| United Nations | E/CN.17/IPF/1996/25 |
Economic and Social Council
Distr. GENERAL
8 August 1996
ORIGINAL: ENGLISH
COMMISSION ON SUSTAINABLE DEVELOPMENT
Ad Hoc Intergovernmental Panel on Forests
Third session
9-20 September 1996
SCIENTIFIC RESEARCH, FOREST ASSESSMENT AND DEVELOPMENT OF
CRITERIA AND INDICATORS FOR SUSTAINABLE FOREST MANAGEMENT
Programme element III.1 (b): Measuring and capturing
forest values: issues, policies and challenges
Report of the Secretary-General
SUMMARY
The present report is prepared in response to the request of the Ad Hoc
Intergovernmental Panel on Forests at its second session to have additional
input on some of the underlying policy issues that influence forest valuation
(programme element III.1 (b)), scheduled for further substantive discussion
during the third session of the Panel.
Forests are often adversely affected by the behaviour of two groups
belonging to the two extremes of the socio-economic scale: rent-seeking
concessionaires, and poor farmers who are forced to practise "slash and burn"
agriculture. The issue of values of the multiple benefits of the forests has
two dimensions: first, the various values have to be identified and measured,
and, second, means have to be created to capture these values, thereby leading
to improved forest management based on a fuller understanding of benefits and
costs. Examples from Indonesia and Costa Rica show that if all values of the
forests are accounted for, sustainable forest management is economically
justified.
This report discusses the reasons for observed destructive practices
and different means to reduce them. Concessionaires would have an incentive
to use the forest resource more efficiently and according to sustainable
principles if the price of the resource and costs of non-compliance with
sustainable guidelines were increased, and the terms of concessions permitted
them to be marketable assets, which the owner would then have an incentive to
protect and maintain. Similarly, poor farmers and forest dwellers would be
more inclined towards sustainable behaviour if they were given the chance to
participate in management decisions, and shared the revenues and user rights,
especially of non-timber products.
Although the last 30 years have seen a major increase in the use of
economic analysis to understand and measure the values associated with forest
benefits, there is scope for considerable further development. In practice,
it is seldom that all benefits are fully measured and minimum values are often
used. An example from Croatia illustrates how important non-marketable values
like "visible landscape" and "erosion protection" can be, when the traditional
value of the wood production is small in comparison.
There are large uncertainties involved when trying to value
biodiversity. Although the potential value could be very high under certain
circumstances, biodiversity will only have a real value if somebody is willing
and capable of paying for it. For this reason, there will be insufficient
protection of biodiversity if normal market forces rule. Increased
international transfers will be needed to protect threatened biodiversity, and
it is essential that such transfers be properly monitored.
Direct benefits of carbon sequestration at the national level are small
when compared with the real costs of protecting a "carbon sink". Poor
countries with large sinks cannot be expected to provide "sequestration
services" on their own. Here also substantial transfers are needed.
Certification of forest management and forest products has great
potential as a tool for controlling sustainable management of forest
resources, but there are many pitfalls. Consumer countries will have to take
concerted action, and be prepared to pay the additional costs involved. It is
also important to introduce similar schemes for substitutes for wood.
Undervaluing of the multiple benefits of forests is one of the factors
that have led to reduced investments in forestry. This, coupled with
widespread forest destruction, accounts for the fact that the future of the
world's forest resources currently looks gloomy. Significant progress will
only take place when nations with large forest resources recognize that it is
in their own interest to use those resources sustainably.
CONTENTS
Paragraphs Page
INTRODUCTION ........................................... 1 - 5 4
I. VALUING FOREST OUTPUTS ........................... 6 - 38 5
A. National level ............................... 16 - 31 7
1. Pricing forest outputs .................. 16 - 25 7
2. Participation and forest values ......... 26 - 31 14
B. Global level ................................. 32 - 38 15
1. Value of biodiversity ................... 32 - 35 15
2. Value of carbon sequestration in the context
of climate change ....................... 36 - 38 16
II. VALUING SUSTAINABILITY ........................... 39 - 44 18
A. Certification of forest management and forest
products ..................................... 41 18
B. Natural resource accounts ..................... 42 - 44 18
III. CONCLUSIONS AND PROPOSALS FOR ACTION ............. 45 - 55 19
A. National level ............................... 51 - 53 20
B. Global level ................................. 54 - 55 22
Annex. RECENT WORK ON VALUING FOREST BENEFITS ........... 24
Boxes
I. Indonesia: is sustainable forestry economic? ................9
II. Costa Rica: can sustainable forestry compete with other
land uses? ..................................................11
III. Croatia: the value of reforestation ........................12
INTRODUCTION
1. The present report covers implementation of the decisions of the
United Nations Conference on Environment and Development (Rio, 1992)
related to the first programme element of category III, "Scientific
research, forest assessment and development of criteria and indicators for
sustainable forest management", of the programme of work of the Ad Hoc
Intergovernmental Panel on Forests.
2. The work under this programme element (III.1) is guided by the
decisions taken at the third session of the Commission on Sustainable
Development and further elaborated at the first and second sessions of the
Ad Hoc Intergovernmental Panel on Forests. The Commission defined
programme element III.1 as encompassing the need to "review existing
periodic assessment of forests, including relevant socio-economic and
environmental factors, at the global level; identify shortfalls in present
assessments relative to policy considerations; and recommend practical ways
of improving such assessments. Examine ways to broaden the scientific
knowledge and the statistical database available in order to better
understand the ecological, economic, cultural and social functions
performed by all types of forests. Promote the further development of
methodologies for properly valuing the multiple benefits derived from
forests in the form of goods and services, and subsequently to consider
their inclusion within the system of national accounting, drawing upon work
that has been already undertaken by the United Nations and other relevant
organizations". 1/
3. Subsequently, the Panel, at its first session, emphasized the need for
the preparation of two reports: (a) one covering programme element III.1
(a), "Assessment of the multiple benefits of all types of forests" and (b)
(the present report) covering programme element III.1 (b), "Methodologies
for proper valuation of the multiple benefits of forests", which "would
consider ways to promote the further development of methodologies for
properly valuating the multiple benefits derived from forests, in the form
of goods and services, and subsequently consider their inclusion within the
systems of national accounts, drawing upon work that has already been
undertaken by the United Nations and other relevant organizations and
assessing progress in the application and incorporation of innovative
approaches into national accounts" (see E/CN.17/IPF/1995/3, sect. II,
para. 18).
