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Water and Payment of Environmental Services in Costa Rica

Water and Payment of Environmental Services in Costa Rica

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Published by Ricardo Russo
Payment of Environmental Services is rising as an inventive financial instrument with both theoretical and practical opportunities for bringing positive change to environmental management, preservation and conservation of water resources, as well as contributing to sustainable development and alleviation of poverty at all levels.
Payment of Environmental Services is rising as an inventive financial instrument with both theoretical and practical opportunities for bringing positive change to environmental management, preservation and conservation of water resources, as well as contributing to sustainable development and alleviation of poverty at all levels.

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Published by: Ricardo Russo on Jun 18, 2010
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Water and Payment of Environmental Services in Costa Rica
Ricardo O. Russo
EARTH University, Costa RicaPresented at
21st Century Watershed Technology: Improving Water Quality and Environment.
 International Conference organized by ASABE (American Society of Agricultural and BiologicalEngineers) and EARTH University (Guácimo, Limón, Costa Rica) focusing on water quality.21-24 February, 2010, Guácimo, Costa Rica
Costa Rica has been a leader among Latin American countries in the design of and development of a system of payment for environmental services (ES) to preserve its forests. Since 1997, a program locally called “Pagos de Servicios AMBIENTALES (known as PSA in Spanish, or Payments for  Environmental Services, PES in English), has been providing payments to farmers and forest owners for reforestation, forest conservation, and sustainable forest management activities. Costa Rica's Forest  Law 7575 recognizes four ES provided by the forest ecosystems: i) Carbon sequestration and storage(mitigation of GHG emissions); ii) Watershed protection (hydrological services); iii) Biodiversity protection (conservation); and iv) Landscape beauty (for recreation and ecotourism). Furthermore, this PES program has been an instrument of wealth redistribution that comes to fortify the family economiesin rural areas.
 Payment for Environmental Services, environmental services, watershed  protection, hydrological services, Costa Rica.
In Costa Rica, there has been a shift toward more sustainable and integrated forms of water resources management jointly with a noteworthy spread of ecosystem based financial instrumentsas mechanisms of support for conservation activities. Payment for environmental services is one of these initiatives. Since 1997, a program locally called “Pagos de Servicios Ambientales” (known asPSA in Spanish, or Payments for Environmental Services, PES in English), has been providing payments to more than 4,400 farmers and forest owners for reforestation, forest conservation,sustainable forest management and agroforestry activities. This program has been recognized for helping the country to achieve deforestation control and increasing forest cover since the early2000s. Forest Law No.7575, enacted in 1996, explicitly recognized four environmental services provided by forest ecosystems: (i) mitigation of greenhouse gas emissions; (ii) hydrologicalservices, including provision of water for human consumption, irrigation, and energy production;(iii) biodiversity conservation; and (iv) provision of scenic beauty for recreation and ecotourism.The law provides the regulatory basis to contract landowners for the services provided by their lands, and establishes the National Fund for Forest Financing (Fondo Nacional de FinanciamentoForestal, FONAFIFO).
The PSA Program is managed by FONAFIFO, a semi-autonomous agencywith independent legal status. FONAFIFO’s governing board is composed of three representativesof the public sector (one each from the Ministry of Environment, Energy and Telecommunications,the Ministry of Agriculture, and the National Banking System) and two representatives from the private forest sector (appointed by the board of directors of the National Forestry Office).This paper emphasizes the experience of Costa Rica’s PSA program in relation to hydrologicalservices, including provision of water for human consumption, irrigation, and energy production.
What Environmental Services Means
Traditionally, environmental services (ES) have been understood and defined quite narrowly interms of facilities that provide water and waste-treatment services, often by the public sector.However, there is a need of moving beyond this stage, and to consider ES holistically.Therefore, ES can be defined as a set of benefits generated for society by the existence and
dynamic development of natural resources or ecosystems, in this case with a particular intereston tropical forests. Also, ES can be seen as a set of regulatory functions (on stocks and flowsof matter and energy) of the natural ecosystems and some agro-ecosystems that help tomaintain or improve the environment and people´s life quality (Odum and Odum, 2000; NRC,2004). De Groot
et al 
. (2002) define ecosystem functions as “the capacity of natural processesand components to provide goods and services that satisfy human needs, directly or indirectly”and additionally, these authors identified 23 ecosystem functions that provide goods andservices, making a contribution to the ecological understanding on ecosystem services and a proposal for valuing them.Although a wide range of ecosystem functions and their associated goods and services have been referred to in the literature, De Groot et al., (2002) suggest that it is convenient to groupecosystem functions into four primary categories: (1).
 Regulation functions
: This grouprelates to the capacity of natural and semi-natural ecosystems to regulate essential ecological processes and life support systems through bio-geochemical cycles and other biospheric processes; (2).
 Habitat functions
: Natural ecosystems provide refuge and reproduction habitatto wild plants and animals and thereby contribute to
in situ
conservation of biological andgenetic diversity and evolutionary processes; (3).
 Production functions
: Photosynthesis andnutrient uptake by autotrophs convert energy, carbon dioxide, water and nutrients into a widevariety of carbohydrate structures which are then used by secondary producers to create aneven larger variety of living biomass; and (4).
 Information functions
