In this article we will discuss about:- 1. Valuation Techniques of Forest 2. Practical Difficulties of Economic Valuation of Forests.
Valuation Techniques of Forest:
The different techniques can be divided into five broad groups:
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(a) Market price valuation, including methods to estimate the benefits of subsistence production and consumption
(b) Surrogate market approaches, including travel cost method, hedonic pricing and the substitute goods approach
(c) Production function approaches, which focus on biophysical relationships between forest functions and market activities
(d) Cost-based approaches, including replacement cost and defensive expenditure
(e) Stated preference approaches, mainly the contingent valuation method and variants
(a) Market-Based Approach:
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The simplest valuation methods are those, which rely on market prices. Many goods and services from tropical forest land uses are traded, either in local markets or internationally, including wood products (timber, pulp and fuel), non-wood forest products (food, medicine and raw materials). For the products that are commercially traded, market prices can be used to value.
The market prices, however, do not always reflect the appropriate prices for the valuation of various forest products. Since many environmental commodities do not pass through the market system, the markets do not provide prices that can be used to value them. For those products that are commercially traded, market prices can be used to construct financial accounts to compare the costs and benefits of alternative forest land use options. In some cases, it may be necessary to adjust market prices to account for market or policy failures. The latter step, also sometimes called “shadow pricing”.
In addition, there are many services provided by the forests for which there are no prices or it is difficult to have information about their prices. Consequently, a number of surrogate methods have been developed to value the forests.
(b) Surrogate Market-Based Approaches:
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Where there are related goods in the market for non-marketed environmental commodity, then, the prices of the related goods may be used. The markets for property/land, labour, and recreational services are used as surrogate markets to infer the value of environmental characteristics of the area/labour market and natural parks, respectively.
It is a second group of methods rely on the fact that certain non-market values may be reflected indirectly in consumer expenditure, in the prices of marketed goods and services, or in the level of productivity of certain market activities.
These techniques statistically sophisticated methods, such as travel cost models and hedonic pricing, as well as simpler techniques such as the substitute goods method. The theoretical basis for all of these approaches is the household production function, which describes how households attempt to maximize their well-being by allocating time and resources to different activities.
i. Hedonic Pricing Approach:
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More specific approaches in this group include the property value approach and the wage labour differential approach, which are used to value environmental amenities and dis- amenities. In both markets, the basic principle is the same: the property (worth) is characterized by several attributes that can be physical, location/access and environmental attributes, among other things.
Hedonic pricing is based on the assumption that the value of an asset is related to attributes it possesses or the stream of net benefits derived from it. Hedonic pricing is based on the assumption that the market value of land or labour is related to the stream of net benefits derived from it. This stream of net benefits includes a range of factors, including environmental amenities. Therefore, the value of the environmental amenity can be imputed from the observed land or labour market.
A particular buyer may be willing to pay for certain environmental attributes in some area that he may not be willing to pay in another area. The value of the property/labour is thus a result of the composite characteristics of the commodity. The specific contribution of the individual attributes can be obtained through a regression analysis to derive the implicit price of say, the environmental attribute (e.g., level of pollution in the area).
Once implicit prices are obtained for all the observations, a demand function (an inverse) can be derived for the environmental characteristic and its value derived from an estimation of the area under the demand curve. The market value of a residential property, for example, is affected by many variables including its size, location, construction materials and also the quality of the surrounding environment.
With sufficient data on property values and characteristics it may be possible to control for size, location, construction materials and other factors, such that any residual price differential may be imputed to differences in environmental quality. The hedonic pricing method requires large data sets, in order to account for and eliminate the influence of all other variables, which affect market prices. The approach also assumes that markets for land are competitive, and that both buyers and sellers are fully informed of the environmental amenity or hazard.
Hedonic pricing has been used in developed countries to estimate the negative impact of air and noise pollution, or the presence of waste disposal facilities, on the market prices of residential property and, conversely, the positive impact of proximity to water or public green space. It was found that no examples of hedonic pricing used to assess the environmental amenity value (or any other value) of forests in developing countries.
One constraint on use of the technique in developing countries is that private property markets are often thin, uncompetitive and poorly documented. This is a particular problem at the frontier of forested areas, where formal title to land may be missing and where land is often essentially an open access resource.
