owners to conserve their forests rather than harvest them for timber, as is done
in Costa Rica. Logging would open up the canopies and allow rain to wash
away some forest soils, producing sediment in the rivers, which then produces
silt in the reservoir, reducing hydroelectric output. The value of the lost elec-
tricity is the upper limit of the hydro company’s willingness to pay to avoid
the damage. In this way, the externality has been valued in monetary terms,
and an incentive system (direct payment) has been found to incorporate the
external costs and benefits into forest owners’ decisions. Other examples of
payments include the Watershed Conservation Fund in Ecuador and tax con-
cessions on money invested in biodiversity-friendly projects (as in the Nether-
lands). For an overview, see Bayon et al. (2000).
Carbon storage has been the subject of several hundred bilateral agree-
ments since 1989. In these agreements, an agent seeks to offset the damage
done by its own carbon dioxide emissions by sequestering carbon, or storing
carbon that would otherwise be released, in another location. It therefore pays
the incremental cost of storing carbon and collects a paper credit to the effect
that what it has stored has offset its own emissions. These carbon offset deals
are formally sanctioned in the Kyoto Protocol under the arrangements for the
Clean Development Mechanism, which enables rich countries to pay poor
countries for carbon emission reduction. Again, the externality has been inter-
nalized, and it has also been valued because the storage is worth whatever the
rich country is willing to pay for it.
Such ecosystem service payment arrangements are important because the
context for agroforestry is highly likely to be one in which the net financial
returns to farmers from agroforestry are less than the net returns from some
unsustainable land use, and the social rate of return from agroforestry is higher
than the alternatives. Essentially, there is a mismatch between social and
private returns. This can be overcome only if farmers are compensated for for-
going the net financial gains from unsustainable land use, with such compen-
sation coming from resource flows associated with the nonmarket benefits of
agroforestry.
At the moment, agreements to pay farmers in agroforestry schemes for
generating national and global benefits are rare. But the Global Environment
Facility is funding several projects in Nicaragua, Colombia, and Costa Rica in
which payments are made for farm practices that adopt silvopastoral systems
that benefit biodiversity and carbon sequestration (see also Chapter 19, this
volume). How are the external benefits of sustainable land use systems to be
estimated? As discussed earlier, we are interested in estimating the total eco-
nomic value of agroforestry to society, which includes both the private values
to farmers and the social external values to other members of society, nation-
ally or internationally. Figure 4.1 illustrates these value components.
As suggested in Figure 4.1, the total economic value of agroforestry sys-
tems is a combination of use values (i.e., the benefits to its users) and what are
- The Economic Valuation of Agroforestry’s Environmental Services 73