Payments for watershed services
Payment schemes for watershed services are economic incentives to influence watershed management. Furthermore, they are recognized instruments used in development programs for poverty alleviation and protection of natural resources, including biodiversity.
Content Table
- Importance of watershed services
- Valuing and managing watershed services
- Payment schemes for watershed services
- Conclusion
- References
Importance of watershed services
Watershed services are the benefits people obtain from ecosystems within a watershed. The main watershed services are categorized as follows (MEA 2005):
- Provisioning services - services focused on directly supplying food and non-food products from water flows:
- Water supply
- Food provision (e.g. crop, fruit, livestock production)
- Non-food goods (e.g. timber, medicine)
- Hydroelectric power
- Regulating services - services related to regulating flows or reducing hazards related to water flows:
- Regulation of water flows (e.g. retention of rainfall and release, esp. by forests and wetlands; groundwater recharge and discharge)
- Hazard mitigation (e.g. reduced flood peaks and storm damage, coastal protection)
- Control of soil erosion and sedimentation
- Water purification (e.g. removal or breakdown of organic matter, salts and pollutants).
- Supporting services - services provided to support habitats and ecosystem functioning:
- Wildlife habitat
- Environmental flows
- Cultural and amenity services - services related to recreation and human inspiration:
- Aesthetic and recreational services
- Heritage and identity
- Spiritual and artistic inspiration
With increasing recognition of the contribution of watershed services to water security, more and more emphasis has been placed on determining the value of these services. People have started to realize that they need to invest in the maintenance of watershed services, just as they invest in the maintenance of other types of infrastructure. Without such investments, specific watershed services that are beneficial to downstream users are likely to be degraded (Smith et al. 2006).
Watershed protection services are primarily of interest to local and regional users, therefore it is relatively easy to identify the users or beneficiaries of watershed services (e.g. municipal water suppliers, hydroelectric facilities, industrial users, and irrigation systems). The challenge in developing payment programmes for watershed services is the difficulty of translating user benefit into actual revenue streams (FAO).
Payments for Watershed Services (PWS) can be defined as payments or direct compensations by the beneficiaries of a watershed service for the maintenance or provision of the service to its providers (NIVA 2007). Payments for watershed functions seek to link upstream land use and management with downstream water use and management to realize benefits for upstream and downstream participants in the scheme and others in the area, including benefits to the environment.
Valuing and managing watershed services
Ecosystems as a factor in water decision-making
Decisions of how to allocate, price and invest in water are usually made by a comparison between the economic returns of different water demands, and the economic costs of supplying water.
Ecosystems, through their demand for water, provide a wide range of goods and services for human production and consumption – fish, timber, fuel, food, medicines, crops and pasture. On the supply-side of the equation, natural ecosystems such as forests and wetlands generate important economic services which maintain the quantity and quality of water supplies. They help to mitigate or avert water-related disasters such as flooding and drought. Often ecosystems provide a far more effective, cost-efficient, equitable and affordable means of providing these goods and services than artificial alternatives. Yet, typically, ecosystems are not sufficiently considered when water decisions are made and water investments are planned.
In many cases ecosystem under-valuation has proved to be economically short-sighted as regards water users’ and investors’ expectations of future payments and paybacks. It is increasingly apparent that investment in ecosystems now can safeguard profits in the future, and save considerable costs. For instance, wise management of ecosystems for water services can help to prolong the economic lifespan of dams and reservoirs, ensure future domestic and industrial water supplies, and maintain the productivity of commercially valuable fish and plant stocks. (Emerton and Bos, 2004)
Valuation of watershed services
To better understand the economic value of watershed services, a range of methods can be used. The information derived from the valuation of watershed services helps to determine the true costs and benefits of various land uses and trade-offs involved in deciding between them. Making values for watershed services explicit also helps to motivate people to consider these services in decision-making in the first place.
A widely used framework for looking at the value of ecosystems is the concept of Total Economic Value (TEV). TEV has two categories: use values and non-use values.
Use value is composed of three elements:
- Direct-use value is mainly derived from goods that can be extracted, consumed or enjoyed directly, e.g. drinking water, fish, hydropower, recreation activities.
- Indirect-use value mainly derives from the services that the environment provides, including regulation of river flows, flood control and water purification.
- Option value is the value attached to maintaining the future ability to use the environment, including from ecosystem services that appear to have a low value now, but could have a much higher value in future because of new information or knowledge.
Non-use values derive from the benefits the environment may provide that do not involve using it in any way, whether directly or indirectly, and comprise:
o Existence value is the value people derive from the knowledge that something exists, even if they never plan to use it. For example, people value the existence of blue whales or pandas, even if they have never seen one and probably never will.
o Bequest value is derived from the desire to pass on ecosystems to future generations.
