Evaluating alternative Payment for Ecosystem Services (PES) schemes for coastal wetlands and mangrove ecosystems in Mui Ca Mau National Park (MCMNP)

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1 Evaluating alternative Payment for Ecosystem Services (PES) schemes for coastal wetlands and mangrove ecosystems in Mui Ca Mau National Park (MCMNP) Project Activity 2.12 for the Project: Developing a piloting model on payments for coastal wetland ecosystem services in Mui Ca Mau National Park in the context of climate change contributing to poverty reduction in local community

2 THIS DOCUMENT IS SPONSORED BY Project sponsored by The Swedish International Development Cooperation Agency in Vietnam Project Partners Biodiversity Conservation Agency, Vietnam Environment Administration, Ministry of Natural Resources and Environment, Vietnam Research Center of Forest and Wetlands, Vietnam Forum for Reforms, Entrepreneurship and Sustainability, Sweden This report prepared by Scott Cole, EnviroEconomics Sweden Consulting (EES) ( Linus Hasselström, Enveco Environmental Economics Consultancy ( Ana P. Aponte, Daxam Sustainability Services ( Ulrika Stavlöt, FORES ( Citation BCA, FORES, FORWET 2013 Institutional Capacity Assessment, Stockholm, Sweden Project Team Ulrika Stavlöt Ana P Aponte Scott Cole Linus Hasselström Daniel Engström Stenson Nguyen The Dong Huynh Thi Mai Nguyen Chi Thanh Nguyen Tuan Phu Nguyen Tien Dung Le Huu Phu

3 Contacts Biodiversity Conservation Agency, Vietnam Environment Administration, Ministry of Natural Resource and Environment Management No 10, Ton That Thuyet Street, Cau Giay district, Hanoi, Vietnam Tel.: Ext.3108 Forum for Reforms, Entrepreneurship and Sustainability Bellmansgatan Stockholm, Sweden Tel:

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5 ABBREVIATIONS ADB Asian Development Bank BCA Biodiversity Conservation Agency CC Climate Change C0 2 Carbon Dioxide DARD Department of Agriculture and Rural Development Daxam Daxam Sustainability Services DPC District People s Committee EES EnviroEconomics Sweden Enveco Enveco Environmental Economics Consultancy Ltd ES Ecosystem Services FORES Reforms, Entrepreneurship and Sustainability FORWET Vietnam s Research Center of Forest and Wetlands ha hectare HHs Households ICEM International Center for Environmental Management IMHEN Institute of Meteorology, Hydrology and Environment ISPONRE Vietnam s Institute of Strategy and Policy on Natural Resources and Environment LPC Local People s Committee LUR Land Use Right MARD Ministry of Agriculture and Rural Development MCMNP Mui Ca Mau National Park MONRE Ministry of Natural Resources and Environment MRC Mekong River Commission NP National Park PES Payment for Ecosystem Services PFES Payment for Forest Ecosystem Services PPC Provincial People s Committee RP Revealed Preferences SEA Strategic Environmental Assessment SIDA Swedish International Development Cooperation Agency SLR Sea level rise SP Stated Preferences SUF Special Use Forest TEV Total Economic Value USDA United States Department of Agriculture VASEP The Vietnam Association of Seafood Exporters and Producers VEA Vietnam Environment Administration VND Vietnamese Dong (20,000 VND ~= 1 USD in October 2013)

6 WTA WTP ZER Willingness to Accept compensation Willingness to Pay Zone of Ecological Restoration

7 LIST OF TABLES Table 1 Protected habitats in Mui Ca Mau National Park (MCMNP) 46 Table 2 Special protected designations within Mui Ca Mau National Park (MCMNP) 47 Table 3 Main sources of livelihood for households (HHs) within Mui Ca Mau National Park (MCMNP) 47 Table 4 Habitats within the Zone of Ecological Restoration (ZER) of Mui Ca Mau National Park (MCMNP) 49 Table 5 Causes of ecosystem loss in MCMNP 50 Table 6 Ecosystem Services (ES) identified in Mui Ca Mau National Park (MCMNP) 51 Table 7 Average revenue and income (million VND 2012) of 20 households (HHs) participating in the project 55 Table 8 Criteria for assessing the suitability of PES at a particular site 70 Table 9 Criteria for assessing the relative merits of alternative PES schemes 74 Table 10 Assessing the suitability of PES in Mui Ca Mau NP (MCMNP) 790 Table 11 Identifying ES in Mui Ca Mau NP for the purpose of developing alternative PES schemes 82 Table 12 Proposed PES scheme #1a in MCMNP: Aquaculture and Agriculture 86 Table 13 Proposed PES scheme #1b in MCMNP: Eco-tourism 86 Table 14 Proposed PES scheme #2 in MCMNP: Shoreline stabilization 88 Table 15 Proposed PES scheme #3 in MCMNP: Carbon markets 90 Table 16 Comparison of Naturland Standard & Extensive Farming in the Zone of Ecological Restoration (ZER) of MCMNP 91 Table 17 Proposed PES scheme #4 in MCMNP: Eco-labeling 93 Table 18 Summary of the five alternative PES schemes 94 Table 19 Evaluating the relative merits of PES Alternative #1a Aquaculture & Agroforestry 95

