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     A key objective of PES schemes is to generate stable revenue flows that can help ensure long-term sustainability of the ecosystem that provides the service; and to structure the arrangement so that small farmers and communities, not just large landowners, may participate and benefit (this may involve increased transaction costs, and tends to be more effective where farmers are well organized). Examples in Latin America show that community participation and equitable rules are key; promoting rural livelihoods must be a stated objective of the PES program otherwise the lion's share of benefits will go to wealthy landowners. In one example in Costa Rica 70% of PES for carbon sequestration in one year went to a single wealthy landowner (Rosa et al., 2004).

     PES revenues can be generated by user fees, taxes, subsidies, and grants by IFIs and donor organizations and NGOs. Long-standing programs, including those established by New York City and Quito, Ecuador, which levy increased fees on water users to fund watershed conservation are well known. A similar, smaller programs in the Cauca Valley of Colombia works on a similar principle; farmer associations organized a PES program which levies additional water use fees to promote the adoption of conservation measures on over one million hectares and maintain dry-season water flows (Mayrand and Paquin, 2004).

      PES schemes may also include measures to assist local communities with market development and revenue diversification as part of the compensation, or payment, package for the environmental service protected and provided. For example, in Brazil, rubber tappers receive payments for forest conservation services they provide through their management of forest resources. In the US, the Conservation Reserves Program provides funding to farmers to remove sensitive lands from production, prevent land degradation and preserve biodiversity.

     Other projects promote the adoption of improved silvopastoral practices in degraded pasture areas that may provide valuable local and global environmental benefits, including biodiversity conservation; payment-for-service mechanism are being employed to encourage the adoption of silvopastoral practices in three countries of Central and South America: Colombia, Costa Rica, and Nicaragua. The project has created a mechanism that pays land users for the global environmental services they are generating. Another example is the Coffee and Biodiversity project supported by the GEF and the World Bank in El Salvador, which provides marketing and technical support as a proxy for direct payments, to promote biodiversity protection and habitat creation on shade-grown coffee plantations via niche marketing of "shade-grown," song-bird friendly coffee (Pagiola and Agostini, 2002).

      Supportive national policy environments are important. In 1997 Costa Rica reformed its forest law to allow land users to receive payments for specified land uses, including new plantations, sustainable logging, and forest conservation. The amended law recognizes four types of environmental services: carbon sequestration, biodiversity conservation services, hydrological services, and scenic beauty and ecotourism. The law also introduced a fuel tax to finance forest conservation and established an agency (Fonafifo) to raise funds and manage the PES scheme. Similarly, the Ecuadorian National Biodiversity Policy recommends the establishment

 

of markets for environmental services, and the establishment of the mechanisms for water and watershed conservation, coastal protection, global climate changes services, and compensation to landowners-importantly, to both individuals and communities (Mayrand and Paquin, 2004).

     Another variant of a PES scheme is the BioCarbon Fund established by the World Bank to buy certified emission reductions from land-use, land-use change, and forestry projects admissible under the Kyoto Protocol. The Fund is designed to target agricultural and forestry projects that enhance other ecosystem services, such as biodiversity and watershed protection, while improving the livelihoods of local people. Projects include conservation agriculture, such as shade-grown coffee, agroforestry to restore degraded areas, improved agricultural practices, such as shifting from subsistence farming to organic agriculture, and reforestation (Kumar, 2005).

Bioenergy and biofuels: subsidies and standards. Large direct and indirect subsidies, including tax credits for biofuels, have been used to build bioenergy production and markets. Fuel blending mandates and import restrictions, particularly tariffs on ethanol likewise have helped to build domestic markets (UN Energy, 2007). How the bioenergy value chain is structured is crucial for determining the development benefits of this sector. Policy options to support small and medium size enterprises in bioenergy should be considered because of studies showing the multiplier economic and development effects of local ownership in local economies (Morris, 2007; UN Energy, 2007).

First generation liquid biofuels: trade, subsidy and sustainability issues. When subsidies are granted to biofuels, they should be tied to objectively observable positive externalities. Biofuels policies set incentives for producers that directly affect the extent of externalities, the primary justification for granting the subsidies in the first place. In the case of current policies in most countries it is apparent that these incentives are rarely closely linked to the externalities they are allegedly supposed to provide. In fact, the majority of policies in OECD countries create incentives to maximize production of 1st generation biofuels, irrespective of quality and quantity of externalities. Consequently, many biofuels are produced with intensive use of energy inputs, leading to low energy balances and GHG emission reductions while contributing to environmental problems.

      Biofuels produced from agricultural feedstocks (first generation) are rarely competitive with other forms of energy and practically all producing countries support their biofuels industries through a complex set of federal and state-level policies. The most common forms of support are reductions on excise taxes that are designed to foster consumption by reducing the cost of biofuels relative to conventional fuels. On the supply side, these policies are often complemented with direct production support, e.g., payments of Euro 45 ha-1 for energy crops grown on non-set-aside land in the EU and subsidized credit for producers in Brazil and the U.S. In addition, biofuels also benefit indirectly from highly distorted agricultural markets in OECD countries, e.g., the U.S. maize sector, the primary ethanol feedstock in