The world's ecosystems (a word I will use as a catchall for some type of biological community – think wetlands, forests, etc.) provide numerous “services” that are vital to the well-being of humans (de Groot et al., 2012; MEA, 2005). These services are typically known as “ecosystem services,” some examples of ecosystem services include:
Carbon capture by trees
Nutrient cycling by soils
Cultural value derived from the natural world
Biomass fuels being used to create electricity
As you can see, ecosystem services are not only wide-ranging but extremely important! In fact, armies of biologists, economists, and other academics spend their careers working to find out the value of them (hint: I was one of these) and the current estimated value is an average of $33 trillion/year!
Of particular interest to me and my graduate school experience were a subset of ecosystem services called hydrological services, formally defined as: the benefits to people produced by terrestrial ecosystem effects on freshwater. Examples of these include: improvement of extractive water supply, improvement of in-stream water supply, water damage mitigation, provision of water-related cultural services, and maintenance of aquatic habitat, among others.
Now, I probably don’t have to explain to you just how crucial hydrological services are. They do things like help give us clean drinking water, prevent floods, and provide habitats for tons of critters that are integral to the functioning of our ecosystem. Hydrological services also encompass the abundant hydropower that Canada runs on and is trying to share with the US (a topic for another blog post). Also, who doesn’t derive value from a day of fly fishing in the streams of central Pennsylvania?
Just with this background on ecosystem and hydrological services, we can discuss how human activity and climate change are affecting the provision of these services while taking special interest in the situation in Mexico. A significant amount of deforestation has occurred in Mexico and at its worst, between 1993 and 2000, approximately 8.2 million hectares of forests were converted to intensive land uses such as agricultural fields and pastures. (For reference, 8.2 million hectares is nearly 3 times the size of Massachusetts!!!) Increasing deforestation rates due to the aforementioned urbanization and agricultural intensification have adverse effects on the land's ability to capture and filter the water running through a landscape (Martínez et al., 2009). Strategies to reduce the land-use change occurring in Mexico are critical to ensure that generations to come have access to clean drinking water, well-regulated water supplies, and are able to enjoy recreational activities that come with bodies of water and forestland.
Ian during his research period in Mexico / Image courtesy of Ian McGinnis
Payments for Ecosystem Services
By now, I hope you are thinking to yourself: ecosystem services, and hydrological services in Mexico specifically, are super important. The natural follow-up question to this being: what can we do to maximize the provision of these services? For any of my fellow economists out there, you may be excited to know that there is a market-based solution that has been shown to be effective (under certain conditions), known as payments for ecosystem services (PES).
The undersupply of forest-generated hydrological services is due to a failure in the market for these services. This is a consequence of the fact that there is a discrepancy between the private value of forests from the viewpoint of private landowners and the public’s value of the forests. More specifically, private landowners do not fully understand the full costs of deforestation to the public and thus will deforest above the optimal amount and underprovide hydrological services to the market. A wide range of policies have been implemented to address this market failure. Many of them, such as the establishment of protected/reforestation areas, are costly and do not address the underlying issue of market failure because they do not incentivize conservation (Bishop, Pagiola, and Landel-Mills, 2002). In contrast, market-based mechanisms, such as tradable pollution permits and PES establish a market for nature's goods and services. They can help correct market failures by increasing the benefits of conservation to forest landowners or generating resources that can subsequently be used for conservation efforts.
However, PES programs are not perfect, facing several issues that must be solved to create long-term social and environmental gains. A study of 40 payments for hydrological services (PHS) programs in Latin America concluded that only 57% were considered successful, defined as meeting, or exceeding its stated goals, or adding value in terms of ecological, economic, or social well-being (Grima et al., 2017). Four criteria may increase the likelihood of a program being successful: (1) provide a crucial resource while simultaneously contributing to local livelihoods, (2) operate on a local or regional scale, (3) use in-kind (non-monetary) contributions in addition to cash payments, and (4) involve private actors and reduce middle-men between buyers and sellers of the services. Lurie et al. (2013) stress the importance of taking a non-commodity view of watershed services by designing PHS programs based on local characteristics.
In Mexico, the federal government has consistently attempted to introduce PHS programs. In 2003, a program began that would be financed by water user fees, which provide a natural link between the providers and the consumers of the HS. Specifically, landowners are providers of HS because the conservation of forested land helps to regulate and filter water that reaches the downstream water users, the “HS consumers” (Carvalho-Santos, Honrado, & Hein, 2014). The Mexican Congress earmarked 2.5% of water fees to be used to fund the program which is implemented by the National Forestry Commission. After one year, in 2004, the budget was increased from $30 million to $100 million (Cameron, 2015). Under the program, landowners are eligible for payments of approximately $25-35 per hectare per year. Upon acceptance, landowners must not change the land cover of any enrolled parcels and are subject to satellite image analysis and ground visits for inspection purposes (Muñoz-Piña et al., 2008; Engel, Pagiola, & Wunder, 2008).