8 Table 20 Evaluating the relative merits of PES Alternative #1b Eco-tourism 96 Table 21 Evaluating the relative merits of PES Alternative #2 Traditional State buyer 99 Table 22 Evaluating the relative merits of PES Alternative #3 Carbon market PES 102 Table 23 Evaluating the relative merits of PES Alternative #4 Eco-labeling 104 Table 24 Summary of five PES alternatives against the general evaluation criteria 109

9 LIST OF FIGURES Figure 1 Overview of the larger decision-making context 42 Figure 2 Administrative map of Ca Mau province (Source: MONRE) 45 Figure 3 Planning Map of Mui Ca Mau National Park, MCMNP (Source: MONRE) 45 Figure 4 Summary of key PES scheme principles used in defining a PES alternative 72

10 TABLE OF CONTENTS ABBREVIATIONS... 5 LIST OF TABLES... 7 LIST OF FIGURES... 9 EXECUTIVE SUMMARY MOTIVATION AND BACKGROUND MUI CA MAU NATIONAL PARK (MCMNP) PILOT PROJECT PILOT PROJECT OUTPUTS Capacity assessment Land use report Desk study of climate change impacts Ecosystem Services Assessment report International PES Case Studies report Valuation of coastal wetlands report PURPOSE AND SCOPE OF THIS PES ALTERNATIVES REPORT REPORT STRUCTURE Information sources BACKGROUND MUI CA MAU NATIONAL PARK (MCMNP) ECOSYSTEM SERVICES (ES) Ecosystems in Mui Ca Mau National Park (MCMNP) Ecosystem services in MCMNP HUMAN ACTIVITIES Aquaculture Agriculture Agroforestry Tourism Fishery and clam farming Other activities ENVIRONMENTAL ECONOMIC THEORY MARKETS AND WELFARE ECONOMICS POLICY INSTRUMENTS Command and control Information Technology support policies Price-based instruments METHOD ASSESS SUITABILITY OF PES DEFINE ALTERNATIVE PES SCHEMES ASSESSMENT CRITERIA: EVALUATING ALTERNATIVE PES SCHEMES ANALYSIS PES: A POTENTIALLY PROMISING APPROACH FOR MUI CA MAU NP (MCMNP) IDENTIFYING ES OF INTEREST FOR PES DEVELOPMENT DEFINING FIVE ALTERNATIVE PES SCHEMES IN MCMNP... 84

11 5.3.1 PES alternatives #1a and #1b Local PES connected to livelihood model PES alternative #2 State as buyer for shoreline stabilization PES alternative #3 Carbon market PES PES alternative #4 Eco-labeling PES ASSESSING THE FIVE PES ALTERNATIVES IN MUI CA MAU NP PES alternative #1a Aquaculture and Agroforestry PES alternative #2 Traditional State buyer PES PES alternative #3 Carbon market PES PES alternative #4 Eco-labeling PES CONCLUSIONS AND RECOMMENDATIONS KEY CONCLUSIONS KEY RECOMMENDATIONS AND DISCUSSION REFERENCES APPENDIX A LIST OF PROJECT ACTIVITIES

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14 EXECUTIVE SUMMARY Introduction and background The government of Vietnam is pursuing market-based (or price-based ) approaches to environmental protection, with a strategic focus on Ecosystem Services (ES). ES are the benefits that nature provides society including biodiversity, carbon sequestration, food provision, recreation, etc. The country s vision identified through the Biodiversity Conservation Law adopted in 2008 is to identify the benefits that people derive from ecosystem services and to seek a system where beneficiaries of such services pay service providers. Price-based policy instruments are attractive because they lead to the most cost-efficient achievement of environmental objectives by relying on the use of economic incentives to influence actors (Section 3). One type of price-based approach is to develop a market for ecosystem services whereby proper pricing of environmental goods and services can influence actors to choose production methods and consumption options that are more environmentally friendly. An increasingly popular approach is the establishment of Payment for Ecosystem Services (PES) schemes in Vietnam and elsewhere. PES is driven by the assumption that the beneficiaries (users) of ES pay those who can influence the supply of these valued benefits (providers). A well-functioning PES market creates incentives that reward those who increase the supply of ES and make it costly for those who damage them. PES has the potential to induce a variety of local, national, and global actors to better recognize and incorporate the benefits of ES into decision-making. Following the success of PES models for forest ecosystem services, Vietnam wishes to expand PES to cover other ES. The result is the Mui Ca Mau National Park PES pilot project on coastal wetlands and mangrove ecosystems, supported by a Partner-Driven Cooperation Grant from the Swedish International Development Agency (SIDA). 1 Mui Ca Mau National Park (MCMNP) Pilot Project The pilot project focuses on low-income households within the Zone of Ecological Restoration (ZER) of Mui Ca Mau National Park (MCMNP). The project aims to improve income possibilities through a livelihood model while also improving the supply of 1 Vietnamese partners on the project include the Biodiversity Conservation Agency within the Vietnam Environment Administration (BCA), the Institute of Strategy and Policy on Natural Resources and Environment within Vietnam s Ministry of Natural Resources and Environment (ISPONRE), and the Research Center of Forest and Wetlands (FORWET). The Swedish partner is Reforms, Entrepreneurship and Sustainability (FORES) together with their local Swedish experts, Daxam Sustainability Services (Daxam), EnviroEconomics Sweden (EES) and Enveco Consulting.

