Part 2: Protected areas and development
4.4 Economic instruments to achieve water resource protection
Economic instruments are an essential part of the mix of policy tools that should be used in implementing an action plan or water resource protection. They operate by establishing markets for environmental services, in this case the ecosystem and hydrological services provided by PAs that support development via the water resource system.
The main advantage of economic instruments is that they give greater scope for resource users to respond to environmental policies or targets, and allow the activities to achieve the targets at lower overall cost. Economic efficiency and environmental protection are thus complementary objectives.
The design and function of markets for environmental services depends on the specification of property rights and institutional arrangements to support them. In practice, economic instruments have never been used on their own as a management mechanism. They have always been accompanied by direct
regulations of one form or another. A review of the different types of economic instruments is provided in the accompanying PAD Review report on global lessons (ICEM 2003f).
4.4.1 Examples of applying economic instruments
A relevant example of the application of economic instruments relates to the role of terrestrial PAs in protecting the ecosystem functions which control sedimentation and protect water quality. Those functions have economic value because maintaining water quality is important in protecting downstream fisheries, irrigated agriculture and water drawn by local people for drinking, washing and other purposes.
One economic instrument that can be used to protect these functions would be the application of a system of charges (based on the concept of user pays). The rationale for such charges would be to cover the protection and management costs involved in maintaining these ecosystem functions.
With water pricing schemes for irrigators under consideration in several of the Lower Mekong countries, a component of the price charged for abstractions of water could be dedicated to management of PAs protecting the resource.
Another application of economic instruments is in controlling potentially damaging impacts of upstream activities on PAs that could otherwise restrict them from supplying environmental services via the water resource system to support economic development within the region. Relevant impacts may relate to pollution caused by upstream activities, such as industries, town sewerage works or agricultural production.
The policy choice is how to operate the ‘market’ for allowable pollutant discharges; i.e. whether to set the price of allowable discharges (for example by imposing an effluent discharge fee) and let the quantities discharged adjust; or whether to set the target “quantity” (e.g. a maximum allowable total discharge load), and introduce a system of tradeable discharge permits, and let their prices adjust. If pollutant charges are used, the higher the charge, the greater is the economic inducement for polluters to cut back discharges.
Alternatively, if tradeable permits are used, the market for permits will reach an equilibrium price and the total discharge limit will be met at the minimum overall cost of abatement.
An important consideration in the design and use of economic instruments is defining the geographic boundaries of the scheme. The scheme may be developed and implemented at a local scale, national scale, designated river basins or sub-basins, or on a multi-country scale.
At the multi-country scale, transboundary or regional institutional arrangements are required for charging schemes or placing caps on particular functions of the water resources system; for example, pollutant discharges, allowable rates of water extraction, diversions for inter-basin transfers, and maintenance of minimum flows for environmental protection purposes.
General criteria for the application of economic instruments in the context of water resource systems are described in Box 4.1, while Box 4.2 documents operational criteria to be taken into account in the actual design of economic instruments. They indicate that an integrated approach is required to water resource management, in which PAs play an important role.
Box 4.1: Criteria for applying economic instruments
Criteria in italics are essential. Some ‘critical mass’ of the remaining factors should also be present; absence of more than a few greatly increases risk.
Ecological
• The watershed providing hydrological services to key water users has been identified as a conservation priority.
• A water-based finance mechanism is compatible with the overall strategy identified in the conservation management plan.
Hydrological
• The watershed provides verifiable hydrological services of measurable economic value.
• Watershed protection and its effect on the hydrological services provided can be monitored.
• Water services (flow regulation, quality, etc.) are well defined. Single and controllable sources of pollution or environmental degradation lead to a clear cause and effect between forest
management and water services.
• Small scale watersheds where users can readily see the connection between sustainable forest management and the provision of watershed services.
Usage Demands
• A relatively dense population or industrial presence capable of paying for water services.
• Users can be convinced that a valuable service is being provided by forested watershed.
• The economic activity linked to the ecosystem service is relatively important.
• Users are confident that funds raised for improving watershed management is maintaining or enhancing the watershed and the quality of water services.
• Users are confident that the source will remain reliable.
Land Use/ Provision of Water Services
• Sustainable management practices compatible with the provision of water services is made economically competitive with alternative more environmentally harmful land uses.
• Substitutes for water service are expensive or unavailable.
• The economic service provided by the watershed is scarce or declining or the demand is increasing.
Legal/Regulatory Framework
• Property rights and land tenure are well defined. Those who provide water services through sustainable forest management practices are able to receive compensation.
• Additional funds raised through water rate increases do not go into general revenue, and can be set aside to address targeted threats.
Political Context
• Political stability, with transparent legal, economic and administrative institutions.
• Solution must be deemed equitable. If relatively poor users are required to make additional payments that are perceived to benefit rich landowners, or if relatively affluent water users are not required to make extra payments, the water fee will be unfeasible, or unsustainable.
Institutional Arrangements
• Transaction costs of initiating and implementing deals must not exceed long-term benefits.
• Institutional arrangements that reduce uncertainties, promote collaboration, and enable enforcement of agreements so that those who provide water services will receive compensation.
• Institution or agency that administers the watershed should be situated within the watershed itself.
Source: Adapted from Conservation Finance Alliance 2002
Box 4.2: Criteria for the design of economic instruments
Criteria to be taken into account in designing and applying instruments include:
Effectiveness
The success of an instrument in achieving management objectives such as efficiency and in meeting environmental standards.
Efficiency gains
Efficiency gains are measured in relation to the savings in scarce resources and in costs associated with such resources.
Ongoing incentives
Ongoing incentives refer to the stimulus that is provided for activities to improve their technologies and management practices and reduce their costs.
Equity aspects
Equity considerations require that the benefits of environmental management are spread across the community and that no single group in the community should bear a disproportionate share of the costs.
Community acceptance
The community may not fully understand the primary purpose of introducing economic
instruments. Such systems are often viewed as new ways for governments to raise more revenue or as attempts to “sell the environment”. To avoid these perceptions the introduction of any major changes in pricing or allocations of water resource user rights must be preceded by a program of extensive community consultation and education.
Administrative feasibility and cost
Any system must be administratively feasible in terms of management and costs of operation.