4. At the second session of the Panel, members of the Panel expressed an
interest in having more input on some of the underlying policy issues that
influence forest valuation. This report is a response to that interest.
It has been prepared by staff of the World Bank, as the lead agency for
programme element III.1 (b), in consultation with the secretariat of the Ad
Hoc Intergovernmental Panel on Forests in the Division for Sustainable
Development of the Department for Policy Coordination and Sustainable
Development of the United Nations Secretariat. In addition, comments and
contributions were received from the Food and Agriculture Organization of
the United Nations (FAO), the Centre for International Forestry Research
(CIFOR) and individual specialists.
5. The report takes into consideration paragraphs 11 and 15 of the
Statement on biodiversity and forests from the Convention on Biological
Diversity to the Ad Hoc Intergovernmental Panel on Forests of the
Commission on Sustainable Development (E/CN.17/IPF/1996/9 and Corr.1,
annex).
I. VALUING FOREST OUTPUTS
6. The forestry sector is widely viewed as a difficult sector with
frequent poor outcomes of both investments and interventions. Especially
in those developing countries where forestry plays a major part in the
economy (which usually implies that a country has a major endowment of
natural forest), the forest resource may be subject to political patronage
and special dealing. Forest resources occur naturally and are often located
in areas that can be difficult to manage and supervise. Consequently,
forests are commonly the object of "rent-seeking behaviour" - that is,
extraction of resources in a non-sustainable manner with excess profits
going to selected, often politically favoured, individuals.
7. Forests are also often adversely affected by the behaviour of groups
at the other extreme of the socio-economic scale - poor farmers and other
inhabitants of areas in or near forests. In this case, the situation very
often is one where such groups are offered little or no access to the
benefits of forest protection and production. Therefore, they see their
main interests as being served by the conversion of forested land to other
uses, even if that use is neither sustainable nor in the best economic or
environmental interests of the nation as a whole.
8. In this sense, although forestry is frequently compared with other
land-using sectors such as agriculture (especially when analysing the
economics of investments in the sector), it is in fact quite different. In
most cases, ownership of the means of production of agriculture is in
private hands, fragmented among many small-scale owners. While
rent-seeking behaviour and distortions of markets are by no means rare in
agriculture, they tend to be secondary to the mainstream business of the
sector. In forestry, the very terms and conditions under which use rights
are given by the resource owners (usually the State) to its principal users
are frequently a major source of rent transfer, and all subsequent
decision-making, resource allocations and, ultimately, valuations made in
the sector are influenced by this fact.
9. Another important difference between agriculture and forestry is the
time-span between investment and return (harvest). While agriculture needs
an annual investment to produce a crop, natural forests are often
considered an existing resource regarding which the only investment needed
is for harvest, and perhaps the payment of a small royalty or stumpage fee.
As a result, there are few natural incentives to invest in reforestation,
and the temptation is to take the initial quick return from harvest and
ignore investments for distant future harvests. These problems are
amplified when deforestation is done by small slash-and-burn farmers with
high discount rates, short time-horizons and uncertain tenure status.
10. In developed countries, the fact that it is more common for the user
to be obliged, either through legislation or contractual arrangements, to
reforest after final harvest forces the user to regard the cost of
reforestation as part of the cost for utilizing the timber. This situation
gives a better ground for proper valuation of the forest's timber value,
although other forest functions, like carbon dioxide (CO2) fixation and
maintenance of biodiversity, are often undervalued.
11. A major development over the past 30 years has been the increased use
of economic analysis to understand and measure the values associated with a
wide range of forest benefits. Some of these estimates are for benefits
that were formerly considered quite intangible and not amenable to
measurement. For example, economists now routinely measure the benefits
(consumers' surplus) enjoyed by visitors to protected areas and other
recreational sites. One can also measure the willingness-to-pay of
individuals and groups for protection of unique habitats, or endangered
species. These studies are yielding concrete estimates that can be used
not only to determine the total social benefit received by users of
selected protected areas, but also to devise taxation systems to "capture"
part of the benefit to be used to help defray costs and improve management.
In many situations, the distribution of benefits and costs, especially when
poor or marginal populations are involved, is an equally important
dimension.
12. For some categories of goods and services, the techniques used and the
results obtained are quite robust. For other areas, there are major data
and analytical problems. Still, the remaining problems should not distract
from the real advances that have taken place and the fact that the benefits
estimated are frequently minimum values, since many important benefits may
not be amenable to estimation and thus may not be included. The methods
available for valuation have been summarized in the earlier report prepared
for the Panel on methodologies for proper valuation of the multiple
benefits of forests (E/CN.17/IPF/1996/7), and in a number of standard
references cited in the annex to this report.
13. It is important to bear the realities in mind when embarking upon a
consideration of the implications of valuation methodologies in forestry.
Three questions are important, namely, what should be valued, from whose
perspective, and how these values can be measured and captured. In other
words, asking the right question is at least as important as determining
the best means by which questions should be answered. It is at least
arguable that the reason why incorrect and seemingly perverse resource
allocation, management or land conversion decisions are made in forestry is
not that those involved in the decision-making process are unaware of the
correct valuation techniques or incapable of applying them, but rather that
vested interests operating in the sector are simply unwilling to consider
the alternatives such analysis might put forward. These special interests
may be large timber operations or small subsistence agriculturists. It is
for this reason that the present report focuses primarily not upon the
relative merits of the various technologies of valuation, but upon the
policy and institutional issues that need to be considered when those
techniques are applied. This implies strong links with the formulation and
implementation of national forest programmes (NFPs) and programmes of
related sectors (regarding, for example, the valuation of water), and also
involves dealing with the underlying causes of deforestation, as discussed
under programme elements I.1 and I.2 of the programme of work of the Panel.