15 ecosystem services from coastal wetlands and mangrove ecosystems. The results of the project will inform the design of future PES models for coastal wetlands and mangrove ecosystems in MCMNP and elsewhere in Vietnam. The project has four main objectives: 1. To develop a livelihood model for 20 local households aimed at reducing poverty; 2. To suggest a mechanism for buyers and sellers of ES to interact and conduct transactions (PES); 3. To improve capacity-building and public awareness of PES in Vietnam and Sweden; and 4. To create a strategic partnership and long-term cooperation between Vietnamese and Swedish partners. Purpose and scope of the report The purpose of this report is to define and assess alternative PES schemes. The report has five aims: 1. To summarize key conclusions from the project s interim deliverables; 2. To propose alternative PES schemes in MCMNP; 3. To develop a set of general evaluation criteria to assess these PES alternatives; 4. To assess how well each PES alternative meets these criteria; and 5. To provide recommendations for a next step in developing PES schemes for MCMNP. The report is structured as follows: Section 1 provides background on the project Section 2 describes the types of benefits (ecosystem services, ES) that arise from the mangrove forests and coastal wetlands within MCMNP Section 3 provides the environmental economic theory to support the use of PES as a policy instrument Section 4 describes the key methods we use in defining and evaluating alternative PES schemes in MCMNP Section 5 analyzes the advantages and disadvantages of the PES schemes Section 6 provides a number of conclusions and recommendations for a next phase. This section also highlights the trade-offs inherent in designing PES schemes. The analysis in this report is assumed to be part of a larger environmental decision-making context (see e.g., Figure 1, Section 1), in which the government of Vietnam has already decided to pursue price-based policy instruments like PES. Given the preference for this

16 policy instrument, this report defines alternative PES schemes and evaluates the advantages and disadvantages of each. The scope of this analysis is somewhat limited due in part to the relatively short time frame (one year) and the restricted geographic focus on MCMNP in Southern Vietnam. This report relies on a variety of information sources including workshops between Swedish and Vietnamese partners, extensive literature reviews related to economic valuation and PES case studies, field visits and interviews within MCMNP, a consultative workshop to discuss preliminary project results, and input from international experts on a draft version of this report. In addition, a series of interim deliverables produced by the Swedish Partner FORES support the work found in this PES Alternatives Report, including: (full reports can be downloaded from the FORES website at Capacity assessment. This analysis considered the constraints that prevent policy instruments from being institutionalized in Vietnam and identified capacity gaps and suggested measures for improving BCA s capacity development. Land use report. This report reviewed existing land use rights (LUR), legal regulations and local customs related to property rights, which is a key part of PES development. Desk study of climate change impacts. This report considered the importance of coastal wetlands and mangroves in alleviating climate change impacts in the Mekong Delta and Ca Mau province. Ecosystem services assessment report. This report mapped existing ES within Mui Ca Mau National Park based on the Millennium Ecosystem Assessment (MA) framework. This provides key information for the development of alternative PES schemes. International PES case studies report. This study identified lessons learned from other PES schemes around the world in order to better inform the development of PES schemes in MCMNP. Valuation of coastal wetlands report. This study reviewed economic literature to identify the potential values at stake associated with coastal wetlands and mangrove forests. Background: Mui Ca Mau National Park (MCMNP) MCMNP is located in Nam Can and Ngoc Hien districts, approximately 100 km south of Ca Mau city. The study area includes the park s Zone of Ecological Restoration (ZER) in

17 the commune of Dat Mui (Ngoc Hien district). The total area of the park is 41,802 ha of which 9,362 are coastal wetland. In 2012, 51,601 persons lived within the border of the park, but approximately 200 households were allocated land within the ZER. Our study area is within the commune of Dat Mui in Ngoc Hien district. Before the park was established in 2003 (Decision no. 142/2003/QD-TTg), thousands of households lived in the core zone (where they remain today). Of the four communes inside the park, Dat Mui has the highest number of households living in the core zone: 3,900. Of these, only 200 households have been allocated land. The remaining 3,700 households have not be granted a LUR (and thus are not regulated) and/or have minimal land to support a dwelling. MCMNP s mangrove forest and coastal wetland are rich in biodiversity and have several special designations that condition the use of the land by the inhabitants of the park. The range of economic activities that can be developed in the park is limited because MCMNP belongs to the Special Use Forest system. Families living in the ZER that hold a LUR contract are allowed to combine extensive shrimp farming with forest protection. The main source of livelihood in the area comes from aquaculture. Other minor sources of income are fruit trees, seasonal collection of resources such as clams, and local wage labour. Summary of project results Ecosystem Services (ES) in Mui Ca Ma National Park (MCMNP) Coastal wetland ecosystems and mangrove forests in MCMNP provide important ES that contribute to human well-being and poverty reduction. An extensive mapping of nature s benefits in the park resulted in the identification of six key ES: Food provisioning Carbon sequestration Shoreline stabilization Protection of freshwater supplies from saltwater intrusion Provision of biodiversity Aesthetic quality/landscapes In recent decades, overexploitation of wetland ecosystems has resulted in ES losses as a result of population growth, overexploitation, invasive species, climate change, etc. Institutional factors such as weak implementation of environmental laws have made it difficult to stem these losses. In 1965, mangroves covered 87,097 ha in Ca Mau Province; in 2001 they covered 32,875 ha; and in 2010 they covered 18,585 ha (Vu Tien Dien et al, 2012).

