Monteverde Institute: Economy and Resource Management

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  Grey water, May 23, 2022

  Susannah Barton, Brian Hughes, Erin Rossier, and Jesse Reiter

  Grey water is made up of waste water from showers, bathroom sinks and laundry machines. Grey water does not include waste water from toilets. If properly collected and stored grey water can be reused for different purposes such as landscape irrigation.

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  Forests and integrated water resources management, DFID forestry research on forest and water interactions, May 23, 2022

  Ian R. Calder

  The public perception that forests are, in all circumstances, necessarily good for the water environment, that they increase rainfall, increase runoff, regulate flows, reduce erosion, reduce floods, “sterilize” water supplies and improve water quality, has long been questioned by the scientific community. Although this simplistic public perception has been debated since the nineteenth century(Saberwal, 1997) and a large literature is available on the debate, the evolving “modern” science perception (the reader is referred to reviews by Bosch and Hewlett (1982), Hamilton and King (1983), Hamilton (1987), Bruijnzeel (1990), Calder (1992), particularly as regards tropical forests, and the more recent reviews, in the light of new studies, by Calder (1999, 2000) and Bruijnzeel (2001, 2002)) suggests a more complex and generally less advantageous functioning of forests in relation to the water environment. In a world where increasing demands are being made on water resources for food production, for domestic consumption, for industrial use and for ecological purposes, there is a greater awareness that the costs of the generally higher water use of forests as compared with other vegetation types needs to be evaluated in relation to their benefits for timber and conservation, amenity recreation and environment (CARE) products and for supporting livelihoods. Financing mechanisms which are directed at conserving environmental services and protecting indigenous forests, and which may also serve to provide compensation payments to inhabitants of upper water catchments, are being promoted in many regions of the world. But for these mechanisms to be sustainable and defensible requires that the disparity between the public and science perceptions of the role of forest needs to be addressed and also that the bio-physical and socio-economic impacts of changing land use and forest cover are understood.

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  Airbnb: Global phenomenon, local conversation. A study of the environmental, economic, and social impacts of airbnb on the Monteverde area [PowerPoint], May 23, 2022

  Mount Holyoke and Goucher Program Spring 2018

  A study of the environmental, economic, and social impacts of Airbnb on the Monteverde area.

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  ¿Mi casa es su casa? The impact of airbnb on the Monteverde community [PowerPoint], April 13, 2019

  Deena Blum, Madeleine DesFosses, Ilana Heller, Rachel Luce, Talia Michaud, Beau Ngu, Molly Sutter, and Eleanor Zelek

  We are have been studying in Monteverde since January living with host families, and this experience has been great in allowing us to better connect with the community. Our research is continuation of research was start last year on topic that many in Monteverde have been interesting. For a lot of us this project has uncovered many important aspects of Airbnb. Intitially I thought the platform was cheaper a lot alternative when traveling that was also good way to make money, but it’s so much more. This presentation will be about 75 minutes followed by questions and a break at 10:15.

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  Monteverde, Costa Rica: Balancing environment and development, 2005

  Erin Cavanagh

  Two years ago I would have never imagined that I would see the glow of molten lava contrasting against the night sky, stand on the top of a mountain looking at the Pacific Ocean hundreds of miles away, or become the daughter of a family other than my own. I began my journey through the World Food Prize program in February 2004 when my friend Lindsey Negaard told me that she would be interning in Mexico for the World Food Prize. After explaining to me all the different steps necessary to compete for an internship, she asked me if I was interested in continuing the program for Bettendorf High School. Before writing my paper on water efficiency in rice production and obtaining background information on starvation, I was ignorant of the number of hungry people worldwide that can be saved through science. The presenters at the World Food Prize Symposium in October 2004 impacted me to desire to see these parts of the world myself. When I was selected to intern at the Monteverde Institute in Monteverde, Costa Rica, I realized that I had a great deal to learn about Costa Rica and its culture before I even left the country. The next two months taught me lessons that I will never forget and introduced me to a people and a culture that I will treasure for the rest of my life. Costa Rica, meaning rich coast in Spanish, is a beautiful country sandwiched between Nicaragua to the north and Panama to the south. Although Costa Rica is a very small country, encompassing only 51,100 sq km, it is one of the most well-educated countries in Central America with 96% of its approximately 4 million people being able to read and write over age 15. (CIA World Fact Book) Because of abolishing its military in 1948, Costa Rica has gained a reputation of a safe, peaceful country with strong democratic roots. (“Our Democracy: An Overview”) Although Costa Rica’s economy has been booming recently because of ecotourism, traditionally Costa Ricans worked in the agricultural sector. Even today, twenty percent of its population is employed in agriculture. (CIA World Fact Book) The Costa Rican people, or “ticos” as they are referred to commonly, are an extremely friendly and caring population that emphasizes retaining traditions such as the Catholic religion. (“Our Democracy: An Overview”)

