Forest is a necessary resource for preservation of water supply sources. We analyzed the public policy aimed at forest conservation for preservation of water supply sources with an environmental tax on forest destruction. We supposed the quality of the water depends on the preservation of the water source affected by forest conservation. Furthermore, we assumed that consumption activities of residents have negative external effects on forest conservation. Local governments adopt different financing methods for environment conservation, because they cannot arrive at an agreement on the principle of cost burden. In Toyota city, an additional rate for water is imposed on residents to finance investments for forest conservation and secure high quality water, because all residents are the beneficiaries of the high quality water. It is common for the consumption activities of residents to directly or indirectly destroy the environment through the production activities of firms producing consumption goods. Imposing taxes on consumption is justified by the polluter-pays principle(PPP). In this paper, we examine three schemes to finance the costs of the public investment for forest conservation; (i) general taxes(lump sum tax),(ii) additional rate for the water supply, (iii) consumption taxes. A model of the long-run optimal problems of investments for forest conservation is constructed, where each level of investment is compared according to the financing scheme. The following conclusions were made; (1) all three schemes cannot achieve the optimal resource allocation of consumption goods, water supply and investments for forest conservation, (2) the lump sum taxation scheme achieves an efficient investment for forest protection, but cannot resolve the distortion due to negative external effects of consumption, and (3) the consumption tax scheme can improve the distortion effects of consumption by raising the price of consumption, (4) the consumption tax scheme can achieve the optimal level of consumption. Although we cannot rank each scheme on the basis of its efficiency, it appears the second scheme has merit because people want to protect the forests to secure water resources and are willing to pay the costs. JEL Classification: H23, Q23, Q25, Q28