18 Assessing the suitability of PES in MCMNP We assess the suitability of developing PES schemes within MCMNP by considering a set of suitability criteria (see Table 8, Section 4.1). We find that PES schemes could be a potentially promising policy instrument for managing coastal wetlands and mangrove ecosystems in MCMNP due to the following: Government structures, though still in need of improvement, provide the basic infrastructure needed for implementing a PES program and help reduce transaction costs for private actors involved in the market. The coastal wetlands and mangrove ecosystems that are in focus in the proposed PES schemes provide significant value on a global, national, and local level, as they are demanded as inputs to aquaculture and agricultural production. Furthermore, they are at risk from population growth, climate change, etc. Local participants indicate a strong willingness to participate and have benefitted from capacity-building and awareness-raising funded by BCA and other intermediaries. Although the clear identification of property rights in Vietnam provides a challenge for PES implementation, existing land use contracts between the MCMNP and the local land users may provide the type of legal infrastructure needed for PES schemes. Defining alternative PES schemes for MCMNP To define alternative PES schemes, we consider the most valuable ES in MCMNP and link them to an economic good(s) that provides improved well-being for society (Table ES-1). In most cases, the ES itself (Column 1) does not provide direct value to society per se 2 ; rather, the combination of the ES and other inputs (e.g., human, physical, or intellectual capital) leads to an economically valuable good, as shown in Column 2. For example, the combination of provisioning ES together with harvesting technology provides valuable products like fish. By identifying who benefits and who can provide these ES (Columns 4 and 5, respectively), Table ES-1 takes a first step in identifying possible buyers and sellers in a market scheme and provides a useful overview of how to conceptualize alternative PES schemes. 2 An exception is carbon sequestration.

19 Table ES-1 Identifying ES in Mui Ca Mau NP for the purpose of developing alternative PES schemes Ecosystem services (ES) in MCMNP Economic good provided Possible PES Schemes in MCMNP Geographic scale for benefits Primary beneficiaries 1 Providers 1. Food provisioning 2. Carbon sequestration 3. Shoreline stabilization 4. Protection of freshwater supplies from saltwater intrusion 5. Provision of biodiversity 6. Aesthetic quality/landsca pe Fish Primary: local Secondary: national, global Households/food producers national citizens due to food security; local consumers of forest products Climate regulation Global Global citizens, and particularly those living in areas most vulnerable to the effects of climate change Protection of buildings, infrastructure Protection of drinking water & irrigation supply; reduced treatment costs 2 Tourism; resilient ecosystems Tourism and cultural values Local, national Primary: local Primary: global Secondary: local Primary: local Secondary: national Local households; residents; nation s citizens from border protection Local residents; farmers; water supply companies Global citizens Tourist business in Ca Mau 1 Local residents; global citizens; tourist business in Ca Mau 1 land user /manager or regional fishermen land user /manager land user /manager land user /manager land user /manager land user /manager

20 We motivated the selection of five alternatives PES schemes two suggested by FORWET and three suggested by FORES based on the following considerations: o They cover the most valuable ES found in MCMNP; o They illustrate the opportunities for diverse PES approaches in MCMNP; o They illustrate the range of possible combinations of buyers and sellers; o They illustrate the various geographic scales to which PES can be applied (e.g., local, national, global); o They provide the opportunity for combining or layering PES schemes to maximize environmental benefits and household incomes; and o They generally meet the broad definition of PES provided by Wunder et al (2005) (Section 3). The key attributes of the five alternative PES schemes are summarized in Table ES-2.

21 Table ES-2 Summary of the five alternative PES schemes PES attribute Ecosystem Service Buyer Seller Geographic al scale Interventio ns by seller Payment by buyer PES 1.a Agricultu re Food, habitat Local HHs MCM National Park Local Contribute s money/ma terials for mangrove restoration In-kind labor hours to protect forest PES 1.b Ecotourism Opportuniti es for tourism and recreation Tourists & tourist businesses PES 2. State buyer Shoreline stabilizatio n State governmen t (or environmen tal NGOs) PES 3. Carbon Climate regulation Private companie s, environme ntal NGOs, etc. Final consumers Local HHs Local HHs Local HHs Local HHs MCM National Park Constructs homestay building, improves scenery Cash payments to HHs National (affects all citizens) Protecting, enhancing, or planting mangrove trees PES 4. Ecolabeling Food provisioning, supporting services, nutrient cycling, habitat provisions, water purification, etc. Inputbased cash payments (based on actions taken) Internatio nal or national Protecting, enhancing, or planting mangrove trees Cash payments based on actual carbon stored (outputbased) or actions taken (inputbased) National and international Eco farming practices (e.g., reforestation) (see table 16) Direct payments to the local HHs from buyer through higher price Intermediar ies or knowledge providers NGOs and research institutes NGOs and research institutes Gov t authorities, NGOs, academics NGOs and governme nt authorities Certified middleman, processor, certification agency, government authorities

