Water and Payment of Environmental Services in Costa Rica

Ricardo O. Russo
EARTH University, Costa Rica

21st Century Watershed Technology: Improving Water Quality and Environment 21-24 February, 2010, Guácimo, Costa Rica Abstract. 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 economies in rural areas.

Keywords. payment for environmental services, environmental services, Watershed protection, hydrological services, Costa Rica. Introduction
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 instruments as mechanisms of support for conservation activities. Payment for environmental services is one of these initiatves. 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 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 early 2000s. Forest Law No.7575, enacted in 1996, explicitly recognized four environmental services provided by forest ecosystems: (i) mitigation of greenhouse gas emissions; (ii) hydrological services, 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 Financiamento Forestal, FONAFIFO). The PSA Program is managed by FONAFIFO, a semi-autonomous agency with independent legal status. FONAFIFO‟s governing board is composed of three representatives of 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 hydrological services, 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 in terms 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 interest on tropical forests. Also, ES can be seen as a set of regulatory functions (on stocks and flows of matter and energy) of the natural ecosystems and some agro-ecosystems that help to maintain 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 processes and components to provide goods and services that satisfy human needs, directly or indirectly” and additionally, these authors identified 23 ecosystem functions that provide goods and services, 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 group ecosystem functions into four primary

developmentgoals. 1996). . 7. Millennium Development Goals and Water Quality In 2000. Perhaps the most important choice in any ecosystem valuation study is how the initial question is framed. 2005).. Among most used methods for valuing ecosystem services are “stated-preference” techniques (used to measure the value people place on a particular environmental item. 2002. Additionally.un. Regulation functions: This group relates 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. Daily et al.htm ) or of the UN Statistics Division ( http://millenniumindicators. they produce oxygen and remove carbon dioxide from the atmosphere. 2003. 2004). Therefore. policymakers make the critical decision to value all the services of the watershed. Information functions: Because natural ecosystems provide an essential „reference function‟ and contribute to the maintenance of human health by providing opportunities for reflection. or to protect). FAO and other organizations have promoted discussion and exchange of experiences on this issue by organizing specific events such as the Regional Forum on Payment Schemes for Environmental Services at the Third Latin American Congress on Watershed Management. 2000. Lewandrowski et al. there is a large body of literature about valuation of ecosystems and environmental services (Costanza et al. ranging from timber through scenic beauty. and provide valuable goods and services. Water and hydrological services are linked to the four main ecosystem functions. and also in relation to ecosystem services is in a shaping state (Gutman. Eradicate extreme hunger and poverty. 2004). economic factors can introduce uncertainty as well (NRC. recreation and aesthetic experience. and provide very effective filtration systems for higher water quality (FAO/REDLACH. 1997. Reduce child mortality. this does not mean that ecosystems or their services have no value.org/About_the_goals. smooth out peaks and troughs in water availability.. malaria and other diseases. One of the key considerations in meeting the MDGs is that water quality must be improved at all levels. These methods include contingent valuation and choice experiments. For ecosystem valuation. and 8. by 2020 (UN.. 2004). Promote gender equality and empower women. Peru.Combat HIV/AIDS. 4. the United Nations established eight Millennium Development Goals (MDGs) with the aim of speeding up poverty alleviation and socio-economic development by 2015: 1. At present. probably because of the term valuing ES is often used as attaching economic values to ecosystem services which are treated as public goods and therefore have no market value. 