Mexico’s Program for the Payment of

Hydrological Environmental

Services of Forests

Carlos Muñoz PiñaInstituto Nacional de Ecología

Maintaining our Natural Capital

Economic Aspects of Biodiversity

• OECD efforts to express in monetary terms the value of environmental services.

• Even if imperfect or incomplete, it helps to make decisions. – Makes evident when costs are larger than gains

from their transformation or damage.– Identifies those who benefit, in order to link

them to contribute back again to nature.

Identify the burden of wrong signals

• Important to look at where well intentioned subsidies are actually creating environmental perverse effects.

• Rural productivity and subsidies to pesticides and fertilizers. –A shift to decoupling-

• Fisheries and fuel subsidies, link with overfishing and climate change.

Designing New Economic Instruments

• Based on understanding economic drivers of environmental damage, OECD countries design new policy instruments.

• Payment for Environmental Services responds to a situation where:– The burden is now shifted to the ones who benefit, not

the resource owners (poverty). – The goal is to have more, not all. It sends a signal to

those with lowest opportunity cost to respond first.

Targeting and Evaluating

• Important to make a difference, modify behavior. Design to give greater value for money.

• Use GIS to target funds where environmental service is more valuable (scarcity)

• Use models to predict behavior with/without, and compare to observed reality. Adapt.

60 million hectares of temperate and tropical forests in Mexico

A country that experienced very fast deforestation in the 1990s.

- 3

-2

-1

0

1

2

3

4

5

Ann

ual r

ate

of c

hang

e%

TemperateForests

TropicalForests

Shrubs Vegetaciónhidrófila

Otros tipos de

vegetaciónNatural

GrasslandInduced pasture

Crops

Land use change in Mexico 1993-2000-

Overexploited Aquifers

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

Program’s Objective•

Stop the

deforestation

that

threatens

those

forests critical

for

watershed-related

environmental

services

in Mexico

ByPaying land owners to preserve forest land and

avoid its transformation for other uses, such as: agriculture and cattle raising.

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

-2000 -1000 0 1000 2000 3000 4000 5000 6000

.00005

.0001

.00015

.0002

.00025

.0003

.00035

.0004

.00045Densidad

FrijolRENTAF N(s=1.22e+003)

-1000 0 1000 2000 3000 4000 5000 6000

.0001

.0002

.0003

.0004

.0005

.0006

.0007

.0008Densidad

BovinosRENTABOV N(s=858)

-100 0 100 200 300 400 500 600 700 800 900

.001

.002

.003

.004

.005

.006

.007

Densidad

Ovinos y CaprinosRENTAOTR N(s=175)

Cattle

Corn

Beans

Sheep & Goats

Source: Luis Jaramillo (2003) www.ine.gob.mx

-1000 -750 -500 -250 0 250 500 750 1000 1250

.00025

.0005

.00075

.001

.00125

.0015Densidad

MaízRENTA N(s=282)

Forest area incorporated into PSAH

Year in which forest is signed into the program …

2003 2004 2005 2006 2007 2008 2009 total

Surface incorporated into the program (thousand hectares)

127 184 169 118 546 654 567 2,365

Forest owners participating (individuals + collectives)

272 352 257 193 816 765 711 3,366

Total payment to be made over 5 years

(million US$)

3.5 5.2 4.7 17.2 84.2 100.9 87.4 303

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 (area)

(%)

Pop.(%)

Elegible area

CONAFOR

%

PSAH 2003

%

PSAH 2004

%

PSAH 2005

%

PSAH 2006

%

PSAH 2007

%

PSAH 2008

%

Extremely Overexploited

(+50% a +800%)

0.1 29 7 0 0 7 13 6 5

ModeratelyOverexploited(+5% a +50%)

19 14 18 13 10 20 34 12 12

Expansion margin or

Equilibrium(less than +5%)

68 57 73 79 85 72 51 80 80

No information 13 0.1 2 8 5 2 2 2 3

TOTAL 100 100 100 100 100 100 100 100 100

Overexploited Aquifers

Type of Aquifer

Country (area)

(%)

Pop.(%)

Elegible area

CONAFOR

%

PSAH 2003

%

PSAH 2004

%

PSAH 2005

%

PSAH 2006

%

PSAH 2007

%

PSAH 2008

%

Extremely Overexploited

(+50% a +800%)

0.1 29 7 0 0 7 13 6 5

ModeratelyOverexploited(+5% a +50%)

19 14 18 13 10 20 34 12 12

Expansion margin or

Equilibrium(less than +5%)

68 57 73 79 85 72 51 80 80

No information 13 0.1 2 8 5 2 2 2 3

TOTAL 100 100 100 100 100 100 100 100 100

Overexploited Aquifers

Type of Aquifer

Country (area)

