This document summarizes a study of the Arenal-Tempisque Watershed in Costa Rica. The watershed contains multiple users from forests and dairy farms in the upper watershed to hydropower generation, irrigation, wetlands, and coastal fisheries. An economic analysis found dairy/cattle farming and irrigation impose large negative externalities, while hydropower and irrigation provide most benefits. Addressing issues like sedimentation, water flows, and pollution could increase net social welfare through stakeholder cooperation. The study highlights tradeoffs between economic activities and environmental impacts in the watershed.

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

2. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
The Arenal-TempisqueThe Arenal-Tempisque
Watershed – the study siteWatershed – the study site

3. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
Characteristics of the WatershedCharacteristics of the Watershed
• Multiple users located between the very upper portionsMultiple users located between the very upper portions
of the watershed to the coastal watersof the watershed to the coastal waters
• A man-made lake created to develop hydropower in theA man-made lake created to develop hydropower in the
upper watershedupper watershed
• All users dependent on the water flows in the watershedAll 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 activeA fairly enlightened government structure with an active
public and private sectorpublic and private sector

4. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
Major stakeholders – from the upperMajor stakeholders – from the upper
watershed to the coastal waterswatershed 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 middleICE – hydropower generating authority (upper to middle
watershed)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 coastalCoastal fishermen (lower watershed/ adjacent coastal
waters)waters)

5. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
The Arenal-TempisqueThe Arenal-Tempisque
WatershedWatershed

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

7. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
The management issueThe management issue
• Conflicts between ICE and other stakeholders over theConflicts between ICE and other stakeholders over the
timing and quantities of water releasedtiming and quantities of water released
• Growing concerns over sedimentation in the upperGrowing concerns over sedimentation in the upper
watershed and impacts on the reservoir and ICEwatershed and impacts on the reservoir and ICE
• No effective forum to bring all stakeholders togetherNo effective forum to bring all stakeholders together
• A sense that the watershed is operating sub-optimallyA sense that the watershed is operating sub-optimally
wrt use of water and its economic and environmentalwrt use of water and its economic and environmental
impactsimpacts
• No real effective “voice” for the downstream wetlands orNo real effective “voice” for the downstream wetlands or
coastal fishermencoastal fishermen

8. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
Major economic sectors/ actors in the watershed -- rated byMajor economic sectors/ actors in the watershed -- rated by
numbers of people and their political powernumbers of people and their political power
Actor/AgentActor/Agent NumbersNumbers Political/Political/
Economic powerEconomic power
ForestryForestry SmallSmall LittleLittle
Livestock, DiaryLivestock, Diary SmallSmall Little – MediumLittle – Medium
Electric GeneratorElectric Generator Very small (1)Very small (1) Very LargeVery Large
Irrigated farmerIrrigated farmer MediumMedium MediumMedium
Tilapia farmerTilapia farmer SmallSmall LittleLittle
FishermenFishermen LargeLarge LittleLittle

9. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
Valuation of Resource Use in the A/TValuation of Resource Use in the A/T
WatershedWatershed
• Economic valuation carried out of each major use sectorEconomic valuation carried out of each major use sector
• Relied on local prices and valuesRelied on local prices and values
• Largely based on change-in-production approachLargely based on change-in-production approach
• Some limited use of benefit-transfer to estimate wetlandSome limited use of benefit-transfer to estimate wetland
valuesvalues
• Explicit inclusion of costs of externalitiesExplicit inclusion of costs of externalities
• Preliminary results – but certainly gets attention!Preliminary results – but certainly gets attention!

10. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
Baseline payoff matrix (in present value, million dollars)Baseline payoff matrix (in present value, million dollars)
ForestForest
ReservesReserves
Dairy/CattlDairy/Cattl
e Farmse Farms
ICEICE IrrigatedIrrigated
FarmsFarms
WetlandWetland FisherFisher
menmen
RealizedRealized
BenefitBenefit
ForestForest
ReservesReserves
MaximizeMaximize
forest areaforest area
(39.7)(39.7)
(39.7)(39.7)
DairyDairy
CattleCattle
FarmsFarms
-- MaximizeMaximize
dairy &dairy &
cattlecattle
incomeincome
(37.5)(37.5)
(37.5)(37.5)
ICEICE -- SiltationSiltation
ofof
reservoirsreservoirs
(-703.1)(-703.1)
OptimizeOptimize
electricityelectricity
productionproduction
(1,821.6)(1,821.6)
(1,118.5)(1,118.5)
IrrigatedIrrigated
FarmsFarms
-- -- -- Maximize cropMaximize crop
incomeincome
(194.9)(194.9)
Bird damageBird damage
to cropsto crops
(-20.1)(-20.1)
(174.8)(174.8)
WetlandWetland -- -- -- Agro-chemicalAgro-chemical
pollution andpollution and
soil runoffsoil runoff
(-51.6)(-51.6)
MaximizeMaximize
conservationconservation
(70.7)(70.7)
(19.1)(19.1)
FishermenFishermen -- -- -- Agro-chemicalAgro-chemical
pollution andpollution and
soil runoffsoil runoff
(-111.6)(-111.6)
ReducedReduced
Agro-chemicalAgro-chemical
and soiland soil
runoffrunoff
(16.9)(16.9)
MaximiMaximi
ze fishze fish
incomeincome
(121.2)(121.2)
(26.5)(26.5)
NetNet
BenefitBenefit
(39.7)(39.7) (-665.6)(-665.6) (1,821.6)(1,821.6) (31.7)(31.7) (67.5)(67.5) (121.2)(121.2) (1,416.1)(1,416.1)

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

12. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
Electricity generation mix over timeElectricity generation mix over time
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1st year 10th year 20th year
Sandillal
Corobici
Arenal

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

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

15. Caspian EVE 2005/UNDP and WBI John A. Dixon, E
GEF
ConclusionsConclusions
• An integrated approach clearly identifies winners andAn integrated approach clearly identifies winners and
losers and potentials for gain.losers and potentials for gain.
• Coalitions are needed to reduce costs of externalitiesCoalitions are needed to reduce costs of externalities
and increase net social welfareand increase net social welfare
• Existing institutions do not promote coalition buildingExisting institutions do not promote coalition building
• Other potentially important impacts (e.g. tourism,Other potentially important impacts (e.g. tourism,
recreation, ecosystem services) are not well captured inrecreation, ecosystem services) are not well captured in
the studythe study