswered questions abound. What drives market development? How should markets be established? What costs are involved? Will markets improve welfare? Will some stakeholders benefit more than others? How does performance vary between market structures? What is the role for governments? Of particular concern is the lack of knowledge related to what market creation means for poor people. The critical question is whether markets for forest environmental services can contribute to poverty reduction, while at the same time achieving efficient environmental protection. In short, do markets for forest environmental services offer a “silver bullet” for tackling economic, social and environmental problems in the forestry sector, or are they simply “fools’ gold”? Drawing on ideas in New Institutional Economics and recent thinking on forests and poverty, this paper attempts to shed light on these questions through (1) the development of a conceptual framework for guiding research; and (2) the application of this framework in a global review of emerging markets for carbon sequestration, biodiversity conservation, watershed protection and landscape beauty. In total, 287 cases are reviewed from a range of developed and developing countries in the Americas, the Caribbean, Europe, Africa, Asia and the Pacific. For each service, the paper considers six central questions: • What form do markets take? Markets vary tremendously between locations and services sold. This review considers seven key features to help describe market form: the commodities, the characteristics of participants, the level of competition, payment mechanisms, the geographical extent of trading, the level of maturity and the degree to which markets are embedded in broader institutional contexts. • Why do markets evolve? Markets evolve in response to changing demand and supply conditions. Understanding what is driving changes in demand and supply is a critical first step in developing strategies in market creation. • How do markets evolve? Institutional development tends to be slow, iterative and path dependent. It is closely intertwined with shifting power relations and changing incentive structures. Understanding the complex processes through which change occurs is essential for those wishing to foster market development. • What does market development mean for human welfare? With market development driven by certain individuals and/or groups, there can be no presumption that markets will improve social welfare.