2 Terms relevant to Payment for Ecosystem Services

Ecologists, environmentalists, social scientists, policy-makers, community leaders and others have used various terms to describe market-based instruments that reward the stewardship of ecosystem services benefiting “external” actors. When such programmes initially attracted significant attention in the 1990s, the predominant name was payment for environmental services. In recent years, however, critics have challenged both the payments and environmental components of this nomenclature (Engel et al., 2008*; Bennett, 2009*). From an ecosystem point of view, ecosystems provide services that sustain, strengthen, and enrich various constituents of human well-being (Kumar and Muradian, 2009*). To maintain a healthy ecosystem and, at the same time, to meet the basic requirements of human well-being, scientists have started studying payment for ecosystem services, which is often abbreviated to PES. Terms relevant to PES are as follows:

Ecosystem Services (ES): ES are the benefits people gain from ecosystems to sustain human well-being (MEA, 2003*; Kumar and Muradian, 2009*). These include provisioning services such as food and water; regulating services such as the regulation of floods, drought, land degradation and disease; supporting services such as soil formation and nutrient cycling; and cultural services such as recreational, spiritual, religious and other non-material benefits (Table 1). With regard to PES, all of these ES are taken into consideration.

Payment for Ecosystem Services (PES): PES is a type of market-based environmental policy instrument. Some of these instruments incorporate, to varying degrees, aspects of market-based approaches (Sterner, 2003). They can be essentially defined in terms of payments to land managers and others to undertake actions that increase the quantity and quality of desired ecosystem services, which benefit specific or general users, often remotely. PES, effectively, provide incentives to address market failure by altering the economic incentives faced by land managers or others who can affect the delivery of ecosystem services (CCICED, 2007*). In this sense, it can be argued that PES fits within the broad category of market-based (economic) instruments that include taxes and charges, subsidies and tradable permits (DEFRA, 2010). PES is defined as a transaction between providers and beneficiaries of ecosystem services, using innovative instruments to manage and measure transactions between providers and beneficiaries of ecosystem services (Kumar and Muradian, 2009). PES has emerged as one of the most innovative and cost-effective responses to the management of ecosystem services. Payments have been successfully designed and executed for carbon, watershed services, genetic material and various other nutrients.

The basic idea behind PES schemes is that the users/beneficiaries of a service compensate the providers. Beyond this, PES can vary according to a number of characteristics, including:

• Provision of ecosystem services, which can be based on one specific service (e.g. carbon sequestration), and/or bundles of ecosystem services (e.g. carbon sequestration plus biodiversity enhancement) (CCICED, 2007*).
• Financing, which can come from different sources, including: the government effectively purchasing on behalf of a large number of beneficiaries. For example, public benefits purchased through Environmental Stewardship relating to landscape and biodiversity on behalf of English public private companies and individuals, downstream water users paying for watershed management on upstream land (Berry, 2006; CCICED, 2007*).
• Payment approaches, which can be classified into two main categories: output-based payments based directly on the delivery of ecosystem services (which can also be referred to as payments for results), and input-based payments for the adoption of particular land uses or land management practices that are expected to deliver additional ecosystem services and benefits (typical of many agri-environment subsidies).

Eco-compensation: Urgent needs for payment for ecosystem services in China have led to a wide range of policy and programme innovations, many under the broad heading of “eco-compensation”, which is a term directly translated from the Chinese word shengtai buchang into English. The term was officially defined for the first time by the China Council for International Cooperation on Environment and Development in 2007, in a research project on PES. It stated that eco-compensation is a type of institutional arrangement to protect and sustainably use ecosystem services, and to adjust the distribution of costs and benefits between different actors and stakeholders, mainly through economic measures (CCICED, 2007*). In other words, eco-compensation schemes aim to protect the ecological environment and improve relations between man and nature. It is a public regulation that aims to adjust relations between the stakeholders involved in ecological conservation on the basis of ecosystem service values, costs of ecological conservation, opportunity costs, and via government means and market schemes.

Internalisation of externalities is the key to eco-compensation. The theories of Pigovian Tax and Coase Transaction cost have a high policy significance for eco-compensation schemes. In the current selection of policy approaches concerning eco-compensation, various policy measures have different adaptive conditions and scope, and are subdivided according to the property rights and equity considerations of public goods concerning the issues of eco-compensation and the extent of ownership. If the marginal transaction fee via governmental adjustment is lower than the marginal transaction fee via voluntary consultation, it is better to take the approach of Pigovian Tax, e.g., by levying an eco-tax (fee) on the beneficiaries and destroyers of the eco-function, so as to solve the compensation issue.

The Chinese term “eco-compensation schemes” (buchang jizhi) appears to encompass both PES-like policies that involve direct payments from the government to individual and community-level suppliers of ecosystem services, as well as policies that develop frameworks of cooperation between various levels of government for the financing and sharing of costs of environmental protection and restoration. Compared with the term PES, eco-compensation emphasises the more institutional and political aspects of payment. This is because in China, apart from policy approaches concerning eco-compensation, direct payment in terms of monetary or in-kind to protectors of ecosystem services is currently often made by governments, and the market mechanism is not yet fully functional. The growing use and importance of eco-compensation within China’s environmental policy framework is indicative of a greater emphasis not only on developing innovative market-based instruments for environmental policy, but also on resolving property rights and equity issues surrounding the use and protection of natural resources, which should be taken into consideration when creating eco-compensation schemes.

Although many Chinese policy and programme innovations relevant to PES fall under the broad heading of “eco-compensation”, for international audiences and reference, we have chosen to use the umbrella term “Payment for Ecosystem Services (PES)” in this paper, to refer to the wide range of compensation made to the providers of ecosystem services. These payment schemes are currently being shaped in China, and are often at different stages of development – ranging from one-off payments between the beneficiaries and providers of ecosystem services to cap-and-trade markets (CCICED, 2007*).