DevelopingPESintheAbuanWatershed Chapter 5: Developing Payments for Environmental Services in the Abuan Watershed By Edgardo E Tongson Sr Consultant on Water Resources

s WWF-Philippines

Abstract Watersheds provide important environmental services to society, including flood regulation, water retention, soil formation, nutrient cycling, landscape beauty, carbon sink and as habitat for biodiversity. Payments for Environmental Services is a market-based tool linking buyers and sellers of environmental services in order to generate sustainable financing for watershed management. The Abuan watershed, with its flood regulation and water retention features, has the potential to generate at least 3.3 MW of hydropower, irrigate 1,025 hectares of rice paddy, and supply domestic water to 130,000 population in the town of Ilagan. With reforestation of 2,146 has of open grasslands and arrest of illegal logging activities, the watershed can generate carbon credits of 21,250 CO2 tons and 718 CO2 tons from CDM and REDD respectively. The scenery and clean water also offer opportunities for river-based ecotourism such as boating, kayaking, white water rafting and rappelling. The total economic output from these environmental services can reach USD 9.3 Million a year, of which USD 715,329 (or 7.7%) can be realized annually through voluntary and involuntary PES schemes and provide sustainable financing for watershed protection. If we remove payments from carbon credits, the annual payments through PES amounts to USD 539,580 or the equivalent of USD 9.50/hectare. Examples of model PES schemes and institutional design to implement PES in Abuan are presented.

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1.Introduction
Watersheds provide a host of services beneficial to society. Unfortunately, society attaches no value to these services. As such, this results to their further loss and degradation. Watershed values, when realized, have the potential to generate significant economic activity that will benefit the watershed communities. Beneficiaries of these services pay for activities that enhance these services. Part of these values may be captured and monetized as part of Payments of Environmental Services (PES) schemes. PES schemes are growing in popularity because they provide sustainable financing to defray the cost of watershed activities. In relation to the Abuan watershed, four types of services stand out: 1. Watershed protection (e.g. hydropower companies and water utility pay upland farmers for avoiding deforestation, soil erosion, pollution, flooding risks) 2. Landscape beauty (e.g. tourism operator paying local community not to cut trees and pollute river that are used to enhance visitor experience) 3. Carbon sequestration and storage (e.g. Foreign power company paying farmers in tropical countries to plant or maintain trees) 4. Biodiversity protection (e.g. conservation groups paying local community to restore areas to create biological corridors).

1.1EmergenceofPESasaConservationTool
Land use activities can produce both positive and negative impacts to the hydrology of a watershed. PES is a tool to provide incentives to encourage sustenance of positive impacts and to minimize the negative effects. These activities entail costs such as conduct of patrols to stop illegal logging, sustainable upland farming, reforestation and provision of alternative livelihoods to logging-dependent communities. While the conventional way of funding watershed activities is through government budgets, PES schemes diversify sources of funding by capturing payments from private users of water for different types of watershed services. Compared to the use

DevelopingPESintheAbuanWatershed of public resources such as taxes, PES schemes offer a more direct, efficient and more equitable allocation of resources. PES schemes mimic market transactions between buyers and sellers. Buyers of watershed services, such as end users, will continue to make voluntary periodic payments for watershed activities as long as watershed functions and services are well-defined and maintained. The theoretical framework of PES is derived from the Coase theorem (Coase 1960). The theorem states that, in free markets without transaction costs, buyers and sellers will reach an equilibrium in which externalities are internalized through payments, entitlements or transfers made in either direction. Voluntary, conditional and periodic payments for a well-defined Environmental Service (ES) describe the nature of PES schemes (Wunder 2005).

1.2CasesandBestPracticesinPESworldwide
There is growing literature presenting cases and examples of its application world wide (Landell-Mills & Porras 2002, Pagiola 2002). Similar experiences were documented for the Philippines (Padilla et al 2005). Some examples of water payments through self-organized deals are presented in Figure 5-1. The cases include a well-known water company (Vittel) who acquired upstream farmlands at the beginning and gave incentives in the form of PES later on. In Ecuador, the hydroelectric companies contribute to a fund, called FONAFIFO, to compensate landowners residing in watersheds for land use activities. In Colombia, irrigators groups pay upstream land owners to control erosion in springs and waterways.

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Figure51.ExamplesofWaterPayments(UNEP2008) The payments from PES for land use activities can range widely. In PES cases compiled in Costa Rica, the payments range from USD 10 to 45/ha-year (Figure 5-2).

Figure52.RangeofpaymentsforForestServicesinCostaRica(Pagiola 2007)

DevelopingPESintheAbuanWatershed To conserve 18,000 ha of watersheds in Costa Rica, hydropower companies, bottlers, hotels and irrigation farmers pay a total of USD 500,000 a year (Pagiola 2007). The higher payments reflect higher opportunity costs such as when forests are near urbanizing areas, or where there are competing alternatives, e.g. rubber, oil palm, soya, logging, etc.

1.3 Watershed Services from Abuan Watershed: Use it or Lose it. The hydrology of the Abuan watershed offers a range of benefits that could be harnessed for conservation and development. The potential economic values from watershed services in Abuan will come from the clean and abundant year-round surface water that can be delivered by gravity to different users, such as hydroelectric power plants (through runoff-river schemes), river-based tourism, irrigation and domestic water supply. The watershed generates high levels of surface run-off estimated at 1,234 Million m3/year (Rojas 2009). A large drainage area (63.79 sq km), steep slopes and thin soils underlain by semi-permeable pyroclastic materials contribute to high levels of surface runoff. Sixty-seven (67%) percent of the annual precipitation of 2900 mm is converted to surface run-off. Water absorbed as soil moisture results in interflow that find their way into channels and into Abuan river. The soil, however, is vulnerable to erosion as ninety percent (90%) of the watershed areas have slopes exceeding 30% (Evangelista 2009). The study site has low groundwater potential with ground water recharge limited to just 5% of annual rainfall (Rollan 2009). The baseline scenario shows that we will lose the forest and the watershed services to destructive activities. The recent campaign against illegal logging in Abuan in 20082009 yielded half a million board feet of timber valued at P 8 Million pesos (Ly 2009). This paper argues that the economic gain from logging is small compared to potential gains from protecting the forest. However, unless the watershed services of Abuan basin are utilized by Ilagan town and by society at large, these gains will not be fully realized.

