98 Sandra L. Postel and Barton H. Thompson, Jr.

/ Natural Resources Forum 29 (2005) 98–108

Natural Resources Forum 29 (2005) 98–108

Watershed protection: Capturing the benefits

of nature’s water supply services
Sandra L. Postel and Barton H. Thompson, Jr.

Abstract
Healthy watersheds provide valuable services to society, including the supply and purification of fresh water. Because these
natural ecosystem services lie outside the traditional domain of commercial markets, they are undervalued and underprotected.
With population and development pressures leading to the rapid modification of watershed lands, valuable hydrological
services are being lost, which poses risks to the quality and cost of drinking water and the reliability of water supplies.
Increasing the scale and scope of programmes to protect hydrological services requires policies that harmonize land uses in
watersheds with the provision of these important natural services. This article summarizes key attributes of hydrological
services and their economic benefits; presents a spectrum of institutional mechanisms for safeguarding those services; dis-
cusses programmes in Quito (Ecuador), Costa Rica and New York City; and offers some lessons learned and recommenda-
tions for achieving higher levels of watershed protection.
Keywords: Watersheds; Drinking water; Water quality; Ecosystem services; Natural capital; Land use; Rural landscapes; Soil and water conservation.

1. Introduction Table 1. Ecosystem goods and services provided by healthy

watersheds
A watershed is an area of land that drains into a common • Water supplies for agricultural, industrial, and urban-domestic uses
water source. Because watersheds connect and encompass • Water filtration/purification
terrestrial, freshwater, and coastal ecosystems, they perform • Flow regulation
a wide variety of valuable services, including the supply • Flood control
and purification of fresh water, the provision of habitat that • Erosion and sedimentation control
• Fisheries
safeguards fisheries and biological diversity, the sequester- • Timber and other forest products
ing of carbon that helps mitigate climatic change, and the • Recreation/tourism
support of recreation and tourism (see Table 1). In the • Habitat for biodiversity preservation
parlance of ecological economics, watersheds are natural • Aesthetic enjoyment
assets that deliver a stream of goods and services to society. • Climate stabilization
• Cultural, religious, inspirational values
Commercial markets, however, value these services only
partially if at all.
The failure to adequately incorporate the value of natural
services into decisions about the use and management of
to a large extent. A global analysis of 106 primary water-
watershed lands is reducing the net benefits that societies
sheds found that in nearly one-third of them, more than
derive from watersheds. Land-use changes — from forest
half the land area had been converted to agriculture or
to farmland, for example, and from farmland to urban
urban–industrial use. In Europe, 13 watersheds have lost at
settlements — diminish the ability of a watershed to per-
least 90% of their original vegetative cover. China’s Yangtze
form its ecological work. In much of the world, the conver-
and Yellow River basins have lost 85% and 78% of their
sion and modification of watersheds has already progressed
forest cover, respectively. In the Indus basin, more than
90% of forest lands have been converted to other uses,
as have virtually all the forest lands of the Senegal and
Sandra L. Postel is the Director of the Global Water Policy Project, Lake Chad basins in sub-Saharan Africa (Revenga et al.,
Amherst, MA, USA. E-mail: spostel@globalwaterpolicy.org
Barton H. Thompson, Jr. is Robert E. Paradise Professor of Natural
1998).
Resources Law, Stanford Law School, Stanford University. E-mail: The ability of healthy watersheds to moderate water flows
buzzt@stanford.edu and purify drinking water supplies is one of their most
© 2005 United Nations. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108 99

