Valuation of non-market forest products with no near-market substitute

The value of recreational services and environmental services of forests often have no market or near-market prices, so other techniques must be used to value them. Economists have many techniques for measuring non-market values and a great deal of practical experience applying them to forests. Economic valuation techniques may be divided into ‘revealed preference’ and ‘stated preference’ methods. The former derives forest values from observed market (revealed) behaviour towards a marketed good related to forest goods and services. The latter is based on surveys that ask people to state (stated preferences) their values. Economists are often more comfortable with estimates derived from actual market behaviour, but for some forest services even indirect market information may not be available, such as protecting endangered species. The techniques most commonly used for forest services are briefly described in Box 7.4.

Recreation, tourism and cultural services

Physical accounts for tourism are relatively easy to compile but valuation of tourism poses a greater challenge. Tourism is not a distinct industry in national economic accounts; rather, it cuts across a range of industries, such as hotels and accommodation, restaurants and transportation services. The only tourism services that are directly recorded as such in national accounts are payments such as entrance fees for national parks, licensing fees for hunting, etc. However, entrance and license fees are often not related to the cost of providing the recreation service and cannot be taken as the value of recreation. Moreover, some forest recreation opportunities are provided free to the consumer. Thus, it is very difficult to determine the output of the tourism industry and to determine separately how much of that output is dependent on forest ecosystems.

Special surveys are undertaken and a framework for tourism satellite accounts has been created for the construction of complete economic accounts for tourism, but extremely few countries compile tourism satellite accounts. As an alternative, researchers often use hedonic pricing (described in Box 7.2 for land valuation) and travel cost approaches (Box 7.4), both of which are revealed preference techniques. More recently, stated preference techniques such as the contingent valuation method (CVM) and conjoint analysis have been used.

In developed countries, these tourism valuation studies are often available, but they may not be as readily available in many developing countries. Recreation and tourism values in forest accounts of developing countries are often omitted or only partially represented. In South Africa, for example, the tourism values for only one kind of forest, fynbos woodlands, were represented; no reliable estimate was available for national parks.

Box 7.4.  Non-market valuation techniques Travel cost method measures the value of forest recreation services by estimating how much people are willing to pay to travel to that site.  Information about travel costs and other socio-economic characteristics of users that affect demand (e.g. income, distance from site, etc.) is collected through site surveys and aggregated to estimate a demand curve, or several demand curves, for different zones around the site. Most costs associated with travel may be easily measured, although there remains controversy over whether to include the visitor’s travel time as part of the cost.    Contingent valuation method (CVM) elicits the value individuals place on a hypothetical situation such as preservation of a forest or a species by asking them how much they would be willing to pay for it, or how much they would have to be compensated to do without it.  This is particularly useful for eliciting the value of environmental goods and services for which there are no market prices, such as recreation and biodiversity.   Conjoint analysis is a survey technique developed by marketing experts to analyze consumer choice. It is similar to CVM, but the survey instrument differs. CVM poses the question ‘How much are you willing to pay for a good?’ or ‘Would you be willing to pay $X for a good?’ Conjoint analysis separates out the attributes of the good and asks individuals to rank the importance of each attribute. The survey presents a series of questions about different combinations of attributes. This approach can be particularly useful for forest ecosystem valuation because ecosystems provide multiple services; for example, a forest may provide recreation, wildlife habitat and hydrologic management.

 

Table 7.6 provides an example of the value of forest goods and services for Sweden, indicating the valuation technique used for each product. Most products had both a market and a non‑market component. For those with a market component, the market price was used for both components. Only the value of recreational services required the use of non-market valuation techniques, in this case the travel cost method.

Table 7.6:        Output related to wooded land in Sweden, 1999 (million euros)

Source: Eurostat, 2002a, Table 38, p. 40, and Norman et al. (2001) for recreation services.

Other forest environmental services

In South Africa, an additional service, pollination of commercial agriculture, is included. In the region, many farmers pay for commercial pollination; other farmers benefit from close proximity to fynbos woodlands that provide habitat for wild bees. The value of pollination services was estimated at the cost farmers would have paid for commercial pollination.

