38806_environmental Economics II assignment

2013

Adhitya Wirayasa

38806, Locker 005

ES-EPM

Watershed Services and Assesses the

Cost of Its Protection Using Contingent

Valuation Method

Watershed Services and Assesses the Cost of Its Protection Using Contingent Valuation Method

1

INTRODUCTION

TEEB Foundations (2010) describes Ecosystem Services as the direct and indirect contributions of

ecosystems to human well-being. The Millennium Ecosystem Assessment (MEA, 2005) classifying

ecosystem services into four parts, including supporting services (e.g. nutrient cycling, soil formation,

primary production), provisioning services (e.g. food, fresh water, wood), regulating services (e.g.

climate regulation, flood regulation, water purification), and cultural services (e.g. aesthetic,

recreational and other non-material benefits). These services have been provided by a different

ecosystem such as forests, wetlands, seas, and many others.

As an ecosystem, forest has provided humans with different ecosystem services. According to FAO

study (1997), forest produced various raw materials for industries including timber, rubber, and fruit.

There's a considerable number of forest have high cultural values and also provide beautiful scenery

valuable for ecotourism. A forest also provide humans with a wide range of ecological services such

as maintenance soil quality and the provision of organic materials, preventive erosion, modulate

climate, being part of biodiversity and habitat for other species, and regulate water cycle and

regulating its flow through the hydrological system like in the watershed.

Watershed services had been affected by changes of forest cover especially in tropical regions. Lélé

(2009) argues these effects illustrate in different forms and results in multidimensional changes in

watershed processes such as: soil erosion rates, peak and low-flow levels, groundwater recharge

rates, and water quality (Table 1). Several studies have been conducted to shown the importance of

ecosystem services and to find out the relationship between forest cover and watershed process.

The Millennium Ecosystem Assessment (2003) indicates there are at least three value domains to

express the importance of ecosystem and their services including ecological, socio-cultural and

economic value.

Various instruments and methods had been developed by ecologists and environmental economists

to quantify the value of ecosystem services into monetary unit. Use values and non use values are

used to distinguish between each ecosystem services. Use values encompass direct use values such

as the provisioning services (e.g. seafood and timber) and indirect use values such as such as air- and

water-purification, erosion prevention and pollination of crops, which usually called regulating and

supporting services (Jones-Walter, 2009, Turner et al., 2003 in de Groot et al., 2010, and TEEB

Foudation, 2010). In the other hands, non use values are those related to cultural services such as

recreation and aesthetic appreciation. The sum total of use and non-use values associated with a

resource or an aspect of the environment is called Total Economic Value (TEV).

This essay has been designed with a main objective to identify recent evaluation process of the

watershed ecosystem. The specific objectives of this study are as follow:

1. To briefly explain ecosystem valuation methods.

2. To observe and compare two different cases on watershed valuation using contingent

valuation method (CVM).


2

Table 1. Forest Watershed processes and impacts: a framework

Source: Lélé, S., Venkatachalam L (2006) in Lélé (2009)

This paper will be divided into several sections start with introduction, measuring the benefits of

environmental protection, how much people willing to pay for the protection of watershed,

discussion, and conclusion.

MEASURING THE BENEFITS OF ENVIRONMENTAL PROTECTION

Humans' activity and decision has altered the ecosystem into biodiversity losses and social cost due

to overuse and poor management of natural resources (Michel Salles, 2011). The links between

ecosystem and the factors that contribute to human well-being were emphasized in the Millennium

Ecosystem Assessment synthesis report. These constituents of well-being were indicated through

various level of security, basic material for good life, health, good social relations, and freedom of

choice and action (Figure 1) that defined as the ‘opportunity to be able to achieve what an individual

values doing and being’ (MEA synthesis report, 2005).

Figure 1. Linkages between Ecosystem Services and Human Well-being

Source: Millennium Ecosystem Assessment synthesis report (2005)


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The motivation to develop a better and more comprehensive informational base for the policy

formulation and decision making process is driven the significant number of research in areas of

environmental and ecological economics in the last 30 years or so (R.K. Turner et.al, 2003 in Michel

Salles, 2011). These so called valuation methods for non-market goods and services (Table 2) can be

distinguish between the methods for expressing preferences ranked by columns (direct and

indirect) and type of observation according ranked by rows (revealed and stated).

Table 2. Valuation Methods for non-market goods and services

Source: Michel Salles, J (2011), Adapted from B. Chevassus-au-Louis et.al (2009)

Turner et.al (1994) and Goodstein (2011) is used to explain the definition of Contingent valuation

method, travel cost method, and hedonic prices as can be seen below.

Contingent valuation method often referred to as an expressed preference method. It's derived from

assessing the benefits or consumption of environmental goods or environmental protection through

willingness to pay (WTP) or willingness to accept (WTA). This called contingent valuations because

the values stated by the respondent are "contingent" upon research questions asked.