This situation will probably change as incomes grow and land markets in developing countries become more efficient and discriminating (and as land transactions are better documented). It may already be possible to apply the hedonic pricing method to residential property markets in and around high-growth cities in developing countries, especially where new residential housing developments provide home buyers with the opportunity to reside in greener, forested areas, away from the smog and congestion of the city centre.
ii. Travel Cost Method:
This method is used to measure the recreational value of natural resource scenic areas that are normally unpriced or priced with very low entrance fee. The travel cost method is based on the assumption that consumers value a forest site in terms of the cost of getting there, including all direct transport costs as well as the opportunity cost of time spent travelling to the site (i.e. foregone earnings).
The fee collected is usually based on cost recovery for the staff manning the area and may not even be enough to cover the man-made improvements made in some of the country’s national parks. To obtain an idea of how much value people attach to the resource for recreation, the approach assumes that the amount that people are willing to spend to visit the site is a good indicator of the value of the resource to them. This survey-based method has been used extensively to estimate the value of recreational aspects of forests.
Three basic steps are involved in travel cost models. First, it is necessary to undertake a survey of a sample of individuals visiting the site to determine their costs incurred in visiting the site. These costs include travel time, any financial expenditure involved in getting to and from the site, along with entrance (or parking) fees. In addition, information on the place of origin for the journey and basic socio-economic factors such as income and education of the individual is required.
The resulting data is manipulated to derive a demand equation for the site. This relates the number of visits to the site to the costs per visit. The third step is to derive the value of a change in environmental conditions. For this, it is necessary to determine how willingness to pay for what the site has to offer alters with changes in the features of the site.
By comparing the willingness to pay for sites with different facilities it is possible to determine how the total benefits derived from the site change as the facilities of the site change. A demand function for recreation (measured in visit-days per year or visitation rate per 1,000 populations) with price, income and prices of related goods as dependent variables, should be constructed. From this demand function, the value of the recreation benefits can be estimated.
iii. Substitute Goods Approach:
For those forest resources which are non-marketed or which are used directly by the harvester (e.g. fuel wood), value may be approximated by the market price of similar goods (e.g. fuel wood sold in other areas) or the value of the next best alternative or substitute good (e.g. charcoal). The extent to which the value of the alternative marketed good reflects the value of the nonmarket good in question depends, to a large extent, on the degree of similarity or substitution between them.
That is, if the two goods are perfect substitutes then their economic values should be very close. As the level of substitution decreases so does the extent to which the value of the marketed good can be taken as an indication of the value of the non-marketed forest good.
Chopra and Kadekodi (1997) use the approach as an alternative to labour cost analysis for valuing fuel wood, in a study of deciduous forests in India. No examples were found of the substitute goods approach being used to estimate other forest values. In some circumstances, a substitute good may be non-marketed as well, but it may still be possible to infer a price for the good in question.
In a cost-benefit analysis of a management programme for two forested watersheds in Nepal, fuel wood was valued in terms of the alternative uses of its closest substitute that is cattle dung which can be dried and burned when wood is unavailable. The opportunity cost of using cattle dung as fuel rather than as fertilizer is estimated in terms of losses in food grain resulting from lower dung inputs into agricultural production.
Thus this approach involves two stages – first, estimating a conversion factor for equating the two substitutes (in this case, the energy value of dung and wood); and second, estimating the marginal effect on output and thus profits, of a change in the use of the substitute (in this case cow dung).
The main problem with the substitute goods approach is that it is difficult to find substitutes which are perfect and which do not provide additional side-benefits. Thus, such value estimates should be viewed with caution.
(c) The Production Function Approach:
Another valuation method involves an attempt to relate human well-being or the incremental output of a marketed good or service to a measurable change in the quality or quantity of a natural resource. Such method is variously called production function approach or dose-response or input-output method. The production function approach may be used to estimate the indirect use value of ecological functions of forests, through their contribution to market activities.
The production function approach involves two steps. The first step requires establishing a dose-response function with the response reflecting measures of damages in physical measures (e.g., production losses, incidence of morbidity/mortality). The dose corresponds to the level of environmental stress (e.g., soil erosion, air pollution). The dose response function can be established from data obtained through experiments or survey work.
