A review of economic approaches modeling the complex interactions between forest management and watershed services

This paper provides a comprehensive review of two decades of published research that applies different economic approaches to address forested watershed management decisions. The review takes stock of the applied integrated economic and ecohydrological modeling approaches and assesses the way these approaches capture the complexities involved when linking ecohydrological and economic systems. The implications of integrating watershed services into forest management decisions are discussed, lessons are drawn from existing approaches and future research needs identified. Existing modeling approaches are categorized from independent modular models with a unidirectional flow of information to fully coupled holistic models, and are analyzed, among others, in terms of the efficiency improvement that forest-based investments achieve in watershed services provision. The review shows that the number of studies investigating the relationship between forest management and watershed services in economic decision-support models is very limited. Only 14 studies that were identified examine these relationships for water supply, while 9 studies were found to focus on the impact on water quality, 2 of which addressed water quality in combination with water supply. A shortcoming is that about half of the studies do not clearly specify baseline conditions to test the incremental value of the evaluated forest management actions in terms of watershed services provision, which undermines evaluating their cost-effectiveness or economic efficiency. A promising finding is nevertheless that in 8 of the 10 studies where these relationships were evaluated in terms of their costs and benefits compared to a specified baseline alternative, forest conservation or forest management is shown to be an economically efficient nature-based solution to supply the watershed services of interest. The limited availability of geo-referenced data and information, including the often complex and confidential nature of cost and price data, and the high data demands of more advanced spatial econometric models are among the main barriers to address relevant forest and water economic interactions. Important future extensions of existing integrated approaches include the further coupling of more detailed ecohydrological models and multi-sectoral hydro-economic models that are able to account for the different risks (floods, droughts, wildfires) and uncertainties under climate change and their impact on watershed services and water security.