14. As noted above, rent-seeking behaviour by powerful interests
associated with the industrial logging and processing sector, and the
exclusion of other interest groups from effective participation in forest
management, lead to the ignoring of many forest values - values that are
often significant, including non-timber forest products, biodiversity
benefits, on-site and off-site soil and water impacts, and carbon
sequestration. Failure to take these factors into account results in an
underestimation of the value of the resource, and therefore in incorrect
decisions as to its use and management. Undervaluation of the resource,
and consequently incorrect decisions as to its use, also result from a lack
or failure of mechanisms to adequately capture the benefits that are
potentially available. This leads to a situation where those benefits are
assigned a de facto zero or very low value by decision makers, since they
are not actually accruing to any group. Therefore, this report will deal
with the issues surrounding both the measurement of forest values, and the
capture of those benefits. 2/
15. The management challenge is to correctly analyse these various
benefits from forests, while recognizing that many important benefits will
occur at the national, regional or international level and may not have
readily observable market prices. Because of these factors and other
market failures, together with the existence of widespread policy failures,
forest resources are often used in a manner that is uneconomic from a
social perspective (although very profitable from a private financial
perspective). The result is an unsustainable management pattern.
A. National level
1. Pricing forest outputs
16. In cases where forest depletion is observed, it is usually not true
that those responsible are acting in an inefficient or wasteful manner.
Indeed, in most cases they can be shown to be operating quite efficiently
in a commercial sense, based upon the market and price signals they are
receiving. To the extent, however, that those signals are wrong (in that
they are not reflecting the real value of the resources involved, and the
degree of scarcity that is implicit in their continued supply), the users
will be inefficient and wasteful from a public and societal point of view.
If the market and price signals change - should, for example, a Government
raise the resource price of logs considerably (either administratively, or
by introducing a greater degree of competition among the potential buyers
of those logs) - then processors and other users will alter their methods
of production, substituting other inputs for the erstwhile cheap, but now
more expensive, resource. There will usually be short-term adjustment
costs associated with this, but these are rarely as significant as those
predicted by users before the change has occurred.
17. There are some experiences in other sectors illustrating that early
evaluations of investments in environmental protection, like reduction of
air and water pollution, tended to underestimate the real values of all the
benefits and overestimate the cost of achieving them. In the late 1960s,
stricter control of effluents from the pulp and paper industry and other
major polluters in Sweden restored the waters around Stockholm to the
extent that bathing is now possible in the middle of the city and fishing
for salmon has become a major attraction. Besides obvious benefits for the
local population, the improvement has also had very important indirect
economic implications through increased tourism.
18. Effluent restrictions also promoted research in the pulp and paper
industry that led to techniques for recovering chemicals from the digesting
liquor and generating heat, and subsequently electricity, from the burning
of the residues. Such techniques are now considered economic and cost-
efficient production processes in their own right. State-of-the-art pulp
mills now release water that is cleaner than the water they take in and are
almost self-sufficient in terms of energy supply. Research has extended so
far that today it is possible to build a pulp and paper mill with a closed
system without any effluent. It will probably take another 10-20 years,
however, before such mills are operating on a commercial scale.
19. Similar lessons have also been learned in other areas, such as air
pollution control. It has been found that often there are investments
yielding important environmental benefits that may also produce direct
economic returns to the firm implementing them. Distorted input prices in
many of the former Soviet countries led to inefficient use of energy and
raw materials, high levels of pollution, and poor-quality outputs.
Adjusting prices by removing subsidies has resulted in efficiency gains and
reduced environmental damage. Similarly, low or non-existent stumpage fees
discouraged better forest management.
20. A parallel lesson can be drawn for the forest sector. The analyst
seeking answers on the true worth of forest resources will learn relatively
little from the production costs and technical coefficients of an industry
that is based on an input (forest products) that is underpriced. If the
new materials derived from the forest are priced correctly, one will
observe major changes in production processes and efficiency of input use.
An example that demonstrates this argument can be drawn from some recent
World Bank analysis of the economics of forest sustainability in Indonesia
(see box I).
21. Similar reasoning applies in the case where logs are being directly
exported, either at stumpage prices that are too low, or where the method
of assessing stumpage does not create any incentive for efficient log
extraction from the forest. In such cases, the perceived value of the
standing resource, and thus the benefits of ensuring its regeneration, will
be lower than the real value.
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Box I. Indonesia: is sustainable forestry economic?
In September 1995, the World Bank presented an analysis of the economics
of sustainable forestry in Indonesia to the Minister for Forestry, and senior
government and industry officials. A basic premise of the analysis was that,
with current patterns and levels of exploitation of the natural forest
resources of the country, in a relatively short period - 10-15 years -
Indonesia would have little commercially usable forest estate remaining:
either the resource would be in an immature regenerating state, following high
levels of extraction in the preceding three decades, or it would have been
converted from natural forest to some other form of land cover. The
alternative scenario was to adjust the annual allowable cut from the forest
resource down to sustainable levels, through a mixture of administrative and
market measures designed to create strong incentives to pursue sustainable
practices among all interest groups involved in the sector. The question was,
was this worth doing, from Indonesia's point of view?
To the extent that economic analyses of the desirability of persistence
in forestry as compared with agricultural conversion are carried out in
Indonesia, they tend to be done on the basis of static, average-hectare
comparisons, usually assuming conversion to some investment-intensive, high
productivity alternative, and often using unadjusted current prices in the
analyses, as opposed to true market prices. Not surprisingly, the result is
usually in favour of conversion, unless decision makers can be convinced to
accept high valuations for unquantified environmental and other externality
benefits in particular cases.
In this study, however, it was assumed that most forest that is
converted is likely to end up in fairly low-intensive alternatives, such as
shifting cultivation, because this is the reality of forest conversion in
Indonesia. It is simply not feasible that any more than 10 or 15 per cent of
the currently forested land area of about 100 million hectares (ha) could be
converted to high-productivity agricultural or tree crop use, given rational
assumptions about site suitability, the availability of investment capital for
such purposes, and the likely impacts on commodity markets of large additions
to supply. The basic efficiency of investment in regeneration of logged-over
forests was shown to be superior to low-intensity agriculture options, even
though quite conservative values for non-timber outputs, and soil and water
benefits, were applied.
Rather than treat processing norms as exogenous and static across both
scenarios, the study assumed that, according to perceived scarcity of the
basic raw material, industry would adjust its technology and processing
efficiency - not only (more rapidly) in the case of the sustainable scenario,
where log availability volumes would decline fairly quickly from current
levels (importantly, it was assumed that this signal would be sent to the
processing sector very clearly in the form of resource price rises), but also
in the case of the non-sustainable scenario, as available log volumes declined
as a result of forest depletion towards the end of the period of analysis.
All adjustments of technology used in this respect were kept within currently
achievable bounds, so as not to bias the analysis.