DevelopingPESintheAbuanWatershed The objective of this study is to determine the feasibility of setting up a PES program in the Abuan watershed. This paper will present the potential uses of watershed services in Abuan, potential economic contribution, indicative amounts that can be captured through PES schemes, identification of buyers and sellers and a conceptual arrangement of instituting a PES system.

2.Methods
PES requires clear definition of land use activities that would lead to hydrological effects that are important for investors, or buyers, in different economic sectors whether irrigation, hydropower, domestic water supply, agriculture or tourism. It will require the understanding of the socio-economy and farming practices of watershed communities, site geomorphology, soil profiles and erosion, land use trends, hydrology, hydrogeology and economics. This emphasizes the need for interdisciplinary research and expertise that will be involved in the design and operation of PES schemes. The preceding studies by Rojas (209), Rollan (2009) and Evangelista (2009), provide background information on the hydrology, hydrogeology, soils and land use activities respectively. These studies assessed the conceptual feasibility of a run-off river hydropower facility, irrigation and domestic water supply. Carag (2009) assesses the tourism potential for river-based ecotourism. Figure 5-3 describes the pathways in preparing a business case for PES. It starts from understanding the science and economics, charging services users, paying services providers and establishing the institutional framework.

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Figure 5-3. The Multi-Disciplinary Nature of PES Schemes (Pagiola 2007) The first step is developing the business case for investors and buyers to pay for environmental services1. The business case will outline the opportunities for PES by identifying the environmental service(s), understanding their linkages to land use activities, measuring the hydrological impacts, estimating opportunity costs of buyers and sellers, designing contractual agreements and designing an institutional framework for collection, disbursement and monitoring of payments to upland communities. The methodology of developing a business case for a PES scheme in the Abuan watershed is enumerated as follows: 1. Defining ecosystem services in Abuan Watershed and measuring economic output 2. Identifying prospective buyers 3. Identifying sellers, and Watershed Protection Services 4. Assessing legal and policy context for PES 5. Prospective PES amounts per sector 6. Surveying available PES support services, organizations and institutional arrangements are no current investments in Abuan for water-related operations. This paper lays the empirical basis for exploring combined and integrated schemes to maximize its natural endowments beneficial to society,
1There

DevelopingPESintheAbuanWatershed The next section presents the results from the research. The findings are organized following the methodology outlined above.

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3.Results
DefiningecosystemservicesinAbuanWatershedandmeasuringeconomic output

igcse_flood_hydrographs.jpg 616!590 pixels 10/26/09 10:10 PM

IntheAbuanwatershed,regularandyearroundstreamflowsaretheprimary watershedservicethathavethepotentialtogeneratesignificanteconomic benefitstothetownofIlaganandprovinceofIsabela.Flowregulation,asa watershedservice,canbemeasuredusingahydrographwhichshowsthe dischargeorstreamflowsagainsttimeduringarainfallevent.

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Therearefour(4)hydrauliccontrolssizeofriverbasin,vegetation,slopeand soiltypethatinfluencethefloodperformanceofawatershed.Ofthese, vegetativecoverandsoiltypecanbealteredbyhumanactivities,whiletherest arebeyondhumancontrol.Figure54illustratestheeffectofchangesinsoil andforestcoverondischargeratesandflooding. Figure54.SoilandVegetationEffectsonStreamHydrograph Inforestedwatersheds,thehydrographshowsagradualrise,alaterpeakingof floodsandagradualrecessionofstreamflow(greenline).Whenforestsare removed,thegraphshowsahigherandquickerpeakfloodandasteeper recessioncurve(blueline).Themeanamplitudeasmeasuredbythedistance betweenpeakandbaseflowiswiderfordeforestedorimpermeablewatersheds.
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DevelopingPESintheAbuanWatershed Theconversionofsoilsfrompermeabletoimpermeablesurfacematerialdueto landdevelopmentsiscommonlyfoundinurbanizingwatersheds.Soil conversionhasthesameeffectonthehydrographasadeforestedwatershed. Soilcompactionorsurfacepavingresultsinhigherrunoff,quickerpeakfloods, lesserinfiltrationanddiminishingbaseflows. Withforestcoverstillat89%,theAbuanbasinretainsabout33%ofa10year 24hourstormwithacumulativerainfallof308.8mmandabout25%ofa50 yearstormwithacumulativerainfallof389.2mm(Rojas2009).Theforestsand itssoilsarelargelyresponsibleforwaterretention,storageandfloodpeak attenuation. Intactforestsretainwaterasitiscaughtinthebranchesandleavesofthetrees andneverhitsthegroundandalotissoakedupbytheleaflitter,grassandother organicmaterialontheforestfloor.Thismaterialprotectsthesoilfromerosion, reducescompactionfromtheimpactofheavyrainsandconservesmoisture.If theforestisremoved,thegroundisexposedtohigherrainfallwithhigher intensitiesandtosolarradiationresultinginhigherevaporation,lesswater infiltration,highersoilerosion,quickerandhighervolumeoffloods. Theconversionofpermeablesoilstoimpermeablesurfacessuchas establishmentofbuiltupareaswillexhibitthesameimpactsasadeforested watershedi.e.highervolumeofrunoffandquickerfloodingdownstream.The lossofsoilduetoerosionresultsinlesserinterflowanddiminishedbaseflows duringthedrymonths. Theflowdurationcurveisatoolthatmeasuresthepercentageofthetimethat flowratesequalorexceedthevariousflowratesduringtheperiodofstudy. Rojas(2009)developedaflowdurationcurve(Figure55)whichshowsan80% dependableflowofabout15m3/secondor1.3Millionm3/dayanda95% dependableflowofabout9.5m3/secondor0.8Millionm3/day.