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  Que estamos aprendiendo de la experiencia con los mercados de servicios ambientales en Costa Rica? Revisión y crítica de la literatura, November 2003

  Manrique Rojas and Bruce Aylward

  The use of markets and payments for environmental services is a topic gaining increasing attention amongst policy-makers and environment and development practitioners around the globe. Simply put, the term ‘environmental services’ can be taken to refer to the overall concept of natural systems providing a continuous flow of valuable goods and services to society. This is in contrast to similar services provided by man-made physical infrastructure and technological capital (i.e. water treatment, artificial fertilization, genetic modification) for which these environmental services are a substitute. The use of market mechanisms as a means of incorporating the economic value of these environmental services into the financial decision-making of producers and consumers is an additional tool that can be employed to resolve longstanding market failures that lead to less than desirable economic outcomes – i.e. having fewer environmental services and paying more for their man-made substitutes. In the developing world, Costa Rica has led efforts to experiment with the application of these mechanisms, many of which were simply ideas on paper just a few years ago. A survey of markets for environmental services by IIED highlights the formative role Costa Rica has played and provides a rich characterization of the economics of these initiatives in a global context (Landell-Mills and Porras 2002). As a complementary effort, this paper digs deeper into the literature regarding the Costa Rica experience in an effort to see what we are learning from the experience: how has technical, scientific and economic information on environmental services fed into these initiatives? To what extent are these initial experiences being monitored and evaluated? Is there a feedback loop that connects these experiences with learning about environment and development issues, particularly in the local context of policy-making within the country? The principal objective of the literature review is to identify and review documents and other material that address the following: 1. the local origins of the concept of payments and markets for environmental services and how they have developed over time, particularly in relation to the broader international development of the concept and local necessities/realities (historical and trend analysis); 2. the types of existing initiatives related to markets for environmental services, and who is participating in such initiatives (descriptive work); 3. the knowledge base that underpins market development, i.e. the extent to which markets are based on specific scientific and technical knowledge regarding the biophysical, economic and social relationships involved as opposed to general views on the subject (critical assessment); 4. the initiatives undertaken and underway to date with respect to the monitoring and evaluation of the experience with payments and markets for environmental services and to what extent (and with what results) the literature assesses these initiatives in terms of economic efficiency, environmental effectiveness, and social equity and/or poverty reduction. Where written material is not available or does not provide comprehensive coverage, interviews with those involved in these initiatives were used to supplement the documentary evidence. Given that IIED has undertaken a thorough review of the global literature on this topic and identified the examples emerging from Costa Rica, objectives 1 and 2 draw heavily on the existing IIED work by attempting to cross-check, confirm and, where possible, expand the coverage (in number and depth) of existing cases of markets and payments. The added value of the literature review will be in the deepening of the knowledge base and analysis of its content with respect to objectives 3 and 4. This in turn provides a basis for charting a way forward. The paper is organized to cover the objectives one by one. In the first chapter the local origins of the concept of markets and payments for environmental services in Costa Rica is explored. The paper then turns to the experiences (or market cases) gained so far in the country, providing in each of the succeeding chapters a description and review of each of the cases, an assessment of the role of knowledge in the development and formulation of the initiatives and a report on monitoring and evaluation underway to date. The paper concludes by drawing out some of the lessons learned and making recommendations regarding practical steps that other countries, researchers and financing organizations might take to improve the process of launching such initiatives in the future.

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  ¿Qué estamos aprendiendo de la experiencia con los mercados de servicios ambientales en Costa Rica? Una revisión y crítica de la literatura, November 2003

