Water and Payment of Environmental Services in Costa Rica

Ricardo O. Russo
EARTH University, Costa Rica Presented at 21st Century Watershed Technology: Improving Water Quality and Environment. International Conference organized by ASABE (American Society of Agricultural and Biological Engineers) and EARTH University (Guácimo, Limón, Costa Rica) focusing on water quality. 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.

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 initiatives. 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 categories: (1). 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; (2). 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; (3). Production functions: Photosynthesis and nutrient uptake by autotrophs convert energy, carbon dioxide, 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; and (4). Information functions: Because natural ecosystems provide an essential ‘reference function’ and contribute to the maintenance of human health by providing opportunities for reflection, spiritual enrichment, cognitive development, recreation and aesthetic experience. Water and hydrological services are linked to 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) with the aim of speeding up poverty alleviation and socio-economic development by 2015: 1. Eradicate extreme hunger and poverty; 2. Achieve universal primary education; 3. Promote gender equality and empower women; 4. Reduce child mortality; 5. Improve maternal health; 6.Combat HIV/AIDS, malaria and other diseases; 7. Ensure environmental sustainability; and 8. Develop a global partnership for development. Water quality management contributes both directly 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) Significantly reduce biodiversity loss by 2010; and d) Achieve significant improvements in the lives of at least 100 million slum dwellers, by 2020 (UN, 2009). One of the key considerations in meeting the MDGs is that water quality must be improved at all levels. A manner of avoiding the degradation 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 negative externalities and protecting the 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. 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, held in Arequipa, Peru, 2003 (FAO,

2004). A complete description of the goals, targets, and indicators can be found at the Millennium 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 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. At present, the valuation of ES in agriculture, forestry and natural resources, and also in relation to ecosystem services is in a shaping state (Gutman, 2003; Lewandrowski et al., 2004), 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. Therefore, attempting to assign values to ES presents several challenges because of the environment provides several services simultaneously, and different types of value are measured by different methodologies and expressed 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 is important to say that people are not familiar with purchasing such services if they are not specific 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 in dollar terms. Among most used methods for valuing ecosystem services are “statedpreference” techniques (used to measure the value people place on a particular environmental item. Examples include how much people would pay annually to obtain drinkable freshwater, or to protect). These methods include contingent valuation and choice experiments. The contingent method differs fundamentally from other conservation approaches because instead of presupposing win-win solutions, this approach explicitly recognizes hard trade-offs in landscapes with mounting land-use pressures, and seeks to reconcile conflicting interests through compensation (Wunder, 2005). Additionally, there is a large body of literature about valuation 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 question is framed. In some cases, water quality may be the key issue; in others, policymakers make the critical decision to value all the services of the watershed. However, uncertainty can arise at many steps in an analysis. For ecosystem valuation, one of the biggest sources of uncertainty is the lack of probabilistic information about the likely magnitudes of some variables; economic factors 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 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. The PES program of environmental services aims to protect primary forest, allow secondary forest recovering, and promote reforestation of abandoned pasture and degraded lands (Rodríguez Zúñiga, 2003). These goals are met by contracts of payments for environmental services with individual 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 the conservation of the forest resources of the country. 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.

In all cases, participants must present a forest management plan certified by a licensed forester, as well as carry out conservation, reforestation, or sustainable forest management activities (depending on the type of contract) throughout the life of individual contracts (Camacho Soto et al., 2002; Ortiz, 2002). The program was established in 1996, building upon previous experiences in Costa Rica as well as an institutional framework dating back to 1979. The legal basis for the program is Costa Rica's Forest Law 7575, which recognizes four above mentioned 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). In addition, 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, 2005). An overview of how the program works has been presented by Landell-Mills and Porras (2002). Briefly, the Ministry of Environment (MINAE), through FONAFIFO, is charged with channeling government payments to private forestry owners and protected areas. Payments vary according to the type of activity undertaken: reforestation (US$ 450/ha), forest preservation (US$200/ha) and agroforestry systems (US$ 0.75/tree). Payments are made over a five-year period. In return landholders cede their environmental service rights to FONAFIFO for this period. When the contracts expire, landowners are free to renegotiate prices, or sell the rights to other parties. They are, however, committed to managing or protecting their contracted forest for 20 years (or 15 in the case of reforestation). Their obligation is recorded in the public land register and applies to future purchasers of the land.

