Empeoramiento del intercambio de

As with other environmental service markets, the literature on watershed protection fails to produce systematic cost–benefit analyses of emerging payments systems. The implicit assumption is often that markets are “a good thing”. The discussion of benefits and costs of watershed protection tends to be broad and little attempt is made to put an economic value on these. Moreover, assessments generally do not examine the costs and benefits vis à visan alternative system for achieving watershed protection, e.g. command and control mechanisms. Instead they focus on assessing impacts of watershed protection. The lack of impact analysis relating to markets is a clear gap in the literature and one that requires urgent attention. More specific comments with regard to economic, social and environmental costs and benefits and what markets mean for poor people are provided below.

5.5.1 Economic costs and benefits

Few of the studies provide a comprehensive list or valuation of the economic costs and benefits resulting from emerging markets for watershed protection services. References tend to be vague, providing little basis for drawing out conclusions as to whether markets generate net benefits. A summary of the available information is presented in Table 11 below.

Table 11: Economic impacts of watershed protection markets

Economic benefits

• Income generation for suppliers • Employment in watershed businesses • Cost savings vis à vis command and control

approaches to achieving improved watershed protection

• Cost savings vis à vis point source pollution controls • Direct benefits from watershed protection, e.g. more

efficient hydropower and water supply systems • Positive spin-offs for forestry, agriculture, fishing,

recreational activities Economic costs • Costs of providing watershed protec- tion • Transaction costs of introducing and managing payment mechanisms • Opportunity costs associated with forgone land uses.

The main economic benefits highlighted include those that are achieved or expected from watershed protection and those associated with market approaches to promoting watershed protection. In general no figures are provided to indicate the value of these benefits. The study of the Philippines proposed Watershed Conservation and Protection Fee, however, stands out for its efforts to measure consumer surplus (i.e. net benefits for consumers) associated with improved watershed protection. Based on lower average estimated willingness to pay of beneficiaries worth US$0.03/ m3_{, given a total}

annual consumption of 48,607,272 m3_{, then willingness to pay comes to}

US$1.46 million per year. This compares favourably with costs of implementing the watershed management programme worth US$2.591 million over 5 years.

142

With respect to the cost savings achieved by using market-based approaches, measurements have been made for several of the USA watershed-based trades. For instance in North Carolina, the state is saving US$59 million by adopting a trading scheme versus an emission permit system. New York City is estimated to be saving between US$2.6-4.6 million over 10 years by adopting a land use- based trading scheme instead of building a $4-6 billion filtration system. The level of actual and expected landowner income is also quoted in

descriptions of market systems in Costa Rica, Vietnam and Panama. But, these are one-off figures and are rarely set against costs to landowners, or other benefits.

Costs of watershed protection are provided for 16 of the cases reviewed, but in only 3 cases (Quito’s Water Conservation Fund, North Carolina’s water quality trading scheme and Minnesota’s water quality trading scheme) is reference made to transaction costs. The description of Quito’s new Water Conservation Fund highlights how between 10-20% of finance channelled through the Fund will be kept to cover administrative costs. As only one component of

transaction costs, this gives an idea of their importance in determining market success.

Transaction costs are also highlighted by Woodward and Kaiser (2000) in their review of USA water quality trading schemes, though they make no attempt to measure them. They emphasise that transaction costs are closely linked to the trading system, rules, reporting requirements, etc. and that different market structures will have different transaction costs. However, they stress that this does not imply that it is possible to simply switch to a system with low transaction costs since high transaction costs might reflect the difficulty of introducing a market in unfavourable conditions, e.g. imprecise measurement techniques. Where these conditions mean that trading is so costly that it is not beneficial, command and control approaches may be preferable.

5.5.2 Social costs and benefits

No social costs were highlighted in the literature. As with economic impacts, social benefits may be split between those arising from watershed protection, and those associated with market-based approaches. The two categories of benefits are listed below.

Benefits associated with watershed protection

• Health benefits result directly from improved drinking water, and indirectly from improved agriculture, fishery productivity and knock on effects for diets. • Environmental education, which is often promoted alongside watershed

protection activities to generate local support.