The basic analytical results indicated that Indonesia would be far
better off, in standard economic terms, to move its forest extraction and
processing onto a genuinely sustainable basis. This option was shown to have
a net present value $6 billion greater than that derived from a projection of
a continuation of present usage patterns, at a real discount rate of 11 per
cent per annum. It is interesting that this result was achieved without
inclusion of any valuation of global benefits from forest retention
(biodiversity protection and carbon sequestration), and with relatively
conservative assumptions on the rates of technical adjustment that would be
made in the sector as a result of altered log volume availability signals. As
a result, the study was able to draw strong conclusions on forest resource
pricing and allocation, industry and trade policy, revenue sharing and
participation, and other fundamental policy constraints that currently
encourage non-sustainable practices in the sector, despite the clear
preferability of the sustainable option, from the national viewpoint.
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22. The World Bank has also studied the economics of sustainable forestry
in Costa Rica, where it was evident that most accessible forest could in
fact be converted to fairly profitable alternatives, by small- and larger-
scale land users. However, the study concluded that, while the interest
groups immediately involved would profit from conversion of forests to
other land uses, the nation as a whole would lose. The study therefore
recommended a system of subsidies that would compensate the group that
lost, in direct terms, from the imposition of sustainable forestry
practices (see box II).
23. The study also illustrates the limitations of "across the board"
solutions even within a relatively small country such as Costa Rica. A
general application, including large forest countries, would present an
even greater challenge.
24. A further variant of the problems created by inadequate market
signalling in forestry is the increasingly recognized one of undervaluation
of non-timber forest products. In many countries where forests are
allocated for utilization - usually to a large commercial concern - such a
user may have either no interest in using, or no right to use, the
non-timber products that are in the forest. Others, including traditional
local users of the forest, may be excluded from extraction of the resources
under the terms of new concession agreements, or may simply be denied
access to them by the nature of the large- scale operations being
undertaken. Again, in such cases the actual level of output of non-timber
forest products from the production forests, and the prices paid for them,
will be a poor guide to their potential value in an effectively functioning
market situation.
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Box II. Costa Rica: can sustainable forestry compete
with other land uses?
Sustainable forest management, though thought to be a desirable
environmental goal, is seldom practised in Latin America. Forests are
threatened by conflicts of interest between those who want to protect the
country's natural resources and those who wish to develop the land for
strictly commercial purposes. Costa Rica provides a good example of this
dilemma. In spite of aggressive policies to promote sustainable management of
forests, forest depletion has continued and today most remaining pristine
forest areas are contained within the protected area system.
A study attempted to shed some light on the question why sustainable
forest management was not being widely adopted and on the nature of the
conflicts of interests regarding forest conservation. Specifically the study
attempted to answer the following questions:
(a) Is sustainable forestry commercially viable?
(b) Is sustainable forestry economically desirable once the
environmental values from forests are considered?
(c) Who gains and who loses from the lack of sustainable forestry?
(d) Who should pay for incentives to promote sustainable forestry?
The analysis was based on real and simulated data for three sites in
Costa Rica. It included simple forest growth and land-use models that
compared the profitability of sustainable forest management with that of
conversion to high-yield forest plantations, forest mining and cattle
ranching. Back-of-the-envelope estimates of environmental values, including
watershed values, pharmaceutical values, carbon sequestration and existence
and option values for biodiversity, were included. The analysis considered
four social groups: large farmers integrated into capital markets, small
farmers excluded from capital markets, local taxpayers, and international
consumers of environmental services. The answers to the above questions were
the following:
Sustainable forestry cannot compete with alternative land uses under
constant price assumptions, and this is consistent with everyday practices
observed in Costa Rica. Large farmers prefer conversion to capital-intensive
land uses such as forest plantations, while small farmers adopt forest mining
technologies.
Sustainable forestry would be economically desirable if environmental
values were considered. Hence, it would make sense to subsidize farmers'
practising sustainable forestry. Carbon sequestration and biodiversity values
overwhelm national environmental values such as watershed protection.
International consumers of environmental services lose the most from the
absence of sustainable forestry in Costa Rica but local taxpayers also lose
owing to the likely higher costs of providing public water services. Both
large and small farmers gain from not practising sustainable forestry, but
large farmers gain more than small farmers.
However, overall losses are greater than gains, so there is an
opportunity for transactions through which the losers, international consumers
and local taxpayers pay small and large farmers to practise sustainable
forestry. Small farmers would accept a much smaller payment to follow
sustainable forestry than large farmers and hence payments for sustainable
forestry should be targeted primarily at small farmers.
From a policy perspective, the study resulted in a recommendation to the
Government of Costa Rica to establish a system of subsidies for sustainable
forest management targeted primarily at small farmers and to promote
transactions through which the international gainers would pay the local
losers from forest conservation. Since the study, Costa Rica has approved a
law creating subsidies for sustainable forest management. Costa Rica has also
advanced greatly in exploring other kinds of transactions between
international gainers and local losers from forest conservation, namely joint
implementation agreements in forestry. Five are currently being implemented
and another three are at the proposal stage for a total budget of
US$ 28 million.
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25. Box III illustrates the relative importance of different types of
forest values. While conditions at the Croatian Adriatic coast, from which
the example is taken, are quite specific because of the very important
tourist industry, it is remarkable how low the timber value is compared
with the other values. The comparison also illustrates how site-specific
forest values are. The sites in the example are all located along a 200-
kilometre-long section of the coastal area of Croatia, yet values vary
widely depending on population density (landscape values), the soils
(erosion protection benefits) and vegetation type and terrain (hunting
benefits).
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Box III. Croatia: the value of reforestation
The proposed coastal forest reconstruction and protection project in
Croatia envisages, among other activities, replanting 5,800 ha of coastal
forests destroyed by war activities.
Quantifying benefits: Separate estimates were made of the expected
benefits of reforestation at each of the proposed reforestation sites. The
benefits considered include:
(a) Landscape. Evidence shows that forested landscapes significantly
increase the attractiveness of resort areas. Tourists are less likely to come
to areas without such landscapes, or will come only if prices are
significantly lower. Estimates of the landscape benefits provided by forests
were based on surveys of tourist willingness-to-pay for improved landscape;
parallel surveys were carried out in Croatia and Italy to estimate
willingness-to-pay. Per hectare values of landscape benefits were then
computed based on the number of tourists at each site and the size of the
visible area, with adjustments for local conditions;
(b) Wood production. The value of future wood production resulting
from reforestation was estimated using information on species composition and
mean annual increments, with assumptions about the proportion of yield
harvested in different time periods;
(c) Hunting. The benefits of improved hunting conditions were
quantified using the values derived from the lease of hunting rights to
foreign hunters;
(d) Erosion protection. The benefits of erosion protection were
estimated from the expected reduction in damage to infrastructure below the
proposed reforestation sites. In many cases, however, there was little to be
damaged.
