Payments for watershed services from planted forests

As indicated at the beginning of this chapter, there has been considerable debate in recent years regarding the merits of supporting afforestation programmes and the development of planted forests for catchment protection and watershed benefits. While the generally perceived view was that 'any tree, anywhere' is automatically a good thing for erosion protection and soil and water benefits, this notion is increasingly coming under question (Alexander and Campbell, 2003). Concerns probably arose first with the large-scale afforestation of natural grasslands in South Africa (Dye and Versfeld, 2007), but this has grown to a more widespread concern about the impacts of afforestation in regions where water resources are limited (Calder, 2007). Policy-makers are now often faced with a dilemma over whether to actively support forest regeneration and restoration programmes or not. Caps on the extent of catchments that can be afforested have been implemented in some jurisdictions (South Africa, South Australia) and are being considered at the national level in Australia. In other places, such as China and Central America, policies are actively supporting the establishment of planted forests for perceived hydrological benefits (Calder, 2007).

Various approaches can create greater public and land manager awareness of unpriced environmental assets resulting in behaviour changes leading to improved environmental outcomes (Pannell, 2008). Mechanisms for managing the hydrological impacts and benefits of afforestation, landscape restoration or catchment management programmes can include education or incentive arrangements in addition to these types of regulatory arrangements. Often a combination of all three is required to fully achieve policy objectives. Where regulation is applied, traditional ownership rights are changed through government action, and there is often a demand for compensation from existing owners and the costs of implementing this approach can outweigh the benefits (Aretino et al, 2001). Increasingly, governments are looking toward incentive programmes and market-based payment arrangements to encourage changes in behaviour and provide for efficient allocation of public funds, or to discriminate effectively between public and private benefits of forest restoration programmes and set up arrangements where the beneficiaries of the services provided by forests pay for their establishment and management (see Chapter 2). Economic incentives can consist of taxes, liability for damages, subsidies for 'better behaviour' or contracts for the purchase of improved environmental outcomes (Shortle and Horan, 2008). There are three potential sources of capital for investment in contracts: government, voluntary private sources and regulated private investment (Binning et al, 2002).

The most common type of market-based trading arrangements for environmental services or pollution control involve setting limits on the total amount of activity and issuing tradable permits such as for carbon dioxide emissions trading. These provide a basis for industry participants to determine the cheapest abatement options. These can be applied most effectively where there are relatively few known yet sufficient sources of emissions to form an effective market (US EPA, 2001).

Services provided by planted forests can be considered more in the class of 'non-point pollution control problem' (Shortle and Horan, 2008). Non-point sources of pollution, such as leaching and run-off of nutrients or chemicals from farm fields or urban streets do not have these characteristics. They are often unobservable, difficult or impossible to measure directly and the output cannot generally be ascribed to individuals or firms. These are most often controlled through regulation or education programmes. Measurement, enforcement and control costs for these types of pollution sources are costly. The most efficient approach economically is to focus control efforts on ambient pollution concentrations and the overall abatement costs of different measures. However, many agents that cause little or no problem might be subject to regulation. Options for reducing these types of transaction costs include (1) creating incentives for accurate self-reporting, (2) restricting incentive payments to activities that are easy to observe and highly correlated with ambient impacts or (3) shifting from monitoring many inputs from individual sources to a more easily observed alternative.

Perhaps the most celebrated case of watershed benefits of forest restoration was the decision by the City of New York to invest about US$1 billion in land protection and conservation practices to avoid spending US$4-6 billion on filtration and treatment plants (Perrot Maitre and Davis, 2001). Much of the effort focused on improving the management of existing forest and changing agricultural land-use practices, but there was some support provided for afforestation. Other examples of payment arrangements for forest watershed services include (Perrot Maitre and Davis, 2001):

1 In Costa Rica, a utility company pays into a fund that pays private upstream landholders to increase forest cover to provide regularity of water flow for hydroelectricity generation.

2 In the Cauca Valley, Colombia, associations of irrigators pay additional fees to a regional agency for land and forest activities to obtain a sufficient supply of water for crops.

3 In New South Wales, Australia, a farmers' cooperative buys 'transpiration credits' from the state forest management agency. The agency earns credits by reforesting upstream lands - a process expected to result in a reduction of water salinity downstream.

Ensuring purchasers get what they pay for is basic to any financial transaction. The scientific principles and tools described above can be used to develop improved understanding of cause and effect relationships between land cover and water quality or yield benefits and to measure how these elements change over time. The key challenges in relation to market-based approaches to watershed benefits are:

• Developing payment systems that address the often long timeframe between action and consequence in relation to watershed benefits. It may take at least a decade for any hydrological impact of afforestation to express itself. In regions with old geological structures and large regional flow systems these benefits may take hundreds of years to realize.

• Developing payment systems that address trade-offs with the production of other goods, benefits or services. The interaction between water quality and water yield is a particular problem for watershed managers. Intact forests may provide the best water quality but lower potential water yield. Interactions with the production of agricultural goods, timber and other services such as carbon sequestration or biodiversity conservation are also important (see Chapter 5). While there may be some 'win-win' combinations, there will often be trade-offs between different environmental services.

• Addressing the uncertainty associated with the outcome of land-use or land-cover change. This uncertainty can be due to: the lack of basic catchment data (such as geology, soils or climate); limited scientific understanding of the processes operating in a catchment or the effects of the land-use change; changes in future climate; variation in disturbance regimes such as fire, insect pests or diseases that have unintended hydrological consequences; or unforeseen changes in patterns of human settlement or land use in catchments over time that impact on the hydrological conditions in the catchment.

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