Payments for Ecosystem Services: Costa Rica

Introduce land sector offset mechanisms and develop agricultural carbon methodologies, Embed just-transition considerations into policymaking

Overview

The ecosystem is responsible for the fresh air we breathe, the clean water we consume, the spaces we inhabit , and much more. These benefits provided by nature, which can be thought of as ‘ecosystem services’, are imperative to the existence and development of life on Earth.

In effort to protect the vital services provided by nature, some governments have experimented with creating a market-based mechanism to derive economic value from protecting the land, rather than extracting its resources.

Costa Rica introduced one of the world’s first Payment for Ecosystem Services Programs (PESPs) in 1996, when Forest Law Number 7575 was adopted. The National Forestry Financing Fund(FONAFIFO) operates the program and compensates landowners for providing ecosystem services . Payments are based on an area of protected or replanted forest and stipulate a minimum contract period. PESP funding was initially provided by state and international development banks like the World Bank, although recently it has attracted private-sector finance.

Impact

Since introducing the PESP, emissions from land use, land-use change and forestry in Costa Rica have dropped, and in 2017 the state’s forests sequestered almost 3,000 metric tons of carbon dioxide equivalent. While forests covered just 25% of the country in 1995, by 2022 60% of the country was home to in highly biodiverse tropical rainforest. Over 1 million hectares of these forests are have qualified for payments under PESP since 1997.

This has enabled Costa Rica to create REDD+ carbon credits, a framework by which the World Bank pays developing countries for protecting forests and reducing emissions from deforestation.

Opportunity

The World Bank issues and buys REDD+ credits generated through avoided deforestation, and subsequently sells these in the voluntary carbon market to corporates. REDD+ credits can be bought and sold on the voluntary carbon market alongside other types of carbon credits. REDD+ credits are often seen as high-quality credits due to their direct impact on reducing deforestation.

In December 2020, the World Bank signed an agreement to provide Costa Rica $60 million for delivering 12 million tons of emissions reductions through 2025. The issuance of REDD+ credits could help other jurisdictions finance their own PESPs.

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