Additional benefits that could not be quantified for lack of data
include recreational benefits for local populations, harvest of non-timber
products, and improvements in microclimatic conditions. The omission of these
benefits indicates that the estimates of benefits to reforestation are
conservative.
Present value and source of expected benefits from
reforestation in Croatia
Present value Source of benefits
of total benefits (percentage)
(United States dollars -------------------------------------
per hectare) Visible Wood Erosion
Country or site landscape Hunting pro- pro-
duction tection
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Jasenje-Bisernjakovica 1 600 53.7 8.6 0.2 37.5
Novigrad 2 700 88.5 10.7 0.8
Trogir 2 500 66.5 5.6 3.3 24.6
Slano 2 700 97.7 2.0 0.4
Brsecine 2 600 97.5 2.0 0.5
Petrinj 2 600 97.5 2.2 0.4
Srdj 7 800 96.4 3.4 0.2
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Note: Present value of benefits has been discounted at 10 per cent.
Results. The table shows the results of the analysis for several of the
proposed sites, including the present value of total economic benefits
expected at those sites, and the distribution of benefits by source. Two
points stand out clearly:
(a) Wood production is a minor part of total benefits. This reflects
partly the relatively low productivity of the area, and partly the long time
period before benefits are received. Slightly higher wood production benefits
could have been obtained if reforestation plans had been optimized for that
purpose, but they would still have constituted only a small fraction of total
benefits. Landscape benefits are by far the most important single benefit.
At sites with large tourist populations, landscape benefits alone justify
reforestation. At sites where the forest is not visible to tourists, however,
landscape benefits are very low. Erosion protection and hunting benefits are
also significant at several sites;
(b) Both the magnitude and the distribution of benefits vary
substantially from site to site, according to the specific conditions
encountered at each. An analysis based on average conditions would have been
very misleading.
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2. Participation and forest values
26. As with any economic asset, the value of forest resources depends on
which segments of society have access to and use of them, and the purposes
to which such groups put those resources. In the case of forestry, the
common practice of concessioning large areas to industrial and commercial
entities primarily or solely interested in the commercially utilizable wood
output from the forest has implications for the value of the forest. It is
frequently the case that such concessioning precludes the use of the forest
by people who may have been making traditional extractions from it for
generations, or even centuries: examples of eviction of such traditional
forest dwellers from large-scale production sites are common.
27. In such cases, the flow of non-timber values from the forest is
effectively reduced to zero - a factor that is almost never taken into
account when evaluating forest operation proposals. Moreover, the nature
of operations carried out on forests by large commercial concerns is
frequently not controlled with respect to maximizing the recovery of
non-wood and other products that may have considerable value to traditional
forest-dwelling and adjacent communities, once operations have ceased.
This, combined with the greater access to the area afforded by road and
bridge work, done for purposes of timber extraction, may encourage the
entry into the area of non-traditional or non-local encroachers - whose
primary interest will be not regeneration of forest values, but conversion
of the land to other purposes - rather than the re-entry of the original
occupants who may be able to make use of non-timber assets.
28. In the interests of balance, it should be pointed out here that
attempts to exclude local populations from forests for purposes of
conservation can have equally adverse effects. In many cases, effective
exclusion is impossible, so encroachment and degradation continue.
29. As has been demonstrated in the case of Indonesia (see box I), the
inclusion of non-timber forest product extraction can alter the economics
of forest use, adding value early in the regeneration stream, and thus
rendering sustainable options more attractive than they would be in the
case where no such extraction of these products is allowed. Moreover, the
involvement of the local inhabitants in the management and use of the
forest in a meaningful way reduces the costs of protecting regenerating
areas, since these people will have an interest in seeing to it that such
regeneration is successful and protected. The result of increasing the
flow of benefits from the forests, and reducing the costs of protecting
them, will be an increase in the total realized value of the resource.
30. Even in cases where local populations in forest areas are not heavily
involved in extraction of non-timber forest products, there is a good case
to be made for involving them directly in management of the forest, and
ensuring that they receive some reward for participation in sustainable
management. Otherwise, it is likely they will take advantage of the
greater access afforded to forested areas to encroach upon such areas and
convert them to other uses - if no financially viable alternative has been
offered them. This will happen even where shifting agriculture is an
arduous, risky and unsustainable land use. In such cases, the nexus
between policies and practices that encourage an exploitive and
rent-seeking approach by concession holders and those that exclude other
groups of society from participation in forest management becomes
particularly destructive.
31. Similar reasoning can be applied to support the involvement of local
government agencies in forest management decisions and proceeds:
typically, such entities receive little or no proceeds from forest
utilization, and even where they do, the terms of such revenue-sharing do
not involve any obligation on the part of the local government to assist in
protecting regenerating forest from subsequent conversion. In cases such
as that of Indonesia cited in box I above, the exclusion of interest groups
that are capable of influencing forest cover from any share in the proceeds
of traditional and/or commercial extraction will work against the
sustainability of the resource, and so will lower its value to the nation.
B. Global level
1. Value of biodiversity
32. There are large uncertainties involved in trying to value
biodiversity. Instead of investing heavily in determining the value and
requirements for biodiversity conservation, it would probably be more
efficient to use such funds to develop principles for selecting areas to be
protected and bringing these under effective management. Cost-efficiency
should be the criteria when judging which method (in situ, ex situ or that
of artificial gene banks) is the most suitable in each case. One way of
reducing the cost of preserving biodiversity is to adapt forest management
and harvesting techniques so that damages to biodiversity are minimized in
commercially managed forests.
33. In the end, biodiversity will not have any value unless there is
somebody (nationally or internationally) capable and willing to pay for it.
The problem is that normally people living in areas with high potential
biodiversity values are poorer and have less or no paying capacity compared
with people in industrialized countries, where the value of biodiversity is
often recognized, for example, as raw material for the pharmaceutical
industry, or in terms of recreation for visitors. There are, however, some
studies that have shown that poor people living in or close to forests
place larger values on biodiversity than the urban population with higher
income levels (and corresponding ability to pay) in the same country.
