Economic Valuation of Watershed Services for Sustainable Forest Management: Insights from Mexico

Economic Valuation of Watershed Services for Sustainable Forest Management: Insights from Mexico
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  14 Economic Valuation of Watershed Services for Sustainable Forest Management: Insights from Mexico   G. Perez-Verdin 1,* , J.J. Navar-Chaidez 1 , Y-S. Kim 2  and R. Silva-Flores 3   1 Instituto Politécnico Nacional 2 Northern Arizona University 3 Private Consultant 1  ,3  Mexico 2 United States of America 1. Introduction Ecosystem services are the benefits that people obtain from ecosystems (Brauman et al., 2007). Recognizing the importance of the services provided by ecosystems for human well-being is not a new idea, going as far as Plato (Feen, 1996) and the economic conceptualization of ecosystem values (Coase, 1960; Feen, 1996). However, the scientific and practical interests in assessing and trading ecosystem services have not gained momentum until the 1990s when pioneering works by Daily (1997) and Costanza et al. (1997) galvanized the field. Among the ecosystem services that received increasing attention in the recent years are the hydrological services due to the role of water as a vital, and sometimes decisive, element in human life (Pare et al., 2008). Hydrologic services encompass a range of benefits that terrestrial ecosystem produces in terms of freshwater. These services can be grouped as: improvement of extractive water supply, improvement of in-stream water supply, water damage mitigation, provision of water related cultural services, and water-associated supporting services (Brauman et al., 2007). The majority of hydrological services take place in the highlands of forest watersheds (Messerli et al., 2004). In these areas, upland forest watersheds work as a source that collects, manufactures, and distributes water and provides hydrological services to lowlands (Neary et al., 2009). Various components of the water cycle (i.e., evaporation, infiltration, surface run-off) critically depend on forest cover. If the forest cover is affected, so it will be the quality and quantity of the water provided to downstream users (Brown et al., 2005). In developing countries, such as Mexico, changes in forest cover are caused among other things by the local economic conditions in which landowners live. While searching for basic needs (food and shelter), they exercise excessive pressure over the forests eventually triggering forest fragmentation and deforestation (Perez-Verdin et al., 2009). Based on the methods used for their economic valuation, hydrological services can be classified into two broad categories of values: marketed and non-marketed. The economic *  Corresponding Author     Sustainable Forest Management – Current Research 260 value of the former is reflected through the market price determined mainly by its demand and supply (i.e., drinking water) while the latter, traded under imperfect markets, requires a more complex evaluation that involves evaluating consumer’s preferences and behavior (i.e., evaluation of recreation sites). The sum of these services gives the total economic value (TEV) of a forest watershed. Because of the quasi-public good nature of hydrological services and the presence of externalities, failure to recognize the TEV of a watershed can lead to depletion, degradation, and overexploitation of forest resources and eventually loss of social welfare (Plottu & Plottu, 2007). Recently, research has focused on assigning economic values to environmental services to redirect policies for sustainable forest management. The intention is to help landowners reduce the impact of externalities by giving monetary incentives and implement best management practices to regulate the quality/quantity of water (Pagiola et al., 2003; Muñoz-Piña et al., 2008). Among the new schemes include the formal articulation of incentive-based instruments, such as Payments for Ecosystem Services (PES) and Markets for Ecosystem Services (MES) (Jack et al., 2008; Gómez-Boggerthun et al., 2010). While the design and operation of various international PES and MES programs have been started by local governments, many of them now promote the participation of the private sector, non-government organizations, and the general public (Paré et al., 2008). The major objective of this chapter is to underline the importance of assigning economic values to hydrological services as a means to achieve sustainable forest management. The paper first introduces critical inputs of the water balance and best management practices for watershed resources. It also describes the types of watershed services and how they can be valued. The paper then analyzes the cases where non-market valuation techniques have been implemented for various types of watershed services in Mexico. And finally, it discusses the operation of a Mexican PES program and its impact on watershed services. 2. Water balance and best management practices The assessment of available water resources is central to economic valuation of hydrological services. The economic valuation of water resources involves knowledge of the supply and demand sides and eventually to the search for effective management policies. The determination of available water within a watershed is given by the water balance and depends on the magnitude of inputs and outputs and the storage capacity. The basic input is precipitation ( P T  ) and is either lost to evaporation ( E V  ) and transpiration ( T  R ) or routed through small pathways of overflow and interflow to give surface runoff ( Q ) and infiltration ( I  ) (Hiscock, 2005). Thus, the water balance model, estimated for a given period of time  ⁄  , is the difference between inputs and outputs. The larger the difference between inputs and outputs, the more supply water there is to end users. In this case, Inputs= P T   and Outputs = I + E V   + T  R  + Q . Therefore, the water balance can be expressed as:  =    −  +   +    +  (1) In mountainous forest watersheds, precipitation is partitioned into throughfall, interception loss, and stemflow (Navar, 2011). Throughfall is the rainfall portion that reaches the ground by passing directly through or dripping from tree canopies. Interception loss is the rainfall retained on the canopy that evaporates back to the atmosphere; it is composed mainly on the amount of precipitation stored by canopies and the evaporation of stored canopy water.  