The second step involves translating the physical impacts to monetary measure. This stage is straightforward to the extent that market prices (adjusted for inefficiency) are available. In the case of loss production for example, the price of the crops may be used in the valuation. Where market prices are not available, cost-based techniques may be employed. To illustrate, morbidity impact may be valued using cost of illness approach. The cost of illness normally consists of hospitalization expenses and work loss days.
An essential requirement of the approach is the availability of reliable information on the physical relationship between the state of the environmental resource and the economic activity or asset it supports. In addition, market conditions and policy distortions affecting production decisions need to be taken into account.
The production function approach has been used extensively in both developed and developing regions to estimate the impacts of changes in environmental quality (e.g. deforestation, soil erosion, air and water pollution) on productivity in agriculture, forestry and fisheries, on human health and on the useful life span or costs of maintaining economic infrastructure.
Surrogate market and production function approaches rely on price (Revealed Preference) to estimate the value of the forest goods and services. These methods try to estimate the value of an environmental good on the assumption that such good exists. An alternative is to ask consumers to state their preferences directly, in terms of hypothetical markets.
Here, information on the value of an environmental benefit is obtained by posing direct question to consumers about their willingness to pay for it or, alternatively, their willingness to accept cash compensation for losing the benefit. The most widely used technique in this category is the Contingent Valuation Method (CVM).
(d) Cost-Based Approaches:
The cost-based approaches measure the costs of ensuring the maintenance of the benefits provided by the environmental commodities. One must recognize that these cost measures are not really measures of benefits and should thus be viewed as proxy measures where benefit estimation is not feasible.
The specific methodologies under this category include the opportunity cost method (i.e., the time to collect non-marketed products, usually valued using the wage rate, is used to value the benefits from the products collected). The other approaches are the replacement, restoration and relocation costs to restore the original condition of the environment. There are also the defensive or preventive expenditures incurred to prevent the change from the existing environmental situation.
In addition to the methods for estimating WTP or WTA for non-market forest benefits, some other cost-based approaches may be used to shed light on the costs of maintaining non-market forest benefits, or trade-offs with market values. Three alternative methods focus on the costs of providing, maintaining or restoring environmental goods and services. A thorough discussion of cost-based valuation can be found in Dixon et al (1986).
The most common methods are:
i. Replacement cost methods, which measures environmental values by examining the costs of reproducing the original level of benefits;
ii. Preventive expenditure methods, which estimate the cost of preventing or defending against degradation of the environment; and
iii. Opportunity cost approaches, which use estimated production costs as a rough proxy for the value of non-market benefits.
Cost-based techniques are commonly used where there is limited time and resources for more rigorous estimation of environmental benefits. However, such techniques must be used with care, with particular attention to ensure that non-market benefits and costs are not confused. Because cost-based techniques do not directly measure WTP for environmental goods and services, the resulting estimates may over- or under-estimate forest benefits by a large margin.
Problems arise when potential rather than actual expenditures are used, as it is not always clear that the environmental benefit in question justifies the costs of replacement, relocation, etc. On the other hand, while cost-based methods are inexact, they may be the only practical alternative in some cases, given resource and time constraints. Where such methods are used, key assumptions about the relationship between estimated costs and associated benefits should be stated clearly.
i. Replacement Cost:
The replacement cost technique generates a value for the benefits of an environmental good or service by estimating the cost of replacing the benefits with an alternative good or service. For example, where logging or road construction in upland forest areas leads to increased runoff and sedimentation, some studies use information on the costs of dredging or flood control as a rough estimate of the non-market benefit of watershed protection.
The technique rests on the availability of such an alternative, which should – as nearly as possible – produce the same type and level of benefits as supplied by the resource or environmental function being valued. When developing a replacement cost scenario, it is normal practice to select the least cost option among all possible technologies, so as not to over-estimate the value of the environmental benefit.
Relatively few examples of the replacement cost method were found in the literature review. One application to valuing forest benefits is to estimate the value of soil nutrients lost due to increased erosion associated with logging or deforestation in terms of the cost of manufactured fertilizer needed to replace the eroded nutrients.
ii. Preventive Expenditure:
The preventive expenditure approach (also sometimes called “mitigation” or “defensive” expenditure) places a value on environmental goods and services by estimating the costs of preventing a reduction in the level of those benefits derived from a particular area. This approach may be most applicable for assessing the indirect use values of forests. No case studies using preventive expenditure were found in the literature review.