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Fig. 55. Flow Duration Curve (FDC) of Abuan River for Hydropower and IrrigationDevelopment Fortheconceptualhydropower/irrigationscheme(Figure56),abouthalfofthe 95%dependableflowestimatedat4.65m3/secondwillbeused.Theotherhalf oftheflowsislefttomaintaintheriveranditsecologicalprocesses.

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Figure56.SchematicConfigurationofConceptualHydropower/Irrigation Development

3.1.1 RunoffriverHydropower Thehydropowerpotentialandirrigationpotentialofthebasinwasevaluatedas acombineddevelopment.Theschemeconsistsof7diversiondams(weirs)anda tunnelwaterwaytotakewatertoapowerstationatlowerelevation.The schemeisconceivedinriverstretcheswithsteepgradients(>1/60slopes)orin placeswheretheequivalentheadismadeavailable. Theoutflowfromthetailraceofthepowerplantwillbedischargedtothemain canaltoallowtheslightlywarmerwatertocooldowntoambienttemperatureas itflowsthroughacanalparalleltotheriverandisdistributedtotheindividual farmlotsintheirrigableservicearea.Notallthewaterisneededforirrigation

DevelopingPESintheAbuanWatershed throughouttheyear.Partofthewatervolumemaygotoawatertreatmentplant to supply the domestic water system for Ilagan town, with distance of 18 kms. With the combined development and conjunctive use of surface water for multiple use, the infrastructures needed and the initial capital investment are significantlyreduced. Inestimatingtheeconomicbenefitsfromminihydropowergeneration,we assembledthehydrologicdataonthestreamsanddeterminedtheamountof wateravailableanditsdistributionthroughouttheyearandfromyeartoyear. Forthispurpose,thecatchmentarea,approximateavailablehead,andannual rainfallisused. Rojas(2009)suggestsusingf95%dependableflowof4.65m3/secondas exploitabledischarge.Withassumedhydraulicheadof80m,theschemecan powera3.3MWhydropowerplant.Weassumealoadfactorof0.8andaselling priceofUSD0.10centsperKWHgenerated. Theestimatedannualsales(inUSD)fromhydropowergenerationiscomputed asfollows: GrossSales=Plantcapacityx1000KW/MWxLoadFactorxNo.ofdays operationsx24hours/dayxUSD0.10/KWH GrossSales=3.3MWx1000KW/MWx0.8x360x24x0.10/KWH GrossSales=USD2,280,960/year CapitalCosts/MWinstalledcapacity=USD2Million HurdleRate=12%p.a. 3.1.2Irrigation Assuming1hectareofricepaddywillrequire1meterofwaterpercropping season,thismeans10,000m3/hectareofirrigationrequirement.Fromtheflow durationcurve,the80%dependableflowisequivalentto7.0m3/secondwhich

DevelopingPESintheAbuanWatershed amountsto6.35MCMin105days.Dividingthisbytheirrigationrequirementof 10,000m3/hectare,anequivalentareaof6,300hectarescanbeirrigatedinone (1)croppingseason. ThereisnoformalirrigationsystemtoservicethefloodplainsoftheAbuan watershed.Farmerswhowereinterviewedarewillingtoplantriceifirrigation systemsareinplace.Theirrigationschemewillconveywaterbygravityto channelsanddikesandirrigate1,025haofSanManuelclayloaminthelower terracesandthefloodplainofAbuanwatershed(Evangelista2009).Irrigation willcomplementtherainfedmonthsandtappedfor105daysinsummer. Excesswatercanbeusedtoirrigatefloodzonesinadjacentwatersheds. Assumptions: Servicearea=1,025 Riceyield/ha/cropping=4.2MetricTons(MT)(basedonaverageyieldsof adjacentirrigatedriceareas. Projectedriceproduction=4,305MT/hacrop Projectedannualriceproduction=4,305x2.5=10,763MT/yr Priceofpalay=USD0.25/kg(@P48:1USD) Gross income per yer = 10,763 x 1000 x 0.25 = USD 2,690,750 Netincome/hacropping=P25,900(Evangelista2009) Annualnetincome=P25,900x2.5=64,750orUSD1,249perhectare CapitalCostIrrigationInfrastructure/hectare:P280,000(USD5,833) Capitaloutlay:USD5,833/hax1,025has=USD5,978,825 Hurdlerate:18%p.a. 3.1.3FutureDomesticWaterSupply

DevelopingPESintheAbuanWatershed Thissamewater,usedtopowerthehydropowerplant,isreturnedtotheriver. Fromhere,thewatermaybeusedconjunctivelytosupplyirrigationwaterfor drymonthsanddomesticwaterallyearround.Waterfordomesticusemayflow toawatertreatmentplantandthenpiped17kmdownstreamtodomesticusers inIlagantown.Atpresent,domesticandindustrialwaterrequirementsofthe townaresuppliedbygroundwater. Asthetownurbanizes,theincreasingdemandforgroundwaterwillleadto heavyabstractionthatmayresultindepletionofwatertables,interferencecosts, saltwaterintrusionandlandsubsidence.Bychannelingsurfacewatertosupply urbandemand,competitionwithindustrialusersanddepletionofwatertablesis avoided. Assumptions: Averagepercapitawaterconsumptionperyear=0.2m3/dayx365days/year =182.5m3/year PopulationofIlagantown=130,000(NSO2007) PriceoflevelIIIwatersystem=USD0.20/m3 GrossSales=182.5x0.20x130,000 GrossSales=USD4,745,000/year 3.1.4RiverbasedEcoTourism Riverbasedtourismisgrowinginpopularityintheregion.Afeasibilitystudyby Carag(2009)onthetourismpotentialinAbuanriveridentifiedboating, kayaking,rappellingandwhitewaterraftingaspossibleactivities.Dayand weekendpackagetoursarebeingdevelopedinAbuanRiver.Thesetourscater toweekendvisitorsfromManila.Thepackagesaretobemadepartofthe tourismprogramoftheIlaganMunicipality,IsabelaprovinceandRegion2.Eco tourisminAbuancancreateemploymentopportunitiesforformerlogging dependenthouseholds.Smallentrepreneurscanbenefitbyleasingpicnichuts

