Brazil: Payment for Ecosystem Services and the Applications of Distributed Ledger Technology

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As governments and companies rush to meet their climate ambitions, we can see a sharp rise in research and development considering nature-based solutions (NbS worldwide). These solutions stand at the forefront of climate mitigation strategies, and represent cost-effective and eco-integrated possibilities to revert the dire consequences of the Anthropocene.

This proposed geological epoch arising from the industrial revolution seems a commonsense approach to climate change discussion. But it is necessary to examine the systemic consequences of absolute anthropogenic disturbance that has reduced nature (composed of its biotic and abiotic elements) to fragments of its former omnipresent role in the self-regulatory structure of the planet.

Carbon-centric mitigation strategies (in the public and private sectors) and the approach of aiming at only greenhouse gas (GHG) emission reduction has oversimplified climate change policy. The effect can be counterproductive and welcomed by sectors aversed to change.

From a public policy perspective, legal frameworks are quickly developing to keep up with the many needs of regulating natural capital and ecosystem services, a challenge that addresses the fragilities of the strategies mentioned above and is inherently framed by complexity theory and systems thinking.

Brazil: Challenges for PES in a NbS Superpower

Brazil is a natural capital powerhouse and home to the majority of the Amazon forest. It also has the most biodiverse savannah region in the word, the Cerrado. These and other strategic biomes are vital to the self-regulating pillars of nature, particularly of South America (although academic studies have documented wider interconnections).

In a brief synthesis, payment for ecosystem services (PES) is a variety of mechanisms through which the providers of such services, usually landholders, are compensated via direct payments or under more complex market mechanisms, such as carbon credits. Therefore, the PES category can encompass a range of tools, for which there are few unifying characteristics. PES has broader legal frameworks in Brazil, which are currently under development. They aim to cover the multi-faceted profiles of landholders that are supposed to be compensated by such schemes. Results-based payments developed in the past, including watershed protection projects and other jurisdictional approaches, but leveraging the participation of PES across the national economy means that different agent profiles will enter the national arena and diversify markets.

The new Brazilian law for PES1, approved in early 2021 and already in force, provides spark for the development of this mechanism, albeit long overdue. For terminology purposes, the bill differentiates the ecosystem services (the natural benefits of pollination, water cycles or carbon sequestration) and environmental services provided by landholders or benefactors that maintain, enhance or restore such ecosystem services). Emerging technologies, such as blockchain, offer huge safety and integrity leaps for the latter.

Databases: An issue of reliability and integration

Brazil has a wide range of PES schemes to consider, on different levels of development, including private and official public databases for results-based payments, REDD+ (jurisdictional and project-level initiatives), carbon market initiatives and many other overlapping frameworks.

Most of these are fundamentally reliant on monitoring, reporting and verification (MRV), including tracking wildlife, water quality, or monitoring biomass and soil carbon stocks. In particular, Gov-tech solutions aiming to incorporate distributed ledger technology (DLT) to the databases above can significantly impact the accountability and integrity of such systems and ensure data consistency.

Integrity issues such as supply-side double-counting are a by-product of the ethereal nature of ecosystem services, for example, the pinpointing of one individual benefactor for a region of complementary environmental services. DLTs, such as blockchain, offer a robust foundation for solving these dilemmas.

As an example, imagine a digital interface where smart contracts stored on distributed ledgers limits commercially sensitive information from certain parties and make all other information on environmental services available to everyone.

With public policies and regulators clamping down on polluters and market solutions pricing in negative externalities, the so-called “tragedy of the commons” and free-riding become seamlessly connected to the appropriate channeling of funds to environmental service providers. Furthermore, double counting is often accounted for in demand side schematics and commonly associated with GHG inventories of companies and countries. The integrity of the payment for environmental services relies on the fair compensation of individuals or organisations that are the originators of such services and the correct identification of payers, for compliance reasons or institutional recognition.

The main issues surrounding PES frequently concern property issues and land tenure rights of smallholders and indigenous communities. These can be especially difficult to solve in municipal level land bureaus that have no connection to more comprehensive databases. Although it is possible to revert these trends through efficient application of technology that enables the cross-referencing of landholders, ecosystem services, basic environmental information and geo-referencing through a transparent, multiple-party, shared accounting system such as blockchain. In essence, such technology can make sure that this plethora of data is trustworthy and verifiable.

In Brazil, they have the potential to cross-reference the Rural Environmental Registry (which stores all data concerning native and riparian vegetation and other essential land-use information), the Land Registry Bureaus and the PES Agreements between payers and landholders. This synergy of databases through DLT and the blockchain (fed perhaps by PES smart contracts between parties) could provide a series of benefits, for instance, creating an efficient way to provide transparency and avoid double counting.

Also, the example mentioned brings a lot of risk mitigation to the permanence aspect of projects, notoriously relevant to current carbon credit projects and undeniably applicable to broader ecosystem services. In Brazil, PES is legally considered a propter rem obligation, a Latin expression in civil law that refers to the legal liabilities connected to the land. In synthesis, PES obligations and financial compensation get transferred to the heirs or buyers of the land. But our database technology rarely enables a cohesive arrangement of these agreements to bring legal solidity to the transactions and the parties.  

Leakage accounting monitors the spill-over effects to proxy areas of the deforestation or environmental degradation avoided in the project area. Connecting the databases on the blockchain could also facilitate this monitoring and provide incredibly trustworthy MRV systems.

Unfortunately, both PES and blockchain are living their embryonic stages in Brazil. It is also fundamental to reflect the level of regulation to which market participants are willing to be subjected. In Brazil, a jurisdictional approach puts a heavy burden on transactions, creating sluggish public policies and over-regulating private transactions.

Understanding the Future of Natural Capital 

While there is a broad spectrum of activities cited in this article, including specific results-based public policies and other voluntary, market-oriented solutions, the analysis relates to the same core principle – the payment for environmental services.  

The primary reason for applying DLT in the cases mentioned is to offer safety and predictability to the tremendous untapped potential of natural capital markets and public policies. It is not to bring endless technocratic bureaucracy or governmental barriers to these transactions. The idea of integrating technology must come with the recognition of NbS and PES as systems of unfathomable complexity, surpassing territorial, socio-economic and even national barriers, requiring ambitious and reliable agreements for and between the public and private sector. Blockchain-based applications offer reliable, transparent solutions to complex legal inefficiencies.

As the global compact for NbS increases the complexity of exchanges between jurisdictions, decentralised traceability may be a welcome feature of cross-border transactions. It would create a solid web of trust between the various i.e. buyers, donors and payers in voluntary or compliance circumstances. As the Global North and South intensify the financial flows for regeneration, a new system may be required.

Expanding the reach of this argument would take us to the Paris Agreement and the problems of article 6 and international carbon markets. DLT could assist developing countries with the hefty task of implementing corresponding adjustments for international transactions. By and large, those with Nationally Determined Contributions (NDCs) are heavily dependent on implementing or enhancing NbS, although this is a controversial issue with no straightforward solution. In the future, under reliable jurisdictions, blockchain and similar mechanisms may be the most common safeguards for all types of natural capital transactions.

Sources:

  1.  Law nº 14.119/2021, National Policy of Payment for Ecosystem Services. Accessed 13th of June, 2021. <https://www.in.gov.br/en/web/dou/-/lei-n-14.119-de-13-de-janeiro-de-2021-298899394>

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