Mexico’s Program for the Payment of Hydrological Environmental Services of Forests Carlos Muñoz Piña Instituto Nacional de Ecología

60 million hectares of temperate and tropical forests in Mexico

A country experiencing very fast deforestation

Overexploited Aquifers

Market failures Less silting and better water quality in watershed and recharge areas in aquifers. Biodiversity Conservation Carbon sequestration The market does not pay for the environmental services of forests:

3 Types of Hydrological Services Aquifer Recharge Improved surface water quality, less suspended particles and lower costs. Reduce frequency and damage from flooding in short steep watersheds

Deforestation and market forces Market signals (inputs and output prices) Short term horizon induced by poverty Costly cooperation in common property forestry Decisions to change land use respond to:

Localities with high or very high marginality

60 million hectares of temperate and tropical forests in Mexico

Land use changes Control vs. Incentives In Mexico, government’s control of land use changes is costly, not effective and potentially poverty increasing. So, necessarily conservation = profitable forests for communal owners taking land use decisions Otherwise: regulatory taking on the poor

A public policy niche Forests with (potential) commercial use PRODEFOR, PROCYMAF, Cadenas Productivas Plantations PRODEPLAN Degraded Forests PRONARE Not degraded, not commercial forests, important for watersheds and aquifers PSAH

Program’s Objective Stop the deforestation that threatens those forests critical for watershed-related environmental services in Mexico By Paying land owners to preserve forest land and avoid its transformation for other uses, such as: agriculture and cattle raising.

Eligibility Areas for PSAH Forests owned by the poor or Forests important for water With potential future clients Providing other environmental services? or Overexploited acquifers Deep poverty municipalities H related natural disasters High water scarcity zones or Cities > 5K Priority Mountains Natural protected areas or

Linking providers with those who benefit Federal Fees Law reformed to introduce an earmarking of a portion of the water fee. Negotiations Initial proposal 2.5% Finance Ministry & National Water Commission want to exclude municipalities from payment, so fix amount to ~US$20 million.

How much? Two ways of approaching the problem: 1.Value of the service: What would society loose if the forests were not there? 2.Opportunity Cost: What landowners would sacrifice if they kept the forest. Between those 2 values is the relevant space of the transaction.

OPORTUNITY COSTS Cattle Corn Beans Sheep & Goats Source: Luis Jaramillo (2003)

Differentiated payment A political economy mix, recommendation based on opp cost, combined with value of service & forestry lobby: 1. Cloudforests: $400 pesos (~US$37) per hectare per year 2. Rest of temperate and tropical forests: $300 pesos (~US$28) per hectare per year

Forest area incorporated into PSAH Year in which forest is signed into the program … total Surface incorporated into the program (thousand hectares) ,143.7 Forest owners participating (individuals + collectives) ,890 Total payment to be made over 5 years (million US$)

PSAH : >1.2 million hectares

Durango: a watershed supplying cities and irrigation districts

Challenges for PES Unexpected success: Three times as many applications as funds. (Excess demand) Possibility of generating greater value to customers. Who received the payments? Lets look at the actual targeting…

Targetting: By value of environmental service By level of poverty By risk of deforestation  Important: voluntary program implies self-selection.

Overexploited Aquifers

Type of Aquifer Country ( surface ) % Population using it % Eligibility CONAFOR PSAH 2003 % PSAH 2004 % PSAH 2005 % PSAH 2006 % PSAH 2007 % Extremely Overexploited (+50% a +800%) Moderately Overexploited (+5% a +50%) Expansion margin or Equilibrium (less than +5%) No information TOTAL 100 Overexploited aquifers

Type of Aquifer Country ( surface ) % Population using it % Eligibility CONAFOR PSAH 2003 % PSAH 2004 % PSAH 2005 % PSAH 2006 % PSAH 2007 % Extremely Overexploited (+50% a +800%) Moderately Overexploited (+5% a +50%) Expansion margin or Equilibrium (less than +5%) No information TOTAL 100 Overexploited aquifers

Targeting the poor

Poverty and PSAH Marginality Forest communities national level Elegibility CONAFOR PSAH 2003 PSAH 2004 PSAH 2005 Hectares (%) Hectares (%) Hectares (%) Hectares (%) Hectares (%) Very high High Medium Low Very Low Total % - 83%

Targetting poverty

SEEKING EFFICIENCY Objetive: Maximize protection of environmental services through avoiding deforestation Efficiency: Maximize value to fee-payers through avoiding maximum hectares deforested at minimum cost, within budget constraint.