34. There is an important need to bridge the gap between the international
perception of the value of biodiversity and the need to protect it in situ,
and the much different national view of the actual benefits that can be
captured from biodiversity conservation and the opportunity costs of
forgoing other development options. Normally this can only be done either
by government fiat regulating and setting aside protected areas, or via
international transfers to guarantee and pay for this protection. Left to
normal market forces, there will be an insufficient level of protection
given to important biologically rich areas. Often this is especially true
precisely in those poorer countries that are particularly rich in
biological diversity. Markets will fail to provide what is clearly seen as
an international need to protect biodiversity because of the inability to
capture those benefits (and pay the associated direct and indirect costs of
protection) at the national level. In such situations international
transfers, via the Global Environment Facility (GEF), through
non-governmental organizations, or via bilaterals, are needed to ensure
that sufficient areas are protected. It is of interest that actual
payments by pharmaceutical companies to protect biodiversity have been very
small (a few tens of millions of dollars), especially when compared with
the billions spent on recreational uses of biodiversity-rich protected
areas.
35. GEF-type funding is important but still modest compared with the
market value of the wood being harvested: for example, from 1988 to 1995,
World Bank lending for biodiversity components topped $500 million with an
additional $237 million coming from GEF and associated co-financing. When
counterpart funds and other donor contributions are included, the total
World Bank- administered biodiversity portfolio is over $1.26 billion. In
contrast, the value of the global wood harvest for the corresponding period
is of the order of 300 times that amount. The challenge is to work with
the wood-processing industry to both minimize negative impacts on
biodiversity and secure additional resources for biodiversity protection.
2. Value of carbon sequestration in the context of
climate change
36. Another "international good" produced by forests is the sequestration
of carbon and its beneficial effects on potential global climate change.
Just as with biodiversity conservation, the perception is that the direct
benefits of carbon sequestration at the national level are small when
compared with the real costs of protecting this "carbon sink". The result
is that there is little or no incentive for nations to provide carbon
sequestration services from their forests, especially for the poorest
countries where the alternative uses of forests for timber production or as
agricultural lands promise immediate, significant national-level economic
benefits.
37. There are three situations where nations will have an incentive to
protect forested areas so as to provide carbon sequestration benefits:
(a) In some countries (for example, Canada) there is a strongly held
view that countries should sequester carbon as part of a national
responsibility towards the world community. At the extreme, this would
imply taxing those who harvest trees and release carbon. Not surprisingly,
this is a minority view and, if it occurs at all, will likely be found in
very-high-income countries;
(b) The existence of binding national and international covenants to
reduce carbon emissions over time can also provide the necessary incentive
to sequester carbon. Under this condition, a country will examine various
options to meet this commitment, and carbon sequestration within the nation
is one such option, along with mechanical carbon removal and decrease in
carbon dioxide emissions. If the least-cost alternative is to sequester
carbon in another location, then the third situation arises;
(c) International transfers may be made whereby one country pays
another to sequester carbon via forest protection or reforestation. This
option means that the country "selling" carbon sequestration benefits is
being compensated for the loss of income from alternative uses of the land,
and the country paying for these benefits sees such payment as a lower-cost
alternative. There is also the question of moral hazard, which arises when
a country threatens to destroy a forest in the hope of receiving some sort
of reward for not doing so. The only obvious solution is to ensure that
transfers are made solely on the basis of net additions to carbon stocks,
or some similar criterion.
38. Although the international market for carbon sequestration is in its
infancy, some interesting efforts are being made to develop this market.
For example, the Fundacio'n de la Cordillera Volca'nica Central (FUNDECOR)
in Costa Rica is developing a programme whereby it will guarantee given
levels of carbon sequestration through both forest protection and
reforestation. The "rights" to the carbon so protected will then be sold
on the international market, just as a company sells shares in a firm. The
buyer (not infrequently a Northern power utility) will then be purchasing a
certain amount of carbon sequestration, produced by FUNDECOR as an agency
that creates and maintains a certain quantity of carbon storage. Note that
this approach develops a market for carbon sequestration that can be bought
and sold on the international market. It should also be pointed out that
since carbon sequestration benefits are truly global, and are not dependent
on where the carbon is sequestered, the market price for these carbon
rights will be set by the lowest-cost providers of the service. Obviously,
the growth of this market will require substantial monitoring and
supervision, and will depend heavily on the confidence of the market in the
management and compliance of the supplier firms with their stated carbon
sequestration numbers. Nevertheless, this is an important evolving market
and an opportunity for creating international financial transfers to
support carbon sequestration services by many countries with extensive
areas of forests.
II. VALUING SUSTAINABILITY
39. A fundamental problem connected with encouraging improved forest
management is the lack of recognition by the market and national planners
of the true values of the various services provided by a forest, and the
inability to "capture" part of the value for those benefits or at least
receive credit in the market-place for protecting these benefits. Several
recent developments offer the promise of improving the incentive for
sustainability.
40. Certification of forest products is an important new approach to
creating a market for sustainably produced timber products. Certification
would help ensure national and international markets for sustainably
produced timber, and can help firms recover some of the additional costs
associated with such practices. Similarly, the evolution of natural
resource accounting is a way to highlight the important role of forests in
national economic well-being, and clearly indicate that unsustainable use
of forests implies a direct cost to national economic growth.
A. Certification of forest management and forest products
41. The trade instrument is intrinsically a powerful one for bringing
countries with large forest holdings to the point of recognizing the value
of those holdings, but it is potentially double-edged, and therefore needs
to be applied with great caution. If a given forest supplier country has
its access to foreign markets for logs and/or forest products significantly
reduced because those products become the subject of consumer resistance,
owing to their being in some way labelled as "unsustainably produced", then
the result may be that the supplier country reduces output, increases
monitoring and surveillance of forest operations, and in other ways pursues
sustainability more vigorously. However, there is also the possibility
that the supplier country will be driven to dump larger volumes on markets
where labelling and sustainability are not an issue (thus lowering the
price of the products and by extension, of the forest resource) or,
alternatively, to simply opt out of forest production to some extent, thus
exposing the forest resource to a higher rate of conversion to other uses -
presumably the reverse of the intention of the labelling exercise. (The
issue of certification and labelling of forest products is one of the main
subjects of programme element IV, and will therefore not be further dealt
with in this report.)
