ANNEX 2 - EXAMPLES OF RECENT ESTIMATES OF FOREST VALUES

Title: Barbier, E. B., 1993. Sustainable use of wetlands. Valuing tropical wetlands benefits: Economic methodologies and applications. The Geographical Journal 159(1) (March): 22-32.

Country: America Central (Guatemala and Nicaragua), Nigeria and Indonesia

Agency:

Description:

Preliminary applications in Central America (Guatemala and Nicaragua) suggest the importance of ranking wetland characteristics and distinguishing between direct use values, indirect use values and non-use values (Barbier, 1989 (quoted in Barbier, 1993)).

A further application in a study of a Nigerian flood plain, carried out in the early 1990s (Barbier et al., 1991 (quoted in Barbier, 1993)), shows how calculation of a few direct use values alone — for agriculture, fuelwood and fishing — demonstrates that wetland benefits are significant, particularly when contrasted with the benefits from irrigation projects that are diverting water away from the flood plain. The analysis shows that sustainable use of the flood plain can yield substantial economic returns to local inhabitants, and these benefits should not be excluded as an opportunity cost of any scheme that diverts water away from the wetland system.

Finally, an economic analysis of the mangrove wetlands of Bintuni Bay, Irian Jaya, Indonesia (Ruitenbeek, 1991 (quoted in Barbier, 1993)), also carried out in the early 1990s, illustrates how the degree of "environmental linkages" between the components of the system are critical in determining the extent to which the mangrove forest can be exploited for woodchip production.

Valuation method(s) used:

The choice of appropriate valuation technique(s) is critical to the assessment of costs and benefits. The assessment required can be grouped in three broad categories, each one corresponding to the type of policy decision concerning wetland use that needs evaluating. According to Barbier (1993) these categories are:

- impact analysis: an assessment of the damages inflicted on the wetland from a specific environmental impact (e.g. oil spills);

- partial valuation: an assessment of alternative resource allocations or project options involving wetland systems or resources (e.g. whether to divert water from the wetlands for other uses, or to convert/develop part of the wetlands at the expense of other uses). An example is the analysis of Hadejia-Jama’are flood plain, Nigeria, where its economic importance was assessed (and thus the opportunity cost to Nigeria of its loss) by estimating some of the key direct use values the flood plain provides to local populations through crop production, fuelwood and fishing.

- total valuation: an assessment of the total economic value of the wetland system (e.g. for national income accounting or to determine its worth as a protected area). This can be illustrated with the economic analysis of the mangrove wetlands of Bintuni Bay, Irian Jaya, Indonesia. The economic analysis compared different forest management options for their effects on the total economic value of the mangrove wetlands. The forestry options ranged from clear-cutting of the mangrove forest for woodchip production through selective cutting regimes of various intensities to a cutting ban.

Outcome:

In the case of the Hadejia-Jama’are flood plain the economic analysis indicates that the benefits were substantial on both a per hectare basis and a water input basis. This suggests that the benefits it provides cannot be excluded as an opportunity cost of any scheme that diverts water away from the flood plain system. The present value of the aggregate stream of agricultural, fishing and fuelwood benefits was estimated to be around N850 to N1280 per hectare, or around N240 to N370 per 10³ m³ of water ("maximum" flood inputs). (In 1989/90 prices, 7.5 Nigerian Naira [N] = US$1).

Given that there is still considerable uncertainty over the dynamics of the mangrove ecosystem, and that alteration and conversion may be irreversible and exhibit high economic costs, the analysis suggests that there is little economic advantage to cutting significant amounts of the mangrove area in the Bintuni Bay wetlands. Under a scenario of linear but delayed linkages of five years, selective cutting of the mangroves has a present value (in Indonesian rupiah) of Rp70 billion greater than the clear-cutting option, and only Rp3 billion greater than the cutting ban option. Even if weak interactions exist, an 80 percent selective cutting policy with replanting is preferable to clear-cutting. (In 1991, approximately 2.95 Rp = US$1).