Main driving force: land use changes. More profitable agricultural and cattle ranching activities. Short term horizon caused by poverty (Guevara:2002). Specific patterns identified through econometrics: transport cost, slope, potential ag yields. How to measure real risk of deforestation?

“All models are wrong, but some are useful.” (George Box, quoted by Kennedy 1992: 73; quoted by Kaimowitz & Angelsen: 1998; and here).

Una rejilla para puntos de muestreo

20% 40% 60% 80% 100% Secundario sin cambioSecundario deforestado Primario conservadoSecundario regeneradoPrimario degradado Primario deforestado 0% Cambios de uso de suelo y distancia al poblado más cercano MINUTOS

ANÁLISIS ECONOMÉTRICO Variable Probit Deforestación/degradación vs no cambio Probit Ordenado Deforestación, degradación, no cambio Pendiente (%) ** ** Altitud (msn) Distancia al pueblo (min) ** ** Distancia a la ciudad (min) ** ** Rendimiento de maíz (txHa) ** Índice de marginación ** ** Dentro de ANP ** ** Pino y Pino-Encino ** ** Selva alta ** ** Selva baja ** ** * Significativo a niveles mayores a 90%; ** Significativo a niveles mayores a 99%, 18k obs

Results for 2000 forests in Oaxaca

Targetting: Risk of Deforestation Risk of deforestation (quintiles) Forests at National Level Elegible area CONAFOR PSAH 2003 PSAH 2004 PSAH 2005 PSAH 2006 PSAH 2007 % % % %% Very high High Medium Low Very Low Total100

Targetting: Risk of Deforestation Risk of deforestation (quintiles) Forests at National Level Elegible area CONAFOR PSAH 2003 PSAH 2004 PSAH 2005 PSAH 2006 PSAH 2007 % % % %% Very high High Medium Low Very Low Total100

2008: Incorporating Watershed Targeting

Topographical Zones and Watersheds

Deforestation Risk and Topographical Zones (millions of hectares of forests) Topographical Zones Deforestation Risk Very LowLowMediumHigh Very High Upper Watershed Middle Watershed Lower Watershed A significant amount of key watershed areas has a high and very high deforestation risk

Modifying rules to incorporate new criteria for selection: location within a watershed and relative water scarcity of the watershed Topographical Zones Average Water Scarcity in the Watershed High scarcity Medium scarcity No water scarcity problems Upper Watershed 5 points 4 points Middle Watershed 4 points3 points2 points Lower Watershed 3 points2 points1 point

Looking ahead We need tests to compare areas with payment and areas without payment, to see if there is a difference (control by deforestation risk, obviously ) The problem of the “sixth year”. Need to see what they do after the contract ends: – They can re-apply but no certainty that they are chosen – They had money and time to build a sustainable forestry operation or move into other markets for environmental services. It is an empirical question.

Modifying behaviour, really (1) % de predios donde se observó deforestación Tasa de deforestación anual (donde hubo def) Predios sin PSAH 96%6.6% Predios con PSAH 97%4.1% Polígono pagado 66%1.9% Polígono no pagado 97%5.8% Combinación de imágenes Spot y Landsat. Método que sobreestima la deforestación, por lo tanto tomar en cuenta sólo el valor relativo. Muestra aleatoria, 160 predios. La diferencia está entre el polígono pagado y las zonas (polígono o predio) no pagado.

Modifying behaviour, really (2) % de predios donde se observó deforestación Tasa de deforestación anual (donde hubo def) Predios sin PSAH 37%0.3% Predios con PSAH 28%0.4% Polígono pagado 9%0.1% Polígono no pagado 20%0.4% Imágenes Spot y Landsat. Umbral alto, método que subestima la deforestación, por lo tanto tomar en cuenta sólo el valor relativo. Muestra aleatoria, 115 predios. La diferencia está entre el polígono pagado y las zonas (polígono o predio) no pagado.

Mexico’s Program for the Payment of Hydrological Environmental Services of Forests Carlos Muñoz Piña