DevelopingPESintheAbuanWatershed andboats,sellinglunchesanddrinks,tourguidingservices,souvenirsales amongothers.Theseinvestmentsspurthelocaleconomythroughmultiplier effects. Assumption: Visitortripsperyear:1,000 AveragespendingorTravelCostpervisitorassuming2D/2N:$50 Tourcost/tourist: GrossSales/year: GrossSales/year: 3.1.5CarbonMarkets Withgrowinginterestincarbonmarketsandemergingincentiveschemessuch asReducingEmissionsFromDeforestationandDegradation(REDD), opportunitiesareemergingtogeneratepaymentsforcarbonsequestrationto benefitAbuancommunities. CleanDevelopmentMechanism TheCleanDevelopmentMechanismallowsAnnex1countriestobuycarbon creditsfromdeveloping(nonAnnex1)countriesinorderfortheformertomeet regulatorycapstocarbonemissions.Thelattermaysellcarboncreditsby sequesteringcarbonthroughtreeplantations,energyefficiencymeasures, switchingtobiomassfuels,andthelike.InthecaseofAbuan,opengrasslands maybeplantedtoagroforestrytoprovidetreebasedlivelihoodsandtosell carboncreditsatthesametime. Thefollowingtableshowstherateofcarbonsequesteredforagroforestry plantations.Assuming2,146hectaresofopengrasslandinAbuanisplantedto agroforestry.Thecarbonsequesteredandequivalentsalesfromcarboncredits iscomputedasfollows: $20/pax 1000x$50+1000x$20 $70,000

DevelopingPESintheAbuanWatershed Assumptions: Opengrasslandconvertedtoagroforestry=2,146has Csequestrationrateofagroforestry=2.7tons/hayear(Lascoetal2000) TotalCsequestration=5,794tons/year Atomicweightofcarbon=12 Atomicweightofoxygen=16 AtomicweightCO2molecule=(12+(16x2))=44 TotalweightofCO2=5.79x103tonsx44/12=21.25x103tonsCO2 Priceof1tonCO2equivalent=US$8/tCO2e Grosssales/year=21,250x$8=$170,000 PaymentsThroughAvoidedDeforestation(REDD) Thisapproach,alsoknownasREDD(ReducedEmissionsfromDeforestationand Degradation),isbeingnegotiatedbytropicalcountriesintherunuptothe CopenhagenClimateChangenegotiationsinDecemberof2009.Thismodeof financingaimstoarrestthedeclineinforestcoverandgloballossofcarbon sinks.Itwillgeneratefinancialresourcesbymaintainingorimprovingexisting carbonsinksinintactforestsbyprotectingforestreserves.Paymentsaremade basedonreducedratesofdeforestation. ThebaselinedeforestationrateinAbuanWatershedisderivedfromthevolume ofconfiscatedtimberasreportedbytheProvincialTaskForceonForest Protectionfor20082009(Ly2009).Infourteenmonthsofthecampaign(July 2008toSeptember2009),thetotalvolumeofconfiscatedtimberoriginating fromAbuanwatershedisreportedat1,449m3.Thistranslatestoannual volumesof1242m3. Deforestationrate/year=1242m3

DevelopingPESintheAbuanWatershed Assumptions: 1ton=2.83m3 Equivalentmassintons=438.87 %Carboncontentofbiomass(Lascoetal2000)=44.7 Ccontentremoved(tons/year)=196 Priceof1tonCO2equivalent=US$8/tCO2e AtomicweightCO2=(12+(16x2))=44 Atomicweightofcarbon=12 TotalweightofCO2removedayear=196*44/12=718tons Grosssales/year=718x$8=$5,749 3.2 Identifyingprospectivebuyers TheprospectivebuyersdifferwithrespecttotheES.Thebuyerscanrangefrom hydropowercompanies,bulkwaterproviderssuchaswaterdistricts,the NationalIrrigationAuthority(asproxyforricefarmers),carbonbrokers representingAnnex1countriesandvisitingtourists(Table51). Summarizingthepotentialeconomiccontributionsfromhydropower,irrigation, watersupply,carboncreditsandtourism,theeconomicvaluesgeneratedby conservingtheAbuanforestsmayreachUSD9.34Millionayear. Table51.EnvironmentalServices,PotentialBuyersandAnnualEconomic OutputinAbuan WatershedService Hydropower(runoff river) Irrigation PotentialBuyers IndependentPowerProducers IPPs, ElectricCooperatives VIBANARAfarmers* AnnualEconomic Output(inUSD) 2,280,960 2,069,750

DevelopingPESintheAbuanWatershed RiceIrrigatorsassociations Tourists,adventuregroups BarangayWaterAssociation IlaganWaterDistrict KyotoProtocolAnnex1Countries Carbonbrokers,banks Same

RiverbasedAdventure Tourism WaterSupply Carbonsequestration (CDM) AvoidedDeforestation TOTAL

70,000 4,745,000 170,000 5,749 9,341,459

VIBANARAfarmersmaybebothbuyerandsellerofES

3.3 IdentifyingSellersandWatershedProtectionServices SellersofPEScanbedefinedasactorsthatlegallyownthelandorwho exercisesmanagementcontrolpertainingtolanduseswithinthewatershed. Thesecanbestateactors,nonstateactorsoramixofboth.Themajorsellers aretheparkauthoritiesoftheNorthernSierraMadreNaturalParkandtheCBFM organizationwhohasjurisdictionto69%and16%ofthewatershedarea respectively. 3.3.1 NorthernSierraMadreNaturalParkProtectedAreaAuthorities TheNorthernSierraMadreNaturalParkcovering69%ofthewatershedareais locatedinthehighercatchmentandprovidesthelargestproportionateshareof benefits.Theagencyhavingjurisdictionoverlandusedecisionsintheparkis theDeptofEnvironmentandNaturalResources(DENR)throughtheProtected AreasManagementBoard(PAMB).UnderthePAMBaretheexecutivestaff consistingoftheparksuperintendentandtherangers.Theparkoffice,aswith otherparksinthecountry,isunderstaffed,lacksresourcesandequipment,and untrainedtohandleacomplexjobinparkmanagement. Somepartsoftheparkmaybetraditionallyownedandcontrolledbyhunting andgatheringindigenouscommunitiessuchastheAgtaandDumagattribesby virtueoftheirancestralclaims.Reportsshowthat13bandswith57familiesper bandbelongtothesegroups.Theysubsistsonkainginorswiddenfarming,