22 Assessing alternative PES schemes for MCMNP To assess the five proposed PES alternatives, we develop a set of general evaluation criteria. These criteria can assist policymakers in identifying the trade-offs in designing price-based instruments like PES, which cover a broad and diverse set of ecosystem services, human activities, and actors (e.g., buyers, sellers, knowledge providers, intermediaries, etc.). These criteria address several relevant questions for our analysis: What issues are important when comparing alternative PES schemes? What are the differences between PES schemes? Are some PES schemes more likely to succeed? What additional information is needed before proceeding with one of the PES alternatives? The criteria are summarized in Table ES-3 and are divided into both general evaluation criteria (applicable in a general sense to all PES schemes) and project-specific evaluation criteria (relevant for the MCMNP pilot project). The first nine criteria are considered essential criteria that must be fulfilled for a PES to develop (e.g., existence of buyers and sellers), while the remaining are considered less critical criteria, but important to strive for in the long run (e.g., ensuring permanence and avoiding leakage). The project-specific evaluation criteria refer to two project goals poverty reduction and increasing government revenue that are in addition to the overall goal of improving ES flows. Although neither poverty reduction nor government revenues are necessary criteria from a theoretical perspective in developing a market, they are nonetheless deemed relevant to local policymakers. Table ES-3 Criteria for assessing the relative merits of alternative PES schemes PES evaluation criteria Description General evaluation criteria Measurability (essential criteria) Definition: It is challenging for buyers and sellers to make decisions about purchasing and selling a market good (e.g., ES within a PES) if it cannot be quantified and measured. ES in a PES scheme should, at least, be measurable such that we can be sure that a given action (by a seller) increases the supply of ES. Ideally, that increase in ES can then be linked quantitatively to improved human well being. Example: In carbon markets, tons of carbon equivalent sequestered can be linked to specific human activities such as planting a certain number of hectares of mangrove trees that otherwise would not have

23 Existence of a buyer(s) (essential criteria) Existence of a seller(s) (essential criteria) Technically feasible interventions (essential criteria) Defined property rights (essential criteria) Voluntary participation (essential criteria) been planted. This measurable ES can then be bought and sold in a PES scheme (in this context the resulting increase in human wellbeing may be linked to avoided damages from climate change such as flooding, extreme weather, crop damage, health effects etc.). Definition: There must be an actor(s) that benefits from a valuable ES and will continue to demand it well in to the future. Ideally, all such actors should be included as buyers (but see beneficiary pays below). Example: Kosoy et al. (2006) describe a PES in Central America whereby water users pay a fee to forest landowners to improve forest management practices and thus improve water quality. Definition: There must be an actor(s) who has the capacity and legal right (see property rights) to increase the quantity/quality of ES. Example: The land use activities of several communities in Madagascar are known to affect ES related to biodiversity conservation (e.g., endangered species). These communities receive payment to refrain from activities that would otherwise lead to habitat loss and further threats to the species. Definition: Interventions by sellers, defined as activities whose purpose is to improve the flow of ES, must be technically feasible. Thus, PES schemes should be built around interventions with a quantifiable and proven link between the activity and the resulting impact on ES provision. Example: Several PES schemes pay landowners to improve forest management through various interventions (e.g., tree planting, forest protection, etc.), which are known to increase the provision of certain ES related to climate regulation (e.g., carbon sequestration). In practice, however, there can be some disagreement about the exact link (see, e.g., Barstad et al. 2012; Dougill et al. 2012). Definition: In order to have the right to sell a good, sellers must own (or at least have defined property rights over) that good. Without clear property rights, buyers may not believe that the seller can deliver the good. Thus, PES systems require clear definition and enforcement of property rights (see also Section 6.2). Example: McElwee (2012) suggests that market-based approaches to forest management in Vietnam (such as PES) may be challenged due to institutional factors and the lack of stable property rights. Hawkins et al. (2010) also note challenges for PES for mangroves in Vietnam, given that the state is responsible for distributing benefits from forest resources to local people and other stakeholders. (Note that in Vietnam the state owns the land but land use rights (LUR) can be allocated to households. This form of property right reallocation is not as strong as formal ownership.) Definition: Economic markets are effective in part because buyers and sellers voluntarily seek one another out and gain mutually from the transaction. When buyers and sellers are forced to participate in a government scheme, the market may disintegrate once the coercion (e.g., regulation) is removed (i.e., in such cases one might

24 say that payments (incentives) for participation were not high enough to cover a seller s opportunity costs see criteria below). Forced transactions may also preclude cost-efficient outcomes. Example: An ideal PES system provides incentives for buyers and sellers to voluntarily participate. PES systems in China have been criticized because households are coerced into participation (Liang 2012, p. 173), which leads to uncertainty about whether cost-efficient outcomes are possible. Direct and adequate payment to providers (essential criteria) Additionality (essential criteria) Conditionality (essential criteria) Ensuring permanence Definition: Providers/sellers of ES must receive adequate payment for their interventions in order to drive (incentivize) their actions, i.e., there must be a predictable link between action and payment. 1 To create incentives, the price should at least cover the opportunity cost of the intervention, including any ongoing maintenance costs. Example: The structure for a Payment for Hydrological Environmental Services Program in Mexico has water users (buyers) paying forestland owners, who improve the flow of watershed services. The payment goes via the government agency, which then passes it on to the seller to incentivize his actions (Muñoz et al. 2008). Definition: Additionality refers to the requirement that a PES scheme provides ES in addition to the current (baseline) level of ES provision and should be in addition to any existing regulatory requirement. Sellers should only receive payments for interventions that are over and above this well-defined and critical baseline. 2 Example: The goal of MCMNP s ZER area is to preserve 70% of the mangrove forests. Since most plots of land are covered by <70% and business as usual is not expected to increase the current percentage, a PES scheme aiming to reach this goal would deliver additional ES benefits, i.e., through an increase in the quantity of protected forestland, an increase in the quality of ES provision (restoration), or the prevention of a loss that otherwise would have occurred. Definition: This criterion refers to the requirement that a seller s payment for ES is dependent (or conditional) on the delivery of actual ES benefits. Ensuring effective conditionality in a PES scheme requires effective monitoring over time and a credible threat that payment will not be provided without evidence of provision. Example: The PES for Hydrological Services in Mexico relies on an intermediary organization to provide monitoring. Participants that do not fulfill their assignment (e.g., forestland restoration to improve watershed services) do not receive payment at the end of the year. Definition: Ideally, PES interventions should be long-lived and not readily reversible. To avoid short-lived ES benefits, PES schemes should be designed to give sellers incentives for long-lived interventions. Example: Under the Woodland Carbon Code in the UK, landowners must commit to a permanent land use change to woodland and to maintain the project area as a permanent woodland carbon sink