Economic Valuation of Watershed Services for Sustainable Forest Management: Insights from Mexico 261 Stemflow is the rainfall portion that flows to the ground via trunks or stems (Dunkerley, 2008). Litter retains part of the throughfall and stemflow and infiltrate into the mineral soil increasing soil moisture content. Evapotranspiration is the amount of water vapor that leaves soil and vegetation via evaporation and transpiration. Factors that control evaporation from soils are the current water content, the water content at wilting point, and the soil water content at field capacity. Factors that affect transpiration are the type of vegetation, density, and age. Conventional forest management practices, that include logging and grazing, affect tree density, canopy cover, and tree composition and structure (Brown et al., 2005). Hydrologic studies in the United States have demonstrated that selective harvesting and clear-cutting promotes increased discharge because of a reduction of stand density and canopy cover that demand less water for transpiration (Swank et al., 1988; McBroom et al., 2008). Non-conventional forest disturbances that cause tree mortality include forests fires, pests and diseases, strong winds, etc. Forest fires of large spatial scales and severity, in addition to tree mortality, also cause soil water repellency (Martin & Moody, 2001). Water repellency reduces infiltration and often promotes surface runoff and soil erosion beyond any other forest disturbance (Pierson et al., 2008). In general, tree mortality beyond natural causes reduce interception loss and transpiration leaving more net precipitation (throughfall) for other processes such as soil moisture content, aquifer recharge, and surface runoff (Brown et al., 2005; Ikawa et al., 2009). In addition, streamflow and aquifers are enriched with sediments and chemicals washed out from the soil that reduces usability. Other human-related disturbances are road construction and maintenance, and harvest-related activities that promote soil compaction and reduce soil infiltration at specific places in the watershed. The aim of best management practices (BMP) is to reduce the effect of non-point and point sources of degradation that affect water quality and quantity (McBroom et al., 2008). Examples of non-point sources, which are characterized by a widespread and diffused generation, include cropland, harvesting areas, animal feedlots and grazing lands, impervious surfaces (e.g., roads, land rocks, deforested sites, urban areas), and construction sites (Neary et al., 2009). Transport of sediments, organic matter, and nutrients, such as nitrogen and phosphorus are examples of point sources. Harvesting, grazing, and agriculture can lead to increased rates of runoff and erosion. Rates of material export from impacted watersheds to water resources, while highly variable within and between land uses, exceed those for natural or undisturbed land uses (Andreassian, 2004). Because of this characteristic, the application of BMP is mainly oriented to reduce the effect of non-point sources. Effective BMPs to reduce the effect of non-point source loads should target changes in current land-use practices, construction and operation of equipment, machinery, and the use of structures to retain or otherwise control the movement of water and material (McBroom et al., 2008; Neary et al., 2009). Also, effective BMPs need to consider the local conditions (e.g., geology and soils, topography, climate, and hydrology), landowner expectations, and the nature of the source of the polluting material (e.g., harvesting, grazing, or agricultural land uses) in which impacts are occurring. Overall, watershed BMPs are oriented to (1) minimize soil compaction and bare ground coverage, (2) separate exposed bare ground from surface waters, (3) exclude fertilizer and herbicide applications from surface waters, (4) inhibit hydraulic connections between bare ground and surface waters, (5) avoid disturbance in steep convergent areas, (6) provide a forested buffer around streams, and (7) build stable road surfaces and stream crossings (Jackson & Miwa, 2007; Neary et al., 2009).   Sustainable Forest Management – Current Research 262 In Mexico, the national water, environmental protection, and forest laws are the basis for regulating watershed management practices. Coupled with the federal laws, almost every state in the country has specific regulations that complement those issues where the federal laws do not apply. Based on this set of laws and regulations, common examples of BMPs that involve forest vegetation and water include: the provision of forested buffer around streams, stabilization and closure of third-order roads immediately after harvesting, construction of culverts on primary and secondary roads crossing streams, pre-harvest planning for cutting, skidding and loading zones to avoid increasing hydrologic and sediment source connectivity to stream channels, and the perpendicular arrangement of forest residues to reduce soil erosion, among others. In the past, the implementation of these BMPs was adopted by landowners who would evaluate the cost and benefits in either doing another activity or doing nothing. Since these practices, which we have identified as externalities, would reduce their economic profits, many landowners did not comply with the regulations leading to increased rates of erosion and sedimentation (Muñoz-Piña et al., 2008). Nowadays, the cost of BMPs is mostly shared with the government; however, the private sector, non-government organizations, and the general public are participating as well. This type of cost-share programs, which embrace the known concept of internalizing externalities, is discussed in section 4 of this chapter. 