Source: The Encyclopedia of Earth
Investment decisions for development projects in intact watersheds have conventionally focused only on direct-use values and ignored the other components of TEV. As a result, there are many instances where development has ultimately led to the need for restoration of watersheds and watershed services at high cost (Smith et al. 2006).
Watershed management - linking land and water use
It is important to understand the relationship between the condition of ecosystems in a watershed and its capacity to provide watershed services. This is the basis for linking the economic interests and welfare of the downstream users of water resources (fishers, irrigators, dam operators and water supply companies) to the actions of managers responsible for upstream waterways, vegetation cover, soil use and land management. Recognition of the downstream benefits of watershed services is the motivation for trying to influence decision-making and management upstream (Smith et al. 2006).
However, managing land and water interactions is difficult because of the public good characteristics of watershed services. Landholders upstream can affect water quantity and water quality downstream through their decisions on land-management practices, but they have little incentive to consider these impacts because they are not affected directly. Water users have little incentive to pay for improved watershed service provision if they cannot exclude non-payers from enjoying these benefits (Porras et al. 2008).
The challenge for managers who have to decide on the optimal mix and intensity of land use in watersheds is to define and quantify indicators to track the delivery of watershed services. For example, the capacity of the watershed to provide fish can be measured by maximum sustainable harvest levels, the capacity to deliver water throughout the dry season can be tracked by hydrological parameters and the attractiveness for recreational use can be monitored by the willingness to pay of visitors or potential visitors. Furthermore, clear targets need to be set for maintaining or improving critical indicators. Such targets provide a simplified description of the desired state of the watershed. The payment scheme can be designed to either maintain or restore the target level for a particular indicator (Smith et al. 2006).
Payment schemes for watershed services
(based on Smith et al. 2006)
General principles
Before presenting in detail payment schemes for watershed services, the general criteria to describe the PES principles are outlined below (Wunder 2005):A PES is a voluntary transaction, where a well-defined environmental service (ES) (or a land use likely to secure that service) is being ‘bought’ by a (minimum one) ES buyer from a (minimum one) ES provider, if and only if the ES provider secures ES provision (conditionality).
In reality, however, it is very difficult to find a scheme that meets all these five criteria simultaneously.
PWS schemes need to be related to the changes in the value of benefits from the watershed services they are designed to maintain or restore. If these values are low, payment may not be justified and a payment scheme may not be an appropriate incentive for sustainable management of watershed services.
Valuations are used to demonstrate the contribution of watershed services to the local and national economy and how payment schemes can be economically beneficial to stakeholders. They help to increase awareness of the existing benefits that water-related ecosystems provide to people, and thus build support among local stakeholders and politicians for the establishment of payment schemes. They also enable a comparison of the economics of payment schemes with other alternatives. However, valuations do not determine the prices paid by beneficiaries of watershed services to service providers.
As in any transaction between contracting parties, prices paid for watershed services under payment schemes are the subject of negotiations guided by the interests and preferences of the beneficiaries and service providers.
Downstream beneficiaries:
The price they are willing to pay is measured against the added cost that would result from a detrimental change in the watershed services supplied from upstream. This is the marginal cost downstream of watershed degradation – resulting from loss of benefits or the cost of replacing benefits – and it will not be worthwhile for beneficiaries to pay a price for watershed a service that is any higher.
For example:
- Dam operators would not pay more to maintain flows in a river than the income they would lose if flows were reduced.
- Water utilities would not have an incentive to protect a wetland from destruction if it was cheaper to obtain the same water purification benefits by building a filtration plant.
Upstream service providers:
The price they are willing to accept is determined by either the added costs they must bear to increase service provision, or the income they must forego – the opportunity cost – if they elect to give up management practices or changes in land use that degrade watershed services.
For example:
- Re-vegetating and excluding cattle from stream banks can help to reduce erosion and downstream sedimentation of waterways, but will increase costs for ranchers upstream, because of re-vegetation works and the need for fencing. A payment scheme offering a price that is lower than these costs will not be attractive to ranchers.
- A payment scheme aiming to provide an incentive for landowners to retain forest on sloping land will have to offer a price that replaces income that would otherwise have been obtained from converting forest to pasture or cropping.
Payments for watershed services are based on assessments of the costs and benefits of land and water management for upstream and downstream stakeholder.
A payment scheme deal is only possible, where the willingness to pay of downstream buyers is higher than the minimum payment needed by upstream sellers. Examples of prices paid in payment schemes for watershed services are shown in the following table:
Types of payment schemes for watershed services
Private payment schemes
In these schemes, private entities agree amongst themselves to provide payments or rewards in return for maintenance or restoration of a watershed service. The term ‘private’ refers to ownership characteristics and includes two heterogeneous groups. These are first, privately owned, profit-seeking companies, such as farms and hydropower companies, and secondly, private individuals or groups of individuals, for whom profit-seeking is not the primary objective (e.g. consumers).