2. 2002. or cannot be valued in dollar terms. and (4). Improve maternal health.categories: (1). which involves subjective judgments (Fausold and Lilieholm. and d) Achieve significant improvements in the lives of at least 100 million slum dwellers. forests support a diversity of native flora and fauna. 2004). NRC. Achieve universal primary education. carbon dioxide. Pagiola et al. (2). Examples include how much people would pay annually to obtain drinkable freshwater. Habitat functions: Natural ecosystems provide refuge and reproduction habitat to wild plants and animals and thereby contribute to in situ conservation of biological and genetic diversity and evolutionary processes. and achieving MDGs. Pearce. attempting to assign values to ES presents several challenges because of the environment provides several services simultaneously. Production functions: Photosynthesis and nutrient uptake by autotrophs convert energy. 1997. this approach explicitly recognizes hard trade-offs in landscapes with mounting land-use pressures.. is the model of payment to providers of ecosystem services from beneficiaries of those services as a way of reducing negative externalities and protecting the resources. water quality may be the key issue. However. 5. 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. This concept of payments has received much attention in various Latin American countries as an innovative tool for the financing of sustainable management of land and water resources. the valuation of ES in agriculture. Additionally. In some cases. 2009). In conventional economics 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. cognitive development. A complete description of the goals. water and nutrients into a wide variety of carbohydrate structures which are then used by secondary producers to create an even larger variety of living biomass. Ensure environmental sustainability. uncertainty can arise at many steps in an analysis. Water quality management contributes both directly and indirectly to achieving all eight MDGs. and indicators can be found at the Millennium Development Goals website of the World Bank ( http://www. b) Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation.org/unsd/ ). it is important to say that people are not familiar with purchasing such services if they are not specific stakeholders. and different types of value are measured by different methodologies and expressed in different units.. held in Arequipa. forestry and natural resources. 2004). A manner of avoiding the degradation of water resources. 3. and seeks to reconcile conflicting interests through compensation (Wunder. in others. one of the biggest sources of uncertainty is the lack of probabilistic information about the likely magnitudes of some variables. c) Significantly reduce biodiversity loss by 2010. De Groot et al. then their willingness to pay may not to be clearly defined. (3). 2003 (FAO. The contingent method differs fundamentally from other conservation approaches because instead of presupposing win-win solutions. spiritual enrichment. Develop a global partnership for development. regulate the surface and underground flow of water. Although this review does not attempt to enter in a discussion on valuation. However. targets. 6. 1997. In the case of forests. Valuation of Environmental Services Environmental services valuation can be a difficult and controversial task. O‟Neill.

2000.4% of the Costa Rican population had access to a drinking water supply system and approximately 26% of the water provided by Costa Rican municipalities and communities failed to fully meet international standards of quality (Astorga 2009). participants must present a forest management plan certified by a licensed forester. iii) Biodiversity protection (conservation). Payments from hydropower producers and other water users were always seen as one of the ways on which the PES program would stand. reforestation. or sell the rights to other parties. with addendums covering specific watersheds Signed 2001. however. It is a program where forest and plantation owners are financially and legally acknowledged for the environmental services that their forests provide to the community. building upon previous experiences in Costa Rica as well as an institutional framework dating back to 1979.