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ECONOMIC
VALUATION OF
FORESTS
Dhaval Negandhi
Indian Institute of Forest Management
dhaval.negandhi@mespom.eu
9/19/2014
Introduction to Audit of Environment & Sustainable Development Issues
Acknowledgements
Dr. Madhu Verma, Professor, IIFM
Ministry of Environment, Forests &
Climate Change, Govt. of India
National Tiger Conservation Authority
The Economics of Ecosystem and
Biodiversity (TEEB)
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Presentation Structure
Introduction to Ecosystem Services
Need for Valuation
Valuation Frameworks
Total Economic Value Framework
Methods for estimating TEV
Challenges and Criticisms
Payment for Ecosystem Services
Application: NPV of forest diversion9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Benjamin Franklin (1706-1790)
“I believe that a great part of the
miseries of mankind are
brought upon them by false
estimates they have made of
the value of things”
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Lets define the terms
Biodiversity is the variability among living organisms; diversity within species, between species and of ecosystems
Ecosystem refers to dynamic complex of living and non-living components interacting as a functional unit
Ecosystem services are the benefits that people obtain from ecosystems – the goods and services of nature
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
The limitation of GDP
GDP no longer a gold standard for
measuring a country’s progress
Lumps together costs with benefits
Fails to account for sustainability
Equity concerns
Valuation of natural capital and ecosystem
services offers an opportunity to replace /
complement GDP.
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
We depend on nature !
fodder production tourist attraction
pollination
carbon sequestrationflood protection
water purification
slope stability
biodiversity
recreation
beauty
fibre production
food production
stabilising micro-climate
recreation
shelter for life stockgame reserve
© MA9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Millennium Ecosystem Assessment
© MA9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Provisioning Services
Freshwater
Raw materials
Genetic resources
Medicinal resources
Ornamental
resources
Goods produced or provided by forests
©UNEP/GRID-Arendal
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Regulating Services
Air purification
Water flow
regulation
Maintenance of soil
fertility
Erosion regulation
Pollination
Natural processes regulated by forests
Climate regulation
Global
Micro-climate
Moderation of extreme events
Water purification
Waste assimilation
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Cultural Services
Recreation
Spiritual & religious
experiences
Inspiration
Cognitive
development
Cultural and social benefits from forests
©UNEP/GRID-Arendal
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Supporting Services
Nutrient cycling
Primary production
Water cycling
Maintenance of
biodiversity
Functions that maintain all other services
©UNEP/GRID-Arendal9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Ecosystem services approach
Biophysical structure or
process
Function
Service
Benefit (Value)
© Raffaelli, D. & C. Frid (eds.): Ecosystem Ecology: a new synthesis. BES Ecological Reviews Series, CUP, Cambridge9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Invisibilities of forest benefits
Value is not fully reflected in markets, price
signals and policies
Decision-making thus ignores biodiversity
and ecosystem services from forests
Lack of incentives for sustainable use
Growing recognition of the need to develop
natural capital accounts and integrated
environmental and economic accounts
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
How can valuation help?
Recognize the ‘value’ of ecosystem services
from forest
Identify costs of unsustainable use
Improve decision-making by making trade-
offs explicit
Provide a basis for policy formulation
Set incentives for sustainable use
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Monetizing nature?
Market and non-
market valuation
Quantitative and
qualitative
Environmental and
social values
Market-centric view
A price tag on nature
Commoditization
About private profits
Valuation Monetization
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Conceptualization
Valuation Frameworks
Ecological
Key Biodiversity
Areas
Critical Natural Capital
Socio-ecological
Millennium Ecosystem Assessment
Develop-mental
Sustainable Livelihoods Approach
Economic
Total Economic
Value
© TEEB9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Valuation Methods
Direct Market Valuation Approaches
Use data from actual markets
Revealed Preference Approaches
Use preferences revealed through choices
Stated Preference Approaches
Simulated market
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Direct Market Valuation
Market prices: traded in markets
Cost-based approaches: man-made infrastructure or cost of damage
Avoided, Replacement, & Mitigation Cost
Production functions: ecosystem services as inputs to production
Typically used for provisioning goods, regulating
services, and potentially supporting services
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Limitations
Lack of markets for most ecosystem
services
Distorted markets even when present
Replacement cost can overestimate the
value
Understanding and information limited for
production function
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Revealed Preferences Approach
Travel cost method: among of time and
money spent in travelling
Hedonic pricing: quality or quantity of
ecosystem services reflected in local
property prices
Travel cost typically used for cultural services.
Hedonic pricing can be used for a variety of services including regulating & cultural.
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Limitations
Market imperfections & policy failures
Large, good quality data sets required
Expensive and time consuming
Cannot estimate non-use values
Sensitivity to assumptions
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Stated Preferences Approach
Contingent Valuation
A policy scenario versus Business-As-Usual
Choice Modeling
Comparison of attributes
Group Valuation
Links valuation with deliberative methods
Can be used for use as well as non-use values by
eliciting Willingness to Pay or Willingness to
Accept9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Limitations
Sometimes the only way to capture non-use
values
Hypothetical nature of markets
Divergence between WTP and WTA
Insensitivity to scale and scope
Different values comparable to a common
metric?
Goods are complex
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Choosing the method
Use values Non-use values
Direct Indirect BequestExistenceOption
Market
Production Function
Revealed Preference
Stated Preference
Confidence?
Co
nfid
ence?
Value?
Valu
e?
© TEEB
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Benefits Transfer Approach
Takes an existing value at the study site and
applies it to a new site
New valuation studies are time consuming
and expensive
Various categories of Benefit Transfer
Unit BT
Adjusted Unit BT
Value Function Transfer
Meta-Analytic Transfer9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Challenges in valuation (I/II)
Aggregation
Summing values of different ecosystem services
Double counting: jointly provided, mutually exclusive, interacting or integral
Part-Whole Bias
Spatial Scale
Differing spatial scale of ecosystem services
Demand arises at different scales – use and non-use values
GIS can help in this regard
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Challenges in valuation (II/II)
Variations in context and characteristics
Characteristics of site, beneficiaries, and context
Non-constant marginal values
Diminishing / increasing returns to scale
Non-linear, step-changes and thresholds
Distance Decay
Equity Weighting
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Criticisms of valuation
The process of valuation
Assumptions
Does the process change our perceptions?
How process affects outcomes?
Valuation and time lags
Drawing the boundary (value Mother,
God?)
How to chose how to value?
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Forest Accounts
Source: Expert Group on Green National Accounts
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Payments for Ecosystem Services
PES can be defined as a voluntary
transaction where a well-defined ecosystem
service (ESS) is ‘bought’ by at least one
ESS buyer from at least one ESS provide, if
– and only if – the ESS provided secures
ESS provision.
Adapted from Wunder, 2005
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Conceptualizing PES (I/II)
© Pagiola 2004
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Conceptualizing PES (II/II)
© Pagiola 2004
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Net Present Value
of Forest Diversion
in India
Economic valuation in practice
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
What is NPV and why is it
charged?
Diversion leads to loss of an array of ecosystem services
Not immediately accounted for by CA
Plantations replaces limited ESs lost by diversion of natural forests
Benefits from CA increase slowly
NPV to account for this loss of services
Should be charged for appropriate length of diversion activity
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Methodology
Classification
14 Forest Type Groups based on Champion & Seth Classification
4 Forest Canopy Cover Density Classes
Rates suggested for