| United Nations | E/CN.17/IPF/1996/7 |
Economic and Social Council
Distr. GENERAL
14 February 1996
ORIGINAL: ENGLISH
COMMISSION ON SUSTAINABLE DEVELOPMENT
Ad Hoc Intergovernmental Panel on Forests
Second session
11-22 March 1996
SCIENTIFIC RESEARCH, FOREST ASSESSMENT AND DEVELOPMENT OF
CRITERIA AND INDICATORS FOR SUSTAINABLE FOREST MANAGEMENT
Programme element III.1 (b): Methodologies for proper
valuation of the multiple benefits of forests
Report of the Secretary-General
SUMMARY
The present document reports on implementation of decisions of the United
Nations Conference on Environment and Development 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 work programme of the Ad Hoc Intergovernmental Panel on Forests. As
requested by the Panel at its first session, two reports have been prepared
for this programme element. The first (E/CN.17/IPF/1996/6) deals with the
assessment of multiple benefits of all types of forests. The second (the
present report) presents an initial analysis of the methodologies for valuing
the multiple benefits derived from forests. It includes a general overview of
the issue, and a short update of its current status, and is followed by a
description of the range of considerations for the substantive discussion of
this programme element at the second session of the Panel.
The need to value realistically the goods and services of forests, forest
lands and wooded lands has been recognized for quite some time but such
valuation has seldom been seriously attempted. Indeed, it has been pointed
out that a major cause of the failure of sustainable forest management, and
even of deforestation and transfer of forests to other land uses, is the
inadequate recognition and underestimation of the values of the many goods and
services provided by forests at the local, the national, the regional and the
global level. However it must be stressed that the application of valuation
techniques in the real world faces the reality of actual forces influencing
the fate of forests and pressures for land-use changes. The proper valuation
of goods and services from forests provides information for decision-making
but is not a panacea when addressing deforestation or forest degradation.
Valuation of forests is complex, as it involves issues of measurement of
elements that escape the conventional approaches to economic analysis. The
identification of values is also strongly influenced by the specific interest
and perspective of the groups considered, whether they comprise the State,
private owners or industries, local communities, or forest dwellers.
Valuation should therefore be used to respond to questions that must be asked
in pursuing sustainability while taking into account the variety of concerns
of major players in forest management and utilization and in developing the
dialogue among policy makers, interest groups and the public at large.
Ultimately, valuation is a tool in making decisions about selecting
orientations for forest management, recovering their full value and allocating
land under forests in situations of competition with alternative use options.
Undertaking the valuation of the goods and services of a forest at the local,
national, regional and global levels is a complex and costly exercise that
must be carried out in response to specific demands and guided by the type of
decisions for which the results are to be used.
A review of the literature indicates an eagerness in attempting economic
valuation. Studies whose aim was to value recreational goods and services
were carried out in the United States of America as early as the late 1950s
and 1960s. Recently, one may note a new and widespread interest in finding
out what the value of forests might be, and also much confusion. This is
hardly surprising, given the complexity of the issue and the practical
problems in the way of establishing such values. Classical and neoclassical
economic theory, on which conventional analysis bases its conceptual
framework, did not pay attention to environmental dimensions. They were
viewed as externalities or side-effects. Thus, conventional analysis has
often failed to adequately capture many forest benefits that do not enter the
market or cannot for other reasons be adequately valued in economic terms or
are perceived in other sectors.
Values are classified as direct use values, indirect use values,
existence value, and option (or non-use) value.
A number of valuation techniques are reviewed including market prices,
efficiency (or shadow) prices, the hedonic pricing method, the travel cost
method, the production function approach, the related goods approaches,
constructed market techniques, and cost-based valuation. It is stressed that
valuation is to be a neutral analytical tool and not an advocacy instrument.
Cost-based valuation considers indirect opportunity costs, restoration
costs, replacement costs and relocation costs, as well as preventive/defensive
expenditures.
The present review suggests that, from a technical point of view, there
exists a large body of techniques, methodologies and approaches for dealing
with forest valuation, although some of them are too theoretical, and
difficult to apply as well as time-consuming and costly; and that some
experiences of the application of valuation techniques exist from which
lessons can be drawn. One must also stress that the application of even the
most traditional valuation methods relies heavily on the availability of
better data, part of which should originate from the assessment of forest
resources. It is critical that the information not be restricted to the
forest sector - that it should also be linked to other sectors that capture
benefits generated by forests and woodlands.
It is suggested that the Panel may wish to pay special attention to
deciding if it wishes to give priority to (a) the furthering of work on
valuation stricto sensu which would imply that continuing efforts are
justified by a demand for full valuation encompassing other dimensions than
those incorporated in traditional methods in order to actually influence
decisions or (b) the political issues raised once value is established, in
other words how to direct serious attention towards the outcome of valuation,
its application and the implications for decision-making and for reconciling
the concerns of the various interest groups or stakeholders.
CONTENTS
Paragraphs Page
INTRODUCTION ............................................... 1 - 11 6
I. VALUATION OF FORESTS IN CONTEXT ...................... 12 - 16 8
II. REVIEW OF METHODOLOGIES .............................. 17 - 62 10
A. Market prices (for traded economic goods and
services) ........................................ 24 - 25 11
B. Efficiency (or shadow) prices (for effective/
efficient resource allocation) ................... 26 - 29 12
C. Hedonic pricing method (for non-marketed goods and
services) ........................................ 30 - 31 13
D. Travel cost method (effort/cost for consumers to
obtain goods/services) ........................... 32 - 33 13
E. Production function approach (to capture indirect,
for example, ecological, values) ................. 34 - 37 14
F. Related goods approaches (to estimate values
indirectly) ...................................... 38 - 46 15
1. Barter exchange approach (to estimate the
barter value of, for example, wild mushrooms) 39 - 40 15
2. Direct substitute approach (to estimate the
value of, for example, fuelwood) ............. 41 - 42 16
3. Indirect substitute approach (to compare a
non-marketed good/service with a close
substitute) .................................. 43 - 46 16
G. Constructed market techniques (hypothetical
"willingness to pay") ............................ 47 - 53 17
1. Contingent valuation method (a consumer's
perceived value of a good/service) ........... 50 - 51 17
2. Contingent ranking method (using relative
instead of absolute values) .................. 52 - 53 18
H. Cost-based valuation (what it would cost to
provide the good/service by other means) ......... 54 - 62 18
1. Indirect opportunity cost (for example, labour
cost of gathering fuelwood) .................. 55 19
2. Restoration cost (what it would cost to
recreate the original ecosystem) ............. 56 - 57 19
3. Replacement cost (what it would cost to
replace the good/service) .................... 58 19
4. Relocation cost (cost of moving people to
where the original good/service still exists) 59 - 60 20
5. Preventive/defensive expenditure (what it
would cost to prevent degradation) ........... 61 - 62 20
III. CHOOSING THE ECONOMIC VALUATION TECHNIQUE/METHOD ..... 63 - 69 21
IV. ISSUES FOR FURTHER CONSIDERATION ..................... 70 - 74 22
Annexes
I. VALUES ASSOCIATED WITH CONTRIBUTIONS OF FORESTS TO HUMAN WELFARE . 26
II. ADVANTAGES AND DISADVANTAGES OF VALUATION TECHNIQUES IN FOREST
LAND-USE APPRAISAL ............................................... 27
INTRODUCTION
1. The present document reports on implementation of the decisions of the
United Nations Conference on Environment and Development 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 work programme of the Ad Hoc Intergovernmental Panel on Forests. As
requested by the Panel at its first session, two reports have been prepared
for this programme element. The first (E/CN.17/IPF/1996/6) deals with the
assessment of multiple benefits of all types of forests. The second (the
present report) presents an initial analysis of the methodologies for valuing
the multiple benefits derived from forests. It includes a general overview of
the issue, and a short update of its current status, and is followed by a
description of the range of considerations for the substantive discussion of
this programme element at the second session of the Panel.
