Mix of land use practices on slopping terrain inworldagroforestry.org/sites/default/files/chapters...Mix of land use practices on slopping terrain in Sasumua watershed, Kenya . Photo:

Chapter 11 | 1

Mix of land use practices on slopping terrain in Sasumua watershed, Kenya

Photo: World Agroforestry Centre/Lalisa Duguma

Suggested Citation: Duguma LA, Minang PA, Alemagi D, Atela J and Nzyoka J. 2017.

Packaging ecosystem services: bundling and stacking concepts and their implications for rewarding land managers. In: Namirembe S,

Leimona B, van Noordwijk M,

Minang P, eds. Co-investment in ecosystem services: global lessons from payment and incentive schemes.

Nairobi: World Agroforestry Centre (ICRAF).

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CHAPTER 11 Packaging ecosystem services: bundling and stacking concepts and their implications for rewarding land managers

Lalisa A Duguma, Peter A Minang, Dieudonne Alemagi, Joanes Atela and Judith Nzyoka

Highlights • Fair rewards for land managers require that the ecosystem services (ESs) generated

across time and space are ‘packaged’ for stakeholders.

• Bundling implies that multiple ESs are packaged jointly for investors with multiple goals.

• Stacking or layering implies that multiple aspects of a single landscape attract separate funding, clarifying the ‘additionality’ requirements for each.

• The choice of the packaging model (i.e. whether to bundle or to stack) is context-specific and is influenced by numerous factors.

11.1 Introduction

Current land-use and land-cover change on our planet1 favours practices that generate high profit, sometimes at the cost of negative external environmental consequences and local sustainability. Among such practices is the rapid expansion of monocrop commodity crops such as oil palm, rubber, coffee, and cacao at the expense of intact natural forests. This trend has raised a major global concern especially due to the loss of the natural forests2,3 which are major carbon stores and sinks, and habitats for diverse flora and fauna. These conversions often entail a significant loss in Ecosystem Services (ESs). The Millennium Ecosystem Assessment report4 indicated that close to one-third of ESs suffer degradation of ecosystem structure and function. Costanza5 estimated that land-use changes from 1997 to 2011 resulted in a loss of ESs worth between USD 4.3 trillion and 20.2 trillion per year, a value exceeding the sum of marketed goods and services (GDP). Much of the ‘success’ in increases of GDP may thus be based on a partial accounting that hides the concurrent losses from view.

Land managers (including land owners and users) make their land-use decisions based on the anticipated benefits6 and the evidence available to them7 concerning the risks and uncertainties associated with the practices. Anticipated benefits are often associated with demand for products for either subsistence or commercial purposes, e.g. coffee8, cocoa9, rubber10, timber11, or oil palm12. Creation of farmlands for such commodity crops has consumed a significant portion of tropical forests ultimately causing concerns around ecological sustainability. This highlights the need to develop strategies to sustainably reduce such conversions while accounting for the needs and benefits triggering the conversions. In

2 | Packaging ecosystem services: bundling and stacking concepts and their implications for rewarding land managers

this chapter, we refer to the land managers as ‘sellers’ and those who pay or reward for ESs as ‘buyers’. To reward land managers fairly, first it is important to find a means of valuing the various ESs and then identify interested parties to provide the resources required to make the rewards.

Different entities, depending on their institutional priorities, are interested in different ESs. These are institutions interested in water, carbon, or the habitat values of ecosystems. The reward mechanisms are often determined on how the ESs can be valued—either as one unit (bundled) or as separate units composed of different ESs that could be paid for by different interested entities (stacked or layered). Whether bundled or stacked, an inherent feature of the reward mechanism is that it aligns buyer-seller parts as those in normal market conditions. As highlighted in previous studies5,13, although we are cognizant that not all ESs can be monetized, a market valuation approach may determine relative values that can inform policy and decision-making processes. Despite the debate on whether to consider ESs as commodities and hence the necessity of the term ‘market’, in this chapter, market mechanisms are used as a better option for capturing the bundling and stacking concepts. The chapter particularly emphasizes how benefits to land managers and/or local communities could be enhanced so that they may manage and utilize ecosystems sustainably.

The specific objectives of the chapter are to 1) revisit the concepts behind packaging ESs and explore the merits and demerits of the different packaging models; 2) identify the barriers and potential enablers such as policy instruments and interventions to improve the rewards land managers providing the services can get; and 3) highlight the current knowledge gaps relating to packaging of ESs.

