Background

It is well known that forests contribute substantially to the welfare of human societies by providing highly demanded and valuable goods and services. Many of these goods and services, however, do not often find their way to the markets. This is especially the case of public goods and externalities related to the active protection and management of forest resources. The economic nature of this type of goods and services (characterised in many cases by improperly or ill-defined property rights and lack of markets) causes important market failures that prevent the producers of those goods and services (forest owners who bear the cost of forest management) from internalising their full value. As a consequence, many forest owners do not have incentives to manage their forests in a way that ensures the sustainable and socially optimal provision of those relevant non-marketed goods and services. In addition, the fact that many of these goods and services are available for consumption almost free of charge increases the risk of overuse and overexploitation of resources.

Market based instruments (MBIs) and payments for environmental services (PES) have recently been attracting increasing attention as a potential solution that could help to establish a much needed balance between the provision and the consumption of forest goods and services by providing necessary incentives both to forest owners and to the beneficiaries (consumers) of these goods and services. While MBIs have already been in use for several decades especially in the context of pollution regulation, PES is a relatively new term which has originally emerged to denote a payment scheme applied in developing countries and based on private contracts between providers and beneficiaries of environmental services. The extensive literature on MBIs and PES notwithstanding, the concepts and especially their possible applicability to the problems of forestry are far from being crystal clear. As PES schemes are being extensively adopted around the world (including developed countries), many questions arise. Should PES schemes be limited to private (decentralised) contracting sphere? Can or should they be used jointly with other (centralised) market-based instruments (such as environmental taxes and subsidies)? Can subsidies and government aid to forest owners be considered as payments for environmental services? These and many other questions remain open and need to be clarified before a clear understanding of mechanisms available to policy makers can be developed.