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 session of the Ad Hoc Intergovernmental Panel
on Forests.
3. The Commission, at its third session, defined programme element III.1 as
consisting in 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/
4. Subsequently, the Panel, at its first session, emphasized the need for
the preparation of two reports (see document E/CN.17/IPF/1995/3,
para. 18 (III.1)):
(a) One would identify ways to expand on the Food and Agriculture
Organization of the United Nations (FAO) Forest Resources Assessment with
regard to the qualitative and quantitative assessment of all types of forests,
including information on biological resources and non-wood forest products and
services; information on environmental and social benefits; standardization of
tropical and non-tropical data; collection of broader types of forest
statistics; coordination of forest monitoring with remote sensing and
geographical information systems; the continuous nature of the assessment; and
the accessibility of information generated to all interested parties;
(b) The second report (this document) 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. Consideration
of this item should benefit from deliberations under programme elements IV,
III.2 and other ongoing work undertaken in this field.
5. The science community should be involved in the preparations of these
analyses in order to explore ways and means of enhancing the scientific basis
for such assessments and valuations (see E/CN.17/IPF/1995/3,
para. 18 (III.1)). At the first session of the Panel, it was decided to
schedule programme element III.1 for substantive discussion at the second
session, to be held in Geneva (11-22 March 1996).
6. This report was prepared by the Food and Agriculture Organization of the
United Nations (FAO), in collaboration with the World Bank as lead agency for
programme element III.1 (valuation) 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, contributions
were received from the Centre for International Forestry Research (CIFOR).
7. This report is an initial response to the request of the Panel at its
first session, taking into account the complexity of the subject and the fact
that the Panel has programmed an initial substantive discussion at its second
session, and a further substantive discussion at its third session. The
report is on valuation methodologies but does not cover the inclusion of
values within the systems of national accounting. It is meant to present in a
concise manner some critical elements underlying approaches to valuation and a
brief discussion of the status of current methodologies with a view to seeking
the guidance of the Panel on the future development of work on this subject.
8. The issue of proper valuation of forest goods and services is closely
linked to and in fact dependent on reliable information on the forest
resource, information of both a quantitative and a qualitative nature
including physical as well as socio-economic elements. In this sense, it must
be stressed that the two topics under programme element III.1 of the work
programme of the Panel, namely, forest resource assessment and the valuation
of forests, are closely related even if they are distinct in nature.
9. The need to value realistically the goods and services of forests,
forest lands and wooded lands has been recognized for quite some time but
seldom attempted seriously. Indeed, it has been pointed out that a major
cause of the failure of sustainable forest management, and even of
deforestation and transfer of forests to other land uses, is the inadequate
recognition and underestimation of the values of the many goods and services
provided by forests at the local, the national, the regional and global the
level. However it must be stressed that the application of valuation
techniques in the real world faces the reality of actual forces influencing
the fate of forests and pressures for land-use changes. The proper valuation
of goods and services from forests provides information for decision-making
but is not a panacea for deforestation or forest degradation.
10. Valuation of forests is complex as it involves issues of the measurement
of elements that escape the conventional approaches of economic analysis. The
identification of values is also strongly influenced by the specific interest
and perspective of the groups considered whether they comprise the State,
private owners or industries, local communities, or forest dwellers.
Valuation should therefore be used to respond to questions that must be asked
in pursuing sustainability while taking into account the variety of concerns
of major players in forest management and utilization and in developing the
dialogue among policy makers, interest groups and the public at large.
Ultimately, valuation is a tool in decision-making as regards selecting
orientations for forest management, recovering their full value and allocating
land under forests in situations of competition with alternative use options.
Undertaking the valuation of the goods and services of a forest at local,
national, regional and global levels is a complex and costly exercise that
must be carried out in response to specific demands and guided by the type of
decisions for which the results are to be used.
11. In section I below, the report briefly sets the valuation of forests in
context. Section II presents, in a concise manner, the methodologies
currently available and, whenever possible, some lessons arising from their
application. Section III deals with choosing an economic valuation method.
The final section (IV) outlines some considerations for the Panel's attention
and seeks its guidance for defining directions for future work on the subject.
I. VALUATION OF FORESTS IN CONTEXT
12. The context in which efforts to manage forests sustainably are taking
place is one of increasing competition for scarce resources, particularly
natural resources, and of concern for the fate of natural forests. 2/
Decision-making by Governments, private enterprises, local communities and
farmers concerning the conservation, management and utilization of a resource
are largely influenced by the value they attach to this resource and the costs
and benefits involved in its utilization - or non-utilization. Valuation of
forests is therefore about increasing the knowledge of the range of values
associated with forests. It provides useful information to all those
associated with decisions and choices among management options and alternate
uses of forests and lands that meet the needs of the groups involved. It must
be stressed that valuation is intended to be a neutral analytical tool and not
an advocacy instrument.
13. This report focuses on economic values associated with forests and
woodlands, that is to say, values to which some monetary measure can be
assigned. This is not to deny that other types of values must be recognized
such as social, ethical, cultural and religious ones, and that these should be
taken into consideration. However, in most cases the principal questions that
decision makers, be they government officials or community leaders or private
entrepreneurs, ask will deal with economic values rather than with all
relevant values and their interactions; for example, what is the nature of
economic values and their usefulness? What are the underlying costs and
benefits? How can they be used as a basis for comparing options and deciding
on them? It is important to stress that economic value measures are primarily
useful in comparing and making decisions on changes, in other words, in
prioritizing practical action including alternative uses of forests as well as
investments and, ultimately, change in land use. Valuation might also be
required for setting levels of possible compensation to those who are obliged
to conserve forests beyond their own needs or to refrain from using their full
production potential. The valuation approach will therefore be shaped by the
decision-making context within which the information is to be used and will
focus on answering the basic questions when comparing a proposed change with
the status quo. In a case where no change is envisaged, valuation measures
are not required for other than curiosity purposes.
14. Economic values have been associated with forestry in the past, in
keeping with the traditional orientation of forest management which was
towards production of timber and other products for the market. Market prices
were thus considered to be the source of information determining the value of
forest production. There has been an increased realization of a wide variety
of goods (foods, fuels, medicines, fodder, and so forth) and services (land
and water protection, amenity and aesthetics, biological diversity, influence
on the biosphere, and so forth); however, the traditional valuation methods
cannot capture many of those goods and services which are non-marketed or
non-marketable, or intangible, or relate to benefits derived outside the
forestry sector or to influences on it that are external. The relevance of
these goods or services at the local level must be identified; however, the
relevance of others are of a wider nature such as encompasses the national,
transboundary regional or global level.