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. Payments vary according to the type of activity undertaken: reforestation (US$ 450/ha). the Ministry of Environment (MINAE). Table 1: Contracts for provision of water services in Costa Rica’s PSA program Company Type of user Watershed / Area Area covered Contribution Contribution to by contract to payment to FONAFIFO (ha) participating administrative land users costs (US$/ha/yr) 2. it has also been proposed that the PSA be an instrument of wealth redistribution that comes to fortify the family economies in rural areas (FONAFIFO.000 900 1. Payments are made over a five-year period. ii) Watershed protection (hydrological services)..818 1. is charged with channeling government payments to private forestry owners and protected areas. however. landowners are free to renegotiate prices. as well as carry out conservation. addendum on non-titled land users signed 2000 for 10 yrs Umbrella agreement signed 2000. there exist water quality and distribution problems that challenge to Costa Rica‟s communities and local governments (Ortega-Pacheco. Although Costa Rica does not normally face water quantity shortages. Table 1). in 2008 only 83. through FONAFIFO. Water quality scarcity has also been attributed to uneven water service distribution and deficient water treatment (Calvo 1990). Ortiz. An overview of how the program works has been presented by Landell-Mills and Porras (2002). allow secondary forest recovering. 2002). Ortiz. committed to managing or protecting their contracted forest for 20 years (or 15 in the case of reforestation).. 2006. 2003).. These goals are met by contracts of payments for environmental services with individual farmers. Hydropower producer Hydropower producer Río Volcán Río San Fernando Río Platanar Signed 1997. They are. Castro et al.493 1. 2002. In return landholders cede their environmental service rights to FONAFIFO for this period. 2001. 2002).800 12 10 15 30 Río Aranjuez Río Balsa Río Laguna Cote Florida Ice & Farm Bottler Heredia ESPH Municipal water supply Azucarera El Viejo Agribusiness Acuífero 550 45 7% Signed 2004 using CSA Río Segundo Río Segundo 5. The program was established in 1996. 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.7575 clearly acknowledged the role of forests in providing hydrological services. Any payments must be negotiated with potential service buyers. In addition.A. or sustainable forest management activities (depending on the type of contract) throughout the life of individual contracts (Camacho Soto et al. Water service payments Forest Law No. 2002). 2007). and iv) Landscape beauty (for recreation and ecotourism). The legal basis for the program is Costa Rica's Forest Law 7575. forest preservation (US$200/ha) and agroforestry systems (US$ 0.000 42 42 42 45d 22d $29/ha yr 1 $4/ha yr 1 $13/ha yr 1 $7/ha yrs 2-5 5% of payment 0 Comments Energía Global Platanar S.75/tree). Briefly. renewed 2002 Signed 1999. renewed 2004. In all cases. FONAFIFO has dedicated substantial efforts to negotiating with water users for them to pay for the water services they receive and has reached a number of agreements (Pagiola. The PES program of environmental services aims to protect primary forest. For example. When the contracts expire. Land and forest owners are paid for the environmental services they produce when they adopt land use and forest management activities that preserve the forest and biodiversity and maintain people's life quality. and promote reforestation of abandoned pasture and degraded lands (Rodríguez Zúñiga. It was designed as a financial mechanism to promote the conservation of the forest resources of the country. later modified to use CSA Signed 2002 using CSA CNFL Hydropower producer . which recognizes four above mentioned ES provided by the forest ecosystems: i) Carbon sequestration and storage (mitigation of GHG emissions). the Law does not compel beneficiaries to pay for services. 2005).000 6. Their obligation is recorded in the public land register and applies to future purchasers of the land.

