4. VALUING THE FOREST AND ITS USES: THE AVAILABLE TECHNIQUES AND THEIR USEFULNESS IN PRACTICE

Once the interested groups and their value perspectives have been identified within the relevant decision context, then attention can turn to the actual economic valuation process.

From earlier discussion, we recall that economic values start with the fundamental concept of a consumer's willingness to pay (wtp) for a particular good or service at a given time, in a given place, or a producer/supplier's willingness to accept (wta) payment for parting with a good or service, in the case of a supplier.

There has been a remarkable growth in the academic economics literature dealing with valuation of environmental services and nonmarket goods associated with forests, and particularly tropical forests and wetlands. However, there are few examples of application of conceptually sound methods on the ground (LEEC forthcoming).

This is not due to a lack of conceptual and theoretical approaches, but due to a lack of data on production functions, a lack of adequate agreement on value tradeoff criteria against which values have to be measured, and a lack of resources to apply many of the time consuming, complex methods developed. Sometimes, of course, it is because there is no need for complex analysis to derive sufficient information to make a decision.

The overall focus in this paper is on the constraints more than the methods of valuation. The latter topic is covered in great detail and abundance in the literature. Some of the reviews of methods include: Kramer et al (1992), Winpenny (1991), Godoy, Lubowski, and Markandya (1993), LEEC (forthcoming), Gregersen and Contreras (1992). Annex 1 provides an annotated bibliography of some main publications on valuation of natural resources. In what follows, we provide a quick overview of the main methods.

The Techniques for Estimating Measures of Economic Value

The general categories of economic value measures commonly used are indicated in figure 4.1 and more specific examples of different techniques and their applications are provided in table 4.1. A key point here is that in any given analysis a number of different techniques may be used. Below we discuss each category briefly.

1. Using direct market prices for goods and services

Market or exchange values are established through the exchange of goods and/or services in the marketplace, i.e., an interaction of producer values (supply) and consumer values (demand). If a transaction is carried out using some form of commonly accepted currency, we speak of the value established in the market as the market price. If the transaction is carried by some form of barter or exchange without the use of currency, we speak of the value established in the market as a market exchange value. (For example, if two loaves of bread are exchanged for one liter of milk, the exchange value of the bread is one-half liter of milk, and the exchange value of the milk is two loaves of bread.)

Figure 4.1. Valuation conditions and approaches (Gregersen et al. 1987).

This method involves direct observation of market exchanges (or uses available records of past market exchanges) to determine the value in exchange of particular goods or service. It assumes that the value of the goods or services exchanged in a market is at least equal to the market exchange rate, although they may be higher.

Table 4.1. Valuation approaches in relation to type of forest product (good or service)

2. Using indirect market price techniques

In some cases, it is possible to use market prices for one good or service to infer values for other goods and services. Table 4.1 indicates seven different variations on this approach (they are not mutually exclusive).

a. Residual or derived prices. - This method estimates the value of particular goods or services from the prices of goods or services established later in the production-distribution process. (For example, the value of forest products at the farm gate may be estimated by subtracting the cost of transporting the products from the farm to a market where the prices or exchange values are known.) It assumes that the value of the good or service at the farm gate is at least equal to the residual value left after subtracting further production, transportation, and distribution costs from market prices. For some goods and services, there may be a sequence of several market exchanges as the good or service moves from the forest to the final consumer. The value of the product produced at each stage may be in part a residual of the value at the next stage, and all of these intermediate market values may ultimately depend upon the market established for the final product.^[2]

b. Value of production increases. The increased market value of production of goods and services with and without the change or activity being valued can sometimes be used to value that activity or change. For example, a windbreak 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 windbreak (there may also be others, such as fodder, shade for cattle, and so forth).

c. Surrogate prices. - This method estimates the value of a particular good or service from the known values or prices of substitute or comparable goods and services under comparable conditions. It assumes that the value of a particular good or service can be closely approximated by the prices of similar goods and services established under similar conditions. Thus, the economic value of gathered fuelwood could, in principle, be estimated as equivalent to the cost of the quantity of an alternative purchased fuel, such as kerosene, which would provide the same cooking or space heat. However, in all cases of surrogate prices caution needs to be applied (e.g., see discussion in the next section on “Valuing forest goods and services in practice”).