15. There are no absolute values, as they are based on perceptions by
individuals and groups which are subject to dynamic changes in their
situation, needs and aspirations. These perceptions in the particular case of
forests have been evolving rapidly in recent years with the broadening of
interests, the increasing number of interest groups, the diversity of
perceptions by different groups and the awareness of the wide range of goods
and services provided by forests at local, regional, national and global
levels. Furthermore, values involve costs and benefits whose distribution
among interest groups is often a significant element in terms of its political
nature and of making decisions. The social and environmental impacts may also
change rapidly and the direction of change may be different for the various
groups affected.
16. In an increasingly populated world with growing needs for land to grow
food and agricultural crops, the sustainability of forests and their
management must also be seen in relation to that of alternative uses of the
land. The decision depends on efficient land capability assessment and on
"clearing-house" arrangements for major land-use changes that take into
account other factors which could be even more important than land capability.
Socio-economic and physical data provided by forest and other land-use
assessments are needed for proper valuation of forests and to enable
comparisons with the valuation of other use options for decisions in a
sustainable livelihood perspective. Valuation of forests must therefore be
seen not as a necessity within a narrow sectoral context but as part of a
broader effort covering alternative land uses. This approach provides the
necessary base for moving towards sustainable land-use systems within which
forests are clearly recognized as an option with its own validity in
contributing to sustainability at local, national and global levels.
II. REVIEW OF METHODOLOGIES
17. A review of the literature indicates an eagerness in attempting economic
valuation. Studies whose aim was to value recreational goods and services
were carried out in the United States of America as early as the late 1950s
and 1960s. Recently, one may note a new and widespread interest in finding
out what the value of forests might be, and also much confusion. This is
hardly surprising, given the complexity of the issue and the practical
problems in the way of establishing such values. The classical and
neoclassical economic theory on which conventional analysis bases its
conceptual framework did not pay attention to environmental problems. They
were viewed as externalities or side-effects. Thus, conventional analysis has
often failed to adequately capture many forest benefits that do not enter the
market or cannot for other reasons be adequately valued in economic terms or
are perceived in other sectors.
18. In response to the limitations of traditional approaches for the
valuation of forest goods and services, new techniques have been developed
which are often faced with inadequate data and knowledge about
economy-environment interactions. While some of them are attractive in
theory, they are also difficult to apply in practice and often expensive and
time-consuming. As has already been stressed, the estimation of the total
economic value of forest resources faces difficulties in terms of placing
monetary values on unmarketable or intangible goods and services and
reflecting the variety of the perceptions of interest groups. In many cases,
economic valuation methods provide estimates of values in orders of magnitude.
Although values expressed in monetary terms facilitate comparison they should
be used with care as they may provide only a partial analysis and be
misleading in decision-making.
19. Conceptually, the total economic value (TEV) of a forest is equal to its
(a) total use value (TUV) plus its (b) total non-use value (TNV). Use value
can be divided into direct use value (DUV), indirect use value (IUV) and
option value (OV) (it is important to stress that these values are intended
net of costs). These relationships can be expressed as:
TEV = TUV + TNV
and (where NUV is non-use value)
TEV = (DUV + IUV + OV) + NUV
DUV can be subdivided into consumptive values, for example, timber, fuelwood
and non-wood forest products, and non-consumptive values, for example,
recreational activities and sightseeing. IUV covers services, that is,
ecological functions performed by forest resources, for example carbon
fixation, water-flow regulation, climate regulation and biodiversity.
Existence value (EV) is basically people's decision to value the existence of
the forest resource coupled with the intention not to use it in future or to
keep it available as, among other things, a contributor to the preservation of
biological diversity and a source of supply of genetic resources. OV and NUV
are associated with people's option to use the forest, or merely have it
available, in the future. They are unrelated to use values - in fact, they
are much more linked to cultural elements, including moral and ethical beliefs
as well as altruistic motives. Even if measuring them in economic terms is
difficult, they should be recognized in valuing the contributions of forests
to human welfare.
20. A summarized presentation to facilitate the understanding of the
different values associated with forest contributions to human welfare is
given in annex I.
21. A range of different valuation techniques exist. Before presenting
them, it must be stressed that the actual issue is not so much that of their
theoretical appropriateness but of the easiness and reliability with which
analysts can attach realistic values to parameters and so derive results that
are sensible and replicable under difficult data conditions. Especially
important is the capacity of a given methodology to yield good results
relatively free from analyst bias in a situation without market signals.
22. Valuation techniques need also to be examined in relation to their
applicability to a number of specific categories of situations in which value
information is particularly critical for decision-making. Examples of such
categories are a major change in forest utilization such as the establishment
of a forest reserve for the protection of biological diversity, the
afforestation of denuded land, a major change in land use affecting forests or
woodlands, agroforestry, watershed management, the conservation of forests for
the stability of the biosphere and as a contribution to the global carbon
balance, and so forth.
23. Valuation techniques were initially utilized in the United States and
Canada, later in Europe and more recently in developing countries. The main
techniques vary from those that rely on actual market prices to those that
rely on hypothetical methods. These techniques include market prices,
efficiency (shadow) prices, hedonic pricing, the travel cost method, the
production function approach, related goods approaches, constructed market
techniques, and cost-based valuation. Most of them have been already applied
in a developing-country context. Detailed reviews of each one can be found in
the literature (see annex II for a summary of these techniques and their
advantages and disadvantages).
A. Market prices (for traded economic goods and services)
24. Market prices are the result of an interaction between consumers and
producers over the demand and supply of goods and services. If this
transaction is carried out using currency, the value established in the market
is the market price. The assumption underlying this is that these prices
reflect economic scarcity and hence are economic efficiency prices. However,
this is not always true. Generally, there are distortions in the market
prices. These distortions can be attributed to taxes, subsidies, exchange
rates and so on. When this exists, appropriate adjustments are required. The
derivation of adjusted prices (commonly called shadow prices) is well
discussed in any standard project analysis handbook. However, if the
transaction is carried out by some form of barter or exchange without the use
of currency, the value established in the market is the market exchange value.
25. A study in Amazonian Ecuador 3/ estimated the present value of net
revenue based on the potential extraction of non-timber forest products
(NTFPs), seven fruits, three medicinal barks and one resin. It was carried
out using market prices techniques in three one-hectare permanent primary
forest plots at the Jatun Sacha Biological Station in the Upper Napo region of
Amazonian Ecuador. These estimated values were compared with the returns from
alternative land uses, namely wood extraction and cattle ranching in these
areas. The study concluded that the current value of net revenue from NTFP
collection was US$ 2,830 in the upland plots and US$ 1,257 in the alluvial
plot, and these returns were significantly higher than those from alternative
land uses in this area. The authors called attention to the fact that the
results of the study also raised an important paradox: if the value of NTFPs
exceeded alternative land uses, why did the region seem so little intent on
adopting these NTFP-related uses? This paradox raises another question
regarding the meaning of value per se? The results of the study suggest that
valuing a piece of forest must be complemented by other measures to turn these
values into revenue flows.
B. Efficiency (or shadow) prices (for effective/efficient
resource allocation)
26. The market price does not necessarily mean the "proper" price and/or
reflect the true economic efficiency price. There are market and policy
failures that can distort market prices. Market failures concern to the
inability of market prices, under certain conditions, to reflect accurately
the value of environmental goods or services; for example, the upstream
polluter has no incentive to account for the costs he imposes on a downstream
user of the river. Policy failures concern instances where government
policies have unintended effects, or sometimes even side-effects or cause
resource-use behaviour inappropriate from a societal perspective (for example,
when subsidies given by Governments for the use of resources that lead to or
encourage resource overuse).