However, a hypothetical example can illustrate how the technique could be used to estimate non-market forest values. For instance, projected expenditures on soil conservation measures aimed at halting or reversing soil degradation could be used as a rough proxy for the benefits generated by the natural nutrient cycling and watershed protection functions of forests.
In the case of logging, the watershed protection benefits that might be diminished by building roads for the extraction of timber could be valued by examining the incremental cost of adopting less damaging extraction methods, such as non-mechanized extraction, helicopter logging, or alternative road layouts. As always, it is important to ensure that the benefits of the preventive expenditure match those originally provided by the environmental function, in order to obtain a realistic cost estimate.
The preventive expenditure method is sometimes confused with a variant of the production function approach known as “damage costs avoided.” The difference is that the latter approach uses information on the costs of making good or repairing damages incurred as a result of some environmental change, whereas the preventive expenditure approach focuses on the costs of avoiding or mitigating damages before they occur.
Where alternative valuation techniques yield different estimates of a particular forest benefit, it is generally preferable to use the lowest estimate so as not to over-estimate the non-market benefit in question.
iii. Opportunity Cost of Labour:
Another valuation approach focuses on the employment opportunities foregone in order to secure or protect a particular non-market benefit. As with other cost-based approaches, the focus is on the costs of providing a non-market benefit, rather than the magnitude of the benefit per se. The basic idea is that a non-market benefit is worth at least as much as the return that could be obtained by private producers if they were to devote the same effort (i.e. the labour used to secure the non-market benefit) in some alternative use.
The opportunity cost approach is most often used to value the subsistence benefits of NTFPs collection, where labour is the main input and prices are not available because all or most output is consumed directly by producers. In such cases, the implicit assumption is that a producer’s decision to spend time collecting non-timber forest products is weighed against alternative uses of household labour.
The opportunity cost of time spent harvesting NTFPs is thus taken as a proxy for the value of the product(s) in question. The only data required are the amount of time spent on the harvest, the resulting yield and the prevailing (rural) wage rate. Nevertheless, care must be exercised when using rural wage rates.
First, it is important to ensure that the effort involved in harvesting a non-timber forest product is commensurate with the effort associated with the prevailing wage rate. For example, one day of a child’s time spent collecting wild foods should not be valued at the same level as the wage received by an adult for physically demanding agricultural work. In such cases, it may be appropriate to adjust the wage rate used.
Similarly, seasonal variations in rural wages should be considered, as the harvesting of NTFPs may be concentrated in periods of slack labour demand, when wages are lower. Third, gathering forest products is often combined with agricultural activities, for example when walking to or from the fields. This must also be taken into account when deciding how much labour time to include in NTFP harvesting costs.
(e) Stated Preference Approach:
i. Market Creation Techniques /Contingent Valuation Methods (CVM):
This method is particularly useful when data are unavailable to value the environmental effects of a particular project or when relevant market behaviour is not observable. These cases include species preservation; historical or cultural phenomena; scenic, ecological or other characteristics; genetic diversity and preservation of open spaces; unobstructed views or public access to amenity resources.
The CVM technique entails creating a hypothetical market for the good in question and asking the respondents how much they are willing to Pay (WTP) for the good in question. The crucial elements of this approach are the definition of the product, the specification of the payment vehicle and the framing of the WTP questions.
The hypothetical nature of the market makes the application of this technique quite open to a number of biases (e.g. starting point bias, strategic bias) and should thus be carefully considered. The CVM is applied in such areas as water quality, air quality, biodiversity and protection of endangered species and land/recreation facilities studies.
The contingent valuation method uses a direct approach, it basically asks respondents how much they are willing to pay for a benefit, or how much compensation they will be willing to accept to tolerate a cost. The individual’s behaviour is inferred from the answers he provides in a survey framework. The aim of the contingent valuation method is to elicit valuations which are close to those that will be revealed if an actual market existed.
This method is applicable for valuing a wide range of non-priced environmental good or service. However, it is more effective when the respondents are familiar with the environmental good or service in question. The success in the use of this method also lies in the design, implementation and interpretation of questionnaires.