Comments:

Barbier’s paper discusses three different cases that have in common the aim of valuation of tropical wetland benefits. Despite the common aim, a different approach was used in each country taking into account the context. This reinforces the importance that must be given to the context in a valuation. It is also important to bear in mind that "the basic methodology for assessing and valuing the economic benefits of tropical wetlands is relatively straightforward, but difficult to apply because of data and resource constraints". The paper also suggests that "there is still considerable uncertainty over the dynamics of the mangrove ecosystem, and that alteration and conversion may be irreversible and exhibit high economic costs". It is fair to assume that this assertion is not restricted to mangrove ecosystems but can be extended to other ecosystems.

Title: Centre for Social and Economic Research on the Global Environment (CSERGE). 1993. Mexico forestry and conservation sector review: Sub-study of economic valuation of forests. Report to the World Bank: Latin America and the Caribbean. Country Department II (LA2). November 1993.

Country: Mexico

Agency: The World Bank

Description:

This study identifies and quantifies in monetary terms the environmental values associated with forest conservation and management. These environmental values typically are not captured by private decision-makers and are not considered in their production decisions. The study was carried out in 1993.

The study generates estimates for representative forests of the following environmental values:

i. Option and existence values of biodiversity:

potential value of genetic resources for pharmaceuticals

existence value: review of studies

existence value: implicit prices from conservation funding;

ii. Use values:

tourism and recreational values of protected and non-protected areas

non-timber forest products;

iii. Functional values:

carbon sequestration and storage

watershed protection.

The products also include analysis of mechanisms for capturing global values and for providing local incentives for conservation of those environmental values.

Valuation method(s) used:

The values associated with forests are greater than their timber values. They include other direct uses of forests, indirect or functional services of forests, and option and existence values maintaining forests for future generations. These are elements of total economic value (TEV). Total economic value is a concept used to express the different components of value of an environmental resource. This is necessary in the case of a forest (with its characteristics as a public good) because the price of such assets generally do not reflect their full value to society. Practical applications of TEV are few because of problems of non-additivity of the elements and of quantification. A comprehensive approach would be difficult in practice (CSERGE, 1993).

A summary of the methodologies used for estimating the value of each one of the categories covered in the report is presented below. However, a detailed description, including additional calculations to provide a national picture, can be found in annexes 1-6 of the CSERGE report.

Tourism. The original data were generated by a visitor survey carried out in the Barranca del Cobre (Copper Canyon) 24-26 May 1993. The questionnaire consisted of 13 questions divided in two groups and was available both in English and in Spanish. The first group of questions was designed to elicit the visitor’s travel cost pattern (travel cost method, TVM). The purpose of these questions was to construct a demand function for visits to Barranca del Cobre, which could be used to estimate consumer surplus. The second set of questions employed the contingent valuation method (CVM). It was intended to elicit respondents’ willingness to pay (WTP) for conserving the forest area. Respondents were also invited to allocate their stated WTP to four distinct value categories, roughly corresponding to: (i) use value related to forest recreation, (ii) use value related to enjoyment of cultural diversity, (iii) option value and (iv) existence value.

Because of lack of available data, some inferences were made to provide an order of magnitude for the overall economic importance of the ecotourism sector. Multipurpose tourism data were estimated on the basis of a survey for the study in Barranca del Cobre.

Non-timber forest products (NTFPs)^A2.2. The assessment of the use value of NTFPs is complicated by the large numbers of different products and their uses. The main problem concerning the evaluation of the use value of NTFPs is the lack of accessible and quantified data. For the CSERGE report, data were compiled from, first, available national production figures and then from a range of indicative values of various NTFPs that were collated from ethnobotanical studies, a variety of referenced sources and anecdotal sources.

Carbon. The values for the carbon sequestration benefits of forest conservation and of plantation forestry were estimated in a two-stage process:

(1) the carbon sequestration and storage was estimated through physical models of forest type and land use change;

(2) studies on the valuation of this carbon sequestration in terms of global warming damage avoided were reviewed.