DevelopingPESintheAbuanWatershed hunting,fishingandgatheringofnontimberforestproducts(rattan,honey, resin,etc). 3.3.2CBFMArea Thestateawardeda25yearleaseagreementtothePeoplesOrganization,called Vibanarra,underaCommunityBasedForestManagement(CBFM)Agreement. Throughthisagreement,theorganizationhaslegalcontroltoover16%ofthe watershed. WithintheCBFMarea,migrantandindigenouscommunitiescanbefoundinthe lowersubcatchmentofthewatershed.Thisarea,clearedthroughaprevious loggingconcession,isnowpredominantlyplantedtocorn,uplandrice,tree farmswithexpansiveopengrasslands,shrubsandresidualforests.Intherainy monthsafteraheavydownpour,theAbuanriverturnsbrown,ladenwithsilt fromupstreamdeforestedareas.Cornplantationsanduplandriceplantedin hillyareasarereportedtohavehigherosionrates(Evangelista2009). Alargepartofthehaulersofillegallogs(calledbugadors)consistingofabout 150familiescomefromthiscommunity.Becauseofpovertyandhigherreturns fromlogging,thesebugadorsrelyontheillegaltimbertrade.Attheheightofthe antiloggingcampaignin2008,someofthesepeoplewereapprehended.Others havetoseekotherformsoflivelihood.Giventherightincentives,theyplayan importantroleinreversingforestdenudation,landdegradationandinproviding bufferingactivitiestothenaturalpark.TheyarealsokeytoanyfuturePES scheme. Theincentiveschememaybechanneledtotheorganizationwhoallocatesthe benefitstoitsmembers.Thisreducesthetransactioncostofrelatingto individualfamiliesparticipatinginthePESscheme. Inthecaseofroamingtribalgroups,theirfootprintorimpactonforestresources isnotassevereasthemigrantfarmers.Leftontheirown,thesetribalgroups

DevelopingPESintheAbuanWatershed willcontinuetolivesustainablyofftheparkresourcesastheyhavesincethe timeoftheirancestors.Theirsubsistenceactivitiesandrightsoverancestral territoriesareguaranteedundertheIndigenousPeoplesRightsActof1996. 3.3.3WatershedProtectionServices Landusepracticesthatdisturbthesoilresultsinhigherosion.Road construction,agriculturecroppingpractices,deforestationmaygreatly accelerateerosion.Soilerosionresultsindepositionofsiltinwaterways,canals, weirs,pipesandotherhydraulicstructures.Thesedepositsreducetheavailable volumethatthestructureisdesignedtoconvey.Everyyear,waterutilitiesand hydropowerplantsspendconsiderablemoneytoremovesiltinloggedcanals andstructures. Swiddenfarmsorkainginespeciallyinsteepslopesareresponsibleforhigh erosionrates.ThepredictedannualerosionratesforkainginfarmsintheAbuan watershedcanrangefrom1524to3671tonsperhectaredependingonslope categories.Theseerosionratesareclassifiedasextremelyhigh.Ifkainginfarms areconvertedtoagroforestryareas,theannualerosionrateswillbereduced dramaticallyby99%to14.9818.52tonsperhectare.Kainginfarmersarebest candidatesforanyPESschemeinAbuan. Theorganizedfarmersmightoffertoimplement,forafee,specificnatural resourcemanagementpracticesoractivities,suchasmaintainingforestcover; reforestation,possiblywithafocusonnativespecies;adoptingsustainableor bestlandusemanagementpractices,suchassustainablefarmingorsustainable forestry.Byadoptingthesepractices,theyarecreatingormaintainnaturalfilters inthewatershedtoreducesoilerosionandwaterpollution.Bymaintaining vegetation,waterflowsareregulatedthroughtheyear,controllingforfloodsand minimizingsoillossandsedimentation. 3.4.1 Assessinglegal,policycontextforPES

DevelopingPESintheAbuanWatershed ThepolicyenvironmentenablingadoptionofPESorPESlikeschemesis embeddedinsectorpolicieslinkedtotheuseandmanagementofnatural resources.Thesepoliciesarefoundinpowergeneration,protectedareasand irrigation. ThedevolutionofpowersunderthelocalGovernmentCodepresents opportunitiestogeneratelocalfinancingfromextractionoruseofnatural resources,e.g.mining,domesticwateruse,hydropower,forestry.Thelaw providesfora1%shareofLGUsinthenationalwealthasstipulatedintheLocal governmentCodeof1991(RA7160). Asummaryofthesepoliciesastheycorrespondtospecificwatershedserviceis presentedinTable52. Table52.EnablingPolicyforPES,valuationmethodsusedand responsibleagency Ecosystem Service Hydropower Policy ENR941 RA7638(DOEAct), RA9136(EPIRA) 1%shareofnational wealth,Local GovernmentCode Voluntary LGUordinance NIPASAct(RA7586) WildlifeAct(RA 9147) PD1067WaterCode ofthePhilippines 1%shareofnational wealth,Local Valuation method 1/2of1 centavo/kwh ofgrosssales Voluntary 1%ofgross sales %ofsummer yield WTP,Travel Cost WTPorCost Based Feebased Costbased 1%ofgross sales Implementing Agency IPP,DOE,LGU, NAPOCOR IPP LGU Irrigators Association,CBFMO LGU,operators PAMB,DENR PAMB,DENR NationalWater ResourcesBoard, WaterDistrict WaterDistrict,LGU