The Travel Cost method which is a revealed preferences method is used to determine the benefits of

protecting the recreational sites by estimate travel costs. Basically sum of travel cost per trip is

compare to the number of visit per year per person. A statistical method such as multiple regression

analysis is used to control undesired factors such as level of welfare, distance to recreational sites

and the presence of alternative sites.

Hedonic prices method which is a revealed preferences method is used to assess the existence of

environmental services which leads to affects certain market prices. Property for example, is the

most common market that using this method. This method uses the prices alteration of related

(complementary) goods to infer a willingness to pay for a good environmental quality such as less

pollution to the air, water, and sound.

HOW MUCH PEOPLE WILLING TO PAY FOR THE PROTECTION OF

WATERSHED?

Case Study 1: Cost-benefit analysis of riparian protection in an eastern

Canadian watershed (Trenholm et.al, 2013)1*

The Canaan-Washademoak watershed located in Southern New Brunswick, Canada part of the Saint

John River sytem and covers an area of 2,160 km2 (Jenkins, 2003 in 1*). There are 91 tributaries of

the river and lake forming approximately 12 major sub-watershed (Dalton and Weatherley, 2005 in

1*).


4

Changes in economy activities along with the transformation of land use believed to cause

degradation on its ecosystem services. Land use in the watershed has altered over time due to

shifting from traditional industry toward service industry whilst the traditional economic activities

such as forestry, agriculture and fisheries still important for economy development. The watershed

mostly forested despite of harvesting wood practices on private forestland has lead to increased

number of young trees (Dalton and Weatherley, 2005 in 1*). Research has discovered about 7.2%

(8.2 km2) of the riparian area of Washademoak Lake has been degraded along with the erosion

which has been reducing the water quality (Dalton and Weatherley, 2005 and Washademoak

Environmentalists, 2002 in 1*). In the other hand the riparian area of the Canaan River is fairly intact.

To quantify the benefits associated with the changes in ecosystem services, non-market valuation

was used.

Contingent valuation method (CVM) was used as a non-market valuation of three main ecosystem

services in the study area such as water filtration, fish and wildlife habitat and aesthetics. The CVM

scenario was developed which included four scenario of riparian protection program which provide

the respondent with a possible impact on water quality, fish and wildlife habitat, and forest scenery

to last for 10 years with the possibility of renewal as shown in Table 3. To conveying CVM, a

questionnaire was prepared to obtaining the estimation value of opportunity benefits, opportunity

costs, and estimating the NPV.

Table 3. The Valuation scenarios (programs) presented in the household survey

Source: Trenholm et.al (2013)

Several methods were used to construct a good questionnaire for estimating benefits. A questions

was made to obtained WTP for each program by using a double bounded dichotomous choice

format which closely to a real market situation such as 'take it or leave' aspect that lead to a higher

confidence intervals, although there are some weaknesses about its validity (Boyle, 2003a,

Hanemann et al., 1991 and Carson and Groves, 2007 in 1*). A cheap talk defined as extra texts

provided in the instrument before WTP questions and the level of certainty for each following

answer were applied to reduce hypothetical bias in WTP responses(List, 2001; Lusk, 2005 in 1*). The

parameterized model included variables representing the highest bid values that represent WTP in

each scenario and also applied three rating scales variables and summed the whole score for each

ecosystem services. To estimate total annual WTP for each riparian protection program, the affected

population was multiplied by the mean benefit estimate (Trenholm et.al, 2013).

A set of specific land use area were chose to estimate the opportunity cost of protecting riparian

area. After that, about 30 m and 60 m riparian buffer were delineated for preservation purposes. In

addition, per acre of opportunity cost for conducting the buffers was determined using wood supply

model for forested areas, register the values of agricultural land and rental values, and conducted an

assessment for the value of residential property. After that, a land use was evaluated by acquired

the relative area of each type of land use by grouping the land into four specification such as

forested area, agricultural area, residential area, other and then forest growth was forecasted using


5

baseline information and the delineated buffer areas. The purposes of doing so were to optimize the

NPV of timber harvested in the watershed for 80 years. To estimate the total opportunity cost of

preserving riparian on residential land, the value of land per acre were calculated (Trenholm et.al,

2013).

After the result of opportunity benefits and opportunity costs obtained, the last step of calculation

was estimating the value of net present value. A number of assumptions along with different

scenarios were selected. A discount rate of 5% was used for each program and then continued with

sensitivity analysis.

The result of CVM was shown in the household WTP for riparian buffer with annual values ranging

from - $4.13 to $42.85 2007 CAD. A previous study found that the highest WTP was $441.59 in 2007

CAD by Loomis et al. (2000) while the smallest value was $0.96 in 2007 CAD by Holmes et al. (2004)

and Amigues et al. (2002). However, the most comparable study reported a range of - $4.40 to

$91.46 in 2007 CAD for a 50 m buffer along 70 km of river.

