Trees are of relatively large size and the life span of most trees is longer than that of other vegetation types. Forests are able to store from 20 to 100 times more carbon per unit area than croplands. Therefore, they can play a crucial role in regulating the level of atmospheric carbon (Ciesla, 1995). The relationship of climate change (one of today’s leading environmental concerns) to the conservation and development of the world’s forests has become a major issue. The issue is a complex one and continues to be a matter of more uncertainty than certainty.

Efforts have been made to value forests as a source of carbon storage and for their contribution to carbon sequestration^A1.9. Some of the highest value estimates given for forests in recent years have been for such services. For example, Kumari (1995b) estimated the TEV of the flow of benefits under a range of management options for the peat swamp forests of North Selangor in Malaysia. The results of this study are summarized in table 4 (section 2.7.2). What is notable in this study is that timber, for which Malaysia is best known, was valued in the base option (A) at only M$2,149/ha which corresponds to 21.3 percent of the TEV, whereas carbon sequestration accounted for M$7,080/ha and 69.2 percent respectively. Under the other management options, timber value even became negative while that of carbon became increasingly dominant.

The question to be asked is whether the threat of global warming and the efficacy of forests as an antidote to it are such as to justify carbon storage becoming the single most important value of a tropical (or any other) forest. Other studies have been concerned with estimating the capacity of the forest to storage carbon. An example of three such studies carried out in Mexico is summarized in table A1.2.

Box A1.3. - Considerations in valuation of watershed values

- Watershed management should be viewed as multiple-use management involving the manipulation of natural, agricultural and human resources, and taking into consideration social, economic and institutional factors operating within the boundaries of a watershed;

- A wide range of forestry projects can contribute to watershed conservation, e.g. a plantation established to produce fuelwood can also contribute to watershed conservation. Its effectiveness in contributing will depend, among other things, on how this forest is to be managed;

- Hydrological benefits from forest preservation are not yet fully understood. Evidence suggests that afforestation with some exotic species may decrease stream flow rather than assist in water availability;

- Biophysical impacts of deforestation on water yield are not yet fully understood. Some authors argue that flood or avalanche events, for example, are more likely to be closely linked to major climatic and geomorphic factors than to land use per se;

- The benefits and costs of watershed conservation are not perceived equally by all interest groups. For example, interests of upland inhabitants may not coincide (or may even conflict) with those of downstream communities. Hence, the share of costs and benefits is different for each group and estimated values will depend on which perspective is taken;

- Any intervention in a watershed can affect people who are separated geographically. For example, the costs of erosion may be largely external to watershed inhabitants or the costs may be both in the watershed (topsoil/fertility loss) and downstream (siltation of dams);

- Political boundaries and landholdings do not necessarily coincide with watershed boundaries. Inappropriate upstream land use practices can cause devastation downstream regardless of the political boundaries. However, it is advisable to plan and act in terms of the political context;

- Many events that occur in a watershed are not fully understood, for instance the speed with which forests give sedimentation control benefits. It has sometimes been assumed that sedimentation will be reduced in the first year after watershed forestry interventions have taken place and that benefits occur in the near future. Evidence is that soil stabilization benefits take place only after many years, if not decades. This has implications in the calculation of the net present value (NPV);

- Many derived benefits from watershed management cannot be readily priced in the marketplace whereas others can be estimated only indirectly, e.g. crop increases made possible by erosion prevention. Given these characteristics, watershed conservation is generally one of the components of other projects with a more direct production orientation, e.g. a fuelwood production project.

Table A1.2 - Carbon storage estimates for forest and non-forest land uses in Mexico

Source: CSERGE (1993): table A.3.2, p. 77 (annex 3).

Note: Biomass and soil carbon figures reported are averaged for all tropics (Brown) and for Latin America (Houghton et al.).

Full references for the three studies may be found in CSERGE (1993).

