Valuing Water Purification Services of Forests: A Production Function Approach using Panel Data from China’s Sichuan Province 20-29

The water purification functions of forests represent one of the most frequently invoked examples of non-market ecosystem services that are economically valuable. Yet, there has been a paucity of statistical estimates that robustly quantify such benefits. This study enriches this thin evidence base through valuing forests’ water purification services in the form of the ensuing cost savings of municipal drinking water treatment, using a rich panel dataset from China’s Sichuan province. The panel nature of the dataset has enabled the estimation of fixed effects models, which control for a wide range of observed and unobserved factors that might otherwise have biased the estimates of interest. Moreover, this study has undertaken a novel spatial piecewise approach to investigate the spatial patterns of such cost savings delivered by forests at different distances from the water intake point. The estimation results find statistically significant evidence that substantiates the expected cost saving effect of forests only within a 3 km radius upstream from the water intake point. This transferrable methodological twist helps facilitate the optimal spatial targeting of forest conservation.