25 (Smith et al. 2013). Definition: A PES scheme is most successful when all individuals (or organizations) that benefit from an ES are identified and included as buyers. So-called free riders are beneficiaries that avoid paying for an ES that they otherwise value. Too many free riders may contribute to an under provision of the ES from a social perspective. Beneficiaries as buyers Example: In a PES system in New England, USA, forest landowners sell watershed services to those who benefit from water quality improvement (Barstad et al. 2012). In theory, beneficiaries include businesses, river users, and even the sellers themselves, but the most politically feasible PES scheme relies on NGOs to buy the services on behalf of all beneficiaries. This is less than ideal from a social perspective because the price only reflects the value to participating beneficiaries. Definition: Ideally, a PES for one ES should not lead to the decline of that ES (or another ES) elsewhere; otherwise, a leakage of environmental benefits from the proposed PES scheme occurs, which prevents a net global gain in such benefits. Avoiding leakage of ES flows Example: A PES scheme designed to produce in situ benefits by reducing timber harvests in a local forest could potentially displace that harvest from the local forest to another forest in the same region or elsewhere. In practice, local PES schemes may lead to leakage on a global level, but the trade-off is that smaller-scale PES schemes tend to be easier to manage and have lower transaction costs. Further, it may be more important to preserve some ES in certain areas than in others. Definition: Although market prices are generally driven by demand for a good/service, it may be important from a social perspective that the price in a PES model capture the true value of ES flows and their contribution to human well-being, including both use and nonuse values. Economic efficiency Social acceptance Example: The price of each unit of carbon sequestered in a PES carbon market should reflect all the avoided economic damages (costs) to society that that unit of carbon would have imposed, including net agricultural productivity, human health, property damages from increased flood risk and sea level rise. A carbon market whose price only captures a portion of these costs is considered economically inefficient as it fails to fully incorporate (internalize) all of the values lost due to climate change. Definition: Although market prices are generally driven by demand for a good/service, it may be important from a social perspective for the price in a PES model to capture the true value of ES flows and their contribution to human well-being, including both use and nonuse values. Example: PES schemes with an awareness-building component build community support and tend to be more successful. Perrot-maitre (2006) notes that the main reason for the success of PES is not financial, but rather trust-building among participants, which underscores the important role of intermediaries and knowledge

26 Transaction costs providers in ensuring the social acceptance of PES schemes (Rowcroft et al 2011). Definition: Compared to traditional markets for consumer goods, environmental markets often have high transaction costs associated with setting up, administering monitoring, and evaluating the scheme. PES schemes with lower transaction costs are more likely to succeed. Example: Due to high information burden on buyers/sellers to participate in environmental markets, some PES schemes develop support groups that help participants gather and summarize important information. Further, governments can play a role by contributing to start-up costs that may otherwise prevent a PES scheme from getting under way (Cole et al. 2012). Project-specific evaluation criteria in Mui Ca Mau NP Poverty reduction Government revenue This project explicitly identifies poverty reduction as an additional goal in developing a PES model for the MCMNP study area. Although previous PES schemes in Vietnam have improved environmental outcomes and household incomes, these two criteria are not necessarily simultaneously satisfied. This project explicitly aims to increase government revenue. Previous PES schemes for forest ES in Vietnam created sustainable financial resources for biodiversity conservation. The model in Lam Dong province successfully reduced expenses from the state budget. The funding was then used to pay for people to protect the forest instead of using annual investment from the state budget. 1 Payment may be made directly to the seller or go through an intermediary that facilitates the transition. In some cases, a small portion of the payment may be needed to cover PES administrative costs. 2 The key challenge in assessing additionality is uncertainty in measuring environmental change over time, i.e., the baseline level of ES (what would have occurred in the absence of the PES scheme) and the projected level of benefits as a result of the scheme. Table ES-4 considers how each of the five alternative PES schemes meets the evaluation criteria. We find that PES #4 (Eco-labeling) and PES #3 (Carbon market) are the most promising PES schemes (see Conclusions and Recommendations).