  Manrique Rojas and Bruce Aylward

  The use of markets and payments for environmental services is a topic gaining increasing attention amongst policy-makers and environment and development practitioners around the globe. Simply put, the term ‘environmental services’ can be taken to refer to the overall concept of natural systems providing a continuous flow of valuable goods and services to society. This is in contrast to similar services provided by man-made physical infrastructure and technological capital (i.e. water treatment, artificial fertilization, genetic modification) for which these environmental services are a substitute. The use of market mechanisms as a means of incorporating the economic value of these environmental services into the financial decision-making of producers and consumers is an additional tool that can be employed to resolve longstanding market failures that lead to less than desirable economic outcomes – i.e. having fewer environmental services and paying more for their man-made substitutes. In the developing world, Costa Rica has led efforts to experiment with the application of these mechanisms, many of which were simply ideas on paper just a few years ago. A survey of markets for environmental services by IIED highlights the formative role Costa Rica has played and provides a rich characterization of the economics of these initiatives in a global context (Landell-Mills and Porras 2002). As a complementary effort, this paper digs deeper into the literature regarding the Costa Rica experience in an effort to see what we are learning from the experience: how has technical, scientific and economic information on environmental services fed into these initiatives? To what extent are these initial experiences being monitored and evaluated? Is there a feedback loop that connects these experiences with learning about environment and development issues, particularly in the local context of policy-making within the country? The principal objective of the literature review is to identify and review documents and other material that address the following:
  1. the local origins of the concept of payments and markets for environmental services and how they have developed over time, particularly in relation to the broader international development of the concept and local necessities/realities (historical and trend analysis);
  2. the types of existing initiatives related to markets for environmental services, and who is participating in such initiatives (descriptive work);
  3. the knowledge base that underpins market development, i.e. the extent to which markets are based on specific scientific and technical knowledge regarding the biophysical, economic and social relationships involved as opposed to general views on the subject (critical assessment);
  4. the initiatives undertaken and underway to date with respect to the monitoring and evaluation of the experience with payments and markets for environmental services and to what extent (and with what results) the literature assesses these initiatives in terms of economic efficiency, environmental effectiveness, and social equity and/or poverty reduction.
  Where written material is not available or does not provide comprehensive coverage, interviews with those involved in these initiatives were used to supplement the documentary evidence. Given that IIED has undertaken a thorough review of the global literature on this topic and identified the examples emerging from Costa Rica, objectives 1 and 2 draw heavily on the existing IIED work by attempting to cross-check, confirm and, where possible, expand the coverage (in number and depth) of existing cases of markets and payments. The added value of the literature review will be in the deepening of the knowledge base and analysis of its content with respect to objectives 3 and 4. This in turn provides a basis for charting a way forward. The paper is organized to cover the objectives one by one. In the first chapter the local origins of the concept of markets and payments for environmental services in Costa Rica is explored. The paper then turns to the experiences (or market cases) gained so far in the country, providing in each of the succeeding chapters a description and review of each of the cases, an assessment of the role of knowledge in the development and formulation of the initiatives and a report on monitoring and evaluation underway to date. The paper concludes by drawing out some of the lessons learned and making recommendations regarding practical steps that other countries, researchers and financing organizations might take to improve the process of launching such initiatives in the future.

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  What are we learning from experience with markets for environmental services in Costa Rica? A review and critique of the literature, November 2003

  Manrique Rojas and Bruce Aylward

  The use of markets and payments for environmental services is a topic gaining increasing attention amongst policy-makers and environment and development practitioners around the globe. Simply put, the term ‘environmental services’ can be taken to refer to the overall concept of natural systems providing a continuous flow of valuable goods and services to society. This is in contrast to similar services provided by man-made physical infrastructure and technological capital (i.e. water treatment, artificial fertilization, genetic modification) for which these environmental services are a substitute. The use of market mechanisms as a means of incorporating the economic value of these environmental services into the financial decision-making of producers and consumers is an additional tool that can be employed to resolve longstanding market failures that lead to less than desirable economic outcomes – i.e. having fewer environmental services and paying more for their man-made substitutes. In the developing world, Costa Rica has led efforts to experiment with the application of these mechanisms, many of which were simply ideas on paper just a few years ago. A survey of markets for environmental services by IIED highlights the formative role Costa Rica has played and provides a rich characterization of the economics of these initiatives in a global context (Landell-Mills and Porras 2002). As a complementary effort, this paper digs deeper into the literature regarding the Costa Rica experience in an effort to see what we are learning from the experience: how has technical, scientific and economic information on environmental services fed into these initiatives? To what extent are these initial experiences being monitored and evaluated? Is there a feedback loop that connects these experiences with learning about environment and development issues, particularly in the local context of policy-making within the country? The principal objective of the literature review is to identify and review documents and other material that address the following: 1. the local origins of the concept of payments and markets for environmental services and how they have developed over time, particularly in relation to the broader international development of the concept and local necessities/realities (historical and trend analysis); 2. the types of existing initiatives related to markets for environmental services, and who is participating in such initiatives (descriptive work); 3. the knowledge base that underpins market development, i.e. the extent to which markets are based on specific scientific and technical knowledge regarding the biophysical, economic and social relationships involved as opposed to general views on the subject (critical assessment); 4. the initiatives undertaken and underway to date with respect to the monitoring and evaluation of the experience with payments and markets for environmental services and to what extent (and with what results) the literature assesses these initiatives in terms of economic efficiency, environmental effectiveness, and social equity and/or poverty reduction. Where written material is not available or does not provide comprehensive coverage, interviews with those involved in these initiatives were used to supplement the documentary evidence. Given that IIED has undertaken a thorough review of the global literature on this topic and identified the examples emerging from Costa Rica, objectives 1 and 2 draw heavily on the existing IIED work by attempting to cross-check, confirm and, where possible, expand the coverage (in number and depth) of existing cases of markets and payments. The added value of the literature review will be in the deepening of the knowledge base and analysis of its content with respect to objectives 3 and 4. This in turn provides a basis for charting a way forward. The paper is organized to cover the objectives one by one. In the first chapter the local origins of the concept of markets and payments for environmental services in Costa Rica is explored. The paper then turns to the experiences (or market cases) gained so far in the country, providing in each of the succeeding chapters a description and review of each of the cases, an assessment of the role of knowledge in the development and formulation of the initiatives and a report on monitoring and evaluation underway to date. The paper concludes by drawing out some of the lessons learned and making recommendations regarding practical steps that other countries, researchers and financing organizations might take to improve the process of launching such initiatives in the future.