Watershed protection. The values were estimated for soil erosion and the off-site costs of erosion. Sedimentation costs are described and examples of them given. These costs were assumed to provide a surrogate value for the forest protection function.

Option value of pharmaceuticals. The methodology used in this study to estimate this value was adapted from a model used by Pearce and Puroshothaman (1992)^A2.3 and calibrated for Mexico. This model estimates option values as a function of the number of species at risk, the number of drugs based

on plant species, and the number of hectares likely to support medicinal plants (taken to be total area of tropical forest). The basic formula, which expresses the value on a per hectare basis, is then:

V_p(L) = {N.p.r.a.V/n}/H per annum

where:

V_p(L) = The pharmaceutical value of a ha of forest (US$/ha)

N = The number of plant species in forests

p = The probability of a "hit"

r = The royalty rate

a = The appropriation rate, or rent capture

V/n = The average value of drugs developed (US$ per year)

H = The area of forest (ha).

These components and their empirical magnitudes are discussed in detail in annex 5 of the CSERGE report.

Existence Value. The existence value is discussed in this study in terms of:

- Evidence concerning existence value in the United States and other Organization for Economic Cooperation and Development (OECD) countries;

- Measuring implicit existence value from "Debt-for-Nature" Swaps (methodology and evidence);

- Conservation easements and franchise agreements as instruments to capture existence value;

- Property rights attenuation such as through franchise agreements and conservation easements.

Outcomes:

Results of the empirical estimated values of elements of TEV of Mexican forests are shown in the table A2.1.

Table A2.1. - Estimated values of elements of total economic value (TEV) of Mexican forests

Source: CSERGE (1993).

In general, conservative estimates have been presented. These values have global elements of which Mexico may be able to capture a proportion.

By adding the non-priced benefits of ecotourism and the potential priced benefits of multipurpose tourism, the total benefits of tourism ranged from $30.6 million to $33.6 million per year. Ecotourism was characterized by a low number of visits and high willingness to pay whereas multipurpose tourism showed an opposite pattern, i.e. a higher number of visits but a lower price paid per visit. For two recorded ecotourist destinations (El Tiunfo, Chiapas, and Sian Ka’an, Quintana Roo) the number of recorded visitors was 150-500 per year and the price paid for the recreational experience $17-$500. Corresponding figures for the multipurpose tourism are 12,000-55,000 and $1-$8.

Ethnobotanical studies indicate that over 2000 plant species from Mexico’s forests are utilized. These range from internationally traded products such as resins, turpentine and pitch from pine forests and chicle from the chicle forests in the Yucatan, to a multiplicity of medicinal plants and wild foods utilized at a subsistence level. Their benefits may be significant in forest management decisions. Te’lom intensive management, for example, can produce $330/ha/year value added. Important forest products include chicle, medicines and building materials. The report’s data are intended to provide some indicative figures for actual use values as well as to illustrate the complex nature o f the use of NTFPs. The report goes further to argue that "the most important conclusion of this study is that the lack of quantitative and comparable data severely hampers attempts to estimate the use value of NTFPs from Mexico’s forests". However, despite the lack of data, the study highlights the importance of NTFPs both in subsistence use and also for income generation. It also lists the major obstacles to maximizing and capturing the value of NTFPs:

- a critical lack of accurate data at both national and local level;

- a licensing/permit system that stifles exploitation of NTFPs, forces trade into the "contraband" sector and makes collection of accurate information difficult;

- that local collectors and gatherers, who are also the primary managers of the resource, capture only a small proportion of the value because of international trading and marketing;

- the danger of over-exploitation of valuable species because of lack of well defined property rights.

The carbon sequestration function of forests provides large global benefits. A range of capital carbon value from $650 to $3,400 per ha is estimated (shown in table A2.1 as an annual value of $20-$100/ha/year). This functional value alone is greater than typical land values in tropical forest areas in many parts of the world.