27 Table ES-4 Summary of five PES alternatives against the general evaluation criteria 3 Extent to which proposed PES meets evaluation criteria Criteria PES 1.a PES 1.b PES 2. PES 3. PES 4. Agriculture State buyer Carbon Ecotourism Ecolabeling Measurability +/- +/- +/- + - Existence of a buyer(s) - +/- +/- +/- + Existence of a seller(s) + +/- +/- +/- +/- Technically feasible interventions + +/- +/- + + Defined property rights + +/- +/- +/- +/- Voluntary participation Direct and adequate payment to providers - +/- +/- +/- + +/ /- + Additionality - - +/- + + Conditionality + + +/- + + Ensuring permanence Beneficiaries as buyers + + +/- +/ /- + + Avoiding leakage +/ /- +/- Economic efficiency Social acceptance indicates the PES alternative would seem to meet this criterion in practice, - indicates the PES alternative is unlikely to meet this criterion in practice, +/- indicates uncertainty over whether the PES alternative will actually meet the ideal

28 Transaction costs -(+) -(+) -(+) - - Poverty reduction +/ /- + Government revenue Conclusions and Recommendations PES development for coastal wetlands and mangrove ecosystems shows promise within MCMNP and we suggest several possible PES schemes. However, a number of technical challenges need to be addressed that require additional capacity-building and the gathering of information to fill key knowledge gaps. Given the vast extent of coastal wetlands and mangrove ecosystems in Vietnam (160,000 ha), and the relatively small study area in which these innovative ideas have so far been tested, there is a need for improved knowledge on how best to scale up the designs suggested in this study. We recommend, therefore, that these designs be thoroughly tested in small-scale pilot studies in the coming years before applying them on a larger scale. Key conclusions The initial livelihood pilot model appears successful. Based on our interviews with HHs, BCA staff, and other experts in October 2013, we find that the livelihood pilot model has been successful. For example, the program has o Improved capacity building through investment in high valued crops (e.g., dragon fruit) that would not otherwise have been possible for low-income households, leading to increased income from agriculture and tourism. o Improved HHs awareness of their dependence on, and need for, ecosystem services provided by mangrove forests, leading to a better understanding of the economic value of these resources o led to intangible benefits related to HHs optimism about their future welfare and general feelings of being more productive and technically proficient. o provided technical training in ecologically-sustainable seafood production methods, which leads to improved future flows of ES, as well as a potential base from which to build future eco-labeled food production. One potential weakness of the livelihood model, however, is an insufficient incentive for HHs to provide adequate forest protection through e.g., re-planting, restoration, and reporting of illegal de-forestation activities. This report considers how best to integrate this promising livelihood pilot model within a future PES pilot scheme in MCMNP.

29 Several PES schemes are possible within MCMNP but some PES schemes may be stronger than others based on an assessment using the general evaluation criteria. For example, the carbon market and eco-labeling PES schemes do well against the evaluation criteria, in particular the essential criteria (the first nine in table 9), relative to the other PES schemes. Further, we believe that the additionality criterion is particularly important given that the objective of PES schemes is to improve long-term environmental outcomes. Our analysis concludes that both the carbon market and eco-labeling schemes are more likely to deliver additionality. Eco-labeling appears promising because it relies on global beneficiaries (i.e., environmentally conscious seafood consumers) with a significant willingness to pay for ES provision. Further, permanence of ES provision is more likely given that Jonell et al (2013) point to anticipated growth in the willingness to pay by global seafood consumers. Eco-labeling is also likely to contribute to alleviating poverty among households in MCMNP. The design of PES schemes requires unavoidable value judgments. Developing PES scheme alternatives and then selecting between them inherently requires subjective value-driven decisions. This report identifies where these types of unavoidable judgments arise and provides discussion of the resulting trade-offs facing policymakers. For example: o Which ES is most important to protect those that provide short-term economic value or those that provide long-term ecosystem resilience and stability? o Given that certain segments of society may gain or lose from a proposed PES scheme, should measures be implemented to compensate losers? If so, how should they be incorporated? o To what extent should fairness be balanced with economic efficiency? For example, an efficient PES scheme would allow for varying prices (incentives) to focus protection on the most valued ES (where value may be a function of e.g., location). But this means that some providers (households) may receive a higher payment than a neighbor if they, by chance, have influence over a more valued ES. These types of judgments are best made by politicians and should incorporate the preferences of those directly affected by the PES schemes or community-based organizations and other PES experts. Section 6 elaborates on the types of unavoidable value judgments facing policymakers in MCMNP related to e.g., property rights and conflicting evaluation criteria.

30 Key recommendations Expand the existing 20 household pilot study to include new participants. Based on the success of the existing livelihood pilot study, we believe that this model should be expanded to include other households in the ZER and perhaps even in the buffer zone. Further, we believe it is important to differentiate between the ecosystem service and poverty goals of the existing pilot program. While we believe that this small pilot study has reduced poverty for participating households (but at a relatively high per household cost, see Section 6), we believe that future PES schemes should place a higher focus on ecosystem service goals. PES schemes should create the right incentives for providers. For example, if payment is linked to improved water quality, then providers will have an incentive to re-invested profits in water quality improvement measures, thus ensuring long-term ES provision for all beneficiaries. These incentives are present if the PES scheme ensures, among other things, welldefined property rights, conditionality, and additionality, all of which are important evaluation criteria discussed in ES-3. Initiate an Eco-labeling pilot study in MCMNP based on PES#4. We believe that PES#1a is not sufficient in and of itself to be developed into a future PES model in MCMNP. However, we believe that some of the ideas within PES#1a could be restructured slightly and used within our suggested PES#4 to obtain a promising PES model. We believe that the strongest arguments for developing an eco-labeling PES are as follows: o Ensures external funding. PES#1a suggests that households are buyers that make labour payments to MCMNP (e.g., protecting and restoring mangrove forests) in exchange for land provision. This scheme relies on government funding through land provision, and it may not provide sufficient economic incentives for households to deliver adequate forest protection. Instead, PES#4 would turn households into providers (i.e., sellers), which provides an income source that (1) alleviates poverty and (2) delivers an economic incentive for forest protection. Further, by introducing a market with a premium price for eco-labeled shrimp, PES#4 provides external funding from global beneficiaries (i.e., seafood consumers with a willingness to pay for shrimp production methods that improve mangrove habitat) that ultimately incentivizes households to ensure the long-term delivery of ES from coastal wetlands and mangrove forests. o Low investment costs. A significant cost of establishing an eco-labeled PES scheme is investment and training in ecologically-friendly shrimp production methods. MCMNP is ideal in this regard because many production methods used in the Park today already meet (or are closing to meeting) the certification requirements, thus reducing start-up costs (see table 16).

