Study: how hydrological service fees pay for forest preservation

Oct. 8, 2021
University of Illinois researches find that policies involving payments for hydrological services may be able to fund various preservation efforts, limiting deforestation and subsequent droughts or flooding.

There exist certain policies may be able to provide funds to offset the hydrological damages of deforestation. Policies that include payments for hydrological services (PHS) can provide funds for various preservation efforts. A new study from the University of Illinois explores ways to make these programs more effective, financially sustainable, and adapted to domestic user preferences.

The study focuses on the conservation of forestland to provide hydrological services in Veracruz, one of the most intensely deforested states in Mexico. The region struggles with both water quality and water regulation issues.

“PHS programs in Veracruz had many landowners sign contracts agreeing not to deforest their land, but there were always funding issues. One city had a fee in its water bill contributing to that fund, but it was minuscule and not based on an economic study with households; another city had a voluntary fee,” explains Shadi Atallah, associate professor in the Department of Agricultural and Consumer Economics and the Center for the Economics of Sustainability (CEOS) at Illinois, and co-author on the paper.

From 1993 to 2000, a combined 8.2 million ha (20.2 million acres) of forests were cleared to make way for agricultural fields and pastures in Mexico. Typically, upstream landowners bear the costs of conserving forest hydrological services, while the benefits go to the downstream water users. In 2001, the Mexican government introduced PHS programs, financed by residential water user fees, to support federal payments to private and communal farmers for forestland conservation.

Atallah and co-authors Ian McGinnis, FTI Consulting, and Ju-Chin Huang, University of New Hampshire, estimate how much residents of two Veracruz cities, Coatepec and Xalapa, are willing to pay for the outcomes of the PHS. They also evaluate households’ preferences for how the PHS is managed and the type of land that is eligible for the payments. 

“We found consumers have a significant willingness to pay for the outcomes of the PHS program, including improved water quality and regulated water quantity that leads to fewer floods and droughts,” Atallah explains.

“We also found people are willing to pay more for an NGO (non-governmental organization) to co-administer the program with the local government, and they want to include shade-grown coffee lands, not just forests.”

These results have the potential to vastly improve conservation efforts and enhance the long-term financial sustainability of PHS.

For example, expanding land eligibility to shade-grown coffee can increase the financial base of a PHS program and potentially incentivize coffee farmers to slow or avoid the transition of land from shade-grown coffee to intensive farming.

“This would preserve hydrological and other ecosystem services such as biodiversity and carbon sequestration,” Atallah says. 

Determining consumer preferences for PHS characteristics and their willingness to pay is an important step toward establishing new PHS programs and improving existing ones so they are financially sustainable in the long run.

“While we knew households want PHS programs to increase water quantity and regulation (that is, less drought and floods), it turns out they also care about who delivers the program and who gets the payments,” Atallah states.

The researchers say local governments could enhance their PHS programs by evaluating the preferences of their residents in program design and administration. They can use such evaluations to justify changing payment structures, expand eligible types of land and determine how a PHS is managed for the benefit of the region.

Specifically, the two cities in the study can use the results to redesign their PHS programs. For instance, Coatepec can increase its land eligibility from forest only to shade-grown coffee farms, which can prevent or delay the conversion of these farms to intensive agriculture or pasture, therefore preventing detrimental impacts on hydrological services. Both cities can use the willingness-to-pay estimates in this study to re-define the forest conservation fee in their water bill.

SOURCE: University of Illinois College of Agriculture, Consumer and Environmental Sciences, via EurekAlert