Carbon storage

Carbon storage is the non-timber value most often included in forest accounts. The unit value of carbon is usually based on one of the following alternative approaches:

Most developing countries do not have carbon taxes and have very limited experience in markets for carbon emissions, so carbon storage is most often valued by the global damage per ton of carbon estimated by one of the global climate change models. Nordhaus (1992) provided the first estimate of global damage from carbon. He constructed a model (the DICE model) that integrated an economic and a geophysical model to estimate the damages from future climate change on the productivity of primary sectors in the US economy, and then extrapolated the damage in the US economy to the rest of the world. Since 1992, there have been many refinements to this model and new estimates of damages. In a recent book, Nordhaus and Boyer give a figure for damage from carbon emitted in the range of US$5-10 per ton of carbon (Nordhaus and Boyer, 1999).

The $10/ton figure is widely used in many studies related to climate change and is also used by the World Bank to value carbon emissions in its measure of comprehensive saving, a sustainability indicator designed to adjust conventional national savings for net gains/losses in human and natural capital, including carbon emissions. At this time, there is no consensus about which methodology to use and the values are often very different, as shown in the example for Sweden in Table 7.7.

Table 7.7:        Value of carbon binding, Sweden, 2000 (million euros)

¹ Based on values derived in a study by Nordhaus, 1992
² Assuming no restrictions of international trade of emission permits
³ Assuming major restrictions on international trade of emission permits

Source: Adapted from Eurostat 2002b, Table 32, p.47

Biodiversity and habitat preservation

This service is most commonly measured in forest valuation studies using CVM. There have also been some attempts at estimating a value based on the potential economic value of new pharmaceutical or agricultural products that might be derived from forests, but these values are highly speculative and not given much weight in most forest valuation studies. The value of biodiversity preservation has not been included in forest accounts.

Environmental protection services

Protective services constitute (unpaid for) inputs to the production of non-forestry goods, such as the regulation of water flows and quality, soil stabilization and water quality. As inputs to production, they are similar to livestock grazing or recreational services. However, it is much more difficult to quantify the amount of protection service provided and its value. In many cost-benefit analyses, protective services have been valued by estimating the lost output of the using sector if these services were reduced. For example, if a natural forest were disturbed, soil erosion might accelerate siltation of a dam downstream, reducing the generation of hydroelectricity over the dam’s lifetime and the water available from the dam for irrigation. Siltation might also increase the costs of municipal water treatment and degrade fisheries habitat. The loss of productivity in each of these sectors may be valued at their market prices (or the cost of producing substitutes).

Because of the difficulty in establishing the level of service provided by a forest and the change resulting from a given change in forest use, SEEA-2003 and the Eurostat framework make no recommendations regarding valuation of these protective services. There are many case studies that have attempted to review some of these forest values (for example, see reviews in Batagoda et al., 2000; Chomitz and Kumari, 1996) but they are typically not included in forest accounts.

The South African forest accounts include one measure of the loss of environmental service: the reduction of water flow from cultivated forests. The case study of the conservation forest reserves in Tanzania was discussed in Chapter 3. South African forest plantations cultivate alien species, mainly pines and gums, which have a higher rate of evapotranspiration than native vegetation. This reduces runoff from precipitation and the amount of water available to downstream users. Cultivated forests have resulted in a reduction of water supply, which is valued in terms of potential agricultural income that has been lost.  Some alien invasive species outside plantation forests have a similar damaging effect on water supply and are being eliminated at considerable expense; the impact of these tree species has not been estimated.

A promising development for valuation of forest environmental services is Payment for Environment Services (PES), a recent initiative mainly in Central America to establish a market in which downstream beneficiaries pay the forestland owners/users for these services (Pagiola et al., 2002). The idea behind PES is that forest environmental services are not traded in markets and this market failure can result in greater deforestation and land use conversion than is socially or economically optimal.

From an accounting perspective, PES is useful because it establishes a market value for the forest service provided. For the following reasons, the market price is likely to be a lower bound on the total value of forest protection services:

Most PES markets are established for watershed protection and carbon storage. There are also a few initiatives for biodiversity protection, mainly in the form of shade-grown coffee. One example of PES is a market for forest watershed protection services in Costa Rica (Table 7.8). Hydroelectric power companies in Costa Rica have contracted with forestland users upstream from the power plants to introduce sustainable forestry in order to reduce sol erosion and resulting stream sedimentation, as well as to preserve stream flow. The power companies pay local land users with approved management plans from US$10-42 per hectare annually. Negotiations to add municipal water users and other beneficiaries are under discussion.