Young oil palm stand established by clearing forests in Lofa County Liberia. Photo: World Agroforestry Centre/Lalisa Duguma

11.2 Packaging ESs: Bundling and stacking concepts

ESs can be packaged and marketed in various models: bundled, stacked14 or as separate pieces (Figure 11.1). In bundling, one credit unit is sold to a single buyer in an integrated market for ESs15,16. In stacking, on the other hand, multiple buyers in the presence of multiple markets buy ESs of their interest using diverse credit units. Thus, in stacking, a single project can receive payments from more than one buyer for the various ESs it provides16,17. Currently,

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however, the common experience is selling ESs that are highly in demand by buyers, hence leaving most ESs out of the evaluation framework.

Figure 11.1 Different forms of packaging ESs

Four different forms of stacking/layering can be identified: vertical stacking, horizontal stacking, temporal stacking and hybrid vertical-temporal stacking (Figure 11.2).

Vertical stacking18 (Figure 11.2a) is when the credits originate from different ESs but are stacked from within the same space19. It is a case where diverse ESs or credits representing the ESs are sold from the same location at any one point in time. For instance, a natural forest ecosystem receiving different credits for carbon, biodiversity conservation and water provisioning15.

Horizontal stacking18 (Figure 11.2b) is the case when you have a management practice resulting in one credit at one location (usually the project site) but which also generates credit(s) in another area. For example: forest management in upland areas is rewarded carbon credits while also generating credits in downstream areas through control of landslides and erosion (e.g. RUPES in Asia20,21). The potential of generating different ESs at different locations for different buyers may enhance the interest and commitment to manage the ecosystem better.

Temporal stacking18 (Figure 11.2c) happens when different ES credits are issued at different times from the same management intervention or the same area or ecosystem with each ES having its own distinct credit units. For example: farmer-managed natural regeneration (FMNR) payments in early phases are associated with carbon payments, followed by provision services such as fuelwood, timber, fodder etc., and followed by additional payments for carbon credits due to fulfilment of the certification criteria. Another example is when a reforestation programme gets payments for carbon credits starting in the early years but payments from biodiversity conservation only commence at a later stage of the scheme when the system is able to provide the habitat services. See also Asquith22 for an example of forest conservation providing temporally stacked services.

The last form of stacking is where temporal and vertical stacking happens in the same context (Figure 11.2d). This may happen in cases where the negotiation is made on a long-term basis (e.g. decade or longer) and when you expect several rotations of ESs credit generation. This is


the case where at time t1 several ESs credits are generated and at t2 there are also expected sets of ESs credits to be generated.

Figure 11.2 Different versions of stacking ESs. Different blocks represent different credits from different ESs. Note: The y-axis could be either credits or payments, but we only put credits for simplicity

Benefits of bundling and stacking are greater rewards or incentives for land managers to provide ESs and for management to enhance multiple ESs as opposed to maximizing a single ES (for example maximizing C sequestration by planting fast-growing monocultures at the expense of biodiversity). In doing so, the mechanisms help reduce the risk of converting existing land uses and land cover to practices that may only be financially attractive at particular times but not environmentally friendly in the long run. Bundling in particular reduces the problem of incomplete coverage of ESs provided by ecosystems and hence limited rewards for land managers. In trying to avert conversions of critical ecosystems to less sustainable practices, the central idea, therefore, should be how to package the ESs better to attract greater rewards for land managers by linking ESs with markets. The current approach of dealing with ESs as pieces with a focus on marketable ESs alone may not generate enough incentive to convince land managers to refrain from converting forests into more profitable land uses. However, if buyers are available and if ESs are either bundled or stacked, the values could gain leverage in competing against other, less sustainable practices. Thus, the approach of either bundling or stacking is a pathway to incentivize land managers’ practices from unsustainable short-term ones to sustainable interventions. This does not ignore the fact that even if bundled or stacked, some ESs may not be valued in monetary terms as there is no market ready to stick a price tag to them. In such instances, bundling may play a key role in

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accommodating the non-marketable ESs without necessarily increasing the benefits to land managers. Bundling is often preferred where there are such incomplete coverage issues19,23.

Shaded coffee farm with Grevillia robusta as shade trees, Thika Kenya. Photo: World Agroforestry Centre/Lalisa Duguma

11.3 The merits and demerits of different ES packaging modes

Both bundling and stacking have their own strengths and weaknesses when it comes to ES marketability. This section briefly discusses the merits and demerits of the approaches.

Merits of bundling:

• Land managers could benefit from aggregated benefits (e.g. water, carbon, habitatetc.)16,24.

