Costa Rica is widely recognized as the first country to successfully institutionalize a Payment for Ecosystem Services (PES) scheme in 1997, with Natural Capital Accounting (NCA) serving as a foundation for ecosystem valuation. Under the PES system, farmers and local communities receive financial compensation for maintaining and restoring ecosystems, with payment levels determined based on the estimated value of ecosystem services provided.
Over the past 25 years, the program has delivered remarkable results. Forest cover increased from 21% in 1987 to more than 54% in 2020. Ecotourism revenues have reached approximately USD 4 billion annually. Most importantly, Costa Rica’s “green GDP”—which incorporates the value generated by ecosystem restoration and conservation—has been estimated to be 8–12% higher than conventional GDP. This represents one of the clearest empirical demonstrations that conservation investments supported by NCA can generate positive net economic benefits.
Forest Degradation and the Turning Point of the 1996 Forestry Law
During the 1970s and 1980s, Costa Rica experienced one of the highest deforestation rates in the world. Government policies promoting cattle ranching and agricultural expansion led to a dramatic decline in forest cover, from more than 75% of the national territory in the 1940s to only about 21% by 1987. The country faced severe ecological challenges, including biodiversity loss, soil erosion, and declining water resources.
Recognizing that environmental degradation would ultimately undermine long-term economic prosperity, the Government of Costa Rica enacted the landmark Forestry Law No. 7575 in 1996. The law introduced two transformative reforms:
Implementing PES through the National Forestry Financing Fund (FONAFIFO)
To operationalize the Forestry Law, Costa Rica established the National Forestry Financing Fund (FONAFIFO), a semi-autonomous agency under the Ministry of Environment and Energy (MINAE). FONAFIFO functions as a marketplace for environmental services, connecting ecosystem service providers with beneficiaries.
The PES scheme compensates landowners for maintaining and enhancing four legally recognized forest ecosystem services:
Sustainable Financing Mechanisms
Unlike many conservation programs that rely heavily on external donor funding, Costa Rica developed a self-sustaining financing model for PES.
Table 1. Revenue Sources and Financial Allocation Mechanisms of the FONAFIFO Fund
|
Category |
Funding Mechanism / Payment Allocation |
Share / Average Payment Rate |
|
Fund Revenue Sources |
– National fossil fuel consumption tax – Water service fees collected from hydropower and agricultural users – Voluntary Environmental Service Certificates (CSA)
– Concessional loans and international grants (e.g., World Bank, GEF) |
– Approximately 3.5% of total fuel tax revenues – Approximately 25% of water service fee revenues
– Based on commitments from domestic private-sector entities – Primarily used as seed funding and technical assistance |
|
Payment Mechanisms (to Landowners and Communities) |
– Conservation of natural forests (maintaining existing forest cover) – Reforestation (establishment of production or protection forests) – Agroforestry systems (integration of forestry species into agricultural land) – Natural forest regeneration (allowing forests to recover naturally on degraded land) |
– USD 60–80 per hectare per year
– USD 600–800 per hectare, disbursed over five years
– Approximately USD 1.3–2.0 per tree, disbursed over three years
– USD 40–50 per hectare per year |
The Critical Role of Natural Capital Accounting (NCA) in promoting PES
Although PES proved highly effective, its initial implementation faced a major challenge: payments were distributed uniformly, regardless of differences in ecosystem quality, ecological significance, or conservation outcomes.
To improve efficiency and effectiveness, Costa Rica pioneered the integration of Natural Capital Accounting (NCA) in accordance with the United Nations System of Environmental-Economic Accounting (SEEA).
NCA fundamentally transformed PES management and resource allocation through a series of specialized accounts:
Land and Forest Accounts
These accounts quantify forest extent, biomass, and rates of change across different forest types, including primary forests, secondary forests, and mangroves. The information enables FONAFIFO to identify areas facing the highest risk of degradation or offering the greatest carbon sequestration potential and prioritize them for PES contracts.
Water Accounts
Water accounts measure water quantity, quality, groundwater resources, and the contribution of forests to watershed regulation. This information supports differentiated PES payments, allowing higher compensation levels in strategically important watersheds supplying major cities or hydropower facilities.
By integrating NCA, Costa Rica successfully transformed PES from a flat-rate payment mechanism into a targeted, results-based system, maximizing the effectiveness of every dollar invested in conservation.
Table 2. Linking Natural Capital Accounts (NCA) with Costa Rica’s Payment for Ecosystem Services (PES) Scheme
|
Natural Capital Account Type |
Key Quantitative Indicators |
Direct Application to the PES Scheme |
|
Land and Forest Accounts |
• Annual changes in forest area |
• Identify and map high-risk forest areas vulnerable to deforestation for prioritization under PES contracts. |
|
Water Accounts |
• Streamflow and water discharge volumes |
• Provide the basis for calculating water service tariffs charged to hydropower operators and downstream water users. |
|
Carbon Accounts |
• Above- and below-ground biomass |
• Provide baseline data for the generation of internationally recognized forest carbon credits. |
|
Ecosystem and Biodiversity Accounts |
• Distribution maps of endemic and priority species |
• Identify and establish ecological corridors connecting protected areas and national parks. |
From Deforestation to a Green Development Success Story
The combination of a robust PES framework and science-based natural capital accounting has enabled Costa Rica to achieve remarkable outcomes:
Costa Rica became the first tropical country to reverse deforestation on a national scale. Forest cover increased from 21% in 1987 to nearly 60% of the country’s territory today.
Restored natural capital has provided the foundation for a thriving ecotourism industry, which contributes more than 8% of national GDP and represents one of the country’s largest sources of foreign exchange earnings.
Data generated through forest carbon accounts have supported Costa Rica’s National Decarbonization Plan, providing the evidence base needed to pursue a net-zero emissions pathway.
Lessons for Viet Nam
Viet Nam is among the pioneering countries in Southeast Asia to implement a Payment for Forest Environmental Services (PFES) policy through Decree No. 99/2010/ND-CP and later the 2017 Forestry Law. However, Costa Rica’s experience offers valuable lessons for strengthening the existing system.
PFES payments in Viet Nam are currently based largely on forest area rather than ecosystem quality or the actual economic value of ecosystem services. NCA can help establish transparent natural capital accounts that support more accurate and differentiated payments based on ecosystem performance.
Viet Nam could broaden PES financing by incorporating additional beneficiaries, including carbon-intensive industries, tourism operators, and other sectors that depend on ecosystem services, thereby reducing reliance on hydropower and water supply companies.
The FONAFIFO model demonstrates the value of a professional, autonomous financial institution supported by modern monitoring technologies such as remote sensing. Similar reforms could help the Viet Nam Forest Protection and Development Fund (VNFF) improve transparency, reduce administrative costs, and deliver payments more efficiently to forest managers and local communities.
Costa Rica’s experience demonstrates that Natural Capital Accounting is not merely a statistical exercise. When integrated into policy instruments such as PES, NCA becomes a powerful tool for aligning environmental conservation with economic development, creating tangible incentives for sustainable resource management while generating measurable social, environmental, and economic benefits.
 with Payment for Ecosystem Services (PES): The Case of Costa Rica){kind=link}