tangible and valuable services. The progressive loss of these Table 2. Forest cover and predicted water treatment costs based on
services risks harm to human health through lowered drink- 27 US water supply systemsa
ing water quality, higher water costs that may burden poorer Share of water- Treatment costs Average annual Cost increase
populations in particular, and lower crop productivity and shed forested per 3,785 m3 treatment costs over 60%
hydroelectric output from reduced dry-season flows. As forest cover
natural watersheds have been converted to alternative land
uses, many industrial countries have turned to increasingly 60% $37 $297,110 –
50% $46 $369,380 24%
sophisticated technological treatment processes to remove 40% $58 $465,740 57%
pathogens and other contaminants from raw drinking water 30% $73 $586,190 97%
sources of diminished quality. In Denmark and Germany, 20% $93 $746,790 151%
for example, the average cost of drinking water is three 10% $115 $923,450 211%
times higher than in Australia and the United States, and
Source: Adapted from Ernst (2004).
four times higher than in South Africa (NUS Consulting a
Based on treatment of 22 million gallons (83,270 m3) per day, the
Group, 2003). Although other factors play a part in these average daily production of the water suppliers surveyed.
differences, the loss of natural watershed functions plays
an important part. For societies facing the challenge of capital and treatment costs than would otherwise be the case.
meeting the water supply needs of growing urban and rural Indeed, the raw water delivered to the utility’s treatment
populations, healthy watersheds are natural assets of increas- plant is so clean that the only treatment given is chlorine
ing value. for disinfection; if turbidity increases significantly during
Lack of information — both scientific and economic — heavy rains, the water is run through sand filters first — but
on the links between land uses in a watershed and the this is rarely needed (Quintero, 2004). Bogotá’s watershed
corresponding hydrological services those watersheds pro- lies within the Chingaza National Park and is protected by
vide complicates the task of designing appropriate institu- the public water utility, a level of protection that is critical
tional mechanisms for watershed protection (Aylward, because throughout much of the Colombian Andes, the area
2002). Nonetheless, the mix of efforts now under way offers of páramo is dwindling rapidly due to population and agri-
valuable ideas and lessons. This article presents a brief cultural pressures.
overview of the importance of natural water supply services, Watershed protection has also reduced capital, operation
a typology of mechanisms for protecting those services, and maintenance costs in industrial countries. An analysis
several cases where innovative mechanisms are under way of 27 US water suppliers revealed that treatment costs for
to increase such protection, and recommendations for achiev- drinking water deriving from watersheds covered at least
ing higher and sustainable levels of protection. 60% by forest were half of the cost of treating water from
watersheds with 30% forest cover, and one-third of the cost
of treating water from watersheds with 10% forest cover
2. The benefits of hydrological services from (see Table 2). Moreover, a number of US cities have avoided
healthy watersheds the need to construct expensive filtration plants by invest-
ing instead in watershed protection to maintain the purity
Of the many ecosystem services that watersheds provide, of their drinking water (see Table 3). In cities such as
hydrological services constitute some of the most economic- Boston and Seattle, these cost-savings were possible largely
ally and socially valuable (Postel and Richter, 2003; Daily because the municipal water authority owned and was able
et al., 2001; Landell-Mills and Porras, 2002). These ser- to protect the critical watershed lands. In the case of New
vices largely fall into four broad (and to some degree over- York City, however, where about three quarters of the wa-
lapping) categories: water filtration/purification; seasonal tershed is privately owned, achieving a level of protection
flow regulation; erosion and sediment control; and habitat sufficient to avoid construction of a filtration plant has re-
preservation. quired a multi-faceted agreement with watershed commu-
Watersheds with a high proportion of land covered by nities (see discussion below) that is now being implemented.
intact forests and wetlands are particularly effective at moder- Watersheds without adequate protection inevitably de-
ating runoff and purifying water supplies. The vegetation liver less clean, less reliable water to their downstream
and soils of forests and wetlands have a remarkable capac- dependents. The conversion of natural watershed lands to
ity to filter out contaminants and trap sediment that would agricultural, industrial, or urban uses adds to that water-
otherwise enter rivers, lakes, and streams. Bogotá, Colombia, shed’s pollution burden while simultaneously diminishing
for example, gets most of the drinking water for its 8 mil- its ability to assimilate and process those pollutants. Defor-
lion citizens from a high-elevation wetland ecosystem called estation, road construction, clear-cutting, and poor farming
a páramo. The vegetation of the páramo absorbs, filters and practices can send large influxes of eroded sediments into
releases clean water at a reliable rate of 28 m3 per second rivers and streams, markedly degrading the quality of
with little seasonal variation and minimal need for treat- water and of aquatic habitats (Calder, 2000; Newson, 1992).
ment. This high reliability and quality translates into lower Runoff from livestock operations, where large quantities of
100 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108

Table 3. Selected US cities that have avoided construction of filtration plants through watershed protection

Metropolitan area Population Avoided costs through watershed protection

(thousands)
New York Citya 9,000 $1.5 billion spent on watershed protection over
10 years to avoid at least $6 billion in capital costs and
$300 million in annual operating costs.
Boston, Massachusettsb 2,300 $180 million (gross) avoided cost.
Seattle, Washingtonc 1,300 $150–200 million (gross) avoided cost.
Portland, Oregond 825 $920,000 spent annually to protect watershed is avoiding a $200 million capital cost.
Portland, Mained 160 $729,000 spent annually to protect watershed has avoided $25 million in capital
costs and $725,000 in operating costs.
Syracuse, New Yorke 150 $10 million watershed plan is avoiding $45–60 million in capital costs.
Auburn, Mainef 23 $570,000 spent to acquire watershed land is avoiding $30 million capital cost and
$750,000 in annual operating costs.

Notes:
a
The City is currently being required to construct a $687 million filtration plant for the more-developed Croton watershed, which supplies about 10% of
the city’s water. The filtration waiver applies to the Catskills/Delaware watershed, which supplies about 90% of the city’s water (NRC, 2000).
b
US v. Massachusetts Water Resources Authority (2000).
c
Supply from Seattle’s Cedar River watershed is unfiltered, but that from the Tolt watershed is now filtered (Flagor, 2003).
d
Reid (2001).
e
ECONorthwest (2004).
f
Ernst (2004).