2006).666 925 30 45 7% 7% Signed 2005 using CSA Signed 2005 using CSA 100 45 7% Signed 2005 using CSA 40 45 7% Signed 2004 using CSA 100 45 7% Signed 2004 using CSA Sources: After Pagiola. where possible beyond a simple listing and qualitative description of affected ecosystem services is also essential. countries and regions. 2006).A. that operate their own collective rural aqueduct systems. gender. helped by the development of a streamlined process based on environmental services certificates (Certificados de Servicios Ambientales. teaching and learning processes for understanding the relationship between PES and water resources in academic environments should be promoted. After a slow start. while recent agreements involve water users paying the entire cost of conservation. quantifying ecological impacts of management activities. In 2005. as well as contributing to sustainable development and alleviation of poverty at all levels Proper management of watersheds is necessary for the protection of water resources and ecosystems. 1. and hotels. PES tools and spaces of discussion. 2009). social. Furthermore.(irrigated) La Costeña SA Olefinas Exporpac Agribusiness (irrigated) Agricultural supplies Agribusiness (irrigated) Hidroeléctrica Aguas Hydropower Zarcas Guanacaste La Manguera S.000 10 n.a. including economic.a n. The town of Heredia has established an „environmentally adjusted water tariff‟. municipal water supply systems. Recent agreements include bottlers. CSA) which are standardized instruments that pay for the conservation of one hectare of forest in a specified area (Pagiola. Energía Global contributes to payments made to participating land users in the watersheds above the company‟s two run-of-the-river powerplants. Limón Province. Hydropower producer producer Desarrollos Hoteleros Tourism El Tempisque Acuífero de Guanacaste Acuífero de Guanacaste Acuífero de Guanacaste Río Aguas Zarcas Acuífero de Guanacaste La Esperanza 3. through the lens of the institutional economics Situation. with hydropower producer Energía Global. Final Considerations Payment for Environmental Services (PES) is rising as an inventive financial instrument with both theoretical and practical opportunities for bringing positive change to environmental management. The study was focused on six communities in Siquirres . irrigation water users. FONAFIFO website A first agreement. Structure and Performance [SSP] Framework. an environmental NGO. market access and infrastructure should be developed and applied appropriately. and locallyfinanced PES programs. These tools would guarantee effective valuation of the natural resources. This may include arrangements for exchanging initiatives to become trained at PES based on living examples in other communities. in addition. Capacity building should be promoted. Similar agreements were reached a year later with other hydropower producers. 2002). 2001. The amounts paid have also risen: early agreements saw water users paying for a quarter of conservation costs (based on the notion that water services are one of four services that the law said forests provide). in the Caribbean region of Costa Rica. The author found that participatory and ecosystem-based management approaches might lead to more effective protection of global water supplies. environmental. FONAFIFO can sell interested water users the appropriate number of certificates. micro-financing. 2003). including state power producer Compañia Nacional de Fuerza y Luz (CNFL). and also that every income segment of the local population of water-users exhibited significant demand and willingness to finance the PES program to protect local water quality (Ortega-Pacheco et al. Local administration and financing of such drinking water systems is common in rural Costa Rica. Ortega-Pacheco (2007) examined the institutional impact of watershed-based. 2006. In a separate initiative. hydropower producer La Manguera SA is paying the Monteverde Conservation League to maintain under forest cover the watershed from which its plant draws its water (Rojas and Aylward. Under this agreement. was reached in late 1997 with the assistance of FUNDECOR. Rather than negotiating each agreement on an ad hoc basis. collective. Costa Rica expanded the use of water payments by revising its water tariff (which previously charged water users near-zero nominal fees) and introducing a conservation fee earmarked for watershed conservation (Fallas. the number of financing agreements with water users rose sharply. At local. preservation and conservation of water resources. and enhance wider participation of stakeholders including donors and recipients from public and private sectors as well as local community members and private individuals. Agreements with water users are typically for five years. . as well as covering FONAFIFO‟s administrative costs. the proceeds of which are used to pay landholders to maintain and reforest watershed areas (Castro and Cordero.