(%)

Pop.(%)

Elegible area

CONAFOR

%

PSAH 2003

%

PSAH 2004

%

PSAH 2005

%

PSAH 2006

%

PSAH 2007

%

PSAH 2008

%

Extremely Overexploited

(+50% a +800%)

0.1 29 7 0 0 7 13 6 5

ModeratelyOverexploited(+5% a +50%)

19 14 18 13 10 20 34 12 12

Expansion margin or

Equilibrium(less than +5%)

68 57 73 79 85 72 51 80 80

No information 13 0.1 2 8 5 2 2 2 3

TOTAL 100 100 100 100 100 100 100 100 100

Overexploited Aquifers

Type of Aquifer

Country (area)

(%)

Pop.(%)

Elegible area

CONAFOR

%

PSAH 2003

%

PSAH 2004

%

PSAH 2005

%

PSAH 2006

%

PSAH 2007

%

PSAH 2008

%

Extremely Overexploited

(+50% a +800%)

0.1 29 7 0 0 7 13 6 5

ModeratelyOverexploited(+5% a +50%)

19 14 18 13 10 20 34 12 12

Expansion margin or

Equilibrium(less than +5%)

68 57 73 79 85 72 51 80 80

No information 13 0.1 2 8 5 2 2 2 3

TOTAL 100 100 100 100 100 100 100 100 100

Overexploited Aquifers

Type of Aquifer

PSAH 2003

%

PSAH 2004

%

PSAH 2005

%

PSAH 2006

%

PSAH 2007

%

PSAH 2008

%

PSAH 2009

%

Extremely Overexploited

(+50% a +800%)0 0 7 13 6 5 6

ModeratelyOverexploited(+5% a +50%)

13 10 20 34 12 12 11

Expansion margin or Equilibrium

(less than +5%)79 85 72 51 80 80 81

No information 8 5 2 2 2 3 2

TOTAL 100 100 100 100 100 100 100

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 69 35 25 22 26High 17 43 47 61 53

Medium 9 6 18 8 14Low 3 14 8 6 6

Very Low 2 1 2 3 1Total 100 100 100 100 100

79% - 83%

Targetting poverty

Targeting poverty (% of forests under PSAH owned by communities with )

0%10%20%30%40%50%60%70%80%90%

100%

2003 2004 2005 2006 2007 2008 NATIONAL (forests)

% d

e la

s he

ctar

eas

paga

das

Muy Alta Alta Media Baja Muy Baja

2007: SEEKING EFFICIENCY

• Objetive: Maximize protection ofenvironmental services through avoidingdeforestation

• Efficiency: Maximize value to fee-payersthrough avoiding maximum hectares deforestedat 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).

Sample points

Possible Outcomes

Primary Forest(well preserved)

Secondary Forest (degradaded)

Inventory 2000 Inventory 2007

Primary Forest(well preserved)

Secondary Forest (degradaded)

Agricultural Use, Pastures or Urban

Deforestation

Conservation

Degradation

Possible Outcomes

Primary Forest(well preserved)

Secondary Forest (degradaded)

Inventory 2000 Inventory 2007

Primary Forest(well preserved)

Secondary Forest (degradaded)

Uso Agropecuario o Urbano

Deforestation

Regeneration

No Change

20%

40%

60%

80%

100%

15 75 135 195 255 315 375 435 495 555 615 675+

Secundario sin cambio Secundario deforestado

Primario conservado Secundario regenerado Primario degradadoPrimario deforestado

0%

Cambios de uso de suelo y distancia al poblado más cercano

MINUTOS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

primario sin cambios secundario regenerado primario degradado

secundario sin cambios secundario deforestado primario deforestado

Cambio de uso de suelo y pendiente*

*La pendient e es medida en porcent ajes.

Pendiente (%)

% de lo s bo sques de 1993/ 1994 ubicado s en ese rango de

Land use changes and slope

ANÁLISIS ECONOMÉTRICO

VariableProbit

Deforestación/degradación vs no cambio

Probit OrdenadoDeforestación, degradación, no cambio

Pendiente (%) -0.005745 ** -0.003574 **Altitud (msn) .0000415 -.00000356Distancia al pueblo (min) -0.0035625 ** -0.002861 **Distancia a la ciudad (min) -0.0018948 ** -0.001137 **Rendimiento de maíz (txHa) -0.0126468 0.0690093 **Índice de marginación 95 0.0787564 ** 0.0647605 **Dentro de ANP -0.618584 ** -0.628249 **Pino y Pino-Encino 0.2120812 ** 0.8128571 **Selva alta 0.4517746 ** 0.814395 **Selva baja 0.2789231 ** 0.6340389 **