d. Opportunity cost. - This method estimates the value of opportunities foregone to provide a particular good or service. It assumes that the value is at least equal to the value of the best alternative foregone to obtain the desired good or service. If dung is to be used as fuel, for instance, the opportunity cost could be the increases in crop yields foregone by using that dung for fuel instead of as a means to condition soils.

e. Replacement cost or cost avoided. - This method assumes that a good or service produced one way cannot have a economic benefit value higher than the cost of producing the same good or service in another way. Similarly, a good or service that helps to avoid other costs cannot have an economic value higher than the alternative cost avoided. Thus, the value of a hectare of forest that is fixing carbon cannot be higher than the cost of some other means of fixing the same amount of carbon.

f. Hedonic methods. - This method estimates values from known values of other goods and services that are technically related to the good or service to be valued. It assumes that the value of a good or service can be estimated from a technical relationship (for example, housing values may decline the closer you get to a loud noise source such as an airport).

g. Travel cost. - This method recognizes that for some goods or services the consumer may have to incur substantial costs (in time or money), to obtain the particular good or service. For example, a recreation experience may involve considerable travel expenses; and gathering free fuelwood may require a considerable amount of time.

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.

3. Using nonmarket price techniques.

In cases where there are no market prices that satisfactorily can be used as proxies or direct measures of value, economists resort to surveys and other similar tools to try to estimate consumers' wtp for goods and services. The most notable of these approaches is:

Contingent valuation. - This method is used to estimate the consumer's wtp for a specified good or service or to accept 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, like with many functions of the tropical forest, the respondent is being asked to express a value for something that has no established monetary market value, such as cleaner water, which might become available in a hypothetical set of circumstances, such as reduction in upstream harvesting activities.

The techniques mentioned above provide a broad array of tools for assessing the economic values associated with forests and their various uses. Any or all of these approaches may be needed to adequately assess the multiple values involved in any one situation. In applying these approaches, many complicating factors can enter the picture.

Valuing Forest Goods and Services in Practice

Though the burgeoning literature on the subject may give the impression of considerable recent activity in actual applications, in practice the number is still very limited. As mentioned, most writing still focuses on methodology, hypothetical applications, reviews of other work, or partial applications (LEEC forthcoming, Winpenny 1991, 1992; Munasinghe 1993). The lessons that can be learned from this limited experience are summarized below by looking at their applicability to different forest outputs, since realistic application in terms of total forest value does not exist.

Valuing marketed goods and services

Since this category, by definition, involves establishment of market prices, they can be used as a first approximation to value the goods and services involved.

If market prices are attached to goods and services, and if they are considered valid measures of value of outputs from the alternatives being compared, then differences in points of view on forest values do not matter. The forest preservationist, the logger, the recreationist, the cattle rancher, or road engineer who wants to clear the forest all face the same set of market prices. Of course, the point is that market prices may not reflect all of society's costs and benefits associated with production of the outputs.

It is only worth the time and effort to value things if the values are going to be used effectively to accomplish something. Market prices are useful because producers and consumers in a market create them together, and then generally abide by them when they want to sell or buy something in that market. Thus, by definition they are useful to both producers and consumers. It does not matter how esoteric the use or purpose may be for a resource, good, or service. So long as there is a market, the market value defines the value in exchange, although not necessarily the value in use to any given individual.

Market prices often reflect conditions that are unique to a particular narrow situation (e.g., a monopoly or monopsony situation) and not necessarily the broader, free interaction of suppliers of goods and services and the general population of buyers. This is particularly a problem in trying to assess the likely movement of markets and market prices over time in a dynamically changing forest situation.

From the private interest point of view, subsidies act to reduce the cost side of the picture or to increase the benefit side. Thus they affect the values attached to benefits and costs by those who are subsidized. From the public point of view, a subsidy is merely a transfer of resources from one use to another. But to the individual receiving the subsidy, the result is an increase in net benefits.

Forest clearing for agricultural expansion (whether commercial or subsistence), hydropower development, and other activities often involve significant government subsidies that can cloud the valuation picture, if only market prices are used as measures of value (cf. Browder 1988a,b, 1990). Subsidies are common for most groups that have an interest in the forest - commercial loggers, those involved in rubber tapping and other extractive activities, and environmental groups.

