Watershed Markets

"First Generation" schemes

Initial round of market for watershed services schemes. Most of them are local and relatively isolated pilot schemes characterised by a “learning by doing” approach”. Most of the schemes reported in the initial Silver Bullet publication fall in this category.

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"Second Generation" schemes

Schemes are slowly beginning to take into account existing experiences and lessons from other projects. Stronger emphasis is placed on the design of baseline studies, monitoring and information sharing. Many of these schemes are subsidised by donors and tend to be part of larger regional projects such as Cuencas Andinas or the Silvopastoral Project.

Administatively-determined pricin mechanisms

An authority can determine payment levels externally. In these cases, bargaining power by landowners is limited, although they can still voice their willingness to accept by choosing not to join. This potentially can send signals back to the authority to adjust their payment levels. This type of payments is mostly used in national-level strategies.

Auctions

Often associated with clearing-house mechanisms and over-the-counter trading, auctions attempt to move a step closer to a competitive market for watershed services. Auctions are proposed for determining the supply of watershed services as well as for allocating obligations to pay.

Clearing-house transactions

A more sophisticated intermediary that offers a central trading platform for buyers and sellers is a clearing-house. This mechanism depends on the existence of a standardised pre-package commodity, e.g. salinity credit, water quality offset.

Direct negotiation between buyers and sellers

These mechanisms involve detailed contracts outlining best management practices, land purchase agreements and conservation easements. Direct negotiations are mostly used in situations when there are few stakeholders involved and/or are capable watershed programme already exists, direct negotiation will be easier and faster. It usually involves detailed contracts setting out best management practices, or land purchase agreements. However, payments are generally part of larger projects, and they are the result of (usually) a long bargaining process.

Ecosystem or environmental services

Broadly speaking it refers to the flow of services provided by natural systems, in contrast with man-made structures that could be substitutes.

Benefits can be direct as provisioning services (i.e. food and water, or “”) or regulation services (i.e. control of floods, land degradation, desiccation, soil salinization, etc); or “regulating services”); or indirect, providing supporting services for the functioning of ecosystem processes (i.e. nutrient cycling; soil creation; and the assimilation, neutralisation and detoxification of wastes).

Ecosystems also provide people with non-material benefits such as aesthetic pleasure, recreational opportunities, and spiritual and cultural sustenance. (MEA, 2005)

Internal trading

Transactions within an organisation, e.g. intra-governmental payments.

International donor support

There are many initiatives of payments for watershed services that are prompted and supported by international donors. In theory, funding is only used to provide a kick-start in the project and support the very high setting-up transaction costs. In the practice, it is unlikely that many of these initiatives will manage to raise enough local funds to be self-sustainable in the long-run.

Market

Markets are defined as voluntary transactions between buyers and sellers, where the price is set on the basis of supply and demand.

Maturity of scheme

The maturity of the scheme refers to its current status. They could be ‘ongoing’, proposals, borderline schemes, abandoned, or uncertain.

Borderline scheme. These are schemes where their market component is not clear. For example, it is difficult to distinguish the buyer from the seller in intra-village arrangements. Some of these schemes were included in Silver Bullet. However, this new review puts them in a separate category highlighting their significance as examples of fair deals but with no market connection.
Ongoing schemes. These are initiatives in which payments are being made from the users (direct and indirect), suppliers, or both.
Proposals. Only relatively advanced proposals have been included in this review. This includes those with advanced baseline studies, stakeholders coming together in negotiation meetings, etc, but no payments are actually taking place yet. Some of these proposals take years to mature into ongoing projects, and this highlights the difficult nature of setting up payments for watershed services.
Abandoned schemes. These schemes have been abandoned, either as a whole, or the environmental service component has been dropped for lack of support or leadership.
Uncertain schemes. It was not possible to obtain sufficient information proving that the scheme had been abandoned or was still ongoing. Some schemes may have evolved into another local or national programme (such as the Chinese regional schemes reported in 2002), but we have not been able to confirm this.

National or local government
budget allocations

National level projects, like the PSA in Costa Rica or the PHSA in Mexico, have annual government budgets allocated for payments for environmental services. In Costa Rica the main source is the 3.5% of collections from a 15% tax on fuels. In Mexico it is approximately US$20-30 million per year.