Government need not have any role in transactions but may wish to develop regulations or make facilitating changes to legislation.
Examples of such schemes are:
- Transfer payments - a hydroelectric power company experiencing increasingly irregular water flows may decide to pay landowners upstream to change management practices. Here the company assumes that a different management practice will improve water supply.
- Land purchases - a private party may decide to purchase land from another private party with the aim of safeguarding the watershed services originating from the land in question. Strictly speaking, this is a mechanism for payment for watershed services only if the land is purchased and then leased back to the former owner under a contract stipulating how the land can be used or managed.
- Cost-sharing - beneficiaries of watershed services can agree among themselves to share the costs that must be met by service sellers upstream to maintain or restore watershed services.
- Purchase of development rights to land - property rights are separated from development rights. A forest owner, for example, may retain the property rights for his or her land, but he can sell the development rights. The buyer and seller then agree in the purchase contract on restrictions on land use and management practices that protect watershed services.
Cap-and-trade schemes, under a regulatory cap or floor
These types of schemes are applied increasingly to the management of groundwater, surface water, wetlands and water quality. The cap is set either by a government agency or voluntarily, as in cases where large companies have established internal trading systems. The permits (or credits) are then allocated among resource users or polluters. Trading schemes aim to reward the companies that are able to cut their pollutant discharge, while penalizing those who pollute more heavily, thus creating an incentive for them to invest in pollution control.
Certification schemes of environmental goods
In this payment scheme, the payment is embedded in the price paid for a traded product, such as certified timber, fish or organic produce.
The consumers need to express a demand for products that meet higher environmental standards and be willing to pay a premium price for them. The suppliers of certified goods are compensated through the premium on prices paid by consumers.
Intermediaries play a key role in this type of mechanism, either as the certification agency or as traders in certified products. Governments could facilitate operation of certification schemes through appropriate laws and regulations.
Public payment schemes
The buyers in public schemes are usually public authorities such as municipalities or national governments who are typically motivated by the need to provide safe drinking water or regulation of river flows. Payment mechanisms include user fees, land purchase and land easement.
For example, the government provides financial aid directly to farmers to adopt management practices to reduce leaching of nitrates from agricultural land into vulnerable groundwater. Payment rates are based on the farmer’s loss of income and costs resulting from changes in agricultural practices.
Public payment schemes have the highest level of involvement by public agencies and, to date, are the most common form of payment scheme for environmental services.
Application of PWS
Payment schemes must be carefully designed to make sure that the incentives they create result in the desired impacts on land cover and land and water use.
There are important prerequisites for the payment schemes to function, such as:
- Need and urgency for action to prevent the degradation of watershed services - there must be a direct, scientifically justified relation between watershed services and changes in land cover, use and management.
- Strong institutional and political support exists for using a payment scheme instead of direct statutory or regulatory mechanisms for solving the problem.
- Suppliers must hold property and/or legal rights to the land and must be able to exert the controls on land use and management necessary to modify watershed services.
- The beneficiaries must have expressed a demand for watershed services and must be able to justify participation in a payment scheme based on the value of the economic benefits they receive from watershed services.
Conclusion
PES belong to the family of approaches making pronounced use of economic incentives. In that respect, PES resemble environmentally motivated taxes and subsidies. But the PES approach of ‘purchasing conservation’ in a contingent way is more direct than most taxes and subsidies which aim more at changes in broader production and resource-use patterns.
Even though the challenges involved in creating market-based mechanisms for the provision of watershed services are numerous, there has been a significant increase in interest to implement such schemes worldwide. Experiences range from small, pilot projects in Nicaragua, to very large-scale national programmes in China. International funding agencies such as the Global Environment Facility (GEF) and bilateral donors are including projects on PES in their portfolios. Governments, especially in Central America, are laying the foundations for new legislation dealing with environmental services.
The focus of this article was the theoretical presentation of how PWS works. As a next step, it would be useful to summarize case studies and empirical research on the topic.
References
Emerton, L., Bos, E. (2004) Value. Counting Ecosystems as an Economic Part of Water Infrastructure. Gland, Switzerland: IUCN
FAO. Payments for Environmental Services from Agricultural Landscapes
NIVA 2007.Feasibility of payments for watershed services
Porras et al. 2008.All that glitters: A review of payments for watershed services in developing countries. Natural Resource Issues No. 11. IIED, London, UK
Smith, M., de Groot, D., Perrot-Maîte, D. and Bergkamp, G. (2006). Pay – Establishing payments for watershed services. Gland, Switzerland: IUCN
Wunder, S. 2005. Payments for Environmental Services: Some Nuts and Bolts. CIFOR, Occasional Paper No. 42