31 o Relies on strong existing brand image Establishing an eco-label PES scheme in MCMNP is particularly attractive because of the existing reputation and brand image of MCMNP. For example, citizens from around the country travel to MCMNP to harvest starter shrimp to use in aquaculture projects (personal communication, households in MCMNP 30 Sept 2013). Continued strengthening of this brand image is important for PES#4 and something that households are not able to pay for themselves. Thus, MCMNP and other market players can and should contribute to branding through investment in marketing. Consider combining or layering PES #4 (Eco-labeling) with PES #3 (carbon markets) to achieve opportunities for multiple benefit PES. Smith et al (2013) discuss the possibility of combining individual PES schemes. In our case, mangrove habitat restoration undertaken by providers in the proposed PES #4 to deliver ecolabeled shrimp also delivers value to beneficiaries in the proposed PES #3 through carbon sequestration. This presents an opportunity for multiple buyers to pay the same household provider for delivering multiple ES stemming from mangrove restoration: i.e., (1) improved biodiversity and food provisioning (PES #4) and (2) carbon sequestration (PES #3). This process -- known as layering -- provides additional income for households and thus meets another project criterion: poverty reduction. However, to ensure this type of proposed layering meets a key evaluation criterion additionality future studies must show that carbon sequestered through eco-shrimp production would not have occurred in the baseline, i.e., if investment, institutional, ecological, or technological barriers would otherwise have prevented PES #4 from being implemented on its own, then successful implementation of PES #4 would allow a defensible claim for additional carbon sequestration, which can then be sold in a carbon market (e.g., PES #3). Gibbon et al (2009) provide a useful methodology for evaluating additionality when layering carbon sequestration with eco-labeled coffee production (see also Soto (2009) for a case study of layering in Mexico). We recommend that this literature and previous case studies be carefully consulted in developing the technical design of future layered pilot studies in MCMNP. Consider expanding PES #1b (Eco-tourism) in the next phase but clarify links between tourist activity and the flow of ES. Based on our field visit in October 2013, this initial PES pilot study appears to have had a successful start and could contribute to reducing poverty. However, in its current form it is not clear how homestay facilities themselves will contribute to improved ES provision. On the contrary, these facilities and associated activities may lead to additional environmental pressures (e.g., habitat loss) if tourism expands too quickly. In the next phase, investment support for homestay

32 development (e.g., physical infrastructure) should be tied to explicit activities designed to improve the flow of ES (e.g., restoration of habitat for wildlife, improvement of water quality for recreation, development or restoration of trails to improve access to wilderness areas, protection of endangered species, etc.). Plan future pilot studies carefully and include proper assessment criteria. The devil is in the detail when it comes to testing and implementing PES models. Future pilot studies should be developed carefully and deliberately before being implemented. This report focuses on phases 1 and 2 from Smith et al (2013), which is a guide for practitioners on developing PES. We suggest that future pilot studies should address the technical issues discussed in Smith et al. s Phases 3, 4, and 5 (see Section 4.2). Some of the important issues include consideration of cultural and demographic information and detailed data collection plans. Continue to fund research to improve the implementation of PES models based on coastal wetlands and mangroves. There are significant knowledge gaps in many areas that need to be filled to ensure effective PES models. There is a demand for information on the extent and magnitude of interventions taken by providers to improve the flow of ES (what interventions are most effective? What are the quantifiable links between intervention and effect on ES provision?). We need information on how outside drivers affect the supply of ESin MCMNP (e.g., population growth, rising incomes in developing countries, land use changes, global carbon emissions, future economic damages related to climate change, etc.) and how this may affect the value of these services for society. Information on the baseline level of services in the absence of a seller s intervention is important for determining additionality resulting from the PES model. Ensure continued funding for the PES start-up phase to ensure investment in capacitybuilding and awareness-raising among ES providers. Most PES models require kickstart funding. BCA s funding of the livelihood model for agriculture and tourism has contributed to the success of those programs, as have efforts to improve the environmental awareness of households, i.e., explaining how participants benefit from ES is critical for turning beneficiaries into buyers. However, the current model has a high cost per household and must be reduced in order to develop economically viable options for scaling up these programs across Vietnam. Strengthen existing governing institutions to ensure long-term success. The ultimate success of PES relies heavily on effective, credible and accepted governing institutions that can oversee and monitor a PES model. Measures to strengthen the belief in existing governing structures will be critical going forward.