Chapter 2: CLARIFYING THE PURPOSE OF THE VALUATION AND ITS CONTEXT AND OUTPUTS

As recently as 1994 Pearce stated that "the economic valuation of forest functions is still in its infancy" (Pearce, 1994). This statement was made in spite of the fact that the need to properly value forest lands and woodlands has long been recognized. As mentioned previously, two German foresters, Martin Faustmann (1849) and Max R. Pressler (1860), were already concerned about this matter during the last century.

Historically, forest management has dealt mainly with the problem of rotation length as it relates to wood production, i.e. the timing of when to harvest a stand of trees. Economic values have been used in forestry in line with this traditional orientation of forest management focused on wood production. These values have been calculated within the framework of the classical and neo-classical economic theories which do not pay too much attention to environmental problems, viewing them as externalities or side-effects¹¹. Thus conventional analysis often fails to adequately capture many forest benefits that either do not enter the market or cannot for other reasons be adequately valued in economic terms.

One of the early references advocating the need to value the broad range of forest goods and services occurred at the 5th World Forestry Congress (WFC) held in the United States in 1960 which had the general theme "Multiple Use of Forest Lands". It was stated at that time that it was "not only through the production of wood but by means of all other ‘forest values’" that forests could contribute to national prosperity (WFC, 1960). The 5th WFC, inter alia, called for "systematic studies to develop methods for evaluating intangible forest values in quantitative terms". Over the years, timber has been the forest output whose value has dominated valuation, sometimes to near exclusion of all else.

The emphasis on using forests only for wood production has changed in recent decades. A greater emphasis has been put on the forest as supplier also of a wider range of goods (such as non-wood forest products) and services, including environmental roles such as land and water protection, aesthetics, biological diversity, influence on the biosphere and so on. Within this context, managers and planners have faced increased public pressure to take into consideration all uses and to value forest resources for these other goods and services.

To do so, it is necessary to develop and apply methods that will take account of this wide variety of goods and services in the decision-making process. Among services of the forest, recreation received earliest valuation attention, originally in the United States (in the late 1950s and 1960s), followed by Canada and later Europe. Since the 1980s there have been further moves towards measuring other goods and services from the forest and to experiment with fuller forest valuation in developing countries. More recently efforts have been made to value the forest resources of the so-called transition economy countries.

Current thinking, particularly after the United Nations Conference on Environment and Development (the "Rio Summit"), calls for more completely valuing the different goods and services of the forests¹². A wide range of methodologies¹³ has been developed and applied with results that often fail to agree, sometimes by several orders of magnitude in a given situation. There is a clear need to identify and apply methods the results of which can more easily win the confidence of decision-makers by being less subject to analyst bias or to unwarranted interest-group influence.

In investment project preparation, the emphasis of valuation has generally been on net commercial or financial worth. This has been particularly so for private investments where profitability is the main criterion and attempts to take broader societal gains into account are secondary. Any valuation beyond financial worth is recognition that decision-makers take into account more than money flows. Fuller valuation should attempt to present many additional considerations in monetary terms; nevertheless, analysts should not ignore non-quantifiable political, social and environmental considerations which are often also important.

Forests have certain attributes that justify fuller valuation:

- particularly in many developing countries, many forest products such as fuelwood and non-wood forest products (NWFPs) are used mostly on a subsistence basis;

- a particularly significant proportion of environmental services of forests do not enter the market;

- externalities are particularly important in forestry — some important benefits of forests are captured not within or even near the forest but further afield, including at global level; and

- forest benefits that will accrue to future generations rather than be used to meet society’s current needs are significant.

Many valuation studies have been carried out with the aim of influencing policy or for research purposes. As far as investment is concerned, these studies have been at the pre-investment sectoral review stage rather than as part of investment project preparation. However, the principles and methodologies of these general approaches would remain the same if they were to be applied in an investment context.

The purpose of valuation is to make the value of each forest use explicit. Michael (1995) suggested that valuation assessment should ensure that economic values incorporate both monetary and non-monetary expressions of preference; they should not be limited to putting a price tag on nature. Given that people attach importance to many things which cannot be expressed in monetary terms, valuation will not on its own provide a full basis for decision; decision-makers will often need to supplement valuation results with "soft" or qualitative considerations of a political, cultural or similar nature.