manure are concentrated, can add dangerous quantities of The loss of hydrological services from the conversion of
pathogens to watershed streams (US EPA, 2003). Fertiliz- watershed lands typically happens incrementally and thus
ers and pesticides applied to croplands, golf courses, and sub- often goes unnoticed. In the extreme case of Mombasa,
urban lawns can enter surface and groundwater, where they Kenya, however, the water supply system was abandoned
pollute water bodies, degrade aquatic habitats, and con- after less than a decade because of the rise in treatment and
taminate drinking water sources. In the United States, the maintenance costs resulting from rapid deterioration of its
US Geological Survey (2001) has detected herbicides in source water quality (Hirji and Ibrekk, 2001).
99% of urban stream samples and 50% of urban groundwater Although forests and wetlands are unambiguously good
samples. at cleansing water supplies, their ability to increase dry-
Cities and settlements dependent for their water suppl- season flows, reduce flood damage, and perform other water
ies on relatively small watersheds with steep erosion-prone supply services varies with local conditions. For instance,
slopes are likely to experience the greatest effects of land- young tree plantations often have high rates of evapo-
use changes on hydrological processes (Nelson and Chomitz, transpiration, so reforesting grassland may actually reduce
2004). The capital city of Honduras, Tegucigalpa, is a case seasonal water supplies: some water that would have infil-
in point. The city gets 30% of its drinking water from the trated the soil and emerged downstream during the dry
Guacerique watershed, which feeds the Los Laureles reser- season is instead transpired back to the atmosphere by the
voir. The failure to formally recognize, protect, and man- rapidly growing trees. In Fiji, the large-scale planting of
age the water purification and sediment control services pine in watersheds that had previously been grassland re-
provided by the watershed has led to the creeping deterio- sulted in 50–60% reductions in dry-season flow — reduc-
ration of these hydrological services during a period of tions that put both drinking water supplies and the operation
rapid population growth and rising land pressures. Accord- of a hydroelectric plant at risk (Dudley and Stolton, 2003).
ing to Lee (2000), agricultural and urban activities that South Africa is actively working to reverse the negative
are largely incompatible with the Guacerique watershed’s water supply (and biodiversity) impacts from the spread of
function as a source of drinking water now occupy about non-native eucalyptus, pine, black wattle, and other thirsty
one fifth of the watershed land. Nitrogen and phosphorus trees into the native fynbos (shrubland) watersheds of the
pollution from sewage and farmland runoff has led to algal Western Cape. The evapotranspiration requirements of these
blooms in the reservoir. High turbidity and fecal coliform alien invasives greatly exceed that of the low-lying and
(bacterial) levels in the reservoir’s raw water have required drought-tolerant fynbos vegetation. Researchers have deter-
greater use of treatment chemicals and increased expenses mined that a restored catchment would yield nearly 30%
to maintain sand filters. Sedimentation resulting from high more water than one of equivalent size populated with
rates of hillside erosion in the watershed is estimated con- thirsty alien trees — and generate new water supplies cost-
servatively to be reducing the reservoir’s storage volume effectively (van Wilgen et al., 1996).
by 2% annually — hastening the day when capital expendi- ‘Cloud forests’ play a very important role in the water
tures for a new supply will be needed. supply services of some mountain watersheds and deserve
 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108 101

