Finance for Forest Conservation & Payment for Ecosystem Services

In ensuring long-term conservation of forests, there is the perennial challenge of finding ways to financially support conservation, regulation and enforcement activities, forest management, and forest protection, in addition to offering alternative financial incentives or livelihood options for stakeholders that would otherwise profit from deforestation. There are a number of ways and mechanisms by which conservation finance has been approached, including debt-for-nature swaps, conservation trust funds, mitigation banking or biodiversity offsets, and payment for ecosystem services, each of which is described in more detail below.

Debt-for-Nature swaps: The concept of Debt-for-Nature swaps was developed in the 1980’s as a method by which debt owed to foreign banks and creditors by developing countries could be renegotiated so that the financial payments originally owed in debt would be applied towards conservation in the country. The idea behind such an approach is to provide a “win-win” situation, where developing countries can pay off their debts, while ensuring conservation. While the specific process of establishing a debt-for-nature program can vary, transactions are often brokered by conservation organizations (such as World Wide Fund for Nature or Conservation International) who work with the indebted country to establish program guidelines and specific terms of the exchange, and purchase debt from banks or creditors for a subsidized rate (as the likelihood of many of these countries paying off their debt burden is low in many cases, such options are beneficial to these financial institutions as well).  Local government approval for the swap is also needed. After the debt is acquired it is presented to the central bank of the indebted country which cancels the debt and provides funds used to implement conservation projects over the period of the agreed-upon conservation program.

Conservation Trust Funds: Also known as Environmental Funds, these finance sources are typically set up as grant-making institutions independent of government agencies. Initial funding for such funds typically comes from government grants, donors, or debt-for-nature swaps, however in more recent years, funds have been established using income from fees or taxes from payment for ecosystem service schemes or water funds.  The structure of these funds can be endowments, sinking funds, revolving funds, or some combination thereof, each of which utilizes interest, capital and revenues differently. Conservation trust funds consist of assets and funds that are legally restricted to specific purposes, and are generally set up by legally independent institutions (such as NGO’s).

Forest mitigation banking/Biodiversity Offsets: Biodiversity offsets or mitigation banking are mechanisms where development projects (such as mining development) that have negative impacts on biodiversity or certain ecosystems (eg forest or wetlands) “offset” their impact by financing restoration or conservation elsewhere. The aim of this approach is one of “no net loss,” or ideally potential gain in net biodiversity, although the degree to which this is successful is subject to debate. While the mechanism offers considerable funding opportunities for conservation and restoration, success of offsetting is not always guaranteed and some conservationists express fear that offsets operate merely as a “license to trash” biodiversity. One of the longest-standing examples of mitigation banking is the Clean Water Act in the United States, legislation passed in 1972, permitting development projects to trade wetland damage by restoring other wetland areas off-site. In recent years financial institutions and companies are increasingly investing in offsets and mitigation activities.

Payment for Ecosystem Services (PES): Payments for ecosystems services aim to capitalize on the fact that forests and ecosystems provide greater social benefits beyond those seen by any individual land owner, and that in some cases concerned stakeholders may help pay to ensure the continuation of services such ecosystems provide. Forests provide a number of ecosystem “services” including hydrological regulation, biodiversity conservation, and carbon sequestration.  Payments for such services may be voluntary, from public stakeholders (such as governments), or may be mandated by the government to be paid by private enterprises. One common example of PES linked to forests are watershed services, where stakeholders such as urban consumers, hydroelectric companies, agriculture and private corporations rely on dependable clean water supply from local watersheds (which can be strongly impacted by riparian forest presence throughout the watershed). Funds from interested stakeholders can then be used to support forest management activities or to incentivize local land owners to maintain forest cover. Another ecosystem service of forests gaining increasing interest is that of carbon sequestration. REDD+ (Reducing Emissions from Deforestation and Forest Degradation) is one such approach where international donors encourage forest conservation or restoration aiming to combat climate change in developing countries by offering financial compensation.

Beyond the approaches described above, there is a diversity of other conservation finance mechanisms. Some other examples include fees from nature-based recreation, such as tourist fees in protected areas, bioprospecting agreements, where pharmaceutical companies offer financial support to countries in return for exclusive rights to search among local biodiversity for new pharmaceutical compounds, or government-levied taxes or fees to support conservation. Additionally, incorporation of alternative income streams into forests, such as economic benefits from sustainably harvested timber and non-timber forest products can offer financial support to help ensure forest conservation. To read more about conservation finance and case study examples of the approaches described above, see WWF’s Guide to Conservation Finance.”

Read more about Payment for Ecosystem Services and Conservation Finance in the Amazon here.


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