• Bundling cuts transaction costs as there is only a single buyer25. • Since there’s only one buyer, misuse of the purchase agreement or use rights can

easily be discussed and corrected as per the agreement. • Bundling eliminates the risk of double counting of ESs26.

Demerits of bundling:

• Bundling is highly dependent on the willingness of the ‘buyers’ to pay for the bundled ESs. It may be challenging to find a buyer interested in covering the bundled cost of the ESs. Thus, the market constraint remains a key limitation of this approach. However, in cases of companies or buyers who do ES transactions for


corporate social responsibility and environmental sustainability, there is a level of flexibility i.e. where most companies have a specific commodity they target in the process of buying ESs24,27.

• It requires complicated methodologies to estimate the values of ESs since thediverse ecosystem services to be bundled often have different attributes. The needfor complex methodologies also incurs a higher cost for the ‘sellers’. Assigning asingle credit unit to diverse ESs with different attributes requires a complex set ofmethods14,24,25.

• Different ESs may be subject to different regulatory policies (e.g. exploitation rate,taxation rules, export rules etc.), which may constrain the effectiveness andefficiency of the bundling approach16,25.

Lanzi village community training in PRESA Project in Uluguru, Tanzania. Photo: World Agroforestry Centre/Lalisa Duguma

Merits of stacking/layering:

• Provides flexible negotiation options for ESs providers16,28.• The approach is subject to relatively less complication with regulatory policies as

each ES is dealt with independently using relevant and applicable policies.• Facilitates the selling of ESs that are in high demand with a few potential buyers,

e.g. carbon is currently the most globally marketable ES due to the GHG emissionreduction targets17.

• Depending on the best time to sell ESs, stacking gives land managers betternegotiation space16.

• Encourages land managers to participate in enhanced ecosystem management fordiversified benefits16,28.

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Demerits of stacking/layering:

• The aggregate benefit from the ecosystem depends on sellers’ capacity to negotiate remuneration and the number of ESs for which interested buyers can be identified19.

• Stacking may incur a higher transaction cost for sellers, as there is a need to deal with different buyers.

• Sellers may not benefit properly from the whole range of ESs as the benefits to land managers depend on the availability of buyers17.

• ESs that are in lower demand may gradually escape policy attention and communities’ focus thereby jeopardizing the sustainability of the system17.

• In cases of misuse or inappropriate exploitation of resources, it may not be easy to find and correct the source problem.

• Since different ESs are valued independently, there may be chances of double counting of ESs14. The double accounting could result from failing to see the interdependence between ESs, e.g. forests conservation which at the same time reduces risks of landslides in elevated terrains. Robertson19 also argued that stacking may lead to net environmental losses since most ecosystem functions are interdependent and integrated.

11.4 The challenges associated with ES packaging

Irrespective of the type of packaging, the very nature of ESs means there will always be several cross-cutting challenges. A few such challenges are described here.

First, since most ESs are not directly marketable (i.e. not a commodity per se) it is difficult to determine their market value or to define value in a systematic manner. Hence, the value assigned may not be a realistic estimate of the benefits generated by the ecosystem.

Second, estimating the value of ESs is a complicated process which is often costly and requires reliable methods and tools which can generate estimates with an acceptable range of uncertainty. This complexity leads to a higher transaction costs for land managers. Land managers may find it difficult to bear the costs and hence, are unable to know the value associated with the ESs generated by the land or ecosystem they manage. The methodological complexity and the high transaction costs of the valuation and monitoring processes could be the main factors that lead to an incomplete coverage problem when it comes to accounting for all ESs provided by the land or ecosystem.

Third, the markets for ESs are generally not mature and demand is very weak. The need to invest in ESs is a discourse that is still evolving and yet to be well understood by a diversity of relevant actors. This may be because most ESs are expected to be provided as a public service by governments and/or non-profit agencies rather than the responsibility of private agencies or land managers. Changing this dominant attitude requires extensive awareness raising at all levels.

Fourth, some ESs are not limited to a given space and delimiting the spatial border for such ESs requires a properly articulated governance structure that accommodates the interests and jurisdictions of relevant stakeholders29. For instance, transboundary rivers such as the Nile river system which crosses many East African countries, the Lake Victoria basin which is shared by numerous East African countries and the Masaai Mara park lying between Tanzania and Kenya.


Table 11.1 presents the specific challenges associated with packaging ESs.

Table 11.1 Specific challenges associated with packaging of ESs

Barriers/challenges Implications for bundling and stacking

Measures to overcome the challenges

Poor experience in marketing of ESs. In many cases, people are only concerned with the non-timber forest products they collect and sell at local markets, as this is an easy way of directly reaping the benefits. Existing mechanisms like REDD+ are not that intuitive to local communities as the marketable product (i.e. carbon) is intangible.