Hydropower Irrigation EcoTourism Biodiversity, bioprospecting DomesticWater

DevelopingPESintheAbuanWatershed Carbon Payments GovernmentCode KyotoProtocol REDD ExecutiveOrder318 (2004) 3.5ProspectivePESamountspersector ThissectionexplorestheamountsthatcanberaisedfromPESschemesunder existinglawsandsectoralpoliciesthatcansustainablyfinancewatershed protection. PowerSector ThepowersectorisoneofthepotentiallysignificantcontributorstoPES schemes.Forallpowerprojects,theDeptofEnergyestablishedthe Reforestation,WatershedManagement,Healthand/orEnvironment EnhancementFund(RWMHEEF)throughRepublicAct7638of1992.The ImplementingRulesandRegulations,ascontainedinER941,Sec6(f),states that: Onehalfofonecentavo(PhP0.005)perkilowatthourofthetotalelectricitysales oftheenergygeneratingfacilityshallbesetasidebythepowerproducertobeused forreforestation,watershedmanagement,healthand/orenvironment enhancement.Thepowerproducerandtheenergyresourcedeveloper,tothe extentoftheirrespectivecontributiontothefund,shalleachsubmitwork programsforreforestation,watershedmanagement,healthand/orenvironment enhancementwhichwouldhavetobeapprovedbytheDOEinconsultationand closecoordinationwiththeDENR,theDOH,therelevantwaterdistricts,local governmentunits,regionaldevelopmentcouncils,nongovernmentorganizations, andotheraffectedparties $/tonCO2e sequestered carbonstocks intrees DNA,DENR

Forestservices

DevelopingPESintheAbuanWatershed ThiswasamendedbyDepartmentCircularNo200003003,wherebythe electrificationfundwillget50%ofonecentavoandtheremaining50%willbe sharedequallybetweentheDevelopmentandLiveihoodFindandthe RWMHEEF). RepublicAct9136alsoknownastheElectricPowerIndustryReformActof2001 (EPIRA)adoptedtheseamendmentstoER941. UndertheRWMHEEFFund,therehavebeenatotalof349projects,withatotal disbursementofPhP413,935,169for38powerplants,overaperiodof8.5years. ThemajorityoftheprojectsarefoundinLuzon,mainlyinMetroManila, correspondingtothenumberofpowerplantslocatedperregionalcenter. (Rosales2003) ThefundsaccruingfromRWMHEEFareadministeredbytheDepartmentof Energy.ForNAPOCORassets,thefundisadministeredbyNAPOCOR.Thelocal governmentunitsubmitsproposalstoDOE/NAPOCORforevaluation.The proposalsmayincludeconstructionofhealthcenters,communaltoilets,water supplysystem,erosioncontrol,forestmanagement,reforestation,rehabilitation, soilfertilityconservationandenhancement,wastedisposalandotherrelated projects. TheamountaccruingtoRWMHEEFforhypotheticalAbuanhydropower operationisestimatedasfollows: AnnualVolumeinKWH=3.3MWx1000KW/MWx0.8x360x24 =22,809,600KWH RWMHEEF=22,809,600KWHx.005/KWH =114,048Pesos(USD2,376) Whiletheseamountsmaybesmall,thehydropowercompanymayaugmenttheir investmentinthewatershedcorrespondingtothevaluestheyattachfor watershedservices.InadditiontotheRWMHEEFschemes,thepowerproducer mayprovideforvoluntarypaymentstakenfromtheirproducersurplus.

DevelopingPESintheAbuanWatershed Forexample,Ina1MWrunoffriverhydroelectricprojectinSanFernando, Romblon,thepowercompanyisvoluntarilysettingasideP400,000ayearfor reforestation,enforcement,livelihoodsandscholarshipstobenefitindigenous uplandcommunities(ROMELCO,perscomm.). AssumingtheeconomicsandproducersurpluswiththeRomblonhydropower projectarethesame,theenvisioned3.3MWrunoffriverschemeinAbuanmay annuallygenerateanadditionalP1.2M(orUSD25,000)forwatershedactivities. LGUSharefromNationalWealth Thelocalgovernmentcodeprovidesa1%sharefromgrosssalesinfavorofthe localgovernmentunit.WithprojectedannualsalesofUSD2,280,960,the1% shareoftheLGUamountstoUSD22,809perannum. IrrigatorAssociations. TheNationalIrrigationAdministration(NIA)ismandatedtobuildirrigation infrastructures(weirs,canals,pumps,etc)toincreasefarmproductivityinrice andcornlands.NIAalsoorganizesfarmersintoirrigatorgroupsinorderto accessloansforirrigationinfrastructure. InasurveyoffarmersinRomblon,thefarmergroupshaveindicatedwillingness topay1cavanofriceforeachhectarefor1croppingseason.Assumingthesame socioeconomicprofilesandwillingnesstopayisfoundinAbuanricefarmers, thefutureirrigationschememaypotentiallygenerate$12,812ayear,computed asfollows: Assumptions: Price=$0.25/kg 1cavan=50kg Potentialirrigablearea=1,025has Voluntarypaymentsbyfarmers=$0.25/kgx50kg/cavanx1cavan/hectarex 1,025has

DevelopingPESintheAbuanWatershed =$12,812peryear Ecotourismpayments. Paymentsfromvisitingtouristscanbeintheformofentrancefeesauthorized throughprovincialormunicipallegislation.ExamplesofLGUlegislated financingcanbefoundinTubbatahaReefs,MabiniTingloy(Anilao)Batangas, PuertoGalera,OlangoIslandandHiluturaninCebuandStPaulsSubterranean RiverinPuertoPrincesaCity. FutureoperatorsinAbuanwatershedcanrunpackagesforboating,kayaking, rapellingandwhitewaterraftingactivities.Theseoperatorscanpayafee similartothosechargedbycompetingsitesalongChicoandPinacanauanRivers respectivelyinCagayanProvince,orbyassessing10%oftheirtravelcost. ForAbuan,weassumeanentrancefeeofP100perpassenger/daytotheriver. Assumptions: DailyEntrancefee=P100 Visitortripsperyear:1,000 Entrancefee:P100/visitor Grosscollectionsperyear=P100/pxx1,000pax/year=P100,000 Biodiversity TheNIPASLawof1992isanactprovidingfortheestablishmentand managementofNationalIntegratedProtectedAreassystem,definingitsscope andcoverage,andforotherpurposes.Thelawallowstheparktocollectentrance fees,donations,penaltiesandfinesarisingformparkadministration.Thepark collectionsaredepositedinthenationaltreasurywhere75%areallottedtothe parkfordirectuseand25%accruestotheIPAFsubfundtosubsidizeother parks.