In despite of issues during data collection and results interpretation, the outcomes of this research

have important policy implications for riparian preservation in the Canaan-Washademoak watershed

and throughout New Brunswick. First, the policy makers should continue to protecting and

improving riparian areas in form of educating landowner about the benefits and also further

restricting development along undeveloped areas.

Case Study 2: Heterogeneous users and willingness to pay in an ongoing

payment for watershed protection initiative in the Colombian Andes

(Moreno-Sanchez et al, 2012)2*

The Chaina micro-watershed is located in Colombia's eastern Andes region, in the municipalities of

Villa de Leyva and Chiquiza (Boyacá Department) is strategic not only for providing drinking water

supply, but also for conserving biodiversity (Borda et al, 2010). It's the home for 4,300 people (880

household), and habitat for at least 135 plants, 155 insects, and 30 bird species. About 198 ha out of

444 ha is part of the Iguaque Flora and Fauna Sanctuary, a national park created in 1997 (Borda et al,

2010 in 2*).

Communal water management boards (WMBs) is responsible for operate and distribute the water to

880 households by using 1000 water connections. Fees are collected for operation and a

maintenance (O&M) purposes which is varies among the five WMBs. Implicit subsidies is received by

the peasant household from three WMBs (Borda et al, 2010 in 2*).

The expansion of agricultural and high rate of harvesting timber has contributed to the changes in

the ecosystem especially to water quality and quantity. During dry season water scarcity leads to

conflicts among water user. In addition, erosion and high sedimentation lead to increasing water

turbidity and during high rain season, landslide increases the sedimentation (Borda et al, 2010 in 2*).

Payment for Environmental Services (PES) scheme is introduced to protect watershed services as

well as for conflict resolution in downstream-upstream landowner. The 'flat environmental service

fee' of US$ 0.50/household/month also has been introduced by WMBs in addition to the fees

collected for O&M of water system.


6

DISCUSSION

To answer the objective about observing and comparing, this section will be presented using a

matrix. Based on analysis on both case studies, a matrix of comparison is used to study and answer

the essay objective (Table 4).

Table 4. Matrix of Study Comparison

Aspects

Case 1:

Cost-benefit analysis of riparian

protection in an eastern

Canadian watershed

Case 2:

Heterogeneous users and willingness to

pay in an ongoing payment for

watershed protection initiative in the

Colombian Andes

Background of

study

Changes in economy activities

along with the transformation of

land use from traditional industry

toward service industry.

The watershed mostly forested

despite of harvesting wood

practices on private forestland

has lead to increased number of

young trees (Dalton and

Weatherley, 2005 in 1*).

The expansion of agricultural and high

rate of harvesting timber has contributed

to the changes in the ecosystem

especially to water quality and quantity

and also increased turbidity especially

due to landslide. (Borda et al, 2010 in 2*).

The 'flat environmental service fee' of

US$ 0.50/household/month also has

been introduced by WMBs in addition to

the fees collected for O&M of water

system.

Valuation method Contingent valuation method

(CVM) by using Cost-Benefit

analysis performed for four

different scenarios. The NPV

calculated with a discount rate of

5% for 80 years.

Initial development of the CVM

questionnaire took place over

several months and involved

consulting the literature and

individuals, as well as focus group

meeting. The questionnaire was

sent to households by mail,

stratified among three groups of

respondent.

Payment for Environmental Services

(PES) scheme is introduced to protect

watershed services as well as for conflict

resolution in downstream-upstream

landowner by applying CVM through

Willingness to Pay study.

Two types of respondents (smallholder

peasants and owners of recreational

houses) were asked about their

preference whether they would prefer an

ES fee differentiated by income, water

consumption, or both criteria.

Face-to-face interviews were conducted

to 218 households after pre-tested the

questionnaire with 12 households.

In addition to the descriptive statistics, a

referendum analysis using a probit model

(2 scenarios) to explain variations in WTP

was performed.

Improving method

weaknesses

A cheap talk, parameterized

model, and three rating scales

variables for calculating the

benefits during constructing the

N/A


7

Aspects

Case 1:

Cost-benefit analysis of riparian

protection in an eastern

Canadian watershed

Case 2:

Heterogeneous users and willingness to

pay in an ongoing payment for

watershed protection initiative in the

Colombian Andes

questionnaire.

Study Results The result of CVM was shown in

the household WTP for riparian

buffer with annual values ranging

from - $4.13 to $42.85 2007 CAD.

A previous study found that the

highest WTP was $441.59 in 2007

CAD by Loomis et al. (2000) while

the smallest value was $0.96 in

2007 CAD by Holmes et al. (2004)

and Amigues et al. (2002).