Negotiations through intermediary

As the number and distribution of stakeholders increase, so does the need for an intermediary. They are used to control transaction costs and risks, and are most frequently set up and run by NGOs, community organisations and government agencies. In some cases independent trust funds are created. Intermediaries are vital in national schemes such as the PSA in Costa Rica and the PSAH in Mexico, and the final contribution from downstream users will reflect their capacity to negotiate on behalf of upstream farmers.

Over-the-counter trades and user fees

These occur where the service is pre-packaged for sale, e.g. water quality credits. Watershed services are frequently offered at a standard rate for different beneficiaries through user fees. This rate is normally not negotiable and imposed on all beneficiaries.

Pooled transactions

Pooled transactions control transaction costs by spreading risks amongst several buyers. They are also employed to share the costs of a large transaction as often required in the watershed markets.

Regulatory mechanisms

Some markets for watershed services are based in externally imposed requirements, especially in developed countries where environmental regulations are stricter. Market-based strategies are used to help companies reach environmental targets while reducing costs of compliance.

Retail-based trades

Where payments for watershed protection are attached to existing consumer purchases, e.g. Salmon Safe agricultural produce. Normally associated with certification and labelling schemes that generate consumer recognition and willingness to pay.

Service Demand

Stakeholders that are interested in the provision of watershed environmental services can be roughly divided into direct demand or service users, and indirect demand or beneficiaries.

Direct demand , or service users, is those individuals or organised groups that depend on water-based services affected by upstream land management. This group could include final consumers of domestic water (organised through private or municipal water utilities), hydroelectric projects, and water-based industry (e.g. beverages, mining, pulp or irrigation groups), as well as environmental users such as wetland users or conservation groups.
Indirect demand for watershed environmental services may be derived from several sources, including national and local governments and international agencies. International agencies can play a key role in providing conservation or development grants to pilot schemes until downstream groups adopt payments. Alternatively, national government may wish to pool service buyers in the public interest for strategic watershed services that cannot be realistically financed by downstream demand. The Costa Rican PES programme, the South African Working for Water programme and the Chinese Sloping Land Conversion Programmes are examples of upstream payments being wholly or partly funded nationally for improved or protected public goods’ provision.

Service providers

Service providers are those stakeholders with a contractual relationship with the users, who commit themselves to implement land conservation practices in their landholdings (specifically in the water recharge area). Potential service providers are those with land in the target areas but without any contractual relationship with users or intermediaries. Kosoy, et al, 2005.

Private landowners: They have clear ownership of their land, with either land titles or undisputed possession rights.
Public lands: This group represents farmers living in public land (usually declared as national parks or protected areas). Farmers do not have possession rights, but manage their plots of land as private areas.
Communal land: Farmers living (or drawing their livelihoods) from communal areas.
Private reserves: private landowners (individuals or groups) registered as reserves and committed to conservation of specific ecosystems.

Voluntary investment from private users

Probably the most common way for companies to decide their payment levels is an internal, voluntary decision based on their own willingness to pay. In most of these cases, funding comes from the company’s profits rather than transferring the cost to the final consumers, and is usually registered as ‘donation’ (many tax-free) in their annual budgets.

Watershed

The term watershed refers to the geographic boundaries of a particular water body, its ecosystem and the land that drains to it. It also includes groundwater aquifers that discharge to and receive discharge from streams, wetlands, ponds and lakes. Large watersheds are sometimes referred to as river basins. It is sometimes referred to as ‘catchment’.

Watershed ecosystem services

These are the ecosystem services provided by fresh water and the hydrologic cycle (MEA, 2005). Services include:

Provisioning: water (quantity and quality) for consumptive user, water for non-consumptive user (hydroelectricity, transport), aquatic organisms for food and medicines.
Regulatory: maintenance of water quality (natural filtration and water treatment), buffering of flood flows, erosion control through water/land interactions and flood control infrastructure
Cultural: recreation, tourism, existence values
Supporting: role in nutrient cycling (floodplain fertility), primary production, predator/prey relationships and ecosystems resilience

These services can be tracked geographically using a Watershed as an analysis unit.