Because economic valuation is not the sole basis for decision-making, the effort expended on it should be kept in perspective. A decision-maker may need only orders of magnitude and their relative importance to make a decision. A drive for extreme accuracy (which can be time-consuming and costly) may be wasted.

As pointed out by Gregersen et al. (1995), there are no absolute economic values other than those based on the perceptions of individuals or groups which, in their turn, are influenced by economic, cultural and social norms. Consequently, forest values are not static: they are dynamic, depending upon the particular context, which may well change over time. Different individuals or groups will often assign different priorities and values to the same forest and their perceptions tend to change with circumstances. There is no universal, objective "truth" or law of value. In the absence of absolutes, forest value varies with the perspective of individuals or groups; values involve relativity to others and, therefore, also involve trade-offs.

The objectives and time preferences of individuals are usually different from those of a community, which, in turn, may differ from those of the society at large. An individual may want to maximize the availability of fuelwood and fodder; a community may want to maximize the availability of a raw material for a popular industry; society at large may want to protect a major watershed. Arnold (1992) felt that for people living in or adjacent to forests, the value lies in the products they derive, in the spiritual and cultural values they attach to the forest environment and in the forest’s role as a land bank. Values of people living in or near forests may differ from those of their national government which may, in turn, differ from those of the international community. The results of valuation should be attributed back only to the group that was studied. Furthermore, values involve costs and benefits whose distribution among interest groups is often political in nature.

The most important attribute of the analyst is not so much the capacity for mechanical manipulation of values but the willingness and ability to discern the perceptions and priorities of various interest groups and to determine what weight to attach to each of them and what other contextual factors to take into account.

Recently, there has been considerable eagerness to value forests in monetary terms, especially tropical ones, but less or even no emphasis on integrating these values into forestry development policy and improved forest management; this eagerness may explain the high value figures such as those for the Amazon forest in Brazil. Gutierrez and Pearce (1992) (quoted in Michael, 1995) provided the following estimates of contribution to the Brazilian gross national product (GNP): US$15 billion for the direct use of non-timber forest products (NTFPs); US$46 billion for the indirect use value of total carbon storage; US$30 billion for existence value; and US$95 billion for total economic value (TEV) with a net present value of US$1,296 billion. Similarly, high values were found for forests in Mexico in a study by Adger et al. (1995) which attempted to estimate the TEV of the forests¹⁴. The annual "lower bound" value of the services of the total forest area was approximately US$4 billion. On this basis, the study concludes that there is a strong case for forest conservation in the Mexico.

Although not a valuation issue, a question must be asked of how the country owning the forests can actually capture this value. Bettencourt (1992) reported in a study on economic valuation of forests and woodlands in sub-Saharan Africa that decision-makers there give little weight to arguments in favour of conservation if there is no quantitative proof that short-run economic benefits would be forthcoming. In his review of studies of the value of biodiversity, Aylward (1993) pointed out that the biodiversity value likely to be captured from industrial sources is small compared with the costs of conservation (quoted in Aylward et al., 1995). This suggests that valuation by itself has little interest for the country owning environmental assets if the values cannot be turned into revenue flows to capture some of the value (Michael, 1995). Forested countries among the developing countries lack the mechanisms to capture the global benefits of their forests. Given such high valuation figures and the failure to capture them, it is difficult to see how they can continue to be seriously considered.

The desire to demonstrate that forests are worth a lot more than is presently perceived by decision-makers may account for the many current efforts at estimating total economic value¹⁵. The TEV is an attempt to add together all values referred to in box 1 (Classification of forest values). It is an aggregate of total use value and total non-use value. Total use value, in its turn, can be divided into direct use value, indirect use value and option value. Total non-use value includes existence value and bequest value. Different values are estimated, in a particular situation, by applying specific techniques.