However, the most comparable

study reported a range of - $4.40

to $91.46 in 2007 CAD for a 50 m

buffer along 70 km of river.

The WTP significantly affected by socio-

economic heterogeneity. Both groups of

respondents feel the positive impacts

from implementing the PES program, and

they were willing to pay a significant

amount above the current fee: US$1.39

compared to the current US$0.50

monthly.

Most of the respondents agreed on

differentiation on ES fee by consumption

rate, and also by income levels.

Policy implication The outcomes of this research

have important policy

implications for riparian

preservation in the Canaan-

Washademoak watershed and

throughout New Brunswick. First,

the policy makers should continue

to protecting and improving

riparian areas in form of

educating landowner about the

benefits and also further

restricting development along

undeveloped areas.

The article has been prepared for the

framework of the CIFOR project “Making

Nature Count: enhancing payments for

environmental service initiatives in

Ecuador and Colombia”. There is no

additional information about the

possibility of using the study result for

policy implementation.

Source: Analysis, 2013

CONCLUSION

As part of the forest ecosystem, watershed services had been affected by changes of forest cover

especially in tropical regions. Lélé (2009) argues these effects illustrate in different forms and results

in multidimensional changes in watershed processes such as: soil erosion rates, peak and low-flow

levels, groundwater recharge rates, and water quality. To show the importance of protecting the

environment, the Millennium Ecosystem Assessment (2003) indicates there are at least three value

domains to express the importance of ecosystem and their services including ecological, socio-

cultural and economic (monetary) value.

Contingent valuation method (CVM) is a direct and stated preference method to quantify the value

of ecosystem services into monetary unit. It's derived from assessing the benefits or consumption of

environmental goods or environmental protection through willingness to pay (WTP) or willingness to


8

accept (WTA). This called contingent valuations because the values stated by the respondent are

"contingent" upon research questions asked.

Based on comparison of two studies, some facts have been found as follows. The two studies on

watershed using Contingent valuation method. The households are using both use values and non

use values that come from ecosystem services. They are willing to pay for an amount of money to

protect the environment so that as the result, they can receive better services such as a better water

quality and quantity and low erosion rates. Basically both study using a willingness to pay approach.

However the first case using both WTP and WTA (Cost-Benefit Analysis), while the second case only

using the benefit approach. The first case shown that values ranging from - $4.13 to $42.85 2007

CAD annually while the second case shown a value of US$1.39 monthly (US$ 16.68 annually).

This essay also found that the outcomes of first case have important policy implication, while the

second case has been prepared for the framework of the CIFOR project. This is a good indication

since Michel Salles (2011) argue that "biodiversity and ecosystem services valuation would remain

meaningless if it does not aim at making better practical choices and actions". He also believes that

"Indeed, valuation is not an end in itself, but rather a conceptual and methodological framework for

organizing information as a guide for decision making".


9

REFERENCES

de Groot, R.S. et.al (2010) Challenges in integrating the concept of ecosystem services and values in

landscape planning, management and decision making. Ecological Complexity 7: 260–272

FAO (1997). Ecotourism and Other Services Derived From Forests in the Asia-Pacific Region: Outlook

To 2010. Asia-Pacific Forestry Sector Outlook Study Working Paper Series No: 24

Goodstein, Eban S (2011) Economics and the environment 6th ed. United States of America: John

Wiley & Sons, Inc

Jones-Walters, Lawrence., Mulder, Ivo (2009) Valuing nature: The economics of biodiversity. Journal

for Nature Conservation 17: 245—247

Lélé, Sharachchandra (2009). Watershed services of tropical forests: from hydrology to economic

valuation to integrated analysis. Current Opinion in Environmental Sustainability 1:148–15

Michel Salles, J (2011) Valuing biodiversity and ecosystem services: Why put economic values on

Nature? C. R. Biologies 334: 469–482

Millennium Ecosystem Assessment (2003) Ecosystems and Human Well-being: A Framework for

Assessment. Island Press, Washington DC. World Resources Institute

Millennium Ecosystem Assessment (2005) Ecosystems and Human Well-being: Synthesis. Island

Press, Washington, DC. World Resources Institute

Moreno-Sanchez, R., Maldonado, J.H., Wunder, Sven., Borda-Almanza, C (2012) Heterogeneous

users and willingness to pay in an ongoing payment for watershed protection initiative in the

Colombian Andes. Ecological Economics 75: 126–134

TEEB Foundations (2010) The Economics of Ecosystems and Biodiversity (TEEB): Ecological and

Economic Foundations. Earthscan, London

Trenholm, Ryan., Lantz, Van., Martínez-Espiñeirad, R., Littleb, Shawn (2013) Cost-benefit analysis of

riparian protection in an eastern Cana watershed. Journal of Environmental Management 116:81-94

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New York: Harvester Wheatsheaf

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38806_environmental Economics II assignment