GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Session 16 Environmental Externalities in a Costa Rican Watershed John A. Dixon World Bank Institute Ashgabad, November, 2005

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed The Arenal-Tempisque Watershed – the study site

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Characteristics of the Watershed Multiple users located between the very upper portions of the watershed to the coastal waters Multiple users located between the very upper portions of the watershed to the coastal waters A man-made lake created to develop hydropower in the upper watershed A man-made lake created to develop hydropower in the upper watershed All users dependent on the water flows in the watershed All users dependent on the water flows in the watershed Unidirectional externalities (for the most part) Unidirectional externalities (for the most part) A fairly enlightened government structure with an active public and private sector A fairly enlightened government structure with an active public and private sector

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Major stakeholders – from the upper watershed to the coastal waters Forest operators (upper watershed) Forest operators (upper watershed) Dairy farmers (upper watershed) Dairy farmers (upper watershed) ICE – hydropower generating authority (upper to middle watershed) ICE – hydropower generating authority (upper to middle watershed) Farmers and fish farmers (middle watershed) Farmers and fish farmers (middle watershed) The Palo Verde Wetland national park (lower watershed) The Palo Verde Wetland national park (lower watershed) Coastal fishermen (lower watershed/ adjacent coastal waters) Coastal fishermen (lower watershed/ adjacent coastal waters)

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed The Arenal-Tempisque Watershed

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed The Arenal-Tempisque Watershed A Flowchart of the Watershed – the physical system

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed The management issue Conflicts between ICE and other stakeholders over the timing and quantities of water released Conflicts between ICE and other stakeholders over the timing and quantities of water released Growing concerns over sedimentation in the upper watershed and impacts on the reservoir and ICE Growing concerns over sedimentation in the upper watershed and impacts on the reservoir and ICE No effective forum to bring all stakeholders together No effective forum to bring all stakeholders together A sense that the watershed is operating sub-optimally wrt use of water and its economic and environmental impacts A sense that the watershed is operating sub-optimally wrt use of water and its economic and environmental impacts No real effective “voice” for the downstream wetlands or coastal fishermen No real effective “voice” for the downstream wetlands or coastal fishermen

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Major economic sectors/ actors in the watershed -- rated by numbers of people and their political power Actor/AgentNumbersPolitical/ Economic power ForestrySmallLittle Livestock, Diary Small Little – Medium Electric Generator Very small (1) Very Large Irrigated farmer MediumMedium Tilapia farmer SmallLittle FishermenLargeLittle

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Valuation of Resource Use in the A/T Watershed Economic valuation carried out of each major use sector Economic valuation carried out of each major use sector Relied on local prices and values Relied on local prices and values Largely based on change-in-production approach Largely based on change-in-production approach Some limited use of benefit-transfer to estimate wetland values Some limited use of benefit-transfer to estimate wetland values Explicit inclusion of costs of externalities Explicit inclusion of costs of externalities Preliminary results – but certainly gets attention! Preliminary results – but certainly gets attention!

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Baseline payoff matrix (in present value, million dollars) Forest Reserves Dairy/Catt le Farms ICE Irrigated Farms Wetland Fisher men Realized Benefit Forest Reserves Maximize forest area (39.7)(39.7) Dairy Cattle Farms - Maximize dairy & cattle income (37.5)(37.5) ICE- Siltation of reservoirs (-703.1) Optimize electricity production (1,821.6) (1,118.5) Irrigated Farms --- Maximize crop income (194.9) Bird damage to crops (-20.1)(174.8) Wetland--- Agro-chemical pollution and soil runoff (-51.6) Maximize conservation (70.7)(19.1) Fishermen--- Agro-chemical pollution and soil runoff (-111.6) Reduced Agro- chemical and soil runoff (16.9) Maximi ze fish income Maximi ze fish income (121.2)(26.5) Net Benefit (39.7)(-665.6)(1,821.6)(31.7)(67.5)(121.2)(1,416.1)

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed The Payoff matrix – what it shows The diagonal elements are the different users/ sectors in the watershed and show their net return from their activity without taking externalities into account The diagonal elements are the different users/ sectors in the watershed and show their net return from their activity without taking externalities into account The off-diagonal elements represent externalities – either those that affect others downstream (below the diagonal) or that affect the sector’s net benefits (elements on the same row) The off-diagonal elements represent externalities – either those that affect others downstream (below the diagonal) or that affect the sector’s net benefits (elements on the same row) A social welfare measure is found in the final column (realized benefit) and final row (net benefit) A social welfare measure is found in the final column (realized benefit) and final row (net benefit)

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Electricity generation mix over time

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Major lessons from the report Most externalities (off-diagonal elements) are negative Most externalities (off-diagonal elements) are negative Electricity and irrigation provide 90% of the benefits Electricity and irrigation provide 90% of the benefits Dairy and ranching provide negative benefits worth $665 million. They should probably not be undertaken Dairy and ranching provide negative benefits worth $665 million. They should probably not be undertaken Irrigation also has high negative impacts Irrigation also has high negative impacts Externality costs are equal to 38% of potential benefits Externality costs are equal to 38% of potential benefits Major losers are the electricity authority, fishermen and wetlands Major losers are the electricity authority, fishermen and wetlands

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed Major lessons (cont.) Rapid siltation of the low cost Corobici (Santa Rosa) reservoir drives the upstream impacts Rapid siltation of the low cost Corobici (Santa Rosa) reservoir drives the upstream impacts Dredging of the Santa Rosa reservoir may be an economical option and should be considered (and costed) Dredging of the Santa Rosa reservoir may be an economical option and should be considered (and costed) Downstream, system benefits are larger with increased irrigated acreage, however demand side effects may lower this benefit Downstream, system benefits are larger with increased irrigated acreage, however demand side effects may lower this benefit The major impact of chemicals is on the estimated life of the wetlands and fisheries (however, valuation of wetlands at $200 per hectare may be high) The major impact of chemicals is on the estimated life of the wetlands and fisheries (however, valuation of wetlands at $200 per hectare may be high)

GEF Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican WatershedConclusions An integrated approach clearly identifies winners and losers and potentials for gain. An integrated approach clearly identifies winners and losers and potentials for gain. Coalitions are needed to reduce costs of externalities and increase net social welfare Coalitions are needed to reduce costs of externalities and increase net social welfare Existing institutions do not promote coalition building Existing institutions do not promote coalition building Other potentially important impacts (e.g. tourism, recreation, ecosystem services) are not well captured in the study Other potentially important impacts (e.g. tourism, recreation, ecosystem services) are not well captured in the study