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  What are we learning from experience with markets for environmental services in Costa Rica? A review and critique of the literature, November 2003

  Manrique Rojas and Bruce Aylward

  The use of markets and payments for environmental services is a topic gaining increasing attention amongst policy-makers and environment and development practitioners around the globe. Simply put, the term ‘environmental services’ can be taken to refer to the overall concept of natural systems providing a continuous flow of valuable goods and services to society. This is in contrast to similar services provided by man-made physical infrastructure and technological capital (i.e. water treatment, artificial fertilization, genetic modification) for which these environmental services are a substitute. The use of market mechanisms as a means of incorporating the economic value of these environmental services into the financial decision-making of producers and consumers is an additional tool that can be employed to resolve longstanding market failures that lead to less than desirable economic outcomes – i.e. having fewer environmental services and paying more for their man-made substitutes. In the developing world, Costa Rica has led efforts to experiment with the application of these mechanisms, many of which were simply ideas on paper just a few years ago. A survey of markets for environmental services by IIED highlights the formative role Costa Rica has played and provides a rich characterization of the economics of these initiatives in a global context (Landell-Mills and Porras 2002). As a complementary effort, this paper digs deeper into the literature regarding the Costa Rica experience in an effort to see what we are learning from the experience: how has technical, scientific and economic information on environmental services fed into these initiatives? To what extent are these initial experiences being monitored and evaluated? Is there a feedback loop that connects these experiences with learning about environment and development issues, particularly in the local context of policy-making within the country? The principal objective of the literature review is to identify and review documents and other material that address the following:
  1. the local origins of the concept of payments and markets for environmental services and how they have developed over time, particularly in relation to the broader international development of the concept and local necessities/realities (historical and trend analysis);
  2. the types of existing initiatives related to markets for environmental services, and who is participating in such initiatives (descriptive work);
  3. the knowledge base that underpins market development, i.e. the extent to which markets are based on specific scientific and technical knowledge regarding the biophysical, economic and social relationships involved as opposed to general views on the subject (critical assessment);
  4. the initiatives undertaken and underway to date with respect to the monitoring and evaluation of the experience with payments and markets for environmental services and to what extent (and with what results) the literature assesses these initiatives in terms of economic efficiency, environmental effectiveness, and social equity and/or poverty reduction.
  Where written material is not available or does not provide comprehensive coverage, interviews with those involved in these initiatives were used to supplement the documentary evidence. Given that IIED has undertaken a thorough review of the global literature on this topic and identified the examples emerging from Costa Rica, objectives 1 and 2 draw heavily on the existing IIED work by attempting to cross-check, confirm and, where possible, expand the coverage (in number and depth) of existing cases of markets and payments. The added value of the literature review will be in the deepening of the knowledge base and analysis of its content with respect to objectives 3 and 4. This in turn provides a basis for charting a way forward. The paper is organized to cover the objectives one by one. In the first chapter the local origins of the concept of markets and payments for environmental services in Costa Rica is explored. The paper then turns to the experiences (or market cases) gained so far in the country, providing in each of the succeeding chapters a description and review of each of the cases, an assessment of the role of knowledge in the development and formulation of the initiatives and a report on monitoring and evaluation underway to date. The paper concludes by drawing out some of the lessons learned and making recommendations regarding practical steps that other countries, researchers and financing organizations might take to improve the process of launching such initiatives in the future.