27. In financial analysis, no account is taken of any of these failures that
distort market prices. Therefore, it is advisable to look at their economic
value in order for their value to society as a whole to be reflected, as in
the case, for example, of alternative forest land uses. To do so, the market
price is adjusted. There are various methods for correcting market and policy
distortions. The derivation of adjusted prices which are commonly called
shadow prices, is well discussed in any standard project analysis handbook.
28. Shadow prices should be cautiously used because:
(a) Market prices are often more readily accepted by decision makers
than artificial values derived by the analyst;
(b) Market prices are generally easy to observe, both at a single point
and over time;
(c) Market prices reflect the decision of many buyers, whereas
calculating shadow prices often relies on the objectivity of judgement of the
analyst;
(d) The procedures for calculating shadow prices are rather imperfect
and therefore estimates can, in certain cases, introduce larger discrepancies
than even the simple use of imperfect market prices.
29. Thus each case should be analysed within the context in which the
valuation is being made, and should take into account the data and resource
constraints. There cannot be a simple blueprint for every case.
C. Hedonic pricing method (for non-marketed goods and services)
30. The hedonic pricing method is one of the systems that use a surrogate
market to input the value of non-marketed goods and services; for example, the
market value differences for similar forest properties are used to reflect the
value of some environmental services or costs that varies across the
properties. There are some limitations to this method, in so far as caution
needs to be applied. One of these limitations involves the fact that there is
little evidence to date to indicate that land, labour or other market prices
are sensitive to the environmental amenities provided by forests.
Furthermore, its data requirements are substantial and the forest resource,
function or attribute being valued needs to be well known and easily
measurable.
31. This method has been applied in developed countries, for example, to
estimate the costs of air and noise pollution and of changes in amenities.
However, given the fairly stringent assumptions on which this method is based
and its data requirements, countries need to have a fairly good knowledge of
their forest resource. In many countries, it will require significant effort
to build the skills needed for analysis as well as for deriving the kind of
results leading to effective decision-making and planning.
D. Travel cost method (effort/cost for consumers to
obtain goods/services)
32. This method recognizes that for some goods or services the consumer may
have to incur substantial cost (in time or money) to obtain a particular good
or service. It assumes that the value to the consumer is at least equal to
the travel costs the consumer is willing to incur to obtain the desired good
or service. For example, a recreational experience may involve significant
travel expenses; and gathering free fuelwood may require a considerable amount
of time. This method has been used extensively in developed countries,
especially in the United States, since the 1950s and 1960s, to value
recreational goods and services. More recently it has also been carried out
in some developing countries. However, despite the improvements in this
method effected since its early application, its usefulness in valuing
alternative recreational uses is still constrained by a number of factors.
These factors are mainly the large amount of data required, the restrictive
assumptions about individuals' behaviour and the sensitivity of the results to
the statistical methods used to specify the demand relationship. It is also
important to bear in mind that gathering free fuelwood is not necessarily a
function of the consumer's willingness to incur travel costs in order to
obtain the fuelwood. On the contrary, it is much more a consequence of
his/her state of poverty. In other words, since around the world the consumer
is too poor to be able to afford to pay for the fuelwood, he/she needs to
travel long distances to gather it free.
33. An example of application of the travel cost method in the context of
tropical forests can be found in the estimation of the value of ecotourism to
domestic users of the Monteverde Cloud Forest Biological Reserve in Costa
Rica.
E. Production function approach (to capture indirect, for
example, ecological, values)
34. The production function approach to valuation may be used to capture the
indirect use value of regulatory ecological functions of tropical forests
through their contribution to economic activities. This approach consists of
a two-step procedure. First, the physical effects of the environment on
economic activity are determined. The second step consists of estimating the
monetary value of the ecological function. For example, the cost of siltation
of irrigation canals can be expressed in terms of reduced availability of
water for crop production. A loss of net farm income thus defines the extent
of the damage imposed by upstream erosion. As another example, consider the
wind-break: it can increase crop values behind it, and those increased values
can be taken as a proxy measure of the minimum value of the benefits from the
wind-break (there may also be others, such as fodder, shade for cattle, and so
forth). In its most straightforward applications, this method uses actual
market prices - or, when distortions exist, appropriately modified market
prices - to value economic production.
35. Applying this approach to the various indirect uses of forests is a
useful method of estimating these non-marketed, but often significant,
economic values. This method has been used extensively in developed countries
and frequently in developing regions to estimate the impact of deforestation,
soil erosion, wetlands and reef destruction, and air and water pollution on
agriculture, forestry, fisheries, health and materials damage. However, it is
a prerequisite that the relationship between the environmental regulatory
function of the forest and the economic activity it supports be well
understood. Frequently, this relationship is not well understood, and a
slight change in assumptions leads to a drastic change in results. For
instance, in relation to the timing of sedimentation, most valuation studies
assume that sedimentation will be reduced in the first year and that benefits
will occur in the near future. This means that their net present value is
fairly significant. However, many soil stabilization benefits may occur only
after some years, if not decades. The net present value is, in this case,
rather small. In addition, the impacts of market conditions and regulatory
policies affecting production decisions need to be taken into account in the
application of this approach.
36. Applications of the production function approach may be most
straightforward in the case of single use systems, for example, forests in
which the predominant economic value is a single regulatory function. In the
case of multiple use systems, for example, forests in which a regulatory
function may support or protect many different economic activities, or those
that may have more than one regulatory ecological function of economic value,
applications of this approach are slightly more problematic. In particular,
assumptions concerning the ecological relationship among these various
multiple uses must be carefully constructed.
37. This approach was employed to value the ecological benefits of rural
afforestation programmes in northern Nigeria.
F. Related goods approaches (to estimate values indirectly)
38. A non-marketed good or service may be related to a marketed good or
service. By using information about this relationship and the price of the
marketed product, the analyst may be able to infer the value of the
non-marketed product. This broadly defined related goods approach consists of
three similar valuation techniques: the barter exchange approach, the direct
substitute approach, and the indirect substitute approach.
1. Barter exchange approach (to estimate the barter value of,
for example, wild mushrooms)
39. There are many forest products that are not widely traded in formal
markets, for example, wild fruits, nuts and vegetables, medicines and
structural fibres. However, some of these forest products may be exchanged on
a non-commercial basis through a process of barter. If the bartered good that
is exchanged for the forest product is also sold in a commercial market, then
it may be possible to derive the value of the non-marketed good using
information on the relationship (that is, the units of exchange) between the
two goods and the market value of the commercial good. For example, consider
a situation where leafy vegetables are harvested from the tropical forest and
consumed locally but not sold in the local market. Given that leafy
vegetables are non-marketed goods, it is not possible to value these goods
directly using market prices. However, if a basket of leafy vegetables of
known weight is routinely exchanged for six eggs through a process of barter
and six eggs fetch US$ 1 in the local market, then it can be inferred that the
basket of leafy vegetables is worth US$ 1; that is, the market price of the
marketed good is used to estimate indirectly the value of the non-marketed
good.
40. As with all valuation techniques, care must be taken in applying this
approach. For example, bartering may occur in an "imperfect" non-commercial
market and the rate of exchange may reflect a wider range of socio-economic
factors than just the value of the goods exchanged. There are few, if any,
studies that have attempted to infer the value of a forest product from the
marketed value of a bartered good. However, this should not exclude the
technique from being considered a potentially useful valuation approach,
especially in developing countries where bartering is common.