special protection. High-elevation ‘cloud’ or ‘fog’ forests There is substantial overlap between lands legally pro-
usually increase local water supplies by raking moisture out tected for their conservation values (e.g., nature reserves,
of the fog-shrouded atmosphere that would otherwise remain national parks, wilderness areas) and watersheds that cities
in vapour form. In most cases, this increased water deposi- depend upon for their drinking water. Of 105 populous
tion in cloud-forest canopies exceeds the re-evaporation of cities in Africa, the Americas, Asia, and Europe, 33 obtain
water from those canopies, resulting in a net gain in water a significant portion of their water supplies from legally
yield. Because their foliage is constantly wet, cloud forests protected lands (Dudley and Stolton, 2003). In some cases,
also have lower evapotranspiration requirements, which the safeguarding of water supplies was a primary reason
means they pump less moisture from the soil back to the for establishing the protected area. For example, the World
atmosphere. As a result, for a given level of rainfall, stream Bank loaned Indonesia $1.2 million to establish the Dumoga-
flows originating from cloud forests tend to be greater than Bone National Park because of the water supply benefits
those from grasslands or other types of land cover. Accord- the park would provide to a large irrigation project in the
ing to Hamilton and Cassells (2003), this extra water sup- lowlands. Similarly, Honduras gave protected status to
ply is particularly noticeable and important in areas of low La Tigra National Park in part because its cloud forests
rainfall, where a low cloud deck touches the mountains. In helped generate 40% of the capital city’s water supply at a
such areas, the raking action of the cloud-forest canopy can cost equal to some 5% of the next best alternative source
double the amount of water made available by rainfall alone. (Reid, 2001).
In humid areas, the gain in yield may be closer to 15–20% Land designated as protected, however, may in some
— still a significant benefit to downstream communities in cases be used by local inhabitants for farming, grazing,
need of drinking water. fuelwood collection, or other enterprises that potentially
can compromise the provision of water supply services. In
such cases, a sensible option may be to establish a mecha-
3. Institutional mechanisms for increasing nism through which the downstream beneficiaries of those
protection of water-supply services services provide financial support for good watershed man-
agement practices to safeguard the quality and quantity of
A rich variety of institutional mechanisms exists to encour- the water supply.
age higher levels of protection of watershed hydrological A case in point is Quito, the capital of Ecuador. Home to
services. There is no ‘right’ approach: successful arrange- more than 1.5 million people, Quito derives about 80% of
ments will be contoured to the needs and characteristics of its drinking water from two protected areas — the Cayambe
individual watersheds. Options that make sense for small Coca Ecological Reserve and the Antisana Ecological
watersheds may differ considerably from those suitable Reserve. These reserves encompass 520,000 ha of high-
for very large ones. Similarly, measures appropriate for altitude grasslands and cloud forests. Although formally
relatively pristine watersheds may not be applicable to protected as part of Ecuador’s national park system, these
watersheds in which substantial population and economic reserve lands are also used for cattle, dairy, and timber
activity already exists. production by the 27,000 people living within or around
The menu of options consists of four broad categories: the reserves.
governmental ownership and control of watershed lands; Concern about the impact of these activities on the quan-
broad-based government incentive payments to encourage tity and quality of water supplied to Quito led to the estab-
ecologically sound land-use choices; government regula- lishment of a trust fund to finance watershed protection
tions to protect watershed health (including market-based measures. Proposed in 1997 by Fundación Antisana (an
cap-and-trade schemes); and negotiated payments by the environmental NGO based in Quito), and established in
(usually downstream) beneficiaries of natural water supply 2000 with support from The Nature Conservancy (a US-
services to the (usually upstream) providers of those services. based conservation organization) and the US Agency for
Table 4 provides a sampling of these different types of water- International Development (USAID), the trust fund (called
shed protection efforts now ongoing in various parts of the Fondo del Agua, or FONAG) is designed to pool the de-
world. The cases described below illustrate in more detail the mand for watershed protection among the various down-
institutional features of several approaches. These have been stream beneficiaries. These include a municipal water supply
selected from the group summarized in Table 4 not because agency (EMAAP-Q), irrigators, commercial flower planta-
they are the best, but because they offer useful lessons. tions, and hydroelectric power stations. Quito’s electricity
supplier, Empresa Eléctrica de Quito (EEQ), generates about
3.1. Watershed trust fund, Quito, Ecuador 22% of its hydropower in the watersheds surrounding the
capital (Echavarria, 2002).
The solution to watershed protection found by Quito, FONAG is a non-declining endowment fund that can
Ecuador, involves the establishment of a trust fund to receive money from both government agencies and private
finance payments to landowners in the watershed in return organizations. An independent financial manager invests
for their safeguarding the water supply for the city. the funds, and returns on these investments are to be used
102 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108

Table 4. Institutional mechanisms for watershed protection: some examples

Case example Motivation for watershed effort Source of funds

Costa Rica: A national National law gives government authority to pay Tax on fossil fuels; World Bank loan;
Payment for Environmental Services Programme landowners for ecosystem services provided by Global Environment Facility grant; sale of
their land carbon credits
Paraná, Brazil: Ecological Value-Added Tax State law earmarks 5% of value-added tax revenue General tax on goods and services (value-
to municipalities for critical watershed or added tax)
conservation land
Colombia: Ecological Services Tax National law establishing regional agencies Property taxes; hydroelectric revenues;
responsible for watershed management industrial water user fees
United States: Conservation Reserve Programme National law gives government authority to General taxpayer revenues
compensate farmers for converting eligible cropland
to more resource-conserving land uses
European Union: Agri-Environment Programmes Regulation enacted by European Union General EU budget for agricultural purposes
United States: Pollution Cap-and-Trade Schemes National policy to reduce cost of achieving non- Public and private polluting enterprises,
point pollution targets under Clean Water Act some state and federal funding
New South Wales, Australia: Salinity State programme to reduce salinity of land and Salinity-emitting enterprises; Public and
Cap-and-Trade Scheme water cost-effectively private investors in a state-run
environmental services fund
Perrier Vittel: Direct payments by the company Protect its source for high-priced bottled spring Perrier Vittel
to farmers water, thereby increasing profits
Quito, Ecuador: Watershed Trust Fund Protect quality and supply of drinking water, as well Voluntary contributions from water
as ancillary biodiversity and conservation benefits supplier, electricity supplier, and NGOs;
funding eventually to come from user fees
La Manguera SA: Costa Rican hydropower To ensure water flows for dry-season electricity Hydropower revenues
producer voluntarily pays a conservation production
organization to protect upper watershed
Cauca Valley Water-User Associations, To ensure water flows for dry-season irrigation Water-user fee, collected through the
Colombia associations
New York City: A negotiated agreement To avoid the cost of a filtration plant required under Taxes on NYC water bills; municipal bond
with watershed communities federal drinking water rules issues