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  Land-water linkages in rural watersheds case study series. Cooperation between a small private hydropower producer and a conservation NGO for forest protection: The case of La Esperanza, Costa Rica, April 2002

  Manrique Rojas and Bruce Aylward

  This Case Study focuses on a cooperation mechanism developed in Costa Rica between La Esperanza Hydropower Project (downstream water user) and the Monteverde Conservation League, a conservation NGO that owns most of the hydropower plant’s upper catchment. The objective of the mechanism is to ensure the conservation of forest cover where it already exists, since forests are perceived to provide a range of downstream hydrological services for which the hydropower producer is willing to pay. The mechanism is centered on a private contract between two parties, where the hydropower producer commits to paying the forest owner in exchange of the latter’s commitment to maintain the forest cover on its property. The payment increases through the first five years of the contract from US$ 3 to US$ 10/ha/yr, and from the fifth year onwards US$ 10/ha/yr is used as a reference value in a formula that factors in power produced and the tariff at which the power is sold. Under the agreement, the hydropower producer makes payments to 3 000 ha in the watershed, which is equivalent to 88 percent of the total area. The contract was signed for 99 years. This payment for environmental services (PES) scheme represents a considerable increase in the O&M costs of the power plant (approximately a 21 percent increase) and is a significant contribution to the annual budget of the conservation NGO (approximately 10-25 percent of the annual budget)

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  Market and policy incentives for livestock production and watershed protection in Arenal, Costa Rica, March 1999

  Bruce Aylward, Jaime Echeverria, Katherine Allen, Ronald Mejías, and Ina T. Porras

  Conventional wisdom amongst environmentalists holds that the cutting of tropical forest for livestock production is not only bad business but also bad for the environment. In particular, it is thought that conversion to pasture leads to rising sedimentation of waterways and reservoirs, an increase in flooding and loss of dry season water supply. In the case of Lake Arenal, Costa Rica this conventional wisdom is stood on its head in an evaluation of the market and policy incentives guiding land use in the Río Chiquito watershed of the Arenal region of Costa Rica. The study suggests that ranching, dairy and associated downstream hydrological effects represent important values to the Costa Rican economy, values that significantly outweigh expected returns from options for reforestation or forest regeneration. Further, there appear to be no large market or policy incentives subsidizing livestock production or providing incentives for rapid deterioration of soil productivity. Thus non-hydrological externalities associated with changing land use from forests to livestock production, such as carbon fixation, biodiversity, ecotourism and existence values, are likely to be of minimal importance in Río Chiquito. Therefore the analysis suggests that there is little reason to encourage large-scale reforestation of the watershed or to purchase land for protection. Instead efforts should focus on how to maximize the complementary returns from livestock and water production.

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  Institutional arrangements for watershed management: A case study of Arenal, Costa Rica, December 1998

  Bruce Aylward and Alvaro Fernández González

  The CREED Costa Rica project conducted an exhaustive quantitative inquiry into the economic factors that determine land use in the Río Chiquito watershed of Lake Arenal, Costa Rica, and found that livestock production is likely to produce positive hydrological externalities. This paper integrates these results into an application of the Institutional Analysis and Development Framework that is informed by a participatory process conducted with watershed stakeholders. The paper identifies physical measures, institutional arrangements and incentive mechanisms to stimulate improved watershed management in Río Chiquito by expanding the analysis beyond just the internalisation of hydrological externalities, to consideration of the larger “bundle” of goods and services provided by the watershed. In so doing it provides a refined vision for the Action Programme drafted by stakeholders. The latter is evaluated using IAD criteria and appears to be a promising improvement on current arrangements. Not surprisingly, the findings suggest that the public good characteristics of a number of the watershed goods and services produced in Río Chiquito imply the need for institutional arrangements beyond that represented by markets. However, the results suggest that simply labelling such goods and services as public goods is too simplistic an approach. In the Arenal case, although upstream landholders may find it difficult to exclude others from consuming the downstream benefits of land use decisions already made, the possibility remains that they may retain rights of exclusion over future land use decisions. Given the private good characteristics of downstream hydrological products this suggests that there does exist a basis for a market-driven, polycentric arrangement between upstream producers and downstream consumers. Thus, the advantage of investigating the public good natures of the myriad of goods and services produced by watersheds is that it provides an analytical basis for the suggestions of the types of institutional arrangements that might be most appropriate for the management of these goods and services. As an incentive mechanism for implementing a polycentric scheme to improve watershed management, it is recommended that the inter-institutional commission, called for under the Action Programme, develop a two-way sealed bid auction system of allocating contractual arrangements. Producers would agree to undertake management improvements in return for compensatory resource transfers (or projects). External stakeholders wishing to obtain off-site services would not only contribute funds but also assist in establishing priorities for the awarding of contracts, up to and including establishing their willingness to pay for specific measures in specific geographic areas. Ideally, producers would likewise set their offer price for specific measures in specific geographic areas. The respective sealed bids would be sorted and matched in a cost-effective, optimising manner by an independent committee organised under the commission. The hydrological and economic information developed in the CREED project could be used to establish both hydrological and carbon storage priorities, while the offer price for the measures would be best left to the individual producers to decide.

