HANOI - An innovative market in
water quality is rapidly emerging worldwide, as cash-strapped
governments in countries as diverse as China, the United States,
Brazil and Australia invest billions of public and private dollars
in schemes that reward people who protect water resources,
according to a new report that is the first to quantify payments
for watershed services that could help avert a looming global water
quality crisis.

Calling the water crisis a threat to humanity that exceeds
global warming, the authors of the study released today at the
global Katoomba conference in Hanoi said that a number of regions
of the globe seem to be responding to such frightening indicators
as the steady proliferation of “dead zones” in waterways around the
world.

In the United States, for example, years of unchecked fertilizer
run-off along the Mississippi River have generated algae blooms
that have created massive oxygen-starved dead zones in the Gulf of
Mexico the size of a small US state.

“Our findings suggest growing awareness by the public and
private sectors worldwide of the water quality crisis, and
acknowledgement that the problem is too big to be solved by
traditional approaches alone,” said Michael Jenkins, Forest Trends
President and CEO. “But the billions of dollars that are being
spent on strategies aimed at protecting water resources represent
only a snapshot of the potential for using market-based incentives
to reduce threats to water.”

In the report, State of Watershed Payments: An Emerging
Marketplace, experts at Forest Trends’ Ecosystem Marketplace, a
non-profit organization dedicated to developing markets for
“ecosystem services,” identified roughly 288 programs yielding an
estimated US$9.3 billion in payments for watershed protection in
2008.

These include payments for watershed services (PWS), in which
“land managers” such as farmers and forest communities are paid to
maintain water quality, and water quality trading programs (WQT),
in which industry and other polluters meet quality standards by
buying and selling pollution reduction credits.

Over the last few decades, the total investment was about US$50
billion and affected about 3.24 billion hectares of watershed,
which is land that funnels water into major waterways like the
Chesapeake Bay in the US and the Yangtze River in China.

“Clearly, a global movement is building that could be rapidly
scaled-up to reduce water pollution much the same way carbon
markets are intended to reduce greenhouse gases,” Jenkins said.

Marta Echavarria, one of the report co-authors, said that their
analysis of payments for water services, as well as for water
trading schemes, revealed that many programs around the world are
focused on more effective management of forests.

Thus, she said it makes sense to link water quality issues to
the climate change discussion regarding the use of payments and
trading exchanges to reduce carbon emissions from deforestation and
forest degradation, or REDD.

“The same activities in forests that can affect climate change
influence water quality and biodiversity, as well,” she said. “We
need to broaden the lens and look at how payments for environmental
services can purchase multiple benefits, from clean air to clean
water to biodiversity. Then, we can design programs that allow
markets to put a value on all of these benefits.”

Trading in Credits for Water Pollution

Water quality trading programs totaled only about US$11 million
in 2008, but the authors believe this sector could grow rapidly,
much in the way carbon trading has skyrocketed from relatively
small investments early in the decade to become a market worth
US$144 billion in 2009.

The report highlights the potential for attracting private
sector participation by setting up exchanges that would facilitate
trading in water pollution credits. Like carbon trading, water
trading allows polluters to meet a mandated limit, either by
reducing their discharges or by purchasing a credit tied to a
reduction achieved elsewhere in the watershed, such as by a farmer,
forest owner, or wastewater treatment plant.

“Water trading is poised to expand
rapidly as a way to protect water quality,” said Tracy Stanton,
Water Program Manager for Ecosystem Marketplace and lead author of
the report. “We found a number of programs
already well-established, but to see wider adoption, we need
governments to stimulate the markets by setting clear water quality
standards that will drive greater demand for pollution credits.
Likewise, government is uniquely positioned to help lower the
barriers to private sector investors by lowering the perceived
risks.”

Most of the 72 trading programs studied in the report are
located in the US, but they also can be found in Australia, Canada
and New Zealand.

For example, in New South Wales, Australia, the Hunter River
Salinity Trade Scheme allocates salinity credits that can be traded
among 23 coal mining and power generation facilities as a way to
meet government-mandated caps on pollution discharge.

The report finds evidence that trading schemes could greatly
expand in the US, especially now that the Department of Agriculture
has established an Office of Environmental Markets. Already,
efforts are underway to develop ecosystem markets in the Chesapeake
Bay, the Florida Everglades, the salmon habitat in the Pacific
Northwest, the forests in the Northeast and in the Ohio River
Basin.

In addition, China has been conducting water trading pilot
programs since the early 1980s and appears to be laying the
groundwork around the country for establishing large trading
exchanges in ecosystem services, and Europe has been developing a
trading scheme to combat declining water quality along the
Danube.

Payments for Water Services

The authors note that government funds still make up the bulk of
payments for water quality, but there are indications of interest
from major players in the private sector. Global beverage companies
such as Coca-Cola and SAB Miller have been engaged in watershed
protection programs for the past several years. And in France,
since the mid 1990s, Nestlé has paid farmers to manage animal waste
and reforest sensitive areas to protect the mineral water used in
its Vittel line of bottled water.

“While this type of payment may seem quite small at the moment,
this is an area in which we are most likely to see tremendous
growth,” said Jenkins. “After all, if the private sector does not
start paying for watershed services, then we are missing an
important potential solution to this problem. “

For now, the public sector is
funding most of the programs of “payments for watershed services,”
and the greatest number of programs are in China and the United
States.

In China, for example, where 700 million people lack access to
safe water, payments in exchange for watershed protection increased
from US$1 billion in 2000 to US$7.8 billion in 2008, and the number
of programs expanded from 8 to 47. Thus far, these initiatives have
protected or restored 270 million hectares.

A significant portion of the payments are subsidies for farmers
to reduce their pollution in and around forested areas. And in the
United States, payments for watershed services have grown from
US$629 million in 2002 to US$1.35 billion in 2008, and could expand
rapidly, as the federal government has recently taken unprecedented
actions to address critical gaps in watershed restoration polices
across the country.

But the authors argue that China and the United States could
learn much from innovations introduced in the nations of Latin
America, where governments are experimenting with new ways of
making payments and new methods for measuring and monitoring their
impact.

Latin America has emerged as the global leader in innovative
market-based clean water programs. Today, there is a range of
local, state, and national initiatives underway in ten countries,
led by Costa Rica and Mexico, but also including Colombia,
Guatemala, and Brazil.

In 2009, for example, the Brazilian state of Espirito Santo
established a new program that encourages dairy farmers in three
river basins to close off pastures in order to improve water
quality and flow. Farmers are paid for each liter of milk lost due
to the closures, with much of the money coming from water tariffs
as well as royalties from oil and gas exploration and hydropower
production.

In the nations of Africa, the report identified 20 programs
totaling about US$62.7 million, though the authors suggest that the
number could grow as new initiatives are underway, including
programs supported by the World Wildlife Fund in South Africa and
Kenya.

“We now know that payments for watershed services are no longer
a series of isolated incidents,” said Stanton. “Though much remains
to be done, we have documented the beginning of a global movement;
an emerging marketplace in the protection of water resources.”