2. Direct substitute approach (to estimate the value of,
for example, fuelwood)
41. If forest goods used directly are non-marketed (for example, fuelwood),
then the value of their use may be approximated by the market price of similar
goods (for example, fuelwood purchased from other areas) or the value of the
next best alternative/substitute good (for example, kerosene or charcoal). 4/
The extent to which the value of the marketed good reflects the value of the
non-marketed good depends, to a large extent, on the degree of similarity or
substitution between the two goods. That is, if the goods are perfect
substitutes then their economic values should be very close. As the level of
substitution decreases, so does the extent to which the value of a marketed
good can be taken as an indication of the non-marketed forest good. Once
again, market imperfections may distort the economic value of the good or
service reflected in the market-place.
42. The substitute good approach has been used for the economic valuation of
wetland benefits in the Hadejia-Jama are flood plain of north-east Nigeria.
3. Indirect substitute approach (to compare a non-marketed
good/service with a close substitute)
43. The techniques presented above are not always applicable in remote areas
and rural settings in developing countries. An alternative but second-best
approach to valuation is the indirect substitute approach, which does not
relate directly to willingness to pay.
44. The indirect substitute approach is similar to the direct substitute
approach but requires one additional step in the valuation procedure. This
additional step consists essentially in combining the production function
approach with the direct substitution approach. That is, if a non-marketed
forest good has a close substitute then it may be possible to derive the value
of the non-marketed forest good from the value of the substitute good.
However, if the value of the substitute good cannot be determined directly
from the market then it may be possible to derive its value indirectly, by
analysing the change in value of economic output caused by a change in the use
of the substitute good as an input into production.
45. However, the indirect substitute approach is necessarily based on fairly
stringent assumptions about the level of substitution between the two goods,
the role of the substitute good as an input into economic output, and the
value of the economic output. This technique is also fairly data-intensive.
Given the tenuous link between the item being valued and the actual valuation
procedure and the heavy data requirements, this approach can be expected to
provide only rough indications of value.
46. This approach was applied in a cost-benefit analysis of a management
programme for two forested watersheds in Nepal. Fuelwood was valued in terms
of the alternative uses of its closest substitute, namely, cattle dung, which
can be dried and burnt when wood is unavailable. The opportunity cost of
using cattle dung as fuel rather than as fertilizer was estimated in terms of
losses in food grain production resulting from lower dung inputs into
agricultural production.
G. Constructed market techniques (hypothetical "willingness
to pay")
47. Constructed market techniques measure individuals' willingness to pay
(WTP) to continue receiving benefits, or their willingness to accept (WTA)
compensation in return for forgoing benefits. This is done by presenting
people with a hypothetical or simulated market situation and either directly
eliciting consumer preferences for the object of the valuation or obtaining
preference orderings which can then be anchored to a revealed preference. 5/
It is important to note that both evidence and theory indicate that, for a
particular measurable change in the provision of a good, measures of WTA and
WTP will not necessarily be identical - WTA will exceed WTP. The use of WTA
as a measure of economic welfare in examining unique environmental goods has
been questioned since the difference between WTP and WTA is likely to be
particularly large in such cases.
48. Within this context, some caution should be exercised in the use of WTP
and WTA. First, an accurate initial identification of the object, or property
right, that is being measured must be made. This should lead to a proper
assessment of whether a measurement of WTP or WTA is called for. Second, as
they do not measure the same property right, it is important to avoid taking
WTA as a measure of WTP, and vice versa.
49. The simulated market technique could be applied, for example, to the
valuation of tropical forests as a means to investigate option and existence
values held by non-tropical populations. The usefulness of such an
investigation to the tropical country owner of the resource is not clear.
What is the purpose of a survey to determine WTP and/or WTA, for example, to
preserve the Amazon forest if the person does not even know where exactly the
Amazon is located? On the other hand, the person can answer in terms of any
value since he/she is not actually going to pay anything. However, would this
value be the same if he/she had to actually pay? Beyond this one possibility,
these techniques are as yet of limited usefulness in evaluating natural
resource issues in developing countries as regards the task at hand.
1. Contingent valuation method (a consumer's perceived
value of a good/service)
50. Interest in the contingent valuation method (CVM) has increased over the
last decade or so. CVM techniques use one of two measures of consumer's
surplus: compensating variation (CV) or equivalent variation (EV). CV is the
amount of payment or change in income necessary to make an individual
indifferent with respect to an initial situation and a new situation with
different prices. EV may be viewed as a change in income equal to a gain in
welfare resulting from a change in price. This method is used to estimate the
consumer's WTP for a specified good or service or WTA compensation for
receiving an undesired good or service. In practice, it is usually derived
from the responses of potential consumers to a hypothetical exchange
situation. The method assumes that the consumer's expressed WTP in a
hypothetical situation is a measure of the value to the consumer in an actual
situation. It is particularly difficult to apply meaningfully when the
respondent is asked to express a value for many functions of the forest that
have no established monetary market value, such as provision of cleaner water,
which might become available in a hypothetical set of circumstances, such as
through reduction in upstream harvesting activities.
51. Applications of CVM to ecotourism in the market of developing countries
illustrate the use of this technique. For example, a report on a survey of
option and existence values conducted at Khao Yai Park in Thailand was based
on this approach. In a CVM study of the viewing value of elephants in the
Kenyan national parks, WTP for current levels of elephants in Kenyan parks was
estimated. The value of ecotourism at a tropical rain forest site in Costa
Rica was based on this approach. Another example from Costa Rica was a study
that used a "take-it-or-leave-it" personal interview survey to establish WTP
for the Monteverde Cloud Forest Preserve. 6/
2. Contingent ranking method (using relative instead of
absolute values)
52. The contingent ranking method differs from other methods in that it does
not ask respondents to place a monetary value on the environmental amenity
itself. Instead, a range of amenities are ranked and then scored relative to
each other, with one of the amenities serving as an "anchor". The
respondents' WTP for the anchor is then elicited and used in inferring their
WTP for the other amenities. The valuation of multi-purpose tree resources in
Zimbabwe involves an excellent example of this technique. Zimbabwean
smallholder farmers were asked to rank and score 10 categories of commodities
obtained from trees. These non-monetary preferences were calibrated by
simultaneously asking respondents to score a hand-pump borehole and a
well-known type of pit latrine. Respondents were then asked for their WTP for
the borehole and latrine in order to provide an "anchor" for use in inferring
the value of the forest products and services.
53. The contingent ranking method has obvious merits in the context of
evaluating alternative land-use options. However, it is important to bear in
mind that due to its "indirect" approach, contingent ranking does not
necessarily provide true estimates of WTP. Cross-checking of both contingent
ranking and other CVM methods may be required in order to provide an
indication of the reliability of the value estimates produced.
H. Cost-based valuation (what it would cost to provide the
goods/service by other means)
54. A final set of valuation techniques for non-marketed goods and services
can be grouped together under the heading of "cost-based valuation". These
techniques assess the costs of different measures that would ensure the
maintenance of the benefits provided by the environmental good or service that
is being valued. These cost estimates are then used as proxies for unknown
environmental benefits.