DevelopingPESintheAbuanWatershed TheWildlifeActof2001isanactprovidingfortheconservationandprotection ofwildliferesourcesandtheirhabitats,appropriatingfundsthereforeandfor otherpurposes.Thelawupgradesthepenaltiesandfeesasadeterrentto commitwildlifeviolations.Italsosetstheprotocolandfeesforbioprospecting bylocalandforeigninstitutionsforcommercialandnoncommercialand academicpurposes. ThePAMBmaysetvisitorfeesforentrancetothepark.Sincevisitorsdonot crossintotheparkboundary,weomittheentrancefeesincalculatingthe potentialamountstoberaisedfromPESschemes. DomesticWater TheLGUmaycollect1%fromthegrosssalesofthewaterdistrictasitsshareof nationalwealth.ForAbuan,thesecollectionscanearntheLGUuptoUSD 474,500peryearfromdomesticwateruse.Thesecollectionshoweverdonot guaranteeearmarkingforwatershedactivities. UnderthePhilippineWatercode,theNWRBthroughtheLocalWaterDistrictis responsibleforsettingwatertariffstobechargedtoconsumers.Currentwater policieshoweverdonotreflectthetruecostofwaterprovisionwhichincludes thecostofmaintainingwatersheds.Apartfromthe1%levybyLGUs,thewater districtmayhowevervoluntarysetasidefundsforwatershedprotection. Carbon ThecreditsfromCDMandREDDandequivalentmonetaryvalueswillgodirectly tothecommunitiesthathostandmanagetheforestresources,includingplanting treestosequestercarbon.Thereishoweveraneedforlocalconsolidator, broker,andverifiertovalidatethecarboncredits. ThecarboncreditsfromCDMandREDDcangenerateuptoUSD175,749ayear assumingalltheopengrasslandsarereforestedandillegalloggingiscurtailed.

DevelopingPESintheAbuanWatershed ForestServices ExecutiveOrder318(2004)onPromotingSustainableForestManagement providesforpropervaluationandpricingofforestryresourcesandcollectionof feesforuseofenvironmentalservicesofforestsandwatersheds.Italsoprovides foraploughbackmechanismthatensuresserviceprovidersareproperly compensated. PoolingallpotentialPEScontributionsfromdifferentsources,theproposed schememaygenerateUSD715,329peryear(Table53).Withforestcoverat 56,807has,thisisequivalenttoUSD12.59perhectare. TheESindicatorsforthehydropowerandirrigationschemesaretheaverage baseflowsduringdrymonths(MarchJune)measuredinaverageMCM/day. Forthewatercompany,itiswaterqualitymeasuredinTotalSuspendedSolids andotherparameters.Forcarbonbrokers,theindicatoristheforestcoverin numberofhectares.Fortourism,itmaybeacombinationoftheabove indicators. Table53.IdentifyingESBuyers,indicatorsandestimatedamountsforPES ESBuyer Hydropower Power Company PESamounts InUSD RWMHEEF Voluntary 1%sharefrom grosssales Voluntary1 cavan/HHyr WTP Amounts ESindicators (inUSD/year) 2,376 Stablewaterflowsyear round,baseflowsduring drymonths 25,000 same 22,809 same 12,812 Dryseasonflows,MCM 2,083 Scenery,Clean&flowing water,H2Oquality 474,500 Abundant,clean& Potablewater,H2O quality 170,000 ReForestationcover (has) 5,749 OldgrowthForestcover

Irrigators association Tourists

WaterDistrict 1%Sharefrom grosssales Carbon brokers CDM REDD

DevelopingPESintheAbuanWatershed Total (has) 715,329

Ifweremovepaymentsfromcarboncredits,theannualpaymentsforPESis reducedtoUSD539,580ortheequivalentofUSD9.50/hectare.Thisis comparabletothelowendoftherangeofPESpaymentsintheCostaRica examplemadebyahydropowerproducer(seeFigure52).Butthisratiois higherthanwhattheotherprotectedareasareearningandwillimprove managementeffectivenessifspentwisely. 3.6SurveyingavailablePESsupportservicesandorganizations PESprogramscanbeintheformofselforganizeddealsbetweenfewsellersand buyersorlegislatedschemesandstructuredarrangementsinvolvinglarge numbersofbuyersandsellers.Thelatterwillrequirebrokerstosetuppayment mechanisms,aggregatesellersand/orbuyers,conductstudies,anddefraythe transactioncostsessentialforitsestablishmentandmonitoring.NGOsusually performthebrokeringrolewhileLGUsprovidetheenablingframeworkand initialfunds.Nohardandfastruleisprescribedinsettingupvoluntaryand involuntaryschemes,butamixofbothmaybemoreapplicable. 3.6.1InstitutionalArrangement ThereisnostandardblueprintindesigninginstitutionstoimplementPES schemes.ItisimportanttohighlightthatPESneedtobeadaptedonacaseby casebasisandusedasappropriate,keepinginmindthatPESaremeansof securingecosystemservicesthatareimportanttosocioeconomicdevelopment. InthecaseofAbuan,thepotentialroleoftheCBFMcommunityistoprovide bufferingorsocialfencingtothepark.ThisshouldbethegoalofanyPES scheme.Thesefarmersarelocatedinareasthatprovideaccesstothepark,and arethereforeinthebestpositiontospotandreportillegalactivities,monitorand dissuadepoachers,outsidersandmigrantsfromenteringthepark.