for watershed protection measures, including acquisition increase their contributions. At least one survey of water
of critical lands and improved agricultural practices. At consumers in Quito suggested a willingness to pay higher
this early stage, contributions to FONAG are voluntary. fees for watershed protection (Echavarria, 2002).
EMAAP-Q has committed itself to paying 1% of its water Indeed, it is the willingness of beneficiaries to pay for
revenues into the fund, a payment expected to total about watershed protection in the absence of good estimates of
$14,000 per month. EEQ has agreed to pay a flat fee of the value derived from that protection that has allowed
$45,000 per year. FONAG to get off the ground. Strong political support for
The voluntary nature of FONAG’s funding and the heavy the fund helps as well, as do the important ancillary benefits
reliance on only two large contributors make long-term of biodiversity preservation and poverty alleviation in the
financial adequacy a challenge. Moreover, while an innova- watershed. Yet the key is that EMAAP-Q and EEQ seem
tive financing tool, the endowment fund may not be the to accept that some minimum investment in protecting the
most efficient way to fund watershed protection — using local watershed is sensible even in the absence of a sound
the contributions immediately to pay for watershed protec- economic analysis. However, sustained financing and a
tion measures may make more sense than first building an broader base of contributors to FONAG may require the
endowment from which to pay for those measures, espe- demonstration of more definite links between the water-
cially because the longer-term goal is to establish a steady shed protection undertaken and the benefits downstream.
stream of user fees as the funding source. However, the
lack of scientific information on the hydrological linkages 3.2. Costa Rica’s forest protection
of land use in the watershed and the corresponding lack of
estimates as to the economic value of watershed services to In Costa Rica, a solution to the problem of protecting
the beneficiaries makes it difficult to establish credible user sources of freshwater supply was found through making
fees. In the interim, it is critical that EMAAP-Q and EEQ arrangements for forest protection, which secures four
 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108 103

environmental services, joining hydrological services to Table 5. Status of Costa Rica’s Payments for Environmental
other ecosystem values. Services Programme, 2002a
Additional support and financing for watershed protec- Contract type Land area (ha) Total payments (million US$)
tion can come from packaging a number of the goods and
services jointly produced by the watershed. Ecosystem ser- Forest conservation 259,220 56.4
vices that are potentially complementary to the natural water Forest management 32,012 11.2
supply and purification services provided by watersheds Reforestation 22,613 12.8
Plantations 626 0.1
include: soil conservation; sedimentation control; fisheries Totals 314,471 80.5
protection; carbon sequestration; biodiversity conservation;
recreation; tourism; and cultural and aesthetic enhancements. Source: Adapted from Rosa et al. (2003).
The total value of such complementary benefits will often Note: a Based on data for 1997–2001 and areas planned and budgeted for
justify a greater degree of watershed preservation than would 2002.
the hydrological services alone, as well as open up new
financing opportunities. For example, Ecuador’s National
Biodiversity Policy recommends that beneficiaries pay for FONAFIFO has applications pending for more than
a variety of environmental services (including the provi- 650,000 ha in addition to the land already enrolled (Pagiola,
sion of water) from public and private lands, with high 2002). The forest conservation contracts have proven the
priority given to páramos, mangroves, flood plains, and most attractive, accounting for 82% of all contracts (see
mountain forests (Echavarria et al., 2004). Table 5).
In 1996, Costa Rica adopted a forestry law (Law Despite these encouraging signs, analysts are concerned
No. 7575) that explicitly recognizes four environmental ser- about both the equity and sustainability of Costa Rica’s
vices provided by forested lands — hydrological services; PSA programme. Contracts are made only with private land-
carbon fixation (which mitigates greenhouse gas emissions); owners having title to their land, which excludes landholders
biodiversity conservation; and provision of scenic beauty and land users without property titles. This requirement,
for recreation and tourism. The law gives the government along with complicated bureaucratic procedures, high
authority to contract with landowners for the environmen- transaction costs, and other factors, has favoured medium-
tal services their lands provide. Funds for the Pago por to large-scale private landowners over indigenous commun-
Servicios Ambientales (or PSA, Payments for Environ- ities and small farmers. Only 3.2% of lands incorporated in
mental Services) programme are channeled through the the programme are indigenous territories, even though such
National Forestry Fund (FONAFIFO). The PSA programme territories comprise 20% of the natural forest outside of
offers land owners different types of contracts, including protected areas (Rosa et al., 2003).
forest conservation contracts under which owners agree to The programme will also need a firmer financial founda-
protect existing forests, and reforestation contracts. Pay- tion. There is no guarantee that the transfer of revenue
ments are slightly above the opportunity cost of conversion from the fuel tax to the programme will continue, nor that
to low-value land uses, such as pasture. The programme World Bank loans and GEF grants will be replenished.
pays land owners about $40 ha/year under the forest con- Therefore, the ability to increase payments by beneficiaries
servation contracts and $538 per ha over five years under seems key to the programme’s long-term success. Although
the reforestation contracts (Pagiola, 2002). total payments by beneficiaries have so far been disappoint-
While authorizing payments for environmental services, ing, some important gains in this area have been made. To
the forestry law does not require that beneficiaries pay for date, FONAFIFO has reached agreements with several
those services. The primary funding source instead is the hydroelectric power producers (HEP). Because they oper-
earmarking of revenues from a national sales tax on fossil ate run-of-the-river plants, they have limited water storage
fuels. A loan from the World Bank and a grant from the capacity and thus depend on the watershed to provide ad-
Global Environment Facility (GEF) ( justified as a payment equate seasonal flows to sustain their electricity production.
by the global community for Costa Rica’s biodiversity con- Energia Global, for example, a private HEP, operates
servation values) have provided substantial additional funds. two small run-of-the-river facilities, one in the 2,404 ha
The sale of carbon sequestration credits, which programme Rio San Fernando watershed and the other in the 3,466 ha
authorities had hoped would generate significant revenues Rio Volcán watershed. Energia Global pays FONAFIFO
for the programme, have yielded only $2 million from a for a portion of the payments the forestry fund is making
single sale. Ultimately, the PSA programme aims to have to participating land users in those watersheds. Recently,
all beneficiaries of hydrologic services paying for the ser- the company’s annual share was $10/ha, about a quarter of
vices they receive. the standard PSA contract payment for forest conservation
On the surface, Costa Rica’s programme seems quite (Pagiola, 2002). Energia Global’s rationale for investing in
successful. Between 1997 and 2002, more than 314,000 ha forest protection is based on the assumption that a degraded
were incorporated into the programme and total payments watershed would cause greater variability in seasonal stream
amounted to more than $80 million (Rosa et al., 2003). flows, increasing the risk that the plant could not operate
104 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108