Stacking would be a relatively easy option to avoid complications with the accounting of the various benefits. For bundling, it is necessary to be able to analyse the range of benefits and assign an aggregate value to them.

- Training local communities, indigenous people and civil society organizations and environmental experts in ESs valuation. - Using tools and methods that are applicable to a wide range of ESs.

Unclear definitions of rights to the benefits (e.g. carbon rights, land rights, tree rights etc.) and the land generating the benefits30,31.

Stacking seems more realistic as the community can deal with those ESs they have the right to benefit from.

Policies and regulations governing rights to resources should consider the roles of ESs for the improvement of livelihoods and to enhance sustainability of the local environment.

Most ES-generating resources (e.g. in Africa) are located in politically unstable areas and buyers may avoid such high-risk environments unless they assured by governments32,33.

This is a risk to both bundling and stacking.

Global actors and citizens should make efforts to enhance security so that resources may benefit local people and are managed on a sustainable basis.

Some ESs attract more buyers than others, e.g. carbon sequestration and GHG emission reduction benefits of forests through REDD+ currently attract more buyers than any other ES.

Stacking helps local communities understand the benefits easily and avoids the effort of finding buyers who want to deal with bundled services.

Inform potential buyers about the interdependencies between the different ESs so that they may contribute to the management of the resource system.

11.5 The challenges associated with ES packaging

As highlighted earlier, current practices of dealing with or marketing ESs are very restricted to those ESs for which buyers exist. Hence, the market is largely defined by the presence and willingness of buyers. Such approaches are not sufficient to tilt the decision of land managers towards more sustainable interventions. However, policies and regulatory frameworks listed below could help address the challenges highlighted in the above section to ensure the sustainable management of ecosystems. Some of the potential policy instruments are:

1. Corporate Social Responsibility (CSR): CSR is a growing mechanism for private-sector investments to contribute to sustainable management of natural resources. The scheme also serves as a mechanism to re-invest in the environment to compensate for the harm caused by the business interventions of private companies. This is a voluntary engagement by private-sector companies. Any contributions from CSR mechanisms could pay for the ESs not paid for in the

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‘regular’ market contexts. Promotion of CSR could help to bring on-board private-sector actors and other important players to address the lack of buyers of ESs.

2. Ecotaxation (environmental levies): With other in-demand ESs being paid for, jurisdictional authorities can impose environmental levies on users who directly or indirectly benefit from the resource so that other ESs unpaid for may be covered through this mechanism to reward land managers for the services they render

from their land. According to Jack34, this is very similar in context to charges. This mechanism is not unlike the one imposed on private or public companies that requires offsetting their environmental impacts35. This could reduce the management cost for land managers since the resources gained through the levies could cover some expenditures.

3. Subsidies: Subsidies are a form of key financial and in-kind instruments that could be used by governments to encourage and stimulate ecological stewardship36. When neither of the above mechanisms (CSR and ecotaxation) exist, governments could provide subsidies to land managers of ESs. This could include material support, marketing support and the creation of international and national market opportunities. Covering the costs of those doing the valuation process could also be an important subsidy.

4. Tax waivers: Indirectly, governments can waive full or part of the tax for land managers who provide diverse ESs that may not be wholly marketable but are necessary for the sustainability of the system. This could reduce the overall transaction cost of the packaging and marketing processes.

5. Land and tree tenure: In many developing countries, tenure security has often been mentioned as a key challenge in promoting improved natural resource management. Both land and resource tenure are often delimited by policy. For land managers to engage in lasting interventions that promote sustainable natural resource management that ensures the provisioning of ESs, policymakers could focus on strategies to ensure tenure security. One way of doing this will be to learn from the experience of Madagascar where the state has instituted other alternative land rights security titles that are more accessible to most of the population including ‘land attestations’ and ‘land possession attestations’37.

6. Eco-certification schemes: Different certification schemes have specific provisions and conditionality on improved environmental management. For instance, the Climate, Community and Biodiversity Alliance (CCBA) has the standard that ensures that only best practices that provide multiple climate, community and biodiversity benefits are certified and thus enhancing the provisioning of multiple ESs through improved ecosystem management. Besides improved environmental management, certified goods/products are usually bought at premium prices by consumers, which could incentivize land managers.