However, the literature on forestry valuation shows that there has been a tendency to value particular forest uses as if they exist in isolation, are mutually independent and therefore can be considered additive as TEV implies. This suggests some contradiction in the term TEV in that not all values of forests can be reduced to economic or monetary terms. For example, there are other types of values that must be recognized such as ethical, cultural or religious ones, all of which cannot or should not be assigned a monetary value but must nevertheless be taken into consideration¹⁶. Winpenny (1992) has appealed to economists wishing to value forests to recognize that economic value is only one yardstick; he has stressed that monetary values fail "to capture all, or even most, of the value of forests". Indeed, for many forest-dwelling tribal people, forests can be worth much more than any monetary value assigned since, as Shukla et al. (1990) said, "their life style is full of customs and traditions where forests play a significant role".

Another complication in trying to calculate the TEV arises from the fact that estimating TEV is not merely a matter of summation of estimated values derived for various forest functions using the methods and techniques available. It does not seem that there is a major problem with calculating TEV, but rather that there may be many "correct" TEVs depending on the combination of complementary outputs chosen. A forest produces outputs that, according to their relationships, can be classified as complementary, independent or competing. Their addition would therefore be meaningless and misleading. There are other values, such as spiritual and cultural values, that cannot be valued in monetary terms. For example, a study carried out by CSERGE on Mexican forests points out that practical applications of TEV are few because of problems of quantification and of elements not being additive (CSERGE, 1993). Therefore, aggregation of values in order to estimate the TEV deserves further research.

Table 1 is a matrix that summarizes different uses of a forest in order to draw attention to the question of their compatibility or incompatibility. It shows that some forest activities or functions can be complementary whereas others are competitive or even mutually incompatible.

A key consideration for the analyst is to recognize that, although each activity or output may, on its own, be valuable, when considered in a multiple-purpose forestry context, some benefits can be captured only if others are suppressed or cancelled. For example, the level of timber harvesting may affect the forest value for watershed protection, and/or biological diversity, and/or recreation. Or the setting aside of part of a forest to protect biological diversity may affect the value of the forest for timber production. Wherever any of the uses compete in any way with any other use, then there is a different kind of problem. With competing uses the problem becomes one of deciding on the appropriate level or combination of uses a given forest can support. It is a problem of allocating use levels.

Table 1. Forest management for multiple use: compatibility matrix.

Table 1 continued.

Source: Adapted from Panayotou and Ashton (1992) and Gregersen (1996).

It is not always clear from the examples in the literature why TEV has been sought since, sometimes, partial valuation focused on the most critical forest functions for a given case could yield a perfectly adequate result. TEV is of particular relevance for policy analysis, whereas in the context of investment it may often not be necessary. Nevertheless, TEV continues to be appealing and investment preparation experts may be required to derive it. In complex multiple-purpose projects such as those on protected areas, wetlands management or watershed conservation, TEV (or a near approximation) may be desirable. Many investment projects involve interventions where a choice has to be made between uses of the land. In some instances, forest valuation could be limited to a comparative approach¹⁷, especially if, after valuing one or a few key forest functions, superiority (or inferiority) of the forest option is already amply demonstrated so that further effort seems pointless. TEV should be pursued where there is no clear superiority of one or another option.

Good sense suggests that a complex process such as TEV determination should not be embarked upon lightly. Quick estimation should first be done on partial valuation. Only if partial valuation methods prove inadequate in giving a convincing basis for judging the relative merits of options should a full-blown TEV exercise be contemplated. Experience shows that to calculate complete and total economic value is difficult, that it may be unnecessary for the decision required and may often even be meaningless. In many cases, it is more realistic to focus on the most dominant elements of value in a given context rather than also attempting valuation of more minor considerations, to the point of diminishing returns for additional effort.

In other investment situations the impacts of the project will be of more concern: valuation should then focus on comparing net values with or without the project. Such cases could include afforestation of degraded land, forest industries or major recreation developments.

It is also important to take into account the problems related to double-counting and possible trade-offs between various direct and indirect use values. Recognizing that it is necessary to dis-aggregate the goods, services and attributes of an ecosystem for valuation purposes, Barbier (1994) warns that complementarity and substitutability of the goods and services must be accounted for in arriving at total use values to avoid their being possibly grossly overstated.

