Session 16

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

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

3. Characteristics of the Watershed • 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 • All users dependent on the water flows in the watershed • Unidirectional externalities (for the most part) • A fairly enlightened government structure with an active public and private sector Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

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

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

6. Competition for Land CATTLE AND Forest Preserve DAIRY FARMS Reduced Soil Greater Soil Arenal Erosion Erosion Silt Reservoir Arenal Power Plant Silt Santa Rosa Reservoir Electricity for COROBICI POWER PLANT National Grid Silt Sandillal Reservoir SANDILLAL POWER PLANT Irregular Water Flow TILAPIA FARM AND IRRIGATION SYSTEM Agro-Chemical Pollutants Bird Damage Water Flow Tarcoles PALO VERDE WETLAND AND NATIONAL PARK River Agro-Chemical Pollutants Water Flow Water Flow and Industrial and Municipal Fisheries and Nicoya Gulf Pollutants TheArenal-TempisqueWatershed A Flowchart of the Watershed – the physical system Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

7. The management issue • 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 • 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 • No real effective “voice” for the downstream wetlands or coastal fishermen Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

8. Major economic sectors/ actors in the watershed -- rated by numbers of people and their political power Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

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

10. Baseline payoff matrix (in present value, million dollars) Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

11. 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 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) Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

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

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

14. Major lessons (cont.) • 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) • 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) Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed

15. Conclusions • 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 • Existing institutions do not promote coalition building • Other potentially important impacts (e.g. tourism, recreation, ecosystem services) are not well captured in the study Caspian EVE 2005/UNDP and WBI John A. Dixon, Environmental Externalities in a Costa Rican Watershed