Watershed protection is estimated at $2.3 million per year from sedimentation costs alone. Other functions such as watershed regulation and infrastructure damage would expand this lower bound figure. Although this is lower than other values, it is a highly localized problem. The study concluded that the most significant off-site damages from forest conversion are sedimentation costs and alterations to hydrological balances.

The option value of pharmaceuticals is estimated in the range from $26 million to $4,600 million, with a central estimate of $330 million presented in table A2.1. This value stems from the probability of discovering genetic material in the average hectare of forest which may yield billion-dollar benefits. The study concluded that the option value of pharmaceuticals developed from genetic material contained within Mexico’s forests may well be large and may provide an incentive to conserve these resources. However, measures are needed to ensure that Mexico is able to capture a larger share of this value. Similar to those presented for NTFPs, the report lists the following obstacles to maximizing the option value of pharmaceuticals:

- the lack of information; the number of unknown and unscreened species;

- the loss of stock of biodiversity by the accelerated loss of species and habitat, coupled with the loss of indigenous technical knowledge, including folk taxonomy and plant use;

- the lack of clearly defined intellectual property rights. Lack of patent protection may stimulate local initiatives and the development of pharmaceutical-based industry, but it will mean that Mexico (as a country or as private firms and individuals) fails to capture much of value of any products developed;

- a lack of institutional capacity and R&D capacity adding to the failure to appropriate value.

Table A2.2. - Policy recommendations to capture global value of Mexico’s forests

Notes: GEF = Global Environment Facility managed by the World Bank, UNEP and UNDP. NGO = non-governmental organization.

The existence value can be imputed from the willingness of international agencies to pay for conservation, or from direct survey responses. A value of $60 million is estimated for Mexico. Interpreting WTP for sustainable biodiversity use in "Debt-for-Nature Swaps", this study estimated a value of $5/ha for Mexico.

Comments:

The CSERGE report once more emphasizes the importance of the context in which the valuation is being carried out. For example, it calls attention to the fact that watershed protection values appear relatively insignificant although these costs may be concentrated in specific areas and no account was taken of infrastructure costs. The complexity and difficulty of estimating the use value of NTFPs because of the lack of quantitative and comparable data makes clear the need for further research on NTFPs to properly estimate their value. Another point that deserves special attention is related to the question of "capturability" of these values. The report concludes that the size of these non-market values promised considerable returns (both to private decision-makers and to society) if they could be captured. However, the size of the global values is not correlated with "capturability" (see table A2.2).

Title: Kramer, R.A., Sharma, N. and Munasinghe, M. 1995. Valuing tropical forests: Methodology and case study of Madagascar. World Bank Environment Paper No. 13. Washington, D.C.: The World Bank.

Country: Madagascar

Agency: The World Bank

Description:

Development projects in which large forest areas are protected or converted to other land uses, such as agriculture or grazing for livestock, have often failed to take into account the impacts on people with traditional rights to forests. The failure to adequately compensate people for or involve them in the establishment and management of protected areas has resulted in poor performance of many projects dealing with reserves and natural parks. In many instances, these parks and reserve areas are vulnerable to problems related to access by local populations. The study by Kramer et al. focuses on environmental valuation of a forest development and conservation project in Madagascar. It attempts to answer questions such as: Is the value of a park with a buffer zone greater than one without? What is the appropriate level of compensation for local people unable to continue their forest extraction activities because of a reserve? How much are foreign tourists willing to pay to visit national parks in developing countries?

The objective was to adapt several valuation methods for use in economic analysis of a conservation project, in particular, to examine the use of several valuation tools for assessing the benefits and costs of establishing a new national park. The results of the study should have implications for future economic analysis of forestry projects and other environmental projects.

Valuation method(s) used:

The study used four methods for empirically measuring the change in environmental values resulting from the park. These methods were: (i) contingent valuation method (CVM); (ii) recreation demand analysis; (iii) opportunity cost analysis; and (iv) productivity analysis.