In forestry, CVM has been used to value wildlife and recreational benefits of protected areas. Several recent studies have demonstrated the feasibility of applying CVM to forest land use. Valuations produced by CVM are “contingent” because value estimates are derived from a hypothetical situation that is presented by the researcher to the respondent. The two main variants of CV are open-ended and dichotomous choice (DC) formats. The former involves letting respondents determine their “bids” freely, while the latter format presents respondents with two alternatives among which they are asked to choose.
Open-ended CVM formats typically generate lower estimates of WTP than DC designs. On the other hand, because no payment is made in most cases, some observers question the validity of stated preference techniques. Critics argue that CVM fails to measure preferences accurately and does not provide useful information for policy.
Even practitioners accept that poorly designed or badly implemented CV surveys can influence and distort responses, leading to results that bear little resemblance to the relevant population’s true WTP. Much recent attention has focused on overcoming potential sources of bias in CVM studies. Resolving these difficulties involves careful design and pre-testing of questionnaires, rigorous survey administration and sophisticated econometric analysis to detect and eliminate biased data.
It should be noted that in applications of CVM in developing countries WTP can be measured in non-monetary units if respondents are very poor. The use of CVM for valuing environmental resources originated and was largely developed in North America. In forestry, CVM has been used to value wildlife and recreational benefits of protected areas. Several recent studies have demonstrated the feasibility of applying CVM to forest land use in the developing world.
ii. Contingent Ranking:
Contingent Ranking (CR) is a variant of contingent valuation and it involves asking respondents to rank a series of alternative non-market goods. One advantage of contingent ranking is that monetary bids may or may not be used.
A variant of contingent valuation, this method involves asking respondents to rank a series of alternative non-market goods. One advantage of contingent ranking is that monetary bids may or may not be used. Some have suggested that the use of hypothetical cash payments in CVM may be inappropriate in remote rural communities in the developing world, where people may have relatively little exposure to the market economy. In such cases monetary values can be assigned indirectly, by including in the contingent ranking one or more “anchor” goods with known market values.
The contingent ranking method is conceptually simple, easy to administer and able to generate rough estimates of value for a number of forest goods and services at once, without conducting separate WTP surveys for each use and non-use value. On the other hand, contingent ranking may not provide accurate estimates of WTP.
A fundamental question is whether the scores generated by contingent ranking reflect an ordinal ranking of relative preference (i.e. first, second, third, etc.) as opposed to cardinal measurements of value (i.e. one, two, three…). In the former case, it may not be valid to use the cost/price of marketed “anchors” to impute monetary values to non- market goods and services, because they are on different (incommensurate) scales.
Selected Economic Valuation Methods for Intangible Benefits:
For example, the direct non consumptive uses of forest ecosystem viz., ecotourism/ recreation education and research, human habitat, other non-consumptive uses are valued by CVM and experiments method as direct methods and travel cost method can be used as indirect method. Indirect uses like watershed benefits, agriculture productivity, soil conservation, recharging of ground water, regulation of stream flows, and other watershed benefits can be assessed CVM and Experiments method as direct methods and change in productivity approach; replacement cost approach can be used as indirect methods.
Eco-system services like nitrogen fixing, waste assimilation, carbon store, microclimatic functions, other ecosystem services can be assessed CVM and Experiments method as direct methods. Replacement cost approach and indirect estimates derived from experiments are used as indirect methods. Evolutionary processes like global life support and biodiversity are assessed using CVM and indirect estimates derived from experimental data can be engaged. Non-use values will be assessed using CVM.
A study by Hadker et al (1997), entitled “Willingness-to-pay for Borivili National Park: Evidence from a Contingent Valuation” tried to assess the willingness to pay (WTP) of residents of Bombay (Mumbai) for conservation of the Borivilli National Protected Area. Average household WTP was estimated at US $ 0.23 per month or about US $ 31.6 million in aggregate present value terms, which far exceeded the current budget of US $ 520,000 to maintain the area.
The main direct use value of the area is for recreation and the indirect use values may be associated with the area’s role as a source of Bombay’s drinking water and as home to many endangered animals. A number of studies on intangible benefits using various valuation techniques have been conducted for Indian forests.