at maximum capacity. For Energia Global, each lost m3 of More than three-quarters of the Catskill-Delaware water-
water results in the loss of roughly 1 kWh of electricity shed is covered by forest, an important asset for water
output. The company is essentially betting that its invest- quality protection. However, three-quarters of it is also in
ment in watershed protection will help secure at least an private ownership. Consequently, land acquisition is an
additional 460,000 m3 of water per year for energy produc- important component of NYC’s programme. Watershed
tion compared with the water yield provided by a defor- lands have been divided into five different priority zones
ested or degraded watershed (Chomitz et al., 1998). according to the land’s importance for water quality pro-
Costa Rica’s pioneering programme to compensate land- tection. The City purchases land only from willing sellers
owners for watershed services and thus to encourage forest — focusing on the highest-priority zones first — and pays
conservation has created a useful model of ecosystem- full market price for it. In doing so, the City is choosing
service protection. The challenges, however, are to ensure to incur additional costs, because under New York State’s
that the programme does not exclude or disadvantage the health codes it is legally entitled to take land in the water-
poor, thereby worsening inequities, and to achieve sustain- shed by eminent domain. However, as part of the agree-
able financing. ment, NYC vowed not to do this. In addition, to prevent its
land acquisition from eroding local town revenues, NYC is
3.3. New York City’s agreement also paying property taxes on the watershed lands it owns
now and will do the same on all new land and conservation
Creating a unique link between ecosystem-service pro- easements it acquires.
viders and beneficiaries, New York City has negotiated part- Within the first five years of the programme, New York
nerships with upstream landowners and communities City solicited sales of about 104,700 ha and signed 477
in the watershed where its drinking water originates, to purchase contracts for 13,940 ha — roughly doubling the
ensure a pure and safe supply. area of protected buffer land surrounding the eight reser-
A critical attribute of most watersheds is that the costs voirs in the Catskills/Delaware watershed. The purchase
and benefits of watershed protection will usually be separ- price of these lands totals some $94 million, an average
ated spatially and borne by different parties. Put simply, of about $6,745 per ha. To provide additional benefits to
land-holders upstream in the watershed typically provide watershed residents and towns, the City has opened more
most of the hydrological services while water suppliers, than 2,800 ha of its newly acquired watershed lands to public
hydroelectric power producers, and other users downstream recreational uses that are deemed compatible with water
benefit from those services. Thus, linking beneficiaries with quality protection, such as regulated fishing, hunting, and
providers, directly or indirectly, is a key challenge in de- hiking. In addition, the City has either acquired or con-
signing workable mechanisms for protecting hydrological tracted for 960 ha of conservation easements: in exchange
services. for the property owners’ commitment to preserve the land,
The driver for New York City’s decision to invest in the City pays fair market value for the development rights
watershed protection was a requirement, under the US as well as a portion of the property taxes in perpetuity
Safe Drinking Water Act, that water suppliers must filter (NYCDEP, 2002).
their drinking water unless they can demonstrate that they New York City actively works with partner organiza-
are protecting their watershed sufficiently to satisfy water tions in the watershed to administer and implement various
quality standards. New York City (NYC) is the largest city programme elements. In light of the diverse and numerous
in the United States to choose watershed protection instead landowners in the watershed, these groups serve as import-
of a filtration plant. Faced with estimated capital costs of ant intermediaries for the programme’s implementation. In
$6 billion and annual operation and maintenance costs of addition to land acquisition, other key initiatives include:
at least $300 million for the filtration plant, the City opted
to seek a waiver of the filtration requirement by investing i. A watershed agricultural programme to reduce polluted
in a comprehensive watershed protection programme in runoff from farming practices;
the Catskill-Delaware watershed, which supplies 90% of ii. A forestry programme, involving a partnership with
the City’s drinking water (NRC, 2000). landowners, loggers, and timber companies to better
The hallmark of New York City’s watershed protection manage forests;
programme is a memorandum of agreement (MOA) signed iii. A stream management programme, through which
in 1997, after many years of negotiation, by a diverse set the City works with watershed communities and land-
of interests, including state and federal officials, environ- owners to curb stream-bank erosion and riparian habitat
mental organizations, and some 70 watershed towns and degradation;
villages. The MOA commits the City to invest on the order iv. Upgrades to wastewater infrastructure (treatment plants
of $1.5 billion over 10 years to restore and protect the and septic systems) to reduce pollutants entering rivers
watershed, as well as to financial and other measures that and streams;
improve the local economies and quality of life of water- v. Construction of an ultraviolet disinfection plant to in-
shed residents. activate certain waterborne pathogens; and
 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108 105