: Because naturalecosystems provide an essential ‘reference function’ and contribute to the maintenance of human health by providing opportunities for reflection, spiritual enrichment, cognitivedevelopment, recreation and aesthetic experience. Water and hydrological services are linkedto the four main ecosystem functions.In the case of forests, they produce oxygen and remove carbon dioxide from the atmosphere,regulate the surface and underground flow of water, smooth out peaks and troughs in water availability, and provide very effective filtration systems for higher water quality(FAO/REDLACH, 2004). Additionally, forests support a diversity of native flora and fauna,and provide valuable goods and services, ranging from timber through scenic beauty.
 Millennium Development Goals and Water Quality
In 2000, the United Nations established eight Millennium Development Goals (MDGs) withthe aim of speeding up poverty alleviation and socio-economic development by 2015: 1.Eradicate extreme hunger and poverty; 2. Achieve universal primary education; 3. Promotegender equality and empower women; 4. Reduce child mortality; 5. Improve maternal health;6.Combat HIV/AIDS, malaria and other diseases; 7. Ensure environmental sustainability; and8. Develop a global partnership for development. Water quality management contributes bothdirectly and indirectly to achieving all eight MDGs, but it is most closely tied to the targets of Goal 7: a) Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources; b) Halve by 2015 the proportion of  people without sustainable access to safe drinking water and basic sanitation; c) Significantlyreduce biodiversity loss by 2010; and d) Achieve significant improvements in the lives of atleast 100 million slum dwellers, by 2020 (UN, 2009). One of the key considerations in meetingthe MDGs is that water quality must be improved at all levels. A manner of avoiding thedegradation of water resources, and achieving MDGs, is the model of payment to providers of ecosystem services from beneficiaries of those services as a way of reducing negativeexternalities and protecting the resources. This concept of payments has received muchattention in various Latin American countries as an innovative tool for the financing of sustainable management of land and water resources. FAO and other organizations have promoted discussion and exchange of experiences on this issue by organizing specific eventssuch as
the Regional Forum on Payment Schemes for Environmental Services
at the ThirdLatin American Congress on Watershed Management, held in Arequipa, Peru, 2003 (FAO,
2004). A complete description of the goals, targets, and indicators can be found at theMillennium Development Goals website of the World Bank or of the UN Statistics Division
(http://www.developmentgoals.org/About_the_goals.htm) (http://millenniumindicators.un.org/unsd/
Valuation of Environmental Services
Environmental services valuation can be a difficult and controversial task. In conventionaleconomics it is generally accepted that measures of economic value should be based on what people want or the amount of one thing a person is willing to pay. At present, the valuation of ES in agriculture, forestry and natural resources, and also in relation to ecosystem services is ina shaping state (Gutman, 2003; Lewandrowski
et al 
., 2004), probably because of the termvaluing ES is often used as attaching economic values to ecosystem services which are treatedas public goods and therefore have no market value. Therefore, attempting to assign values toES presents several challenges because of the environment provides several servicessimultaneously, and different types of value are measured by different methodologies andexpressed in different units, which involves subjective judgments (Fausold and Lilieholm,1996). Although this review does not attempt to enter in a discussion on valuation, it isimportant to say that people are not familiar with purchasing such services if they are notspecific stakeholders, then their willingness to pay may not to be clearly defined. However,this does not mean that ecosystems or their services have no value, or cannot be valued indollar terms. Among most used methods for valuing ecosystem services are “stated- preference” techniques (used to measure the value people place on a particular environmentalitem. Examples include how much people would pay annually to obtain drinkable freshwater,or to protect). These methods include contingent valuation and choice experiments. Thecontingent method differs fundamentally from other conservation approaches because insteadof presupposing win-win solutions, this approach explicitly recognizes hard trade-offs inlandscapes with mounting land-use pressures, and seeks to reconcile conflicting intereststhrough compensation (Wunder, 2005). Additionally, there is a large body of literature aboutvaluation of ecosystems and environmental services (Costanza
et al 
., 1997; O’Neill, 1997;Pearce, 1997; Daily
et al 
., 2000; De Groot
et al 
., 2002; Pagiola
et al 
., 2002; NRC, 2004).Perhaps the most important choice in any ecosystem valuation study is how the initial questionis framed. In some cases, water quality may be the key issue; in others, policymakers make thecritical decision to value all the services of the watershed. However, uncertainty can arise atmany steps in an analysis. For ecosystem valuation, one of the biggest sources of uncertainty isthe lack of probabilistic information about the likely magnitudes of some variables; economicfactors can introduce uncertainty as well (NRC, 2004).
The Program of Payments for Environmental Services in Costa Rica
The Program of Payments for Environmental Services (PSA) implemented in Costa Rica has been an alternative approach to halt environmental degradation derived from deforestation(Castro
et al 
., 2000; Castro
et al 
., 2001; Ortiz, 2002). Land and forest owners are paid for theenvironmental services they produce when they adopt land use and forest managementactivities that preserve the forest and biodiversity and maintain people's life quality. The PES program of environmental services aims to protect primary forest, allow secondary forestrecovering, and promote reforestation of abandoned pasture and degraded lands (RodríguezZúñiga, 2003). These goals are met by contracts of payments for environmental services withindividual farmers. The program functions like a funds transfer system from those who are benefited of the environmental services toward those that produce such environmental services(Mejías and Segura, 2002). It was designed as a financial mechanism to promote theconservation of the forest resources of the country. It is a program where forest and plantationowners are financially and legally acknowledged for the environmental services that their forests provide to the community.

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