It counted at least 205 programmes in 2011 that paid individuals and communities in cash or in-kind to revive or preserve water-friendly landscape features, including wetlands, streams and forests that capture, filter and store freshwater.
These schemes generated $8.17 billion in investment, an increase of nearly $2 billion above 2008 levels, said “State of Watershed Payments 2012” by Forest Trends, a Washington-based non-profit group with a mission to restore forest ecosystems.
"Such continued growth in management systems for a natural resource in the midst of a major global economic downturn should be raising eyebrows. Leaders and communities around the world are recognising water security as a serious problem and taking creative steps to address it," it said.
The report - the second of its kind - highlights the rise of government-backed "eco-compensation" schemes in China, which accounted for 61 initiatives and 91 percent of payments in 2011.
"Water insecurity poses probably the single biggest risk to the country's continued economic growth today, and the government has clearly decided that its ecological investments will pay off," said the report.
Chinese authorities, for example, are providing health insurance benefits to 108,000 residents in poor communities upstream of the bustling southern coastal city of Zhuhai in exchange for adopting land management practices that will improve drinking water for the region.
"China has this image of being an environmental nightmare - and this is not to say that their environmental problems are not very serious in a lot of places because they are...but what we are seeing is also a very serious attempt to address them," said Genevieve Bennett, lead author of the report and a research analyst with Ecosystem Marketplace, a news and analysis service run by Forest Trends.
The authors identified 73 new programmes under development in countries such as Ghana, Malawi and Romania. They also forecast continued growth in watershed investment in China, and a rebound in the United States and Latin America following a slowdown in 2011.
Bennett told AlertNet the idea of providing cash and other incentives for maintaining the functions of natural water systems - such as providing drinking water, controlling floods and recharging groundwater - is gaining ground because it is often cheaper than building costly infrastructure. Payment in-kind could include the provision of farming inputs, technical training or security of land tenure.
She cited the example of New York City officials who opted to pay farmers in the Catskills to reduce pollution in the lakes and streams that provide the city with its drinking water, rather than spend several billion dollars on a water treatment plant. The decision also helped keep water flowing during Superstorm Sandy, when filtration plants might have been shut down by power outages.
“Whether you need to save water-starved China from economic ruin or protect drinking water for New York City, investing in natural resources is emerging as the most cost-efficient and effective way to secure clean water and recharge our dangerously depleted streams and aquifers,” Michael Jenkins, Forest Trends president, said in a statement.
BENEFITS BEYOND WATER
Programmes to support watershed services are not always a replacement for infrastructure, but can act as a complement, Bennett noted.
For example, dredging sediment from dams is an expensive operation, but reducing upstream erosion by paying people not to cut down trees means less sediment to clear, as well as other positive impacts like better flood protection and increased carbon storage.
“The benefits from these watershed programmes extend far beyond water: they support biodiversity, reduce greenhouse gas emissions, and provide income for the rural poor," Bennett said in a statement.
Despite this, watershed protection efforts have yet to receive much interest from funds set up to back climate change mitigation and adaptation activities, Bennett told AlertNet. But the linkages are becoming better understood in some countries like Peru, which faces the problem of melting Andean glaciers, she added.
Another area with room for improvement is the low level of private-sector investment in watershed management, despite the growing water risks faced by businesses.
The report noted that 53 of the programmes it tracked use some private-sector funding, but these are nearly always driven by regulation and initiated by the public sector or non-governmental organisations (NGOs).
The exceptions are some major beverage companies, including Coca-Cola, mineral water firms and breweries that are playing a more proactive role. In Uganda, for example, a beer maker is paying for the protection of wetlands so they can keep providing a steady and abundant supply of clean water.
Bennett said others may be reluctant until work progresses on metrics to measure the results of watershed investments. "There's a desire among companies to wait until these mechanisms are a little better established, and their role in all this a little clearer," she said.
Nonetheless, compensation for conserving water ecosystems should be recognised as a critically important way of tackling growing threats to water security around the world, and one that will be supported by rising interest in accounting that values natural capital, Bennett noted.
Watersheds have been largely taken for granted but their worth is too great to be replaced with financial and technological solutions, she added.
"Healthy watersheds should be considered as very valuable, and I think water security in the future will depend in part on our thinking about how to manage watershed functions, and protect them and invest in them - so (this is) one tool, but an absolutely crucial one," Bennett said.