Payment for Environmental Services: Hypotheses and Evidence

The use of payment for environmental services (PES) is not a new type of contract, but PES programs have become more in vogue because of the potential for sequestering carbon by paying to prevent deforestation and degradation of forestlands. We provide a framework utilizing transaction costs to hypothesize which services are more likely to be provided effectively. We then interpret the literature on PES programs to see the extent to which transaction costs vary as predicted across the type of service and to assess the performance of PES programs. As predicted, we find that transaction costs are the least for club goods like water and greatest for pure public goods like carbon reduction. Actual performance is difficult to measure and varies across the examples. More work and experimentation are needed to gain a better outlook on what elements support effective delivery of environmental services.