A1.6.1 Elements of carbon sequestration values

Changes in the earth’s temperature and associated changes in climate are not because of a single factor, but have complex causes which can be classified, according to related factors, in the following categories: (i) astronomical; (ii) geological; (iii) oceanic; (iv) land surface; and (v) atmospheric (Ciesla, 1995). The United Nations Framework Convention on Climate Change calls on its parties to reduce their sources and strengthen their "sinks" of greenhouse gases^A1.10. There has been considerable recent discussion on the fact that the global carbon cycle is out of balance and that this could make rapid global climate change more likely. The Intergovernmental Panel on Climate Change (IPCC), the Convention’s scientific adviser, has specifically identified forestry and other land-use-based mitigation measures as possible sources and sinks of greenhouse gases. The role of forests in the global carbon cycle is to act as a sink as well as a stock of carbon (although the size of the sink in unclear). It is also noteworthy that climax forests are carbon reservoirs but not necessarily net carbon sinks: in these forests there is an equilibrium between the amount of carbon released through decay of dead and diseased tree and the carbon absorbed.

The forest’s sink function occurs mainly during its growing stage. Carbon is released upon clearing and burning. It is assumed that the world’s forests store 90 percent of all carbon accumulated in terrestrial vegetation. As such, they should be an important variable in the global carbon cycle, although the specific effects of forests on the global climate are not fully understood. The tropics have been suggested as able to provide clear opportunities for mitigating climate change through forestry (Bekkering, 1992). An example is found in the carbon offset deals which are generally private- and public-sector joint ventures which have as their aim to sequester an amount of CO₂ equivalent to that emitted. For example, in the Netherlands in 1990 the state electricity generating board (SEP) established a non-profit-making enterprise (FACE, Forests Absorbing Carbon Dioxide Emissions) which aims to sequester an amount of CO₂ equivalent to that emitted by one 600 MW power station. To do so requires an estimated forest area of some 150,000 hectares divided into 5000 ha in the Netherlands, 20,000 ha in central Europe and 125,000 ha in tropical countries. At the end of 1993 the total area increased to 180,000 ha with the additional area being in tropical countries. The total cost has been estimated at US$112.17 million. Another example is the New England Power Company’s investment in carbon sequestration in Sabah, Malaysia, through the reduction of carbon waste from inefficient logging activities. This company estimated that some 300,000 to 600,000 tonnes of carbon (C) will be offset at a cost of below $2/t C (Steele and Pearce, 1996)^A1.11. However, forests alone cannot be expected to be the definitive answer to the problem of carbon sequestration. Many other measures should be taken to reduce emission of carbon into the atmosphere.

A1.6.2 Basis for assessing carbon sequestration

Tropical forestry programmes undertaken with carbon sequestration as their aim must be integrated into the social, environmental and economic contexts of the countries in which they are located. There are several methods available to estimate the carbon storage in forests (and hence the fluxes involved in the loss of forests), for example, extrapolation from experimental plots and modelling from inventory data. These different approaches usually arrive at different figures: even similar methods can supply different values. This can be attributed to data availability and collection, assumptions, categorization of forests and so on. An example of these differences is summarized in table A1.2^A1.12.

It is important that the analyst take into account that there are factors such as forest age, intended utilization or use of fire which are likely to affect the balance between the tendency for the forest to sink and/or store carbon as opposed to releasing it.

A1.6.3 Benefits and costs

As mentioned, valuation of forest resources is incomplete, particularly in respect of assessing the scale and distribution of costs and benefits. Some services provided by the forest, such as carbon sequestration, can be awarded values that are very high, even exceeding those of the standing timber. However, most of the benefits are higher at the international level than at national level. Local people are those who bear the greatest costs since, generally, they have their access to the forest denied.

Costs of implementing tropical forestry measures to mitigate global climate change can be high. One of the greatest challenges is to establish who will pay for this environmental value either within or outside the country.

Many benefits of the forest, such as carbon sequestration, can be higher at global level than at national level. This is so where "valuation by itself is of little interest to the country owning the environmental assets, although valuation illuminates the scale of economic distortions due to undervaluation" (CSERGE, 1993: p. 1). Under such conditions of unfair distribution of costs to the poor and benefits to the wealthy^A1.13, valuation could have the role of providing a rational basis for estimating the level of adequate international transfer payments to compensate those countries that are conserving forests beyond their own needs for the sake of global gain.