Chopra and Kadekodi (1997) examined the ecological functions of the Yamuna Basin using the contingent method and suggested an annual value of Rs.624 per hectare as the intangible benefit of forests. The same authors in another study of this region suggested watershed value of Rs.2 lakh per hectare metric soil using an indirect method of reduced cost of alternate technology.
Similarly, value of carbon store was examined by Kadekodi (2001) in a study at the All India level and suggested Rs.1.2 lakh per 17 hectare benefit using indirect estimates. Haripriya (2000) estimated value of carbon store at Rs. 20,125 per hectare and aggregate of Rs.1292 billion from Indian forests using species miscellaneous forest inventory data.
A study by Madhu Verma (2000) examined the contribution of forests of Himachal Pradesh in sustaining livelihood of rural population, provisions for urban markets in local and external regions in terms of direct consumptive and non-consumptive benefits. Apart from direct consumptive benefits from growing various species of forest stock, value of the forest growing stock, salvage, timber drawn by right holders, fuel wood requirement, grasses and grazing and minor forest produce.
The study also accounted for direct non-consumptive and indirect benefits from Himachal Pradesh in terms of eco-tourism and recreation benefits, watershed benefits, micro-climatic factors, carbon sink, biodiversity, and employment generation through forestry works and suggested total economic value of forests of Himachal Pradesh at Rs.2.89 lakh per hectare.
The economic value of forests of Himachal Pradesh is Rs.2.89 lakhs per hectare of goods/services in terms of total geographic area of forests and Rs.7.43 lakhs per hectare of goods/services in terms of area under tree cover and scrub forest. The study suggested that the annual indirect benefits far exceed the direct benefits of forests which are just Rs.21,000 per hectare and Rs.53,000 per hectare respectively.
Hence, if the Gross State Domestic Product (GSDP) of the state is corrected for total economic value, as calculated in the current study, the contribution of forestry sector increases from 5.26 per cent of GSDP to 92.40 per cent of GSDP.
Distributional Concerns:
The main objective of economic appraisal is to evaluate the costs and benefits of alternative activities in terms of aggregate economic efficiency, i.e. irrespective of the distribution of costs and benefits among different groups of people. Most policy-makers, of course, are concerned about distributional impacts, and we may expect alternative forest land use options to impose costs and confer benefits to varying degrees on different social and economic groups.
For example, the designation of forests as protected areas can be seen as a means by which certain interest groups (typically not the poor) secure recreational, amenity or non-use values. This may result in significant loss to another group, e.g. subsistence farmers who rely on forest land for extraction of non-timber forest products, or for shifting agriculture.
Where the values of domestic and foreign consumers differ widely, the resulting conflict may be international in scale, as shown by recent heated debates about tropical forestry and timber trade policy in global forum. Similarly, efficiency and equity objectives in forest land use often conflict. Cost benefit analysis may lend weight to certain values and associated land use options that are unavailable to poorer groups, due to their limited access to capital and information.
These groups must therefore confine themselves to “inferior” uses. For example, a study of a new national park in Madagascar estimated the value of additional benefits to international tourists at two to three times the loss, in terms of lost agricultural land, incurred by local villagers, despite measures allowing them access to buffer zones. While such a change in land use may be economically efficient, since the potential for compensation exists, it will aggravate poverty where compensation is absent or inadequate.
Distributional concerns may be incorporated in an economic appraisal of forest land use options in at least three ways:
i. The distributional consequences of land use options can be made explicit by assigning costs and benefits to specific groups;
ii. Distributional weights can be used in the economic analysis to adjust the benefits and costs according to which groups enjoys or bears them; and
iii. The entitlements (use and access rights) of particular groups with respect to certain forest resources or benefits may be protected by defining minimum standards or guarantees.
To some extent the first approach is a prerequisite of the second and third. Unless the costs and benefits of a project or land use option can be linked to specific groups there is no way to know where distributional weights should be attached or what rights need to be protected. Therefore, the first step in any distributional analysis is to identify the different stakeholders in alternative forest land use options.
