Forests worldwide provide a variety of ecosystem services including carbon sequestration, soil protection and water purification. In particular, the minimal use of pesticides and fertilizers in forest operations coupled with the tree root system are associated with higher drinking water quality. However, forest coverage is expected to have a more influential impact in groundwater quality rather than surface as well as, consequently, on drinking water treatment costs. This study uses cross sectional data at firm level to assess the marginal effect of forest cover on drinking water treatment costs for the case of Portugal, the first of its kind for the country. Our analysis makes use of a range of GIS and spatial variables which capture the heterogeneity in local forest coverage.
The results obtained suggest the existence of a positive and significant effect of local forest cover on water treatment cost savings of 0.056%. However, this effect applies to firms extracting water from groundwater intakes. Neighboring measures of forest coverage have a greater impact on costs from surface water firms. The crucial role of local forest coverage through groundwater provision relates to a problem of intertemporal variation of those costs. Given the expected impact of climate change on precipitation in some regions where drinking water is mostly supplied by groundwater intakes, and since around 97% of forest land is privately owned, these results may suggest that appropriate incentives (e.g., payments for ecosystem services) could contribute to ensuring the sustainable use of water and forest resources.