DevelopingPESintheAbuanWatershed Thusitisimportantforthesefarmerstobenefitfromincentivesystems includingcashandnoncashrewards.Noncashincentivescanincludeland tenure,credit,infrastructureorpostharvestfacilities,andothersupportthatare madeconditionaltofarmerssustainablymanagingtheirland.PESschemescan beearmarkedtosubsidizesustainableagriculturesuchasagroforestry schemes,treefarms,intercroppingsystems,organicfarmingandother practices.Farmerscanorganizethemselvesintocommunitywatchdoggroups andbeemployedtomonitorandpatroltheforestsforanyillegalactivities. Themoresectoralbenefitsarerealized,thegreatertheamountoffundsthatcan begeneratedfromPES.WatershedactivitiesentailcostsandPESschemesare gainingpopularitybecauseoflatentdemandforservicesfromarangeofbuyers, whetherhydropower,ecotourism,irrigationorwaterutilities.Ifopportunity costsfromloggingarehigh,orifthereisabignumberofsellers,the contributionsfrombuyerscanbepooledtopayforwatershedactivitiesthat wouldotherwisebedifficultforasinglebuyer.InmostcaseswherePESschemes operate,thefundsarekeptinatrustaccountandatrusteeorganizationorNGO istaskedtomanagetheaccount. Thefunctionsofthetrusteeorganizationincludeorganizingthewatershed communities,buildingtheircapacities,reviewingproposals,workplansand budgets,disbursingfunds,monitoringandreportingprogress,evaluating outputs,andrepeatingtheprocessaftereachprojectcycle. Thetrusteewillalsoreportprogresstoitsbenefactorsusingindicatorsthatare importanttothem.Theseindicatorsshouldsignifyhealthofthewatershedand arelinkedtothelevelofwaterflowsduringsummer,amplitudeofflows throughouttheyear,waterquality,forestcover,poverty,amongothers. OneoftheimportantindicatorstomonitorinanyPESschemeistheopportunity cost,especiallythosebornebyfarmersingivinguplandusesthataremore profitable,butmaybeecologicallydestructive.Theselandusescaninclude smallscalemining,swiddenfarming,orestablishingexotictreefarms.Because opportunitycostsvaryandfluctuatesovertime,itwouldbeimportantfor paymentsfromPESschemestobeflexibleinordertomatchoratleastcoverthe

DevelopingPESintheAbuanWatershed opportunitycosts.Auctions,biddingandotherschemesaresomeofthemeansto derivetheopportunitycostsofsellers. Figure57depictsaPESgovernancestructureopereatinginSibuyanIsland, RomblonProvince.Thewatershedmanagementprojectcyclecoincideswiththe intraLGUplanning,budgetingandmonitoringcycle.Thisscheme,whichstarted inearly2006,isintoitssecondcycleofimplementationbytheLGUofSan Fernando,Romblon.ThefundscomefromcontributionsoftheMunicipalLocal Government,andWWF.Thesellersaretheuplandcommunitiesconsistingof SibuyanMangyanTagabukidindigenousgroup.Theuplandcommunitiesreceive paymentstoperformpatrols,surveillance,plantnativetreesandagroforestry species. Thefundsfortheseactivitiesareheldintrustusingaseparatebankaccount.The donorsrepresentativesarecosignatoriestodepositsandwithdrawals.Funds aredisbursedaftersatisfactoryreviewofprogressreportsandverificationbya monitoringcommitteewhichiscomposedofthebarangaycaptains,DENRand theNCIP.

DevelopingPESintheAbuanWatershed

Figure57.PESGovernanceStructure,SibuyanIsland,RomblonProvince 2009.

DevelopingPESintheAbuanWatershed Conclusions: ThevaluesbeingderivedformtheAbuaniscurrentlybasedontimber extraction.TherecentcampaignagainstillegallogginginAbuanin20082009 yieldedhalfamillionboardfeetoftimbervaluedatP8Millionpesos.The baselinescenarioshowsthatwewilllosetheforestandthewatershedservices todestructiveactivities.AssumingthereturnsfromloggingisP8Millionayear( orUSD166,667)basedonconfiscationrecords,thisamountissmallcompared totheUSD9.3Millioneconomicvaluesthatcanbederivedfromeconomic sectorsthatdependonmaintainingforestservices.Thisdoesnotincludethe potentialdamageavoidedfromdeforestationsuchasfloodingandlandslides. Withoutthecarbonpayments,thepotentialreturnperhectareofforest preservedisUSD9.50/hectare.Thisiswellwithinthelowendofpayments beingmadetoprotecttheforestsinCostaRica. WhileAbuanshowshighpotential,thechallengeistoconverttheseeconomic valuesintofinancialreturns.ThepaperrecommendsthattheLGUofIlagan presentthebusinesscasetotheRegionalDevelopmentCouncilchairedbythe NationalEconomicDevelopmentAuthorityofRegion2(NEDA2).NEDA2will thenprepareaninvestmentkit,conductinvestorsroundtable,andmarketthe sitetoinviteinvestorsinhydropowerdevelopment,irrigationanddomestic watersupply.TheDepartmentofTourismRegion2(DOT2)shouldadoptthe recommendationoftheCarag(2009)study,buildcapacitiesofoperatorsandset tourismstandardstolaunchecotourisminAbuan.Eachsectorwilleventually undertakedetailedfeasibilitystudiesandoperationalplanstomakethese schemeswork.ThePESschemesandgovernancestructurescanbeestablished lateronceoperationsstartinAbuan. UnlessthewatershedservicesofAbuanbasinareutilizedforthebenefitofits residents,theIlagantownandsocietyatlarge,thepullofdeforestationwill alwaysremain.TheAbuanwatershedhasmuchofferandthebenefitscanbe significantasarguedinthispaper.Itiseitherweuseit,orweloseit.

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DevelopingPESintheAbuanWatershed UNEP,KatoombaGroup,ForestTrends.2008.PaymentsforEcosystemServices: GettingStarted,APrimer.Accessibleat:www.unep.org. WunderS.2005.Paymentsforenvironmentalservices:Somenutsandbolts. CenterforInternationalForestryResearch.OccasionalPaper42,Bogor.