A1.6.4 Constraints to realization of carbon sequestration values

One of the major constraints to the realization of carbon sequestration values is the fact that carbon cycling falls outside national borders, so there is little interest to a country owning environmental assets unless it can capture at least part of this global value. Definition of a compensation mechanism is a very difficult task. Thus, notwithstanding the very high values being calculated for carbon sequestration, it does not seem to be "realistic to boost tropical forestry for the sake of sequestering carbon dioxide alone and [it is] preferred that the fixation of carbon be a positive side-effect with the focus to be on other, more direct, benefits whereas the fixation of carbon should be seen as a positive side-effect" (Bekkering, 1992: p. 414).

One of the great challenges is to seek ways to capture the environmental values of services such as carbon sequestration. Economically, the values that accrue to the international community as a free good should be captured by the country where the forest is located. Different forms of payment have been suggested. For example, the Climate Change Convention allows private companies or foreign countries to fund forestry projects to enhance carbon sequestration in order to offset their own emissions. Points to consider in the valuation of carbon sequestration are summarized in box A1.4.

A1.7.1 Elements of habitat protection and biological diversity values

Biological diversity is the variety and variability of all animals, plants and micro-organisms on earth. Forests are probably the most important terrestrial ecosystem for conservation of this variability. Tropical forests, in particular, are a source of genetic material so rich that it is not yet fully known; their importance has been highly publicized. Two major interests can be noted with respect to conservation of biological diversity. One is associated with ecosystems and species in natural and modified habitats. The other is related to genetic diversity among species of current economic use, particularly in agriculture (World Bank, 1995). Within the latter context, not only may species of flora and fauna become a source of new drugs with great market potential but also forest genes may be used to enhance resistance to disease, drought, salinity etc. or to enhance productivity or other desirable traits of farm stock: thus, forests can help provide an insurance cover for agriculture^A1.14.

Box A1.4. - Considerations in valuation of carbon sequestration

- Trees have relatively large sizes and their life span is longer than that of other vegetation types. Hence, forests are able to store 20-100 times more carbon per unit area than croplands. The relationship of climate change to the conservation and development of the world’s forests has become a major issue, although the issue is complex and a matter of more uncertainty than certainty. The precise effects forests have on the global climate are not fully understood;

- Forests can sequester carbon or act as a sink or store. Given the great concern about climate change, carbon sequestration has become the single most important value of a forest. However, how to capture this value is not clear nor the scale and distribution of costs and benefits. Many benefits are likely to be higher at global level rather than national level. The size of the sink is also unclear;

- The management or use of a forest does not necessarily release carbon into the atmosphere. Factors such as forest age, intended utilization or use of fire are likely to affect the balance between the tendency for the forest to sink and/or store carbon as opposed to releasing it. Young forests are more efficient at capture whereas a fully mature forest or a forest in climax may store more carbon but is unlikely to trap any more;

- Forests alone cannot be expected to be the definitive answer to carbon sequestration. Many other measures should be taken to reduce emission of carbon into the atmosphere;

- Estimated values have ranged from $5 to $125/tonne carbon, but recently a "shadow price" of $10-20 per tonne of carbon emissions has been generally accepted as a reasonable estimate of potential damage from climate change;

- Like watershed functions, the carbon cycle does not respect political boundaries: indeed, its benefits may be greater outside national ones. This has political implications. Those who release most carbon (e.g. industrialized countries) may therefore be the interest group that puts the most value on carbon sequestration functions;

- Forestry management and development may focus on more direct benefits whereas the fixation of carbon should be seen as a positive side-effect. Remember that some analysts have given very high values to it, even exceeding those of timber. Be moderate.