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  An analysis of private and social discount rates in Costa Rica, December 1998

  Bruce Aylward and Ina T. Porras

  In the economic analysis of long-term projects or changes in policy and land use with long term impacts, the cost and benefit flows typically occur in different periods. The process of discounting these flows enables them to be added together and compared with the net present value of alternative courses of action. Discounting is therefore central to intertemporal economic analysis. In the case of the analysis of environmental issues, discounting assumes particular importance, given that economic benefits produced by ecosystems (or damages incurred by their degradation) either (1) occur only in the future (2) increase into the future or (3) subsist at a low level indefinitely. In such cases the difference between a 5 and a 15% discount rate can easily outweigh other considerations in the decision-making process. In a recent analysis of economic incentives for watershed protection in Costa Rica, efforts to value forest productivity and long-term hydrological externalities confronted similar problems. Consultation with local financing agencies, researchers and the literature to determine the source of the discount rate methods and figures employed in practice yielded no satisfactory indication of how rates were developed. Given the paucity of informed expectation regarding such a key variable this paper presents the results of the subsequent effort to develop an informed and defensible position regarding discount rate issues in Costa Rica. The general objectives of the paper are to develop discount rates that can be used in financial and economic analysis within the Costa Rican context. Specifically, the following discount measures were identified (expected use is indicated in parenthesis): • real after-tax private opportunity cost of capital (for discounting all flows in financial analysis) • a consumption rate of interest (CRI), or social rate of time preference (for discounting consumption flows in economic analysis) • development of a shadow cost of capital (for use with the CRI in discounting investment flows in economic analysis) In the process of meeting these objectives, information is also required on imperfections and applicable policy distortions in Costa Rican capital markets and local real riskless interest rates. The final product of the analysis is the calculation of a social discount rate for Costa Rica. Following a presentation of the theory and methods employed, the data and results for Costa Rica are presented.

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  Economic incentives for watershed protection: A report on ongoing study of Arenal, Costa Rica, September 1995

  Bruce Aylward, Jaime Echeverria, and Edward B. Barbier

  Tropical moist forests provide a range of goods and services to society. Traditionally, decisions regarding tropical forest land use have been made on the basis of major direct uses of forest land that generate local and national benefits. Typically, this has meant timber extraction and the conversion of forest to agricultural or livestock uses. In recent years increasing attention has been given to the important economic role non-market benefits may play in providing incentives for the conservation of tropical forests. A number of studies have explored the local, national and global benefits generated by non-timber forest products, ecotourism, pharmaceutical prospecting and carbon storage. Another important ecological service that is often cited as an economic justification of conservation activities is the watershed protection function provided by tropical forests. Soil and water conservation may yield benefits to land-owners and alleviate damage to downstream economic activities. Nevertheless efforts to conserve watersheds are plagued by the difficult nature of the externalities involved. The off-site nature of many of the benefits of conservation activities makes both valuation and internalization of these externalities difficult, thereby preventing the development of 'sustainable' watershed protection programs. This is even the case in areas where pristine, mountainous forests provide downstream national benefits to hydroelectricity and irrigation schemes. The establishment of incentive systems that solve market, policy and institutional failures impeding watershed protection in such areas remains a vexing problem for policy-makers, scientists and communities in developing countries. Drawing on the literature and on-going research in Costa Rica, the paper outlines a collaborative research project investigating the potential for economic incentives for watershed protection in the Arenal region of Costa Rica.