B. Natural resource accounts
42. The traditional way in which Governments measure their economic
"health" is through the use of various macroeconomic indicators. An
important one is the gross domestic product (GDP) of a country and its rate
of growth over time. The System of National Accounts (SNA) is a
well-established approach to measuring the flows of goods and services
through an economy and calculating GDP figures. Forests, however, only
appear in the traditional SNA when forest products are extracted and sold.
There is no accounting for the standing stock of the forest and its change
over time. Since the sustainable manner of forests management can be such
that the "stock" of forests may not change from one generation to another,
while a constant flow of valuable outputs is extracted, a new approach,
natural resource accounting (NRA), has been devised to explicitly measure
and track the changes in stocks as well as flows of important natural and
environmental resources. Similarly, the establishment of forest
plantations are also captured in NRA as an increase of the forestry stock.
43. For the forestry sector, the use of NRA - or more specifically
national Forest Resources Accounts (NFRAs) - has the potential to highlight
not only the important contribution of forest outputs to national economic
growth (marketed outputs are already captured in the SNA), but also changes
in the forestry stock over time. Clearly a rapid-growth policy based on
cutting down a nation's forests and not replanting is non-sustainable in
the long run. This unsustainable development pattern would not be captured
in the short run by the traditional SNA but would be clearly reflected in
natural resource accounts. Early NRA efforts in Indonesia and Costa Rica
highlighted the unsustainable pattern of forest use and its contribution to
measured growth.
44. As the value of other important services from forests become
acknowledged, the use of NRA can also track some of these dimensions. In
short, the use of NRA is one approach to allowing decision makers to more
fully understand not only the benefits from immediate direct use of forest
resources, but also the longer-term picture of the state of a nation's
forest over time. A rational decision maker may still decide to deplete
certain forest resources, but the costs of doing this in terms of various
forest benefits will have become much clearer.
III. CONCLUSIONS AND PROPOSALS FOR ACTION
45. This report has taken as its point of entry into the subject of forest
valuation the fact that political realities have a large impact on the
forest economy: rent-seeking behaviour is not simply a factor that is
present in the sector, but unfortunately a basic characteristic of it in
some countries. At the national level, what actually happens in naturally
forested areas - particularly in forest-rich countries - is very much a
result of rent-seeking behaviour by powerful, but narrow, vested interests.
This creates a situation where sustainable forest management, while by no
means uneconomic from the national point of view, is rarely achieved in
practice in many developing countries, owing to the undervaluation of the
basic raw material from the forest (logs), and the exclusion of other
forest products and benefits in the calculus of forest-sector decision
makers.
46. This report goes on to argue that from the global perspective the
losses caused by lack of sustainable management of large natural forests
are even higher than those accruing at the national level, given the
concerns surrounding biodiversity destruction, and greenhouse gas
emissions. While the international community registers a high level of
concern about these matters, there are currently inadequate transfers of
funds from the global community as a whole to developing countries to
induce genuinely sustainable behaviour in forest management.
47. Undervaluing forest multiple benefits is one of the factors that have
led to reduced investments in forestry, especially in the public sector
where most of the bilateral and international development agencies are
active. Unless techniques and studies aimed at estimating environmental
non-market values acceptable to economists and environmentalists are
developed and the corresponding policies and institutional reforms are
achieved, underinvestment is likely to continue. This will have a
particularly adverse impact in those rural areas where forests do and
should dominate; investments in forest regeneration will help to guarantee
a sustainable source of employment for people living in these areas.
Shadow-pricing, which is supposed to cover this aspect of the investment
analysis, is often used in a very superficial way and does not capture the
specific implications of a "without investment" situation.
48. In many countries where sustainable management of forests has a long
tradition, the cost of reforestation is regarded as part of the harvesting
cost, that is to say, there is a commitment to restoring and maintaining
the resource. Any decision to harvest would take into consideration the
cost of restoring the forest resource. If this principle is used, under
the condition that proper land-use planning has determined the area
suitable for forest, deforestation and degradation of forests are likely to
be reduced.
49. In short, significant progress in reducing forest destruction will
only come when nations that possess forest resources recognize that
sustainable use of the resource is in their own interest. The
international community would be well advised to identify very carefully
those countries that seem genuinely amenable to this idea, and to direct
resources, trade and other support to such countries.
50. In addition, there is need for increased awareness of the costs of
inaction, especially in cases where there is the possibility of identifying
and even measuring benefits, but no adequate existing mechanism to capture
them, for example, the value of carbon sequestration.
A. National level
51. Economic rent collection. The fundamental decision for countries
wishing to pursue sustainability principles is that involving economic rent
collection. Unless appropriate levels of rent for use of the forest
resources are collected, production patterns will tend to be unsustainable
and other non-timber benefits will be lost (this was also one of the
conclusions of the Denmark-South Africa-United Nations Development
Programme (UNDP)-sponsored international workshop on financial mechanisms).
The strong influence of large-scale commercial logging and processing
interests that are created under these circumstances will continue to crowd
out other potential (or traditional) users of other products the forest can
supply, thus further reducing the perceived value of the forest.
Proposals for action
þ Governments in control of large forest resources should collect
appropriate rent for their use. In cases where the Government,
through a forest service, is an operator, the task is to increase wood
prices by opening markets. Pragmatic solutions for introducing
royalty or wood price increases in stages, and even the use of
subsidies to affected industries, might be justified; but these need
to be applied in a strictly limited time-frame, and in a fully
transparent manner.
þ Governments will need to invest more money to ensure that the terms
and conditions under which the forest resource is made available are
adhered to. This will be the case especially where rising royalties
increase the temptation to remove timber illegally, or high-grade the
forest and reduce utilization standards. Where necessary, high
performance bonds (to ensure that the costs of non-compliance are
high), coupled with strong incentive measures such as lengthening the
term of licenses over given areas and allowing firms to transfer
licences, should be applied, so as to ensure that a forest concession
in good condition always has positive present value to the
concessionaire.
52. Participation. It is widely recognized that participation in the
management of, and proceeds from, the forest by all affected groups is
necessary in order to realize the full value of the resource, to maximize
the chances that it will be utilized in a sustainable fashion and, where
appropriate, to achieve certain social goals.