1. Indirect opportunity cost (for example, labour cost
of gathering fuelwood)
55. The indirect opportunity cost (IOC) method is used to calculate the
value of non-market environmental goods when individual labour is involved in
harvesting or collection. The basic assumption of this technique is that the
decision to spend time in the collection and harvesting of, for example, NTFPs
is weighed against alternative productive uses of labour. The use of the IOC
method to value firewood gathered from the forest in Nepal has been described.
Such a technique assumes that harvesting and collection of NTFPs generally
require the expenditure of human effort with only minor investments in capital
equipment. However in many cases it is almost impossible to assess how much
labour is used for collecting NTFPs. For example, how often do farmers
collect NTFPs on their way to a field? These "user cost-based techniques"
suffer from the same deficiency - what something is worth has no necessary
relationship to the costs involved to produce it. The fact that it is hard to
estimate the users' cost to produce, for such joint products as NTFPs in the
informal sector, makes this technique somewhat dubious.
2. Restoration cost (what it would cost to recreate the original
ecosystem)
56. The restoration cost technique is based on the idea that given an
alternative land-use option the non-marketed benefits provided by an intact
ecosystem or the particular goods and services provided by such an ecosystem
can be measured by estimating what it would cost to re-create the original
ecosystem (or environmental good or service). The assumption is that by
restoring the original ecosystem the original level of benefits will be
restored.
57. In the case of primary forests, this method would involve costing the
restoration of the original forest cover. Clearly, this is not something
that, even with active intervention in silviculture and forest management,
could be concluded quickly if it could be accomplished at all. Such
considerations suggest that the technique is unlikely to prove useful.
3. Replacement cost (what it would cost to replace
the good/service)
58. A perhaps more realistic method of re-creating non-marketed benefits
consists in replacing specific natural ecosystem functions or assets with
man-made production processes and capital, instead of relying on the
restoration of the original ecosystem or function to provide the original
level of benefits. This technique generates a value for the benefits of an
environmental good or service by estimating the cost of replacing the benefits
with an alternative good or service. It rests on the availability of such an
alternative for the original good or service. The alternative should produce,
as nearly as possible, the same level of benefits supplied by the resource or
environmental function being valued. 7/ This technique rests heavily on the
assumption that replacing the original good or service is worthwhile, and that
the benefits generated by the investment in replacement outweigh the costs of
replacement.
4. Relocation cost (cost of moving people to where the
original good/service still exists)
59. This technique involves estimating how much it would cost to relocate
(and re-equip) communities in order that they might obtain a level of benefits
in their new location similar to those derived at their original site.
Instead of investigating the cost of bringing substitute benefits to
populations in existing sites, this technique examines the potential for
moving people to alternative locations where such benefits exist.
60. Application of the relocation cost technique to forests is typically
restricted to a different purpose, namely, assessing the direct costs of
establishing new protected areas that require the resettlement of
forest-dwelling communities.
5. Preventive/defensive expenditure (what it would cost
to prevent degradation)
61. A cost-based approach to estimating environmental benefits by examining
preventive expenditures involves obtaining a figure for what it would cost to
maintain environmental benefits by investing in the prevention of their
degradation. For example, in the case of a selective harvesting regime, the
watershed protection benefits that would be lost by building logging roads for
the extraction of logs from the forest could be valued by examining what it
would cost to select less damaging extraction techniques such as
non-mechanized extraction or even extraction by helicopter.
62. In concluding this section, it is necessary to stress that no
methodology provides a comprehensive answer, and this point is exemplified by
a conservation project whose preparation used a combination of valuation
methods to facilitate decision-making. The example 8/ was one of
environmental valuation of a forestry development and conservation project in
Madagascar. Its study contributed to raising awareness of the need for
improved valuation methods for natural resource projects. It allowed some
valuation methods to be adapted for use in economic analysis of a conservation
project. To carry out the research, the following valuation methods were
used: the contingent valuation method, recreation demand analysis (travel
cost method), opportunity cost analysis and productivity analysis. This study
has shown the potential of several valuation methods for improving the
economic analysis of projects. However, as was noted by the authors, a study
of this scope is impractical for every environmental or natural resource
project. In fact, it is a project in itself.
III. CHOOSING THE ECONOMIC VALUATION TECHNIQUE/METHOD
63. All the techniques and methods presented above have fairly wide
applicability. They cannot be prescribed a priori since the choice is
dependent on many factors. However, any of them, used appropriately, should
produce results that can be employed in a decision-making context. As already
stressed above, the main use for monetary measures of forest values is as
information on which to base comparisons of, and ultimately decisions on,
proposed changes in forest management and use. However, the application of
economic valuation techniques to the full range of forest benefits is an area
that needs much more development. Certain recent studies illustrate the
appropriate application of these techniques, but much more empirical work is
required. In short, the following stages should be considered when choosing
the economic valuation technique/method to be used.
64. The first stage in the evaluation process consists in defining clearly
the overall objective or problem at hand. The type of economic assessment
approach chosen will directly depend on the problem confronting the analyst.
It is important to understand the decision-making context before moving on to
the attempt to measure or estimate economic values. The values needed and the
best way to estimate them will vary with the decision-making context.
65. After the appropriate economic assessment approach is identified, the
next stage consists in defining the analysis and information required to
conduct the assessment. The first step is to identify the area under
consideration (whether an existing forest or possibly an area to be reforested
or forested) the time-scale of the analysis, and the geographical and
analytical boundaries of the system. It is also important to identify the
various interest groups involved or affected by a proposed change and then
define their own value perspectives that need to be taken into account in the
decision-making process. These will obviously differ given the type of
problem to be analysed. Once the analytical boundaries have been set, the
economic values within these boundaries of relevance to the assessment need to
be identified. It is therefore helpful to distinguish among different types
of values: direct use, indirect use and non-use values. Identifying system
and analytical boundaries, listing similar and conflicting values by interest
groups and ranking them in terms of their importance to the assessment are all
important steps in defining the information required for the analysis. As an
example, consider the proposal to open a given forest area for logging. Some
obvious interest groups would be the proposed loggers, the indigenous
populations that live in the forest area, the county or province that owns the
forest (and would thus gain revenue), various environmental groups, and the
consumers of timber products, particularly if the increased logging resulted
in lower prices for consumers.
66. The final stage involves carrying out the actual assessment itself.
Priority should obviously be given to assessing those values that are more
relevant to the decision-making requirements. Constraints on time, finances
and skills will affect which goods and benefits can be valued and to what
degree of accuracy. For example, a resource, function or characteristic may
be given high importance initially, but other constraints may prevent its
valuation.
67. Some guidelines exist for using economic value measures in practice.
Gregersen and others (see note 1 below) suggest a general approach for the
public sector that can be used in sorting out the values of different
interested groups and their importance in different decision-making contexts.
68. As a final remark on difficulties encountered, it may be useful to refer
to an example of estimating the total economic value (TEV) of forests. A
study conducted in Mexico 9/ meant for this purpose showed an annual lower
bound value of the services of Mexico's forests to be in the order of US$ 4
billion. TEV is an aggregate of direct-use value plus indirect-use value plus
option value plus existence value. As such, this value encompasses benefits
of Mexico's forests that accrue spatially (locally, nationally, regionally and
internationally); so of this total value only a portion is likely to be
"captured" within the country while most of it, for example, carbon cycling,
will fall outside its borders. One of the conclusions of that study was that
it had demonstrated that a strong case could be made for forest conservation
in the Mexican instance, based on local, regional and global values of
forests, and that those values should be incorporated into decisions on the
future management of such an important resource. This leads once again to the
question how the country can actually capture such values. As was pointed out
in the study, valuation by itself is of little interest to a country owning
environmental assets unless they can be turned into revenue flows. Thus,
appropriate mechanisms need to be developed to capture the estimated economic
values. These mechanisms need to be at the national and the international
level.