The experience with PES is fairly limited so far but may provide useful values for future forest accounts.

Table 7.8:        Annual payments for water quality services by hydroelectric power companies in Costa Rica

Source: Adapted from Pagiola et al., 2002, Table 3.1.

Benefits transfer: applying forest values from one site to another

Valuation of forest goods and services can be quite complex and expensive. When there is insufficient time or the cost is prohibitive, an approach known as benefits transfer may be used. Benefits transfer is a valuation method where environmental benefits measured for one site are applied to other sites. A meta-database of valuation studies, EVRI (Environmental Valuation Reference Inventory), has been compiled by Environment Canada and the US Environmental Protection Agency. It provides information from over 700 valuation studies, mainly from North America. This is an extremely attractive approach that has been widely used for some environmental studies, especially air pollution. However, there are major obstacles to successful implementation of benefits transfer.

At best, benefits transfer can only be as accurate as the original study. Moreover, the new site may differ substantially from the original study site in ways that affect the level and value of forest goods and services provided. Non-market forest goods and services are especially likely to have values that are highly site-specific (Batagoda et al., 2000, Pagiola et al., 2002; Pearce et al., 1999; Pérez and Arnold, 1997). Unless these differences are factored in, the value estimate will not be accurate. For example, the harvest rate per hectare of NTFP will vary among regions due to differences in forest characteristics and differences in the demand by local communities. Similarly, prices for NTFP may vary significantly from one region to another. The challenges of providing reasonably accurate values for forest services with benefits transfer are even greater.

7.3 Monetary supply and use table

The general framework of SUT was described in Chapter 6, physical accounts. Monetary tables have identical entries, measured in currency units, with a few extensions: the supply table includes i) taxes less subsidies on products and ii) margins for trade and transport; the use table includes i) other intermediate inputs and ii) the components of value added.

In principle, these detailed SUTs may be extended to include other, non-timber forest products. In practice, however, such extensive tables are often created only for wood products because of limited data about the use and transformation of non-timber forest goods and services. The forestry SUT for France shown in Table 7.9 includes only wood and wood products.

 Table 7.9:        Monetary supply and use table for wood products, France, 1999

Source: Eurostat 2002a, Table 68, p. 72

7.4 Expenditures for forest resource management and protection

Although forest managers are likely to view almost all forest-related activities as part of forest management—logging, silviculture, etc.—this component of SEEA is much more narrowly defined. This third component of SEEA differs from the others in that it does not add any new information to national accounts but reorganizes expenditures in the conventional SNA that are closely related to protection and management of forests. The purpose is to make these expenditures more explicit and thus more useful for policy analysis, such as trade negotiations (e.g. USA/Canada timber dispute and tariffs). In this sense, they are similar to other satellite accounts, such as transportation or tourism accounts, which reorganize existing information. These accounts are compiled separately for government and private sector expenditures; they are also disaggregated according to major function and purpose.

Table 7.10 shows the accounts compiled by Finland. Both public and private sectors contribute to forest management and protection expenditure. The accounts provide an estimate of the implicit cost incurred to protect the forests by introducing environmentally sound logging practices. This is estimated at the stumpage value of timber foregone.

Table 7.10:      Expenditure for forestry management and protection, Finland, 1991-1995 (million Finnish marks)

*Estimated stumpage values lost because of environmentally preferable methods of logging.

Source: Adapted from UN et al., 2003 Table 8.17, p. 354

7.5 Forest accounts and macroeconomic indicators

Forest accounts provide essential information for the calculation of improved macroeconomic aggregates such as national wealth, gross domestic product (GDP), net domestic product (NDP) and national savings. A more comprehensive measure of GDP is obtained by adding the production of non-market forest goods and services that were previously omitted. In conventional measures of national wealth, or the consolidated balance sheet, only cultivated forests were included. With information from forest accounts, the value of natural forests and carbon storage can (and should) be included as well. NDP and national savings can also be revised by including the value of deforestation or afforestation. Accounting for forest services used by non-forestry sectors does not affect the level of these macroeconomic aggregates, only the distribution of sectoral GDP, because the value of forest services was previously included in the value of non-forestry sectors (as mentioned in the Introduction).

Table 7.11:      Adjustments to macroeconomic indicators from SEEA forest accounts