* 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: National

Level

Elegible area

CONAFOR

PSAH 2003

PSAH 2004

PSAH 2005

PSAH 2006

PSAH 2007

PSAH 2008

% % % % % % % %

Very high 20 12 4 11 7 6 14 11

High 20 6 7 17 13 10 20 16

Medium 20 18 17 20 21 16 18 20

Low 20 25 30 30 27 25 22 26

Very Low 20 39 42 22 33 43 27 27

Total 100 100 100 100 100 100 100 100

Targetting: Risk of Deforestation

Risk of deforestation

(quintiles)

Forests: National

Level

Elegible area

CONAFOR

PSAH 2003

PSAH 2004

PSAH 2005

PSAH 2006

PSAH 2007

PSAH 2008

% % % % % % % %

Very high 20 12 4 11 7 6 14 11

High 20 6 7 17 13 10 20 16

Medium 20 18 17 20 21 16 18 20

Low 20 25 30 30 27 25 22 26

Very Low 20 39 42 22 33 43 27 27

Total 100 100 100 100 100 100 100 100

Targetting: Risk of Deforestation

Risk of deforestation

(quintiles)

Forests: National

Level

Elegible area

CONAFOR

PSAH 2003

PSAH 2004

PSAH 2005

PSAH 2006

PSAH 2007

PSAH 2008

% % % % % % % %

Very high 20 12 4 11 7 6 14 11

High 20 6 7 17 13 10 20 16

Medium 20 18 17 20 21 16 18 20

Low 20 25 30 30 27 25 22 26

Very Low 20 39 42 22 33 43 27 27

Total 100 100 100 100 100 100 100 100

Risk

of

Deforestation

index

classificationall

forests

in Mexico

Quintiles (Version

s2-s3 using

90s data)

Very

Low Low Medium High Very

high

Rate

of Deforestation

observed (2000-2007)

1.8% 3.8% 5.3% 9.8% 19.1%

Does the Economic Risk of Deforestation index really work as a prediction/targetting tool?

Measuring the REDD effect of the Payment for Hydrological

Environmental Services Program in Mexico (PSAH)

What would have happened…• Measuring how much deforestation was

avoided requires comparing: – Observed deforestation, against– the deforestation that would have happened.

• But, how to know how much deforestation would have occured? – We need to be able to predict deforestation,

and then predict under alternative scenarios.

3 ways to predict:

Naive: 1. It would be the same rate as before.2. It would be the same number of hectares

as before.

Sofisticated: 3. It would follow the same pattern as

before (same coefficients, updated variables).

First step: compare deforestation rate observed in forests with/without PSAH.

PSAH

Observed Deforestation

2000-2007

k-has %

Participants 12 0.6%

Non participants 2,372 3.7%

Difference is due to the initial difference in deforestation risk index AND the effect of PSAH

How can these two effects be separated?

Second Step: Use econometric model to predict what would have happened in both type of forests…

PSAHObserved

Deforestation 2000-2007

Without PSAH they would have deforested in …

Deforestation Avoided by PSAH

(with respect to the observed one)

k-has % k-has % k-has %

Participants 12 0.6% 30 1.6% 18 1.0%

No participants 2,372 3.7% 2,372 3.7%

In terms of Reducing Emmissions of CO2 e due to Avoided Deforestation (REDD)

Type of Forest

Deforestation avoided thanks

to PSAH (thousand ha)

Tons of CO2 per hectare

CO2e emissions avoided by PSAH

(tons)

Pine Forest 1,752 113+63 268,607Oak-Pine Forest 3,355 83+89 539,251Oak 1,855 58+69 217,074Cloudforest 252 58+69 29,635Dry Tropical Forest 1,168 24+70 154,572Medium Tropical Forest 3,439 125+177 599,930Rainforest 1,022 125+177 516,327Ajuste…Total 18,332 3,231,157

Summarizing: Targeting in evolution. (objetives interacting with

interest groups)

At the start, applications were approved on a first come, first served basis. .

The second year, a special outreach to forest owners in central Mexico (due to political reasons, but it worked in the right direction for 2 of the objectives).

3rd year: INE points to the little success in targeting aquifers, CONAFOR reaches out for those regions. Basic selection system introduced.

4th year: A formal point-based system is introduced. Water and Poverty criteria in. Parks, and other. criteria are lobbied in.

5th year: Risk of Deforestation criterium is introduced. The Commission for Indigenous Peoples grants additional funds for indigenous areas (just in 07)

6th year: Political pressures make CONAFOR divide funds for “regional balance”, and internal bureacratic pressure introduces additional 2ndary criteria

Mexico’s Program for the Payment of Hydrological

Environmental Services of Forests

Carlos Muñoz Piñacarmunoz@ine.gob.mx

Papers:• Ecological Economics (PES special issue)• www.ine.gob.mx