69. There are many more case-studies. These studies suggest that such
valuation techniques, with proper adaptations to a local context, can be
useful in assessing resource value changes in the context of developing
countries.
IV. ISSUES FOR FURTHER CONSIDERATION
70. This brief review suggests that (a) from a technical point of view,
there exists a large body of techniques, methodologies and approaches for
dealing with forest valuation, although some of them are too theoretical, and
difficult to apply as well as time-consuming and costly; and (b) some
experiences of the application of valuation techniques exist from which
lessons can be drawn. One must also stress that the application of even the
most traditional valuation methods relies heavily on the availability of
better data, part of which should originate from the assessment of forest
resources. It is critical that the information not be restricted to the
forest sector: it should also be linked to other sectors that capture
benefits generated by forests and woodlands.
71. However, a number of important considerations that go beyond technical
aspects are brought to the attention of the Panel in terms of discussing this
topic:
(a) Is the information provided by valuation efforts worth the use made
of it in decision-making. In other words, it is necessary to ask whether
elaborate valuation is able to influence decisions; otherwise it is a wasted
effort;
(b) It should be noted that valuation always takes place in a context of
power relationships among policy makers, society and various types of interest
groups and communities. The power relationships determine whose perspective
ultimately prevails in valuation;
(c) More detailed analysis is required for assessing the applicability
and reliability of valuation in the key situations in which valuation is
important that are probably more central to the concerns of the Panel such as
(i) utilization or conservation of primary, unmanaged or any other types of
forests, (ii) establishment of reserves for biological diversity, (iii) carbon
sequestration and (iv) international watersheds, among others;
(d) Once value is demonstrated and incidence of such benefits is shown
to be supranational, the political question, not a valuation issue, is whether
- and if so how - to compensate those who suffer by making the value stay
available, for example, with respect to areas under conservation that go
beyond national and local needs;
(e) It is important to ensure that valuation is used as an objective
analytical tool relative also to other sectors and to avoid "valuation for
advocacy". The danger may exist that valuation is being applied selectively
to forests for the purpose of advocacy rather than of neutral analysis
relative to other uses of the lands with which forest-related uses are
compared.
72. As was stressed in the introduction to this report, valuation is not a
panacea in terms of stopping deforestation or forest degradation. It is a
useful tool for providing information relating to a comparison of values (of
those that would exist with a proposed change with those that would exist
without one) and to the different ways different interest groups would be
affected. The strength of valuation techniques lies in their ability to
improve the understanding of the multiple goods and benefits of forests and
the differences in the perceptions of and the importance given to, those goods
and benefits by different interest groups. Their usefulness is determined by
the existence of the political commitment to use the information generated for
effective decision-making with a good understanding of the likely impacts.
Even so, review shows that many of the detailed applications have been
produced by researchers at a cost, both in time and in money, that would make
such techniques of little use to managers having to make everyday decisions.
73. It is suggested that the Panel may wish to pay special attention to
deciding if its interest is to be centred in (a) further work on valuation
stricto sensu, which would imply that continuing efforts are justified by a
demand for full valuation encompassing other dimensions than those
incorporated in traditional methods in order to actually influence decisions.
The Panel may wish to consider whether forest valuation theory and methodology
are not ahead of actual applications. On the other hand, most valuation
studies suffer from insufficient data and limited understanding of
economy-environment interactions. The complexities of social systems and the
valuation of social goods and services are seldom considered fully. If the
Panel considers that there is scope for more work for improving valuation
techniques, it may wish to indicate what emphasis it would like to see for
research on alternative ways of bringing interested groups and stakeholders
together and tools that allow people to communicate what they value most and
on work at national, regional and global level or in (b) the political issues
raised once value is established, in other words, how to direct serious
attention towards the outcome of valuation, its application and the
implications for decision-making and for reconciling the concerns of the
various interest groups or stakeholders. More specifically, the key challenge
lies in developing policies and influencing behaviour on the basis of
approaches that address the matter of the values forests provide, that meet
the competing demands of interested groups and that provide a tool for
analysis, and, ultimately, in making decisions and directing action in a
coherent manner among major players and interest groups.
74. Including forest values within systems of national accounting is the
next step to be addressed once agreement has been reached that it is feasible
to derive credible, objective valuations that include all non-market goods and
services.
Notes
1/ Official Records of the Economic and Social Council, 1995,
Supplement No. 12 (E/1995/32), chap. I, annex I, sect. III, para. 1.
2/ For a more detailed and complete presentation of the subject of this
report please see Gregersen and others, Valuing forests: context, issues and
guidelines, FAO Forestry Paper, No. 127 (Rome, 1995). This paper was jointly
sponsored by the World Bank, the United Nations Environment Programme (UNEP),
a project of the United States Agency for International Development (USAID)
and FAO.
3/ A. Grimes and others, "Valuing the rain forest: the economic value
of non-timber forest products", Ambio, vol. 23, No. 7, pp. 405-410.
4/ The surrogate market valuation approach uses information about a
marketed good or service to infer the value of a related, substitute or
comparable non-marketed good or service under comparable conditions. For
example, the value of fuelwood in a new market is estimated on the basis of
the value of an alternative fuel, for example, kerosene, in that market, after
adjusting for the calorific value of the two fuels.
5/ Carson (1991) provides an excellent overview of constructed markets.
6/ For a more general view of CVM as a method of valuing natural areas,
see, for example, Valuing Natural Areas: Applications and Problems of the
Contingent Valuation Method, Proceedings and related papers from a workshop
held on 29 and 30 June 1992, M. Lockwood and T. DeLacy, eds. (New South Wales,
Australia, Charles Stuart University, 1993).
7/ The difference between the replacement cost method and the
substitute good method is that the latter rests simply on establishing the
market price of a substitute. The replacement cost approach involves actually
estimating what it would cost to replace a good or service.
8/ R. A. Kramer and others, Valuing Tropical Forests: Methodology and
Case Study of Madagascar, World Bank Environment Paper, No. 13 (Washington,
D.C., World Bank, 1995).
9/ W. N. Adger and others, "Total economic value of forests in Mexico",
Ambio, vol. 24, No. 5, pp. 286-296.
Annex I
VALUES ASSOCIATED WITH CONTRIBUTIONS OF FORESTS TO HUMAN WELFARE
Direct use values associated with:
Consumptive uses:
Commercial/industrial market goods (fuel, timber, pulpwood, poles,
fruits, animals, fodder, medicines, and so forth);
Indigenous non-market goods and services (fuel, animals, skins, poles,
fruits, nuts, and so forth).
Non-consumptive uses:
Recreation (jungle cruises, wildlife photography, trekking, and so
forth);
Science/education (forest studies of various kinds).
Indirect use values associated with:
Watershed protection (protection of downstream areas);
Soil protection/fertility improvements (maintenance of soil fertility,
especially important in tropical regions);
Gas exchange and carbon storage (improvement of air quality, reduction
of greenhouse gases);
Habitat and protection of biodiversity and species (potential drug
sources, source of germplasm for future domesticated plants and
animals);
Soil productivity on converted forest land (space and soil productivity
for agricultural/horticultural crops and livestock).