Taxes need to be considered in a similar light. Taxes represent a cost in the equation of the private parties interested in the forest, whether such taxes are in the form of stumpage or concession fees, income taxes, export taxes, or any other kind of tax. They reduce the net economic value of the forest or forest land use to the potential user. From the public point of view, a tax is merely a transfer of control over given resources from one person or group to another. It is not treated as a cost or return in social economics, but merely as a “transfer payment.”

The public manager needs to take subsidies and taxes into account when using market prices as a measure of values of costs and benefits associated with forest uses. Discussion of how to account for subsidies and taxes is provided in the companion volume (Gregersen and Contreras 1992).

Timber markets and market prices. Nearly all timber is marketed, and therefore it has market prices attached to it. Market prices are usually available for roundwood delivered at the processing plant or point of export. Costs of harvesting, extraction, and transport have to be deducted to arrive at a residual price^[3] for standing timber in the forest. Total values are derived by applying these unit prices to the estimated quantities that could be harvested as sustainable annual flows of timber from the available standing stock.

Valuation of timber should take account of the variation in market values from species to species, and the variation in residual values with location and topography. However, this usually requires more detailed and accurate information than available. Values are also likely to change over time, possibly quite sharply, as technological advances and changing supply/demand balances allow previously unused species to be brought into commercial use. Periodic revisions of the values will therefore usually be required.

As mentioned above, prices prevailing in a country may distort true market values if taxes, subsidies or quantitative restrictions exist. For example, an embargo on log exports, to encourage local processing, could depress local log prices below world market levels. The calculation should then be made using the latter. A more fundamental concern about market prices - even world market prices - as a basis for valuing tropical timber is that they reflect costs of harvesting existing forests rather than the costs of establishing a replacement resource. They, therefore, undervalue tropical timber in terms of costs of production.

The calculation of residual values of standing timber may have to take account not just of the direct costs of harvesting, extraction, and transport, but also of indirect costs stemming from logging damage. If the latter results, for example, in adding sediment loads to nearby rivers in a way that adversely affects water supplies and fish catches, this should be reflected in the costs of timber production, using the methods discussed below for measuring watershed effects.

Marketed nontimber forest products. The term marketed nontimber forest products is used here to describe a variety of physical goods other than timber that are derived from forests that are traded or sold - such as fruits, medicinal plants, fibers, and canes, etc. For those products and quantities produced for sale, the valuation can be based on market prices, and follows closely the procedure described for timber.

However, it is likely to be considerably more difficult to apply this approach to nontimber forest products because of the nature of the markets, involved. Only a few of these products, such as rattan, enter world trade in quantities and at prices that are reasonably well documented. Most are traded locally, in markets that largely escape formal recording mechanisms, so that data on quantities and prices are not readily available. Market prices often reflect conditions that are unique to a particular narrow situation. The prices obtained in that part of segmented markets in which people presently purchase a particular good do not necessarily reflect the value that a broader consumer population would be prepared to pay. Substantial expansion in production of many products would create imbalances and a fall in prices below levels that would be profitable.

The attention directed recently to the potential for tropical nontimber forest products in modern sector markets, has tended to obscure the fact that in the more heavily populated parts of the high forest zones in the tropics, such as the coastal belt in West Africa and central India, huge quantities of nontimber forest products presently pass through local market systems. Many forest products used by rural populations involve some form of preparation or processing, die greater part of it by a multitude of small enterprises also located in the rural sector. When rural people migrate to urban centers they continue to use some forest foods, medicines, and products, so that trade in the latter increases. Valuation of the tropical forests, therefore, needs to take account of these actual trade flows. However, its existence almost exclusively within the informal sector means that such trade largely escapes formal monitoring and recording, so that it escapes attention and is not well recorded or understood. Scattered market price information can be misleading.

With improvements in rural infrastructure, the markets for many forest products are penetrated by low cost factory-made alternatives from the urban industrial sector. Though some product lines, such as woodworking and handicrafts, tend to have the potential to upgrade and become more competitive, most do not. Many forest-based activities are thus of low value, vulnerable to competition or deterioration in their raw material costs, and offer only a fragile and weak basis for livelihoods. They are likely to collapse or be abandoned in favor of those that offer greater income security and prospect for growth. All these factors have implications in terms of the use of market prices as indicators of value over time.