In 2008, local programs known as "matching" programs were established. These programs matched local funds with national funds in order to diversify the funding source of the program. Under this new mechanism, 50% of the funding would come from the Forestry Commission and the remaining 50% would need to come from local water fees, governments, or private entities. The transition to local programs was considered an improvement in design because it was connecting the actual HS producers (landowners) with the actual HS consumers (water users) (Nava-López et al., 2018).
Valuing Ecosystem Services
One way to improve these programs is to understand the value of HS from the consumer perspective. Choice experiments (CE’s) are a stated preference technique (i.e. survey) for when the changes to be valued are a function of multiple attributes such as PES outcomes and design attributes that can be varied independently (Johnston et al., 2017). Several choice experiments in past literature attempt to measure the value of safe and clean drinking water (see Dauda, Yacob, and Radam (2015), Hensher et al. (2005) and Abdulkarim et al. (2017)).
A key factor missing from much of the literature on this topic is program design. As discussed above, an important part of the intelligent design in a PES program is ensuring that local characteristics are accounted for. Things like “trust” are especially important in a context like Mexico where there is evidence of significant distrust of the government (Meschoulam et al., 2015). My study consisted of designing a hypothetical choice experiment survey which jointly estimated the monetary value of hydrological outcomes (e.g. cleaner drinking water) with program design characteristics (e.g. who administers the program). By measuring the relative importance to water users of outcomes vs. program design, I hope that my work will help design new programs and redesign exiting ones so that local characteristics such as who manages a program and who gets the payments are consistent with the experiences, characteristics, and preferences of those who financially contribute to the program funds.
The study consisted of designing and implementing a choice experiment survey in Veracruz, Mexico, a region with significant hydrological issues and experience with PHS programs. We presented respondents with a sequence of cards providing them a choice between different potential, hypothetical PHS programs. An example of the choice cards is shown below (monetary amounts in MXN/month):
By analyzing the choices that each respondent made using something called discrete choice models, we were able to identify significant willingness-to-pay for PHS programs in our cities. We also found a significant value that respondents placed on the “Program Administration” attribute. Another interesting finding was that the two cities we surveyed had significantly different values for the “Eligible Land” attribute. One of these cities, Xalapa, is a large urban city while and had a low willingness to pay for shade-grown coffee land being included in the program. On the other hand, Coatepec, a much smaller, rural area with a connection to the coffee culture of the region, unsurprisingly had a high willingness to pay for shade-grown coffee land being included in the program. This showed that even within regions, cultural values, such as the connection to the coffee farming practices, will drive the values that people are willing to pay for PHS programs.
Generally, our research has shown that the downstream water users in an area can serve as a viable option for expanding the financial base of a PHS program, especially for municipalities that currently use their annual budget rather than water user fees to make the payments, as is the case in Xalapa (Nava-López et al. 2018). In addition, the support for the inclusion of shade-grown coffee lands means that the program can prevent or delay the transition of these lands into intensive agriculture. Evaluating the total economic value of ecosystem services and revising the payments to landowners are two of the key policy improvements that are recommended in the future in order to make PES programs in Mexico more effective and efficient (Lara-Pulido, 2018). By incorporating program design characteristics in addition to the desired hydrological outcomes, our results are useful for the design of new and the redesign of existing PHS programs in Veracruz and beyond.
Our results highlight the need to take local, city-level preferences, histories, and baseline conditions into consideration in the design and promotion of critically important PHS programs. Locally-estimated values are important in quantifying the full benefits of programs for each city and can be used to justify adjusting the level of payments, the governance model followed, and the lands that are eligible to enroll in the program.
Thanks for reading and if you have any questions about any of this, or about my current job, please feel free to connect with me on LinkedIn or shoot me an email (firstname.lastname@example.org).
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Nava-López, M., Selfa, T. L., Cordoba, D., Pischke, E. C., Torrez, D., Ávila-Foucat, S., … Maganda, C., 2018. Decentralizing Payments for Hydrological Services Programs in Veracruz, Mexico: Challenges and Implications for Long-term Sustainability. Society & Natural Resources, 31(12), 1389–1399. https://doi.org/10.1080/08941920.2018.1463420