• Training in improved land use practices that generate watershed benefits. • Improved recreational opportunities associated with cleaner water, e.g. fishing

143

• Reduced sound and smell pollution, e.g. Ecolotree Ltd. points to improved local odours and reduced sound pollution where it plants its trees. Benefits associated with markets

• Improved environmental education, which is an essential part of the market development process since it underpins beneficiaries’ willingness to pay for watershed protection services.

• Social institution strengthening. Community groups promoted to support markets, offer a basis for cooperation on a range of other livelihood improving activities.

• Improved scientific understanding where market development requires research on land-water linkages.

• Land title clarification where markets require secure property rights.

5.5.3 Environmental costs and benefits

Only environmental benefits are recorded, and for the most part little data is produced to back up the claims. Moreover, they tend to be associated with watershed protection rather than attributed to markets. The main benefits recorded may be split between watershed benefits and other spin-offs. These are listed below:

Watershed benefits

– Improved water quality: controlled sediment and nutrient (e.g. phosphorus, nitrogen) loadings, reduced water salinity

– Flood protection

– Maintained base flows through groundwater recharge – Soil erosion control

– Soil fertility maintenance (nutrients and salinity)

Positive spin-offs

– Biodiversity protection (both land-based and aquatic) – Landscape beauty/aesthetic benefits

– Carbon sequestration

The lack of field-based measurements is worrying, especially in light of questions raised in the scientific literature about forest-water linkages (see Box 21).

5.5.4 Watershed market impacts for poor people

The superficial nature of impact analyses extends to evaluations of costs and benefits for poor households. For the most part, little or nothing is said on the topic. Where it is, blanket statements are common. It tends to be assumed that where the benefits listed above accrue to forest-based communities, they will be captured by the poor. However, a broader look at the literature on watershed management warns against simplistic assumptions (see for instance Farrington

et al, 1999). The benefits and costs listed above are revisited below to consider what they might mean for poor people.

144

The balance of costs and benefits within a watershed can be looked at by considering upstream and downstream communities, i.e. providers and beneficiaries of watershed protection, separately. If we take upstream

landholders first, there are a number of potential benefits for poor communities where they hold land that is targeted under watershed protection payment schemes. Apart from the regular income stream, training in forest management may yield benefits for the natural capital base. This in turn could mean greater income from other forest-based activities, including sustainable timber

extraction, NTFPs, eco-tourism, or even the sale of related biodiversity or carbon services. To the extent that these new activities help diversify livelihood

portfolios of poorer groups, they may reduce income shocks and increase stability. Moreover, where involvement in watershed service markets leads to investment in cooperative institutions such as watershed committees, there are significant potential spin-offs for poorer groups who gain experience in coordination and may use these new groups as a basis for cooperation in other areas.

But the gains experienced by poor upstream communities depend on their ability to negotiate for payments and their freedom to move in and out of the market. Where poor households lack secure property rights in a watershed and forest protection may be imposed by force, these groups have little leverage for ensuring adequate compensation for the loss of land use rights. In extreme cases, poor households will be evicted from protected areas. Similarly, where disadvantaged groups lack the necessary education and political power to bargain effectively with downstream beneficiaries, they may be coerced into unfavourable deals.

With respect to downstream communities, markets also offer new mechanisms to ensure improved and sustainable water supplies. Yet, the extent to which poor communities gain depends on their access to the improved water, the quantities they use and the extent to which they bear the costs of watershed protection. Where access to water is linked to land rights, landless households may not share in the gains. But, where the costs of watershed protection are shared equally across the community, negative equity impacts may be serious. Even where costs are linked to the level of water use, poor people are likely to be disadvantaged since the total will represent a larger share of their income than wealthier users. Moreover, to the extent that wealthier water users do pay most, funds will be channelled towards watershed protection that benefits their interests. This may or may not benefit poor groups.

A key theme running through the discussion above is that where gains from trade are significant, there will inevitably be competition for a share of the rents – either on the buying or selling end of the market. Poor communities that lack education, managerial skills and political connections will tend to be

disadvantaged in such a competition. The risks that poor groups are damaged by markets for watershed protection requires serious consideration. Water is essential to life and risks that markets will reinforce inequities cannot be

145

ignored by policy-makers. The constraints that poor groups face in benefiting from emerging markets is taken up in Section 5.6.4.