Van Den Belt. Oxford University Press.U.).1997. N. Jansson. Journal of Natural Resources Policy Research 1( 2): 189–202. Payments for Environmental Services in Costa Rica. Payment for environmental services: estimating demand within a tropical watershed. De Groot. D. Water resources development in Costa Rica 1970-2000. R. M. D. D... Castro. A.G. and B. C. Farber. Discussion paper 09-04. 2004.S. World Wildlife Fund (WWF) Washington. Aylward. Technical Bulletin No. K. Boumans.V. S. Payment for Environmental Services in Eastern Costa Rican Watersheds: Institutions. FONAFIFO (Fondo Nacional de Financiamiento Forestal.S. 336 p. Sperow.ub. Sutton. D.. Science 289:395-396. Mendoza. NRC (National Research Council). and S. T. 2004. description and valuation of ecosystem functions.. Ortega-Pacheco. Lilieholm. Agricultural Sector. 1990. San José.T. Markets for Environmental Services. Paruelo. Starrett.. P. P. Wasthingon. Resources for the Future. San José. Bishop. 2004. Woodward.References Blackman.S. IT)/REDLACH (Latin American Network for Technical Cooperation in Watershed Management. M. 22 p. House. J. 1):185-204. M... and E. Master Thesis. Valuing Ecosystem Services: Toward Better Environmental DecisionMaking. Calvo. Selling Forest Environmental Services: Market Mechanisms for Conservation and Development. A. Michigan State University. 100 p. R. D. Lincoln Institute of Land Policy Research Paper.. http://www. Eve. Limburg. 2002. S. Aniyar.. PE). and K. R. Fondo Nacional de Financiamiento Forestal de Costa Rica (FONAFIFO).." Hydrological Sciences Journal. FAO (Food and Agriculture Organization of the United Nations. September 1996. Investigación Agraria Sistemas y Recursos Forestales (Fuera de Serie No.O. Tilman. Available at http://www. Jones. Washington.. Simpson.nap. 36 p. Odum. 1996. Washington.. Nature 387:253-260.pdf . 2003.). Walker. Castro. 148 p. MPRA Paper No. CR).M. Ecosystems 3(1):21-23. GB. 151 p. B. Peters. Informe Final. Cordero. FAO Regional Office for Latin America and the Caribbean. P. Lubchenco. 516-531. 2003. Hannon. In Providing Global Public Goods: Managing Globalization. DC. d‟Arge. S. and S. 2010. http://books.V. UN (United Nations). Ehrlich. Earthscan. Final Report. Programa Estado de la Nación (PEN). Volume 8. (Ed. 2000. Global trade for local benefit: Financing energy for all in Costa Rica. A typology for the classification. Department of Agriculture. Levin. 2006. Dasgupta.. New York. R. R. Macroeconomics for Sustainable Development Program Office. p.P. 2009.V. M.A. Söderqvist. Muenchen. R. K. K. Number 5.edu/openbook.uni-muenchen. Wilson and R. DC. O‟Neill. Pagiola. J. Economics of Sequestering Carbon in the U. Landell-Mills (Eds. G. Ortega-Pacheco. London. 290 p. Economic Research Service (ERS).. C. S. From Goodwill to Payments for Environmental Services: A Survey of Financing Options for Sustainable Natural Resource Management in Developing Countries. 70 p. De Groot.com/abstract=1345932 Astorga.. 2009. Gutman. and R. Paustian. Jansson. 2000. Lupi and M.. Land Lines Newsletter. http://mpra.fao.. London. Costa Rica. FONAFIFO. The economic value of open space: A review and synthesis. 35(2):185-196. The value of nature and the nature of value. Kautsky. J.). 2007.S. (Eds. Grasso. B.G. 2005. Tropical forest and the emerging CO2 market. Costanza. Ecological Economics (Special Issue) 41:393-408. Folke. J. Kaul. CL.org/millenniumgoals/pdf/MDG_Report_2009_ENG.C. R. Identificación de zonas de importancia hídrica y estimación de ingresos por canon deaguas para cada zona. Daily. 2002.C. Arrow. B.. San José. Conceicao. Electronic forum on payment schemes for environmental services in watersheds (on line). M.. R.C. The National Academies Press. Cordero. Y. Mäler. N. R. D. http://ssrn. I. 12 April .. International Institute for Environment and Development (IIED). 2009. CR. F. Situación del recurso hídrico. East Lansing. Kaplowitz. What are we learning from experiences with markets for environmental services in Costa Rica? A review and critique of the literature. H. GB.T. Naeem. P.J. UN. 2009.de/2010/ Rojas. M. S.D.. J. Odum.. US. Public Participation and Demand. The value of the world‟s ecosystem services and natural capital.un. Pagiola. New York. 2006.. P. (TB1909). The Millennium Development Goals Report 2009. FONAFIFO: Más de una década de acción. 56 p. U.21 May 2004. 2001. goods and services.. D. and M.php?record_id=11139&page Lewandrowski.J.org/foro/psa/pdf/report. C. Décimoquinto Informe sobre el Estado de la Nación en Desarrollo Humano Sostenible. Raskin. 69 p. S..C.R.pdf Fausold. J.. and R. R. User Financing in a National Payments for Environmental Services Program: Costa Rican Hydropower. The energetic basis for valuation of ecosystem services. Le Goulven K. 2003.rlc. Fallas..

Sign up to vote on this title
UsefulNot useful