CSERGE (1993) reports that some 250 plant species are used as sources of drugs in western medicine with approximately 120 pharmaceuticals being based on plant materials. Over a quarter of all United States prescription drugs are reportedly plant-based. The annual value in 1985 of purchased drugs was US$18 billion. The CSERGE report states further that a "blockbuster" drug developed from plant derivatives may have an annual world-wide value in the region of US$1 billion^A1.15. The possibility of finding "blockbuster" drugs has been the basis for great value being given to biological diversity. This assumption has raised questions of what is the value of tropical forests as sources of plant-based pharmaceuticals given their high biological diversity. The impression is sometimes given that finding plants of critical medical value is an easy task, especially in tropical forests.

Forest habitat conservation is also important for the world’s wildlife^A1.16. Certain varieties of this wildlife, particularly the major mammals and bird life, are attractive for tourists and have become the mainstay of commercial tourism, particularly in savannah Africa. In certain countries of that region tourist revenues are among the top three sources of foreign exchange. It is assumed that multiplier effects of this industry, including rural employment and enterprise-based income, will take place and contribute to social stability. These effects. in turn, are expected to trickle down throughout the society^A1.17. Evidence from the literature on development does not suggest that the trickle-down effect takes place.

A1.7.2 Basis for assessing habitat protection and biological diversity values

Although a matter of consensus that the conservation of biological diversity can assist in protecting critical life support functions, there is divergence regarding its economic value^A1.18. Biological diversity valuation is a matter of great debate. Studies have often provided only partial values, for example, by considering hypothetical benefits to spatially dispersed potential beneficiaries rather than considering important economic impacts that may have only regional importance, as in studies on the northern spotted owl in the Pacific Northwest region of the United States (Chappelle, 1993). Similarly, emphasis has been put on creating parks and reserves in developing countries in order to contribute to hypothetical global benefits regardless of local people’s needs. Usually this is done based on assumptions that are unrealistic, abstract and alien to local conditions. Protection of the environment cannot be viewed in isolation, but must contribute to the advancement of human development.

Forest habitats and biological diversity are the key attractions in ecotourism: given the particular interest of industrialized countries in these aspects, analysts are often tempted to survey only or mostly people from developed countries even when they are operating in developing countries. For example, many studies on recreation and ecotourism which have been carried out in developing countries have been based on CVM or TCM which may rely on interviews mostly with foreign tourists from wealthier countries. This tends to inflate the values estimated. Munasinghe (1993c) expressed concern that, if conflicting claims to park access were to be determined purely on a WTP basis, residents, especially the poor local villagers, were likely to be excluded.

The analyst needs to exercise judgement regarding the likelihood of many species of the tropical forests being the source of new drugs to combat major illnesses. The likelihood of such a discovery is a matter of statistical probability; it is speculative, both as to the likelihood itself and as to how soon. According to Principe (1991)^A1.19, the probability of a given plant species giving rise to a successful drug is estimated at between 1 in 1000 and 1 in 10,000. Moreover, from the initial research to the final result can take up to 10 years. Mendelsohn and Balick (1995) illustrate how complex is this question of using the potential value of undiscovered drugs as a strong argument to conserve tropical forests: (i) experiences with large samples of botanical tests suggest that only between one in 50,000 and one in a million tests result in viable commercial drugs; (ii) the whole process of drug development in the United States from its start up to Federal Drug Administration approval for sale can take from 9 to 12 years; (iii) the average successful drug costs about US$125 million to find and develop. Also of relevance are recent developments in the pharmaceutical industry, e.g. biotechnology.

For developing countries, struggling to meet their basic needs, it is difficult to have a long-term perspective. What is the opportunity cost for a country or for the people in keeping an area preserved waiting for such a discovery and who is going to pay for them not to use the forest in the meantime?

From the valuation viewpoint, having assessed the probability of a "blockbuster" discovery, the potential of forest plants as a source of new drugs should then be analysed with as much caution as for other NWFPs, avoiding undue euphoria about global potential. Global market considerations should not lead to ignoring the social importance of plants at the local or national level. The analyst should give full weight to the fact that many plants have an important role as, for example, the only medicines accessible to local people^A1.20. However, since this "market" is composed largely of the poor, monetary values may not exist or may be drastically reduced if calculated through proxy techniques.