vi. New regulation and enforcement mechanisms to ensure Such missed opportunities are clearly evident, for example,
that the development and use of watershed lands is in the World Bank’s approach to watershed management.
consistent with water quality protection. Between 1990 and 2000, the World Bank allocated
just over $1 billion to watershed management activities.
As of early 2004, NYC had invested more than $1 bil- Of 42 projects examined in an internal review of the Bank’s
lion in the watershed protection programme (Ward, 2004). watershed management portfolio, 38 projects (90% of them)
Financing comes from additional taxes on residents’ water focused narrowly on on-site measures to raise agricultural
bills and from bonds issued by the City. A review of the productivity. These projects tended to have disappointing
programme’s first five years found sufficient progress in rates of adoption of soil and water conservation technology
watershed protection to justify an extension of the Environ- after project termination: once subsidies were removed,
mental Protection Agency’s waiver of the filtration require- implementation of measures dropped off significantly
ment. Sustaining this status will be increasingly difficult, (Boerma, 2000). As a result, watershed investments that
however, as population and economic activities expand in might have yielded positive net economic benefits down-
the watershed region and as stricter federal drinking water stream, were no longer made because they were not seen
standards are introduced in the coming years. as profitable to the farmers themselves in the absence of
If successful, the New York City watershed programme subsidies.
should benefit both City residents and watershed land own- Some of the Bank’s own projects, however, illustrate the
ers. City residents will enjoy high-quality water at a lower potential benefits of making the linkage between upstream
cost than would be the case with construction of the filtration and downstream beneficiaries in project design and imple-
plant. In return for providing water quality services to the mentation. For example, the Bank’s micro-watershed project
City, landowners in the watershed will gain additional in the Brazilian state of Santa Catarina has proved highly
income, healthier streams and habitats, more recreational successful by most measures. Improved land-management
opportunities, and new economic investments, including a practices — including contour terracing, minimum tillage,
$60 million trust fund (financed by the City) that provides and better storage systems for animal manure — were
loans and grants for environmentally sustainable economic adopted by some 106,000 farmers on a total land area of
development projects in watershed communities. 400,000 ha, spanning 534 micro-catchments (World Bank,
The New York City programme is by far the largest 2000). Crop productivity on the farms rose by an average
scheme in the world putting into effect direct payments by a of 40% for wheat, 30% for maize, and 20% for soybean
beneficiary of hydrological services to the providers of those (Lituma et al., 2003). Seeing the benefits, farmers outside
services. It demonstrates that watershed protection can be a the project area began spontaneously to upgrade their own
highly cost-effective alternative to technological treatment practices, which added some 480,000 ha to the total land
in meeting specific water quality standards. It also demon- area improved in the state. Upon completion, the project’s
strates that an inclusive negotiated partnership between overall economic rate of return was estimated at 20% (World
upstream and downstream parties can result in expanded Bank, 2000).
benefits for both from a working rural landscape. Downstream hydrological benefits were not included
in the project’s design and assessment, in part due to lack
of data. However, an independent study by Bassi (2002),
4. Integrating rural development investigated the effects of this World Bank project in
the Lajeado São José micro-watershed, which supplies
Great opportunities lie in the potential integration of rural drinking water to the city of Chapecó. Bassi’s analysis
development with protection of watersheds and hydrolog- showed that there was a 69% reduction in suspended
ical services. sediment concentration and a 61% reduction in turbidity
Many countries, especially in the developing world, of the raw water entering Chapecó’s treatment plant. This
face the challenge of simultaneously having to reduce rural substantial improvement in water quality permitted a cor-
poverty and meet the growing water supply needs of ex- responding reduction in the need for chemicals to treat
panding cities and industries. To date, most efforts to raise the water, which in turn yielded cost-savings of $29,340
incomes in rural watersheds have justifiably aimed at local per year. These savings would be sufficient to pay back
implementation of soil and water conservation measures the entire cost of the Lajeado São José micro-watershed
that enhance land productivity. By focusing almost exclu- project in four years. Indeed, just one year of water
sively on the on-site benefits of watershed measures, how- treatment cost-savings exceeds the $25,000 paid to project
ever, this approach forfeits opportunities to expand the social farmers as subsidies to encourage them to adopt land-
and environmental benefits of watershed management, to improvement measures.
link upper-watershed landowners providing hydrological Thus, in the Lajeado São José micro-watershed, and
services with the downstream beneficiaries of those ser- presumably in other micro-watersheds where there is a
vices, and to establish compensation mechanisms that help downstream municipality, an opportunity exists to strike
finance watershed measures beyond project completion. a deal between the municipal water supplier and upstream
106 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108