Another problem in estimating TEV is related to the fact that in a forest there are thousands of different animal and plant species. Hence, it is likely that an aggregation of individual estimates would lead to unreasonable total sums. Existence value studies, for example, have been carried out in Europe and the United States to value the "willingness to pay" (WTP) to protect endangered species; examples of some of these studies are presented in table 2¹⁸. These values should be perceived as a clue to people’s WTP for a policy that saves that particular endangered species. Such studies fail to take into account that a particular species does not exist in isolation in nature; on the contrary, it is part of a larger dynamic process that represents the context within which it functions (Dailey Jr and Norton, 1994). This suggests that these studies cannot be understood as representing the total existence value of forests. According to Wibe (1995), it is impossible to estimate in a single study the total existence value of a forest.

The process of arriving at an approximation of TEV also involves careful identification of "stock" and "flow" aspects of forests. Forests have both a stock and flow of resources. There are values that are intrinsic to the existence of the forest (e.g. biological diversity), whereas others are related to the conversion of part of that stock (e.g. harvesting) into a flow of timber and other forest products. There are many methods and techniques available that allow the estimation of both.

Table 2. Examples of existence value studies.

Source: Wibe (1995): table 3, p. 15.

Thus, given real world competition among forest uses, the TEV of the forest depends upon the particular combination of uses one wishes to consider. For example, in a given context, the particular type and level of direct use value (DUV) may affect the type and level of indirect use value (IUV) that can be sustained; these, in turn, may affect the option value (OV). This implies that one cannot independently determine, for example, DUV without considering IUV and OV involved, the levels of which affect the value of DUV. But one cannot estimate IUV without knowing DUV and OV, etc. The analyst is then faced with determining a simultaneous solution to a series of interdependent equations. Box 2 summarizes the points discussed above that should be considered in calculating TEV.

It is important that valuation findings are perceived to be useful and believable. In considering criteria for acceptance and use of forest valuation results, Gregersen et al. (1995) subdivided factors into (a) "usefulness" and (b) "credibility". Usefulness factors include relevance and timeliness of the results. Credibility factors include perceived accuracy, reputation of analysts, breadth of interest groups considered, ease of understanding, level of uncertainty and controversy, agreement with information from other sources and acceptability by advisers.

Recent results of some attempted full valuations of forests have given cause for concern. Problems include: (i) analysts producing widely divergent results for any given situation; (ii) attaching high weight and therefore value to forest contributions on which there is so far no scientific consensus, e.g. level of contribution of NWFPs, carbon sequestration and probability of finding species of high medicinal value in conservation areas; (iii) a tendency to present all values in monetary terms or to imply that all values can be reduced to monetary terms; (iv) attaching weights to the value of various forest goods and services on the basis of the views of external people (particularly the wealthy) who inflate values; and (v) deriving total economic value by simple summation.

Box 2. - Calculating total economic value (TEV)

- First ask if TEV is necessary;

- Not all values can or should be assigned a monetary value, e.g. ethical, cultural or religious values; they must, nevertheless, be taken into consideration;

- Forests produce outputs that can be complementary, independent or competing. Thus, TEV cannot be an exercise of simple addition of estimated values for each one of these components. Attempting to calculate TEV can lead to double-counting and possible trade-offs between competing or mutually exclusive uses, both direct and indirect;

- There may be many "correct" TEVs depending on the combination of outputs chosen;

- Existence value studies, for example, aim to value the willingness to pay (WTP) to protect endangered species. These values should be perceived as a clue to people’s WTP for a policy that saves a particular endangered species: however, such species do not exist in isolation in nature; on the contrary, they are part of a larger system that represents the context within which they function. This suggests that these studies cannot be understood as representing the total existence value of the forest. Indeed, it is unlikely that a single study can estimate the total existence value of a forest;

- Forests have both a "stock" and "flow" of resources. There are values that are intrinsic to the existence of the forest (e.g. biological diversity), whereas others are related to conversion of part of that stock (e.g. harvesting) into a flow of timber and other forest products. The process of estimating TEV requires a careful identification of stock and flow aspects of forests;

- Because of the above factors, estimated TEV may not represent an accurate total value. TEV estimation deserves further research.