3. Economic valuation of watershed services The need of economic valuation of watershed services stems from their quasi-public and non-rivalry nature, the presence of externalities, and scales of production (Pattanayak, 2004; Brauman et al., 2007; Plottu & Plottu, 2007). In a market economy, watershed services without economic values will not be provided at optimal levels. The quasi-public, non-rivalry   nature implies that it is difficult, if not impossible, to exclude an individual from using watershed services (e.g. soil retention), and several individuals can use them simultaneously without diminishing each other’s use values. The presence of externalities   means that the economic benefits of users of these services will not be deviated to compensate providers. And regarding the scale of production, these services are characterized by economies of scale in production; the larger the watershed, the lower the marginal costs (Pattanayak, 2004). Valuation of watershed services also implies understanding the different types of benefits a watershed offers to ecosystems and society. A forest watershed not only functions like a basin which receives and stores water from precipitation, surface runoff, or infiltration, but also cleans water, retains sediments, provides habitats for wildlife, sinks CO 2 , and offers many environmental amenities for humans (Brauman et al., 2007; Locatelli & Vignola, 2009). Some of these benefits can be valued through conventional methods that use market-based approaches. For example, the useful life of a dam can be valued through estimations of the rate of sedimentation and the years left to sustain fish. Other benefits require detailed information and more complex approaches that estimate for example the value of environmental services for present, future generations, or consider the presence of externalities (Field, 2008). For example, if fewer recreation opportunities are provided in the watershed, due to water loss resulting from harvesting or grazing, recreationists may act and eventually offer a fee to preserve the watershed and recover the loss of recreation opportunities. In this section, we provide a brief summary of the different watershed values and the means to estimate them.  Economic Valuation of Watershed Services for Sustainable Forest Management: Insights from Mexico 263 3.1 Watershed values For the purpose of this work, we will focus on two main types of watershed values: use and non-use values (Freeman, 2003; Field, 2008). Use values, which consist of consumptive and non-consumptive uses, refer to the situations where people directly or indirectly interact with resource use (Field, 2008). Consumptive use values are derived from extractive resource uses such as timber, commercial fishing and hunting, and the use of water for irrigation and drinking. Examples of non-consumptive uses values are benefits from resources with a minimal or imperceptible extraction and include those from boating, swimming, ecotourism, and camping. Non-use or passive-use values refer to the situations in which people place monetary values on resources independent of their present or future use (Field, 2008). For example, people may be willing to support a long-term program intended to maximize water quality even though their offspring, not they, will receive the benefits. Despite the controversy that these types of values should not be considered in mainstream economics, because they reflect altruism and difficulty to assess, Freeman (2003) argues that non-use values can be defined within a utility theoretical framework and should be considered as public goods. Freeman further contends that ignoring non-use values could lead to wrong policies and resource misallocation. The rationale for assigning values to watershed services also lies on the many biochemical cycles that take place in the watershed, the water and soil conservation functions, and the provision of wildlife habitats and amenities (Pearce, 2001; Pattanayak, 2004; Brauman et al., 2007). Water is the principal medium in which many chemical reactions occur and watersheds provide a variety of conditions in which those chemical reactions take place (Ward & Trimble, 2004). Water, Carbon, Nitrogen, Oxygen are among the key elements whose maintenance depends on the management of forest watersheds. Altering these cycles could interrupt the flow of environmental services, particularly water, to downstream communities (Figure 1). Therefore, the main question is how these hydrological processes, defined by a local drainage unit, can be manipulated to be fairly useful to society. Figure 1 shows the relationship between hydrological processes and economic values to humans. A change in physical or chemical properties of water causes a change in the quality and quantity of the liquid provided. Discharges from non-point pollution sources affect the quality of water and force resource managers to use expensive processes, equipment to clean the water. Conversely, to address the feedback loop, excessive fishing may cause a change in the fish population. Estimating an improvement of watershed benefits involves the use of economic models to determine the monetary units people place on both use and non-use values (Freeman, 2003). The TEV is a concept that illustrates the whole worth of ecosystem services. Due to the nature of some services, hypothetical markets are created to elicit values through a variety of economic techniques, including: (a) direct market valuation approaches, (b) revealed preference approaches, and (c) stated preferences approaches (Freeman, 2003; Champ et al., 2003;). Direct market valuation methods use data from actual markets and thus reflect actual preferences or costs to individuals. Revealed preference techniques are based on the observation of individual choices in existing markets that are related to the ecosystem service subjected to valuation. Stated preference approaches simulate a demand for ecosystem services by means of surveys on hypothetical changes in the provision of ecosystem services (TEEB, 2010). Selection of the best technique depends on the objectives of the researcher, the type of use values, and the type of ecosystem services under evaluation.
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