farmers that would more equitably split the costs and necessary to ensure that the use of land within the water-
benefits of the project. The water supplier should be will- shed does not unduly compromise the watershed’s purifica-
ing to pay a portion of the funding to upstream farmers in tion and water-supply functions.
return for the reduced water-treatment costs. Such a trans-
action would transform what is now a project subsidy of 5.2. Designate watershed protection to be a
limited duration to participating farmers into an ongoing responsibility of water suppliers and bridge institutional
compensation payment for a valuable watershed service divisions that separate watershed decisions from the
that these farmers can continue to provide — the protection provision of safe drinking water
of drinking water quality.
On a much larger scale, China’s Loess Plateau project is Many water suppliers consider watershed management
cited by World Bank staff as a resounding success: it im- to be the province of resource conservation districts, land
proved livelihoods for one million farm families, increased management agencies, and other governmental entities.
annual grain output by 64%, and produced a 3.5-fold Many of these resource conservation agencies, however,
increase in net per capita income. It also reduced the do not consult actively or regularly with water suppliers.
sediment load in the Yellow River system by 57 million Water suppliers that own or control watershed lands also
tons, which in turn reduced the sedimentation of irrigation tend to separate water quality, which is typically over-
canals and reservoirs downstream and allowed expendi- seen by engineers, from watershed protection, which is
tures on flood-protection embankments to be deferred. In generally under the jurisdiction of biologists or other
a summary of the project’s economic performance, the land-management experts. Although varying levels of
Bank reports an economic rate of return of 19% if only on- coordination between the two groups occur, the separa-
site benefits are considered, and 22% if the downstream tion of functions makes it more difficult to integrate a
benefits of reduced sedimentation are included (World watershed’s natural purification services with particular
Bank, 2003a). However, because downstream hydrological water quality goals.
benefits were not incorporated into the project’s design and Similarly, the World Bank’s effort to invest more in
financing, the construction of the larger erosion-control watershed management needs better integration with its
structures was reduced mid-way through the project; local lending for urban drinking water services. The Bank’s own
farmers did not see sufficient benefits to them to justify the water resources sector strategy underscores the importance
cost. A payment by or on behalf of the downstream bene- of such integration (World Bank, 2003b). There are un-
ficiaries would have allowed extra sedimentation-reduction doubtedly many ungrasped opportunities within the Bank’s
benefits to be captured. water project portfolio, including projects now in the pipe-
The Bank’s new watershed management approach ex- line, to lower water treatment costs, reduce public health
plicitly recognizes that the complementarity of upstream risks, and secure drinking water sources by encouraging
and downstream benefits will often make a watershed pro- investments in watershed protection.
ject economically justified, whereas a focus on either the
upstream or downstream effects alone may not. It also 5.3. Acquire additional scientific and economic
acknowledges that “payments for environmental services information on watershed services
by downstream users are seen as a promising option for
distributing benefits and costs of watershed management Additional research is needed both on linkages between
between upstream and downstream stakeholders” (World land use and hydrological effects within watersheds and on
Bank, 2001). the valuation of ecosystem services — as well as on how to
apply valuation techniques in real-world decision-making.
While substantial progress has been made in these areas
5. Lessons and recommendations over the last decade (NRC, 2004), much remains to be done.
Water suppliers and other beneficiaries of watershed ser-
5.1. Act early to integrate watershed protection and vices often do not know the degree to which the protection
management into the provision of safe drinking water and management of any particular parcel of land will pro-
vide water service benefits, or whether the benefits of pro-
A fundamental lesson from those municipalities that have tecting the land are worth the costs. For example, the authors
avoided expensive technological solutions to drinking water surveyed water retailers in California that supply surface
quality is the importance of acting early to protect critical water to 50,000 or more customers and found that water
watershed lands. The opportunity costs of watershed pro- suppliers who had acquired or considered acquiring addi-
tection are rising over time as land values and the worth of tional watershed land were aware of studies showing the
foregone land uses increase; delaying action therefore often water quality value of watershed protection, but were un-
makes watershed protection more costly or even prohibi- able to determine the benefits of protecting specific areas
tive. Where outright purchases of watershed lands are not of the watershed. Only one California water supplier, the
feasible or equitable, regulations or payment schemes are City of Santa Cruz, had tried to place an economic value
 Sandra L. Postel and Barton H. Thompson, Jr. / Natural Resources Forum 29 (2005) 98–108 107

on watershed protection measures, and it was not confident References

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