"Who gets what" is a particularly important issue in considering the value of habitat and biological diversity conservation. For example, there is no guarantee that the discovery of a new drug will necessarily mean a contribution to the well-being of either the country of origin or of local people. It can be argued that this is a political rather than a valuation issue. However, it is relevant also to valuation since a deliberate choice has to be made as to whose perspective and what level of value assessment will prevail in the analysis.

McNeeley (1992) notes that farmers (and consumers) in Europe benefit when India conserves wild relatives of rice, or the many pharmaceuticals that have been derived from Ayurvedic medicine. The wealthy nations may therefore earn a considerable consumer surplus when India conserves a natural area containing a high degree of biological diversity. The question is whether India’s own gain from the option and bequest values justify the conservation efforts and costs it has to shoulder. This argument can be extended to other developing countries when they are encouraged to conserve their natural forest resources.

A second illustration is Madagascar where the Rosy periwinkle grows naturally and now provides a drug for curing childhood leukaemia. Children have been saved and millions of dollars have been made from this discovery. It has been widely used to illustrate the importance of biological diversity conservation. The question that arises is what are the actual benefits to Madagascar and to its people? According to Schiøtz (1989), the answer is none at all. Schiøtz argues further that it "is even unlikely that the drug itself is available to the poor peasants of Madagascar, should they need it"^A1.21. So, why should Madagascar preserve the Rosy periwinkle? In this example, an analyst carrying out a valuation from Madagascar’s perspective could reasonably report a low value for the Rosy periwinkle until this country, where such a valuable plant is located, can capture a fair part of the benefits.

A1.7.3 Benefits and costs

In the case of developing countries, calls for the conservation of the tropical forests imply that specific developing countries should carry the management costs necessary to satisfy people, mainly in developed countries, for whom costs will occur only if and when species become extinct or ecosystems disappear. Upon creation of protected areas to conserve habitats and biological diversity, the problem arises over poor incentives to encourage local people to sustain the protected areas. Local-level benefits from the national parks and reserves are often low and can even be negative if, for example, local people are denied access to the area (Gadgil, 1993; Michael, 1995). In other words, "the opportunity costs of modern conservation programs which restrict access to resources are falling disproportionately upon the very communities that development projects are designed to assist" (McNeely, 1992: p. 126).

A study in Sri Lanka, for example, points out that "those villagers living around forests that were recently declared to be National Heritage Wilderness areas are the most affected, because all forms of extractive use in such areas are strictly prohibited" (Gunatilleke et al., 1993: p. 284). Another example: "the virtual extinction of the Ik people who were dispossessed with the establishment of Kidepo National Park in Uganda is only the most extreme illustration of this problem" (McNeely, 1993: p. 144).

Rural people who live closest to areas with greatest biological diversity are often the most disadvantaged and the farthest from the global cash economy: they are profoundly affected by such developments without being able to capture any gains. Evidence suggests that distribution of the costs and benefits of habitat and biological diversity conservation, in low-income countries at least, may be inversely related to the distance from the forest. The local people pay the most and gain the least while the global community pays the least and gains the most. For example, the change in land use because of the new national park in Madagascar, although "economically efficient, since the potential for compensation exists, it will aggravate poverty where compensation is absent or inadequate" (Bishop and Eaton, 1996). Hence, evidence suggests that distribution of the benefits and costs of biological diversity conservation have opposite directions, i.e. the benefits increase from the local to the global level whereas the costs follow an opposite trend (Wells, 1992). Within such a context, it is unlikely that local people would have a major incentive for habitat protection (Besong, 1992).

A1.7.4 Constraints to realization of habitat protection and biological diversity values

Biological diversity has gained in popularity and the need to conserve it is much advocated. Possibly because of this, Panayotou (1994) has observed a "tendency in the developed countries to view tropical biodiversity as a global resource, and the host country as both a beneficiary and a custodian of this resource on behalf of humanity". Panayotou feels that the conservation benefits to the host country tend to be exaggerated because of failure to recognize differences in technology, preferences and discount rates at different levels of development. In spite of being endowed with biological resources, developing tropical countries lack the capacity to capture the benefits and so fully realize the value for themselves.