The referendum style of contingent valuation questions was used. This style divides the sample into a discrete number of subsamples. Individuals in each subsample are asked whether or not they would be willing to pay a specified amount for the particular non-market good and they respond either "yes" or "no". The procedure was used in both the village survey and the tourist survey. In the village survey, household members were asked about their willingness to accept (WTA) compensation for having lost access to the forest contained in the park. This component of the study analyses the economic and social impacts of establishing the park in Madagascar on village households living adjacent to the protected tropical rain forests. The measure used for the compensation mechanism was units of rice. In the tourism survey, the CVM was used (as an alternative to the recreation demand method) for estimating the total value of the park to tourists.

When environmental conservation projects increase nature tourism activities, economic valuation techniques can be used to measure the associated benefits. Most studies have focused on the value to domestic tourists. The study described here examined the potential benefits that might accrue to international nature tourists from the creation of Mantadia National Park. Recreation demand models use the amounts of time and money visitors spend travelling to a site as price proxies, together with participation rates and visitor attributes, to estimate the recreational value of the site. Most studies portray the problem in terms of a single-purpose, single-destination, day trip to a site that affords some particular recreational experience of a type and quality that can be substituted for those available at many similar sites. Recreation in Madagascar’s national parks contrasts sharply with these assumptions. Park users in Madagascar can be divided into local people and international nature tourists.: these two groups consume distinct goods. The study focused on international tourists. Demand by international tourists required a reformulation of the traditional travel cost models. Data were collected during the summer of 1991.

Opportunity cost analysis is an approach that uses standard economic analysis of market values to determine the net economic benefits associated with the alternative uses of one or more resources. It is a relatively simple, but data-intensive, form of analysis with practical applications for conceptualizing development programmes and for involving people in the management of programmes. It is also a powerful tool in understanding the interrelationships between micro-economics factors relating to use and management of parks. In this study, the opportunity costs of interest are those associated with alternative land uses by people living in or near the park. Given the dependence of the villagers on the forests for a significant portion of their livelihood, creating a national park out of a large tract of forests and imposing restrictions over future use imposes a considerable economic burden on local villagers.

There is a mounting concern that increasing rates of deforestation are causing greater flooding on the eastern half of the island of Madagascar where the monsoon rains are particularly heavy. Productivity analysis was used in this study to measure the benefits to farmers of reduced flooding from reduced deforestation resulting from the establishment of the park and buffer zone. The productivity analysis for this study proceeds by first estimating deforestation rates in the Mantadia area using remote sensing. Deforestation rates for the future are projected based on the historical analysis. These land use changes are then used to project effects on flooding. Finally, the predicted reductions in flooding brought about by the park and buffer zone are used to predict reduced crop losses which are estimated and valued in economic terms. This component represents the combination of ecological and economic information to better understand interactions between humans and a rapidly changing environmental system.

Outcomes:

The household survey covered a total of 17 villages lying to the east and south of the Mantadia region. The total population covered by the household survey is 1598, and the average household size in this region is 4.6 persons. Most of the villages do not have access to any medical facilities, running tap water or electricity. Education is also deficient: most of the villages surveyed had (or were within 4-5 kilometres of) primary school facilities but the survey indicated the average number of years of education per person to be only 2.4 years. Rice production is the primary economic activity in the area. The average household produces 487 kilograms of paddy rice per year, worth about US$128.

Most households also engage in shifting cultivation. Eighty percent of the households surveyed said that they would add to existing land for cultivation. Other crops grown include maize, beans, manioc, sweet potato, taro, sugar cane, ginger, banana and coffee. Fuelwood is the most economically important forest product obtained by the households.

Based on the data collected on agricultural and forestry inputs and outputs, the cash flow models were used to estimate the opportunity costs borne by the villages as a result of losing access to the forests in the park. These results are summarized in the table A2.3.