Tea farms adjacent to natural forests in Murnga County, Kenya. Photo: World Agroforestry Centre/Lalisa Duguma

All these instruments/mechanisms could complement the financial benefits that go to land managers who provide ESs. Such indirect provisions may not always match the net worth of ESs provided. This is mostly due to the incomplete coverage issues, i.e. either we do not have interested buyers for all the ESs provided or it is not possible to value all the ESs provided by the system due to methodological complexities and associated transaction costs. That is why payments for ESs may not be the ‘true’ value the system is worth but rather a reward mechanism to enhance effectiveness of natural resource management38. Most of these mechanisms are more or less bundled approaches to complement the benefits as it does not target any specific ESs.

11.6 Actions needed to promote packaging of ESs for better rewards to land managers

Below are some important actions that need to be taken to facilitate processes leading to better rewards for land managers:

1. Build capacity of key actors: Most people still find ESs an unattractive business case because the perceived lack of proper quantification and valuation systems, which they think undermines the full range of potential benefits that communities and land managers could get from such services, and sustainable development as practical valuation leaves out critical ecosystem functions required to support current and future generations. Therefore, it is crucial that local land managers and communities be aware of the possibility of quantifying, valuing and marketing ESs. This enhances the negotiation position of land managers whose land provides the ESs.

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2. Develop tools and methods: Most tools and methods for measuring, monitoring and evaluation of ESs are confined to academia/research environments or at least have high-level technical details. There is a strong need to develop tools and methods that local communities can easily understand in order to monitor how their practices are performing in providing the services they deliver. One of the emerging technologies, although requiring higher technical skills, is modelling. Supported by field verification, the models could reduce the costs associated with the valuation process. This technology encompasses spatial identification and planning processes and tools25.

3. Develop fair, transparent and effective regulatory structures: The limited number of buyers poses challenges for land managers to gain significant benefits for the services provided. Benefit sharing has remained one of the contentious issues when it comes to natural resource management in regions with poor governance standards. Some countries however are taking the lead, e.g. Viet Nam has developed a robust benefit-sharing structure particularly for forested ecosystems. For more details and examples see13,39,40. Government institutions should limit bureaucratic overhead to the money generated from the services so as to maximize the benefits to the community, especially under government-managed funds for ecosystem services such as in Colombia. Moreover, regulatory terms and conditions should also be clearly formulated for buyers and sellers to avoid unexpected exit from the contract agreements. One key element within the regulatory structures context is to put systems in place that ensure the additionality of the payment schemes. This ensures that the payment for the ESs improves ecosystem management. Additionality occurs when the payment for ESs makes a significant improvement in the management of the ecosystem. This means that without the payment the ecosystem could degrade.

4. Create incentive schemes for buyers: As part of attracting potential buyers, governments at various levels should create incentive schemes that generate better rewards for the land managers. The focus should also be on attracting the buyers who buy diverse ESs as a way of generating larger sums of money for locals. In some countries, the national governments may even act as buyers13,41,42.

11.7 Current knowledge gaps in the context of bundling and stacking ESs

Despite the potential benefits associated with both bundling and stacking as pathways to increase the benefits for the land managers, a wide knowledge gap needs to be addressed. Prominent questions include:

1. Under what context does bundling or stacking manifest as an effective and fair reward mechanism for different sets of ESs? When is it effective to bundle or to stack the ESs?

2. What is the cost associated with the processes, i.e. the quantification and valuation of the ESs, either as a bundled stock or stacked pieces?

3. How do we account for the interdependence between ESs that may often result in double counting of benefits? What is the degree of exclusivity among ESs?

4. What are the institutional framings that result in fair benefits from ESs for land managers dedicated to providing the services to the larger and wider community in


their area? Constanza5 highlighted the need for new institutions that are able to handle ESs as public goods.

5. What are the necessary policy frameworks to ensure the effectiveness of bundling and stacking ESs for improving the benefits to the service providers?

6. What conditions would strengthen demand for either stacked or bundled ESs? I.e. who would want to buy bundled ESs and why, and when/under what conditions would demand for stacked ESs be particularly strong?

7. How do we create acceptable common value systems for ESs so that the rewards would also be fair to the providers of the ESs?

11.8 Conclusions

The aim of this chapter is to articulate the conceptual issues around packaging of ESs and to assess the merits and demerits of each model. Each packaging model, whether bundling or stacking, has its own positive and negative aspects. In principle, what guides the choice of the packaging model are the nature of ESs being targeted, the availability of interested buyers, the transaction costs associated with the packaging models, the policy contexts and applicable regulatory requirements, and the availability of tools and methods for valuation, monitoring and reporting. The choice of the packaging models is therefore context-specific and there is no one-fits-all recommendation to prioritize one over the other.

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