2.7.1 Divergence of results

There is a problem of proliferation of methodologies for full valuation of forests but also of lack of a uniform basis for estimating parameters even in applying one method; thus in applying them, analysts have often ended up with widely divergent results even when applying methods to the same site. For example, when Aylward (1993) reviewed studies of the value of biodiversity in a particular industrial area (as an input in the pharmaceutical research and development process) he found a range of values from $15.00 per species to $24 million per species on an annual basis (quoted in Aylward et al., 1995). This divergence in results can be attributed to factors such as economic diversity among different study sites sampled and a difference in the methods and assumptions used as well as products studied. For example, a contingent valuation survey could be carried out using a different approach and divergent estimate values reached for the same good or service (Elsasser, 1994).

Forests can supply different goods and the quantity of them can be measured on the basis of (i) the inventory, i.e. the quantity in the forest and (ii) the flow, i.e. the quantity used by people. Some researchers carry out valuation on the basis of the inventory, others on the basis of the flow, whereas still others use both quantities (Godoy and Lubowski, 1992). Given that the difference in values between the flow and the inventory can be large, diverse results will be reached.

The use of different methods can lead to different results in the same area, e.g. the people’s estimated WTP annually for setting aside plots of old-growth forest in Sweden varied between SEK50 and SEK125 per household (Naskali, 1995).

Evidence also suggests that people from developed countries reveal a higher WTP for the conservation of tropical forests than people from the regions where these forests are located. For people living in or near a forest its value lies in the produc ts that they can collect from it as well as spiritual and cultural values attached to it. Studies of the same area may therefore present divergent results depending on the database employed.

An example of these differences is summarized in table 3 which shows a range of estimates on the value per tonne of releasing CO₂ into the atmosphere over time according to different studies¹⁹.

Table 3. Estimates of the value of CO₂ release into the atmosphere over time ($/t C).

Source: CSERGE (1993): table A.3.4, p. 81 (annex 3).

According to CSERGE (1993: p. 80, annex 3): "the estimates of Ayres and Walter (1991) are of greater magnitude than those of Nordhaus, though using the same methodology." It is beyond of the scope of this study to discuss which estimate is better or more reliable. Rather, these estimates support the claim elsewhere in this paper that there is no universal value. It should also be pointed out that the interactions between economy and ecology, as well as the carbon cycle, are not fully understood. So some assumptions are made on the basis of the analyst’s own experience or perception. Differences in estimates are not restricted to monetary values such as those shown in table 3, but can also be found in other measures, for example, carbon storage estimates per hectare (t C/ha).

2.7.2 Very high values calculated and publicized

A second element relating to credibility is the very high forest values that have been calculated and publicized. In several developing country exercises the values given for forests are out of all proportion to the size of the national economies. If they were financial, the forest values calculated would in some instances dwarf the national economies of those countries or at least be large enough for the forest sector to cover the national external debts.

It is probably the over-zealous attempts to present all values in monetary terms that have generated estimates that have been far from credible and, therefore, have reduced the confidence of decision-makers. It may be speculated that this problem reflects "advocacy valuation", i.e. that it has arisen from analysts setting out to prove a position they already have in mind, such as to promote conservation or environmental forestry at the expense of utilization.

High values are attached to ecological functions of forests where scientific consensus unfortunately remains weak (such as carbon sequestration). High values have been derived for tropical forests, examples being the economic values of the Amazon forest (e.g. Gutierrez and Pearce, 1992, quoted in Michael, 1995) and Mexico (CSERGE, 1993; Adger et al., 1995). The values estimated are such that, just from selling NWFPs from the Amazon region, Brazil would probably solve all its economic problems; carbon storage would make this even more certain. This sort of study seems to disregard that most of the NWFPs are marketed locally and may be unknown even elsewhere in Brazil: to extrapolate the local market characteristics to a global scale can lead to serious errors. It would appear that underlying the Amazon study are assumptions that (i) there are constant returns to scale in the harvest, collection and distribution of these forest products, and (ii) the demand for them is elastic (at the given price, any amount of them can be sold).

A third example is a 1995 Malaysian study (table 4) in which at base scenario²⁰ Kumari apportioned 69 percent of forest value to its carbon stock alone and nearly 99 percent at scenario B3. When there is a move from the base option to option B1, the TEV rises by M$396/ha while carbon stock value increases by M$969/ha, i.e. 2.4 times more than TEV, because in this instance the reduction in timber value is more than compensated for by increased carbon and other values (Kumari, 1995b).