Table A2.3. - Estimates of economic losses to local villagers from establishment of Mantadia National Park

Note: a. Estimated assuming a 10 percent discount rate and a 20-year time horizon.

Approximately 3400 people in three sets of villages will be negatively affected by the park. The results suggest that an annual compensation of approximately $100 per household would be required. Such compensation could be made in the form of education, health facilities, alternative income-earning enterprises in the buffer zone or other development activities. These compensation costs appear to be a significant part of the true cost of implementing protected area projects and should be built into project design at an early stage. Without adequate compensation and active cooperation of local residents, natural resource management projects are more likely to fail.

The analysis indicates that CVM, rigorously applied, can be effectively used in the developing country context. However, despite all of this encouraging evidence to support the use of the CVM in such a context, further research is required to improve its widespread applicability.

Investigating the impacts on tourism, the study examined the potential benefits that accrue to international nature tourists from the creation of Mantadia National Park. A summary of the benefit estimates for international tourists based on the econometric models used in the study are presented in table A2.4.

Table A2.4. - Estimates of benefits to international tourists from establishment of the Mantadia National Park

* Figures rounded up.

Although the estimated tourism benefits are only one part of the total value of the new national park, the results suggest that tourism can be a significant source of benefits when parks are created in a tropical country, even one with a modest level of international visitors. Clearly, the potential nature tourism benefits should be included in any reasonable benefit-cost analysis for project evaluation.

The productivity analysis proceeds by examining the history of deforestation in the Mantadia area using remote sensing. These deforestation rates are projected into the future to capture the effect on flooding. The relationship between deforestation and flooding is examined using two different data sets, one based on monitored small watersheds in the Mantadia area and one on weather data and flow rates of the Vohitra River. Finally, the predicted reductions in flooding brought about by the creation of the park and buffer zone are used to predict reduced crop losses which are valued in economic terms. All of these predictions are in a "with and without park" framework. In the "with park" case, these losses are considerably diminished.

Because of the interest in measuring the benefits of the park, only crop losses from changed flooding in the vicinity of the park and buffer zone were analysed. The results of this analysis (summarized in table A2.5) suggested that these impacts are modest, but this analysis may underestimate the total watershed protection benefits of the project. It is important to note that the benefits and costs of watershed protection are not borne by the same individuals. Future research projects should be designed to shed further light on these complex and important interrelationships and on the human-ecosystem interface. Productivity analysis is suggested as the best analytical tool to employ in such research.

Table A2.5. - Net present values of flooding damage

Note: the aggregate net present value (NPV) was considered over a 20-year life of the project and a discount rate of 10% was used to calculate the NPV.

Many of the benefits of biodiversity protection occur in countries remote from the resource being valued. The study carried out a survey to explore whether CVM is a workable method for valuing a global good such as existence value. It used a contingent valuation in a national mail survey in the United States to assess the value that residents placed on rain forest protection. The results of this survey are summarized in tables A2.6 and A2.7.

Table A2.6 . - Percentage of respondents answering "yes" and "no" to questions about knowledge of, visits to, and obligations to pay for rain forests

Table A2.7. - Willingness-to-pay estimates for tropical rain forest preservation

Notes a. Assuming 91,000,000 million households in the United States in 1989 (US Bureau of Census).

b. Income distribution in 1989 (US Bureau of Census).

For the study sample, tropical deforestation ranked below most other environmental problems, perhaps reflecting a higher priority for domestic environmental issues.

Comments:

This is one of the most detailed studies on forest valuation using sophisticated methods within the context of a developing country. It showed the potential of several valuation methods for improving the economic analysis of projects and their applicability within such a context. However, as the authors recognize in their conclusions, "a study of this scope is impractical for every environmental or natural resource project". How to adapt these methods to provide useful results remains an open question. As stated in the overview, "the results of the study should have implications for future economic analysis of forestry and other environmental projects". It is necessary to ask whether elaborate valuation, in general, is able to influence the decision-making process: whether, this study, in particular, achieved this remains to be seen.