Option and existence values:
People may value a forest or resource complex purely for its existence
and without any intention to directly use the resource in the future.
This includes intrinsic value;
People may value the option to use a forest in the future, or merely the
option to have it available in the future. Although such values are
difficult to measure in economic terms, they should be recognized in
valuing the contributions of forests to human welfare.
Note that any of the above values can be considered at different scales, for
example, catchment, forest, watershed, regional, national, global.
________________________
Source: Gregersen and others, Valuing Forests: Context, Issues and
Guidelines, FAO Forestry Paper, No. 127 (Rome, 1995).
Annex II
ADVANTAGES AND DISADVANTAGES OF VALUATION TECHNIQUES IN
FOREST LAND-USE APPRAISAL
Valuation Technique Advantages Disadvantages
Market prices
Use prevailing prices Market prices reflect Market imperfections
for goods and services the private willingness and/or policy failures
traded in domestic or to pay for costs and may distort market
international markets. benefits of forest land prices which will
use options that are therefore fail to
traded (e.g. timber, reflect the economic
fuelwood, food, medicines, value of goods or
utensils, recreation). services to society
They may be used to as a whole. Seasonal
construct financial variations and other
accounts to compare effects on prices
alternative land use need to be considered
options from the perspective when market prices
of the individual or the are used in economic
firm concerned with private analysis.
profits and losses.
Price data are relatively
easy to obtain.
Efficiency (Shadow)
Prices
Use market prices but Efficiency prices reflect Derivation of
adjust for transfer the true economic value efficiency prices is
payments, market or opportunity cost, complex and may
imperfections and to society as a whole, require substantial
policy distortions. of goods and services data. Apparently
May also incorporate that are traded in 'artificial' prices
distribution weights, domestic or international may not be accepted
where equity concerns markets (e.g. timber, by decision-makers.
are made explicit. fuelwood, food, medicine,
Shadow prices may utensils, recreation).
also be calculated
for non-marketed goods.
Hedonic Pricing
Method
The value of an Hedonic pricing may have Application of hedonic
environmental amenity potential for valuing pricing to the
is imputed from property certain tropical forest environmental
or labour markets. The functions (e.g. micro- functions of tropical
basic assumption is climate regulation, forests requires
that the observed groundwater recharge) that these values
property value (or wage) in terms of their impact are reflected in
reflects a stream on agricultural land surrogate markets.
of net benefits (or values, assuming that The approach may
working conditions) the link between forest be limited where
and that it is possible functions and agricultural markets are distorted,
to isolate the value of productivity is widely choices are
the relevant known and fully reflected constrained by income,
environmental amenity in agricultural land information about
or attribute. prices. environmental
conditions is not
widespread and data
are scarce.
Travel Cost Method
The travel cost Widely used to estimate Data intensive;
approach drives the value of recreational restrictive
willingness-to-pay for sites, including public assumptions about
environmental benefits parks and wildlife reserves. consumer behaviour
at specific locations It has been used to (e.g. trip multi-
by using information on estimate willingness-to- functionality);
the amount of money and pay for eco-tourism to results highly
time that people spend tropical forest areas in sensitive to
to visit the location. some developing countries. statistical methods
used to specify the
demand relationship.
Production Function
Approach
Estimates the value of Widely used to estimate Requires explicit
a non-marketed resource the impact of deforestation, modelling of the
or ecological function soil erosion, wetlands and 'dose-response'
in terms of changes in reef destruction, air and relationship between
economic activity, by water pollution etc. on the resource or
modelling the physical productivity activities function being valued
contribution of the such as crop cultivation, and some economic
resource or function fishing, hunting etc. output. Application
to economic output. the approach is most
straightforward in the
case of single use
systems but becomes
more complicated with
multiple use systems.
Problems may arise
from mis-specification
of the ecological-
economic relationship
or double counting.
Related Good
Approaches
Uses information about These approaches may provide The barter exchange
the relationship a rough indicator of approach requires
between a non-marketed economic value, subject information on the
good or service and a to data constraints and 'rate of exchange'
marketed product to the degree of similarity between two goods.
infer value. The barter or substitution between The direct substitute
exchange approach related goods. approach requires
relies on actual information on the
exchange of non- degree of substitution
marketed goods for between two goods.
marketed goods. The The indirect
direct substitute substitute approach
approach simply assumes requires information
that a marketed good can on the degree of
substitute for a non- substitution and on
marketed good. The the contribution of
indirect substitute the substitute good to
approach also relies economic output.
on a substitute good
but if the latter is
not exchanged in markets
its value is inferred in
terms of a change in
economic output (i.e.
the direct substitute
approach combined with
the production function
approach)
Constructed Market
Techniques
Measure WTP and WTA by Directly estimates Hicksian Practical limitations
directly eliciting welfare measure - provides of constructed market
consumer preferences. best theoretical measure techniques may detract
Simulated Market (SM) of WTP. from theoretical
construct an experimental SM: controlled experimental advantages leading to
market in which money setting permits close study poor estimates of true
actually changes hands. of factors determining WTP.
Contingent Valuation preferences. SM: sophisticated
Method (CVM) construct CVM: only method that can design and
a hypothetical market measure option and existence implementation may
to elicit respondents' values and provide a true limit application in
WTP. measure of total economic developing countries.
Contingent Ranking (CR) value. CVM: results sensitive
rank and score relative CR: generates value estimate to numerous sources of
preferences for for a range of products and bias in survey design
amenities in qualitative services without having to and implementation.
rather than monetary elicit WTP for each. CR: does not elicit
terms. WTP directly, hence
lacks theoretical
advantage of other
approaches.
Cost-based Valuation
Based on assumption In general, it is easier
that the cost of to measure the costs of
maintaining an producing benefits than
environmental benefit the benefits themselves,
is a reasonable estimate when costs comprise traded
of its value. To goods and services and
estimate WTP: benefits are non-marketed.
Indirect Opportunity Hence cost-based approaches
Cost Method (IOC) uses are less intensive in terms
wages foregone by labour of data and resource
in production of non- requirements.
marketed goods; IOC: useful in evaluating
Restoration Cost subsistence benefits where
Method (RSC) uses the harvesting and collecting
cost of restoring eco- time is a major input.
ystems or goods and RSC: potentially useful in
services; valuing particular
Replacement Cost environmental functions.
Method (RPC) uses the RPC: useful in estimating
cost of artificial indirect use benefits when
substitutes for ecological data is not
environmental goods available for estimating
and services; damage functions with first-
Relocation Costs Method best methods.
(RLC) uses the cost of RLC: only useful in valuing
relocating threatened environmental amenities in
communities; the face of mass dislocation
Preventive Expenditure such as dam projects and
Approach (PE) uses the establishment of protect
cost of preventing damage areas.
or degradation of PE: useful in estimating
environmental benefits. indirect use benefits when
Damage Costs Avoided prevention technologies
Approach (DC) relies on are available.
the assumption that DC: first-best methods to
damage estimates are a estimate damage costs are
measure of value. It is useful for comparison with
not a cost-based approach cost-based approaches,
as it relies on the use which implicitly assume
of valuation methods damage is worth avoiding.
described above.
Source: International Institute for Environment and Development (IIED),
1994.
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Date last posted: 7 December 1999 12:45:30
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