Water service payments
Forest Law No.7575 clearly acknowledged the role of forests in providing hydrological services. Payments from hydropower producers and other water users were always seen as one of the ways on which the PES program would stand; however, the Law does not compel beneficiaries to pay for services. Any payments must be negotiated with potential service buyers. 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, 2006; Table 1). Although Costa Rica does not normally face water quantity shortages, there exist water quality and distribution problems that challenge to Costa Rica’s communities and local governments (Ortega-Pacheco, 2007). Water quality scarcity has also been attributed to uneven water service distribution and deficient water treatment (Calvo 1990). For example, in 2008 only 83.4% 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). A first agreement, with hydropower producer Energía Global, was reached in late 1997 with the assistance of FUNDECOR, an environmental NGO. Under this agreement, Energía Global contributes to payments made to participating land users in the watersheds above the company’s two run-of-the-river powerplants. Similar agreements were reached a year later with other hydropower producers, including state power producer Compañia Nacional de Fuerza y Luz (CNFL). After a slow start, the number of financing agreements with water users rose sharply, helped by the development of a streamlined process based on environmental services certificates (Certificados de Servicios Ambientales, CSA) which are standardized instruments that pay for the conservation of one hectare of forest in a specified area (Pagiola, 2006). Rather than negotiating each agreement on an ad hoc basis, FONAFIFO can sell interested water users the appropriate number of certificates. Recent agreements include bottlers, municipal water supply systems, irrigation water users, and hotels. 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), while recent agreements involve water users paying the entire cost of conservation, as well as covering FONAFIFO’s administrative costs. Agreements with water users are typically for five years.
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 participating administrative (ha) land usersa,b costs (US$/ha/yr)
Río Volcán Río San Fernando Río Platanar 2,493 1,818 1,800 12 10 15 30 42 42 42 45d 22d Heredia ESPH Municipal water supply Río Segundo Acuífero El Tempisque Acuífero de Guanacaste Acuífero de Guanacaste Acuífero de Guanacaste Río Aguas Zarcas Acuífero de Guanacaste Hydropower producer La Esperanza 3,000 10 n.a n.a. 100 1,666 925 45 30 45 7% 7% 7% Signed 2005 using CSA Signed 2005 using CSA Signed 2005 using CSA 40 45 7% Signed 2004 using CSA 550 100 45 45 7% 7% 5% of payment 0


Energía Global Platanar S.A.

Hydropower producer Hydropower producer Hydropower producer

Signed 1997, renewed 2002 Signed 1999, renewed 2004; addendum on non-titled land users signed 2000 for 10 yrs Umbrella agreement signed 2000, with addendums covering specific watersheds Signed 2001, later modified to use CSA Signed 2002 using CSA Signed 2004 using CSA Signed 2004 using CSA


Río Aranjuez Río Balsa Río Laguna Cote Río Segundo

5,000 6,000 900 1,000

$13/ha yr 1 $7/ha yrs 2-5 $29/ha yr 1 $4/ha yr 1

Florida Ice & Farm Bottler

Azucarera El Viejo Agribusiness (irrigated) La Costeña SA Olefinas Exporpac Agribusiness (irrigated) Agricultural supplies Agribusiness (irrigated)

Hidroeléctrica AguasHydropower Zarcas producer Desarrollos Hoteleros Tourism Guanacaste La Manguera S.A.

Sources: After Pagiola, 2006; FONAFIFO website

In 2005, 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, 2006). The town of Heredia has established an ‘environmentally adjusted water tariff’, the proceeds of which are used to pay landholders to maintain and reforest watershed areas (Castro and Cordero, 2001; 2003). 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, 2002). At local, Ortega-Pacheco (2007) examined the institutional impact of watershed-based, collective, and locally-financed PES programs, through the lens of the institutional economics Situation, Structure and Performance [SSP] Framework, The study was focused on six communities in Siquirres , Limón Province, in the Caribbean region of Costa Rica, that operate their own collective rural aqueduct systems. Local administration and financing of such drinking water systems is common in rural Costa Rica. The author found that participatory and ecosystem-based management approaches might lead to more effective protection of global water supplies; 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. 2009).

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, preservation and conservation of water resources, 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; in addition, quantifying ecological impacts of management activities, where possible beyond a simple listing and qualitative description of affected ecosystem services is also essential. PES tools and spaces of discussion, including economic, social, environmental, gender, microfinancing, market access and infrastructure should be developed and applied appropriately. These tools would guarantee effective valuation of the natural 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. Capacity building should be promoted. This may include arrangements for exchanging initiatives to become trained at PES based on living examples in other communities, countries and regions. Furthermore, teaching and learning processes for understanding the relationship between PES and water resources in academic environments should be promoted.

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