Depending on the region and the particular land uses in question, this may include:
i. Indigenous hunter/gatherer populations
ii. Subsistence farmers
iii. Commercial farmers
iv. Small-scale traders
v. Industrial firms (owners and employees)
vi. Local, state and national government agencies
vii. Domestic and foreign consumers
The next step is to determine which groups are affected by the various impacts of alternative land use options. Some costs and benefits may be spread widely among a number of groups, while in other cases the impact on certain stakeholders will be more concentrated. For example, the benefits of timber harvesting will be spread among the owners of logging companies and their employees, as well as firms involved in providing equipment, wood processing, transport, distribution and sales.
It may not be possible to single out every industry (let alone every firm) which benefits from a particular forest land use option. However, it is usually possible to distinguish impacts on broad sectors of the economy and on different categories of labour (e.g. skilled versus unskilled).
Finally, the link between costs and benefits and different groups needs to be quantified, if possible, to show the magnitude of the distributional impact. Ideally this will be in monetary necessary to describe their impact on different stakeholders in physical or qualitative terms.
Costs and benefits may be expressed in financial terms, using market prices, or in economic terms, with adjustments made to account for market imperfections and/or policy distortions, although it is preferable to use the former when looking at distributional impacts. It may be more difficult to trace the distribution of non-marketed costs and benefits, although the techniques used to value these items can often be extended to distinguish different groups.
For example, in the case of watershed protection benefits provided by an upland forest, it may be possible to identify those who stand to lose if these services are disrupted, e.g. land-owners and residents of the downstream flood plain, the regional water or irrigation management authority controlling a downstream reservoir subject to sedimentation, etc.
Practical Difficulties of Economic Valuation of Forests:
In theory, these valuation methods can be applied to biodiversity in order to calculate its total economic value, i.e. its contribution to human well-being. In practice, however, this exhaustive approach faces many obstacles, which explains why so few studies try to estimate the total economic value of an ecosystem or any other aspect of biodiversity. Thus, although the concept of total economic value seems valid theoretically, in the real world it provides only partial and often subjective information on the benefits that can be expected from use of biodiversity.
Four reasons are generally advanced to explain why this valuation exercise is so difficult:
i. The total economic value of an ecosystem can be estimated directly only by using the contingent valuation method and this technique is difficult to apply in contexts having a low level of monetisation.
ii. Monetary quantification of natural assets is a tricky matter because we have only partial knowledge of how ecosystems work.
iii. It is very frequently observed that the assumptions used to estimate economic values are deliberately conservative: given the uncertainty of the valuation procedure, the analyst generally opts for a low estimate of the benefits derived from the environment. This choice indicates how much latitude the analyst has in producing the estimate.
iv. The literature shows that, in practice, estimates of total economic value result not from aggregating all the benefits drawn from the ecosystem concerned, but from aggregating only certain values that the analyst was able to quantify in monetary. The concept of total economic value thus corresponds to the sum of a few economic values selected subjectively by the analyst, rather than to the sum of all the values that actually constitute total value.
These practical difficulties do not, however, negate the legitimacy of economic valuation of tropical forests. Although estimating total economic value is indeed an ideal objective, monetary valuation of certain benefits of biodiversity often provides important information for users and/or managers of these resources.
Caution should be exercised in the use of shadow prices, due to the sometimes arbitrary and imperfect manner in which they are calculated. A recent review of experience at the World Bank, for example – found that shadow prices for conventional (as opposed to environmentally-related) policy failures were rarely used in project appraisals.
In many cases the market price is taken as a rough proxy of the real economic value of a good or service, on the grounds that the effects of policy on prices are trivial, or simply due to lack of data or expertise to estimate accurate shadow prices. In practice, analysts often limit themselves to adjusting for the most visible policy distortions, such as those created by government intervention in foreign exchange markets, taxes and direct financial subsidies.
While the above classification would help to estimate the total economic value of natural and environmental resources, it is possible that some of the goods and services may fall in more than one category and hence it is in such cases that it is essential to avoid double counting. The aim of economic analysis or valuation is to ensure optimal use of the forest resources available to society, i.e. to allocate these resources where they will be best used and will maximize social well-being.
To this end, cost-benefit analysis is currently the decision support tool most widely employed by policy makers, who use to measure economic efficiency in resource utilization. The central purpose of such analysis is to help decision makers select the projects and strategies that use resources most efficiently.