Though some products exhibit well-established supply and use patterns, many are more ephemeral. Most are low value goods, and sensitive to price and transport costs, thus affecting projections of market expansion and price response. Products such as fruits are perishable and so are marketable only locally. The seasonal nature of supply of many products can result in supply/demand imbalances and a collapse in prices at certain times. The ease of entry into many forest-based activities similarly frequently leads to excessive capacity and output, with corresponding market price impacts. The implication is that one cannot readily extrapolate from point studies and/or pilot scale experiences.

Many of these factors also affect the potential for expansion of tropical forest products into modern sector markets. Access to markets and transport infrastructure limit the locations that could probably place products on the market competitively. Modern sector markets require a level of product or output quality and quality control, which often cannot be achieved with production from an unmanaged resource and processing in small, unmechanized enterprises. Valuation is also hampered by uncertainty about basic input-output relationships for tropical forests as discussed in section 1 on the valuation and decision contexts.

Valuing forest products for subsistence use

People acquire many goods, such as fruits, fuelwood, and poles, not through the market but by gathering or producing them themselves. Values for these products need to be arrived at indirectly through the use of surrogate prices. A number of alternate approaches may be possible, as is illustrated by the three different bases for valuing fuelwood outlined below:

• By reference to the price of purchased fuelwood, or other purchased fuels such as charcoal or kerosene. This can present difficulties because the different fuels have to be expressed in the same delivered energy terms to compare them. Also, the approach is likely to overvalue subsistence supplies if the users would not purchase fuel if they could not gather fuelwood (i.e., if they would adopt an alternative such as switching to other gatherable fuels).

• By reference to the value of other locally available gatherable fuels - i.e., crop residues and dried dung. As these do not have market values they have to be valued in terms of the opportunity cost. The alternative use for dung usually is assumed to be as soil conditioner, and its value in this use is calculated in terms of increased crop yields foregone by diverting it to use as fuel. This approach is valid only if people actually work dung into the soil if they do not burn it, and recent research has suggested that this is less widespread than has been assumed, because farmers find the impact on crop yields is not sufficiently great to justify the labor input involved (McIntire et al. 1992).

• By reference to the opportunity cost of the time that household members spend gathering fuel from further away. This approach rests on being able to accurately identify what part of the time spent, say, in walking to and from the household's outer fields, and gathering fuelwood en route, is attributable to the latter - and what alternate activity the gatherer could have engaged in if not gathering fuel.

The different approaches can produce quite different values in any given situation, which further complicates the task of valuation.

Other subsistence goods can be considerably more difficult to value. Most foods from the forest complement other parts of the diet; for example, providing essential vitamins or proteins. It is, therefore, difficult to separate out their effect. If that were possible it would probably have to be expressed in nutritional or health terms rather than as economic values.

One approach attempting to estimate subsistence values lost with the loss of forest is that of relocation costs that would be incurred in moving the population concerned elsewhere. But as it is much more than just their subsistence supplies that they lose in such a case, these costs reflect other values as well. All the issues identified in the previous section concerning the poor database on nontimber forest product resources, occurrence, productivity, and use apply equally to their subsistence uses - as do the uncertainties about the dynamics of change over time.

Valuing aesthetic and environmental services

The valuation methods discussed earlier, including, for example, hedonic methods, have also been used with various services derived from the forest, although the credibility of these valuation exercises is less than for nonmarketed goods for subsistence consumption.

Recreational use. The assessment of recreational values for forest areas requires a wtp approach. The travel cost and contingent valuation methods have both been used in developed countries. A limitation of the first method is that it captures only part of the value to the user. The weakness of the second method is the assumption that people's stated assessment of what they would be willing to pay accurately reflects what they would actually spend to enjoy that recreational experience. There has been almost no experience to date of trying to apply either method to recreational use in tropical forest areas.