Proposals for action
þ Governments should begin to apply participatory forest management
mechanisms at significant field scale. There are many options,
ranging from direct titling of traditional forest dwellers/users to
specific areas, to leasing, forest stewardship, and community
concessioning arrangements, by which the access to and rights of use
of forests can be broadened, without necessarily abandoning any means
of retaining control over the sustainability objective.
þ Not all approaches can or should be implemented by fiat from the
central government. Large-scale concessionaires can be given a strong
incentive to involve local communities in forest operations, through
being offered longer and more secure tenure over the resource
themselves on evidence of success in this respect, or the inclusion of
certain standards of participation in their operations as part of
performance bonding (please also refer to the report of the
Secretary-General to the Panel at its third session on programme
element I.1). Local governments, which are potentially important
influences on the behaviour of local communities, can be induced to
involve those communities in forest management (or off-forest
alternatives) by receiving a larger share of revenues from forest
activities than is typically the case, but with those receipts
conditioned by successful development of participation alternatives.
þ Governments should ensure that poverty objectives are dealt with at
least as effectively in the forestry sector as elsewhere. Where local
dwellers living in or near forests are largely poor - as is frequently
the case where natural forest areas are concerned - then approaches
that effectively involve significant numbers of those people will be
acceptable. In cases where surrounding populations are more varied in
income distribution - as is often the case around agricultural and
agroforestry development sites - then more careful targeting of low-
income groups will be required if poverty alleviation is to be a major
factor in investments.
53. Natural resource accounting (NRA). A new approach, NRA, has the
potential to highlight the real national economic costs of unsustainable
patterns of forest use. The results of NRA will inform Governments, the
international development assistance community, and the private sector, and
should improve decision-making in relation to the forestry sector (some
aspects of this issue have been included in the report of the
Secretary-General to the Panel at its third session on programme element
III.2 (E/CN.17/IPF/1996/21)).
Proposals for action
þ Governments should be encouraged to establish indicators and
accounting systems to monitor and evaluate changes in the stocks, as
well as the flows, of national forest resources.
þ International development assistance agencies and other international
interest groups should utilize the results of such accounting when
planning and prioritizing their own interventions in countries with
important forest resources.
B. Global level
54. Biodiversity conservation. In many countries, there is a gap between
the apparently high level of international concern for biodiversity
conservation and the level of funding available to forest resource-owning
countries to protect biodiversity. In some situations, national benefits
are sufficiently large to generate the resources needed for conservation.
In other situations, transfer of funds from the international community to
those countries where biodiversity assets are located will be an important
element in obtaining better protection of these resources.
Proposals for action
þ Where significant use of biodiversity exists (for (eco)tourism,
pharmaceuticals, recreation), either from national or international
visitors, efforts are needed to increase "user fees" and income
generation to support biodiversity conservation.
þ In many situations, owing to budget constraints and low levels of
direct use of biodiversity, national Governments may not be able to
justify supporting biodiversity conservation adequately. In such
cases further international transfers, such as from GEF,
non-governmental organizations and bilateral agencies, are required.
þ At present, there are few mechanisms whereby consumers of forest
products can opt to contribute directly to biodiversity protection. A
system of voluntary levies, attached to forest products, collected
through suppliers and retailers willing to participate and
administered through some credible international agency, could be
considered a means of raising consumer awareness and contributions to
the global problem of biodiversity protection in forest areas.
55. Carbon sequestration. Sequestration of carbon in forests as a means
of offsetting emissions of greenhouse gases is now generally regarded as a
viable approach. The challenge is to implement an effective market
approach so as to achieve this.
Proposals for action
þ The role of developed-country Governments is crucial, not in making
direct contributions to carbon offsetting investments, but in
strengthening compliance with existing international agreements on
national carbon emission targets, and ensuring that the private sector
is allowed enough flexibility to determine the most cost-efficient
means of compliance.
þ Providing information to potential investors in carbon-offsets will
help to develop the international market for carbon sequestration.
þ Compliance monitoring is required to develop an efficient and credible
international market in carbon-offsets. To be effective, it is
essential that application of "carbon charges" be made to all
substitutes so that timber certification will not have the perverse
effect of driving consumption away from timber to potentially more
environmentally damaging alternatives.
Notes
1/ Official Records of the Economic and Social Council, 1995,
Supplement No. 12 (E/1995/32), chap. I, sect. D, annex I, sect III.
2/ The subject of demonstrating and measuring environmental and
social benefits and of how to capture these benefits was the main theme of
the International Symposium on the Non-Market Benefits of Forestry, held in
Edinburgh, United Kingdom of Great Britain and Northern Ireland,
24-28 June 1996, organized by the British Forestry Commission as a
contribution to the international dialogue on the sustainable management of
forests.
Annex
RECENT WORK ON VALUING FOREST BENEFITS
A number of recent works address the issue of valuating the multiple
benefits of forests. Some are general overviews while others are
site-specific case-studies. A very partial listing from this literature
includes the following:
Chomitz, K., and K. Kumari (1996). The Domestic Benefits of Tropical
Forests: A Critical Review Emphasizing Hydrological Functions. World Bank
Policy Research Working Paper No. 1601. Washington, D.C.: World Bank (May).
Freeman, A. M. (1994). The Measurement of Environmental and Resource
Values: Theories and Methods. Washington, D.C.: Resources for the Future.
Gregersen, H. M., and others (1995). Valuing Forests: Context, Issues,
and Guidelines. FAO Forestry Paper, No. 127. Rome: FAO.
Grimes, A., and others (1994). Valuing the rain forest: the economic
value of non-timber forest products in Ecuador. Ambio, vol. 23, No. 7
(November).
Kramer, R., R. Healy and R. Mendelsohn (1992). Forest valuation. In
Managing the World's Forests: Looking for Balance Between Conservation and
Development, N. Sharma, ed. Iowa: Kendall/Hunt.
Lampietti, J., and J. Dixon (1995). To See the Forest for the Trees: A
Guide to Non-Timber Forest Benefits. Environmental Economics Series Paper,
No. 13. Washington, D.C.: World Bank (July).
Mitchell, R., and R. Carson (1989). Using Surveys to Value Public Goods:
the Contingent Valuation Method. Washington, D.C.: Resources for the
Future.
Wibe, S. (1995). Non Wood Benefits in Forestry: A Survey of Valuation
Studies. Economic Commission for Europe/Food and Agriculture Organization of
the United Nations (ECE/FAO) Timber and Forestry Discussion Papers. New York
and Geneva.
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