Table 4. Summary of results for a Malaysian study^a.

Source: Kumari, 1995b: table 12, p. 28. (1990 prices, 8% discount rate.)

Medicinal plants are another element whose value is often inflated. The temptation is to assume that in any tropical forest conservation area, some plant with a "miracle cure" substance will be found equivalent to the Rosy periwinkle (with its anti-cancer properties) found in Madagascar. No effort is made to apply sensitivity analysis to forest value according to the level of probability of such discovery, thus implying certainty where none is justified.

Some concern is beginning to be expressed by serious professionals that this eagerness to find monetary values may, by generating unrealistic numbers, eventually undermine the credibility of full forest valuation in general. For example, Andersson and Bojö (1992) felt that the case for sustainable use of forest resources was not well served by resort to improper use of the replacement cost method. They considered it better to undertake the difficult search for realistic values which could sustain long-term credibility.

2.7.3 Apparent over-use of monetary proxies for all forest values

A third source of weakness undermining usefulness and credibility of valuation results relates to apparent over-use of monetary proxies for all forest values. There is no clear consensus about whether all forest values can be expressed in monetary terms²¹. Gregersen et al. (1995) pointed to certain conditions, e.g. "irreversibilities" or uncertainty and uniqueness of certain species, that cannot be adequately addressed in economic terms; Mäler (1991) comes to similar conclusions. Many other social, cultural and ecological benefits cannot be valued in monetary terms; some practitioners feel it is time to call a halt. Michael (1995) reports Ehrenfeld’s (1988) argument that "if we persist in this crusade to determine value where value ought to be evident, we will be left with nothing but our greed when the dust finally settles". Between these two extremes there are authors, such as Folke (1995), who suggest that ecologists and economists can find common ground. There are also authors, such as Peterson et al. (1988), who go further and argue that economics should be integrated with other disciplines.

Nevertheless, the assumed correlation between lack of monetary values and destruction or misuse of forests has led to eagerness in attempting to value, in monetary terms, each good and service in every forest. The attempt to express most, if not all, values in monetary terms for ease of comparison is appealing, but can lead to gross miscalculations and, ultimately, wrong decisions.

2.7.4 Dependence on the views of outsiders in establishing forest values

The fourth credibility problem is the heavy dependence on the views or perceptions of often wealthy "outsiders" as a basis for attaching weights to the value of goods and services of forests. Estimated values are likely to reflect the WTP for the moral satisfaction of contributing to public goods, not the actual economic value of these goods.

In the Amazon example referred to earlier, the US$95 billion for TEV with a net present value of US$1,296 billion was derived from surveys of WTP among the relatively wealthy adult population in countries of the Organization for Economic Cooperation and Development (OECD): surveys among Brazilians would probably have resulted in lower values. Given that values depend on the level at which they are assessed and according to the perspective of each interest group, the utmost efforts are necessary to consult and agree upon who should be involved and at what levels and what weights should be accorded to the levels and interest groups’ perspectives.

Questions on WTP for the existence of forests as a whole can lead to meaningless answers. How can an individual correctly evaluate the utility difference between an actual situation (i.e. forests exist) to a hypothetical situation (i.e. no forests at all)? For specific sites it is possible to compare, for example, the use value of the site for a park or reserve to its value for timber exploitation and this can contribute to planning the land use (Wibe, 1995).

It is also important to bear in mind that there may be a great gap between survey responses and the real world. It is one thing for a person to tell an interviewer how much he/she is willing to pay to save a forest, a species and so on: it is quite a different matter when the same person is asked to write out a cheque. Lack of knowledge of the socio-economic, political and ecological conditions in which a forest is located can lead the analyst to wrong interpretations and, consequently, false and meaningless values.

2.7.5 Use of additive methods for estimating TEV

A fifth problem is the use of additive methods for estimating total economic value (TEV) of a forest. In some studies TEV may have been derived by mere summation, so giving higher values than if internal incompatibilities were corrected for. As discussed earlier, there are conceptual problems in that the sum of the parts is not the same as the overall worth of the forest because some of the values are mutually exclusive and some are interdependent.