Watershed effects. The impacts of change in forest cover on watershed functions can encompass erosion of soil cover, altered downstream water flows, flooding and sedimentation, and consequent damage to agriculture, fisheries, dam storage, and power generation. In principle, many of these effects can be valued in terms of effects on production or of preventive expenditure methods, e.g., in terms of loss in crop yields due to damage from sedimentation, flooding, or dry season water shortages on downstream agriculture, or the costs of building flood prevention structures to prevent such damage.

In practice, the difficulties, and costs, of tracing and quantifying such complex chains of cause and effect confine valuation exercises to investigating costs and benefits only to the point where decisions can be made about a course of action. In most cases this has meant focusing on effects in the upland areas near the area where the forest cover is to be disturbed. While this is an appropriate strategy to pursue in project appraisal, it evidently provides a less than complete picture of all the costs and benefits associated with watershed effects. (Some examples of application are illustrated in Gregersen et al. 1987.)

Biodiversity. Conservation of biological diversity is of value because it contributes to increased resiliency of ecosystems, ecosystem stability, improved habitat, and the prevention of loss of genetic material that could be of value in the future. The impetus to ensure conservation of this diversity can arise at a number of different levels - concern to avoid reduction in genetic diversity within a particular species, the loss of a given species, damage or destruction of an entire ecosystem, or degradation of a major biome.

At the species level a hedonic approach has been used to establish the value of conserving the gene pool of major agricultural crops. The value can be arrived at by reference to the value of that part of the species range that is presently used commercially, the value of improvements in the properties of that crop already achieved through breeding, and the costs incurred in collection and maintenance of the gene pool used in that breeding. This approach has not been attempted yet for forest tree species.

A large part of the earth's gene resources exists in the plant and animal populations of the tropical forests. Thus, considerable attention has been paid to the possibility of putting values on presently unused species that might prove to have commercial value sometime in the future, e.g., as a source of medical products to combat some new disease or to attack existing health problems more effectively. Though examples of important medical products based on wild forest species have been well documented, it is impossible to assign ex ante values to properties or products that have not yet been identified. Furthermore, as potentially useful products acquire significant value only after commercial processes to produce them in a controlled agricultural or industrial environment have been developed, questions arise about what part of that eventual value to attribute to their origins in the forest.

This issue tends to reinforce the existence value of tropical forests - the value that people place on their continued existence independent of the values of particular uses. The task of assessing such values is approached through various means of assessing wtp Because of the global values associated with uniquely rich tropical systems involved, this task is as much concerned with assessing what other, wealthier, countries are prepared to contribute to maintaining the tropical forests of importance to the conservation of biodiversity as it is about their existence values within the countries of the tropical forest belt. Any attempts to arrive at such values at present would be highly speculative.

Other ecological effects. In principle, the value of tropical forests in terms of microclimate, climate, and the atmosphere could be assessed through the effects on production (or the preventative expenditure costs) resulting from climatic and atmospheric changes associated with alterations in the extent or composition of the tropical forests. In practice, the relationships between forest change and atmospheric change are as yet imperfectly understood, so this can be attempted only in rather speculative terms.

The clearing and burning of large areas of forest clearly release substantial amounts of carbon dioxide into the atmosphere. But there are other major sources of carbon dioxide, and it is not clear what share of the total output is due to harvesting or burning of tropical forests. Similarly, there are a variety of ways in which carbon dioxide emissions could be curbed or reduced. The value of retaining or managing tropical forests as a carbon store would need to be compared with the efficiency of alternate forms of carbon capture or storage (which could include replacing the forest with carbon dioxide-absorbing plantations or crops, or establishing compensatory fast-growing plantations elsewhere) - and with the values foregone by not exploiting other of the forests' values, such as timber. The fact that the likely impact of rising carbon dioxide levels on different parts of the world is not clearly understood yet further complicates the task of placing values on carbon capture and storage.

Similarly, it is known that transpiration from tropical forests accounts for a substantial part of the recycling of moisture back into the atmosphere; but empirical evidence as to the impact of disruption of this flow through forest removal is limited and inconclusive. However, more local and immediate effects of forest removal may be measured, in much the same way as the effects on watershed functions can be. A falloff in crop yields on adjacent lands, for example, could be assessed in terms of the costs of compensatory inputs of fertilizer, or of the investment in windbreaks that prove necessary to offset the loss of the protection previously afforded by the forest.