In some developing countries a fast-growing demand for farmland because of population increase and the low productivity of agriculture makes it difficult for large areas to be set aside as protected areas. As early as 1977, Leslie (1977) asserted that forest reservation "on a large scale without commercial utilization or conversion to agriculture simply to preserve them [forests] as a major ecosystem, is hardly a serious option". A "hands-off" approach is neither practical nor necessary. The establishment of parks and reserves can be considered part of the solution to biological diversity conservation which should be complemented by production forests to be managed to supply goods and services needed by either the local population or the country (Vanclay, 1992; Earl, 1992).

As stated earlier, if protected areas to conserve habitats and biological diversity are created, the problem arises of poor incentives to encourage local people to sustain them. The establishment of buffer zones and a major participation of local people in biological conservation has been suggested (Wells and Brandon, 1993).

Although biodiversity conservation can contribute to sustainable use of natural resources, unregulated biodiversity prospecting (such as drug development) may cause resource depletion. For example, Oldfield (1984)^A1.22 reports that an entire population of Maytenus buchananni, source of the anti-cancer compound maytansine, was destroyed when the United States National Cancer Institute harvested 27,215 kg in Kenya for testing in its drug development programme.

Box A1.5. - Considerations in valuation of habitat protection and biological diversity

- Forests, particularly the tropical ones, are a source of genetic material so rich that it is not yet fully known although its importance has been highly publicized;

- Two major interests can be noted in biological diversity conservation: (i) associated with ecosystems and species in natural and modified habitats, (ii) associated with genetic diversity among species of current economic use, particularly in agriculture;

- Many species of the flora and fauna may be a potential source of new drugs with social and economic implications. However, recent developments in the pharmaceutical industry, e.g. biotechnology, may lead to a decreasing interest in the development of new botanical products. Also, once discovered, a drug is often produced in plantations or synthesized. In the long term, therefore, the value of the discovery tends to decrease;

- Forest genes can be used to enhance resistance to disease, drought, salinity etc. or to enhance productivity or any other desirable traits of farm stock;

- Although forests can, indeed, store species of flora and fauna with potential pharmaceutical value as well as serve as a genetic bank, these are only potentials. Such a discovery is not an easy task: it is costly, time-consuming and obeys the laws of probability;

- Following discovery, research and development costs to produce commercial pharmaceuticals from a plant are often high and can reduce net value drastically;

- Creation of national parks and/or reserves can impose opportunity costs on local people who have their access to the area denied;

- It is of crucial importance to take into account who gets what in considering the value of habitat and biological diversity conservation;

- In selecting the perspective from which to value, consider that of a country carrying out habitat protection and biological diversity conservation, where the opportunity costs of modern conservation programmes which restrict access to resources may fall disproportionately upon the very communities that such programmes are designed to assist;

- Evidence suggests that the conservation benefits to the host country tend to be exaggerated because of the assumption that it has the capacity to capture the benefits and so fully realize the value for itself. Instead, very often it lacks the technology and, despite being endowed with biological resources, it lacks the capacity t o gain from them.

Notwithstanding the increasing demand for "natural products", which should boost the pharmaceutical industry’s interest in research on plants, recent developments in biotechnology put at risk the potential use of plant-derived drugs^A1.23. Pearce and Moran (1994) refer to work done by Principe (1989) which suggests that "the pharmaceutical companies have shown a decreasing interest in the development of new botanical products ... processing plant genetic material is time-consuming and expensive". Randall (1991) argues that the emerging technologies of bioengineering may not necessarily enhance the value of naturally occurring genetic material and could yield substitutes instead. Winpenny (1992) goes further to argue that "given the trend towards the production of synthetic drugs, pharmaceutical firms might only offer low ‘bids’". Furthermore, once the active principle of the natural product is known, it is likely that there will be a shift towards having it synthetically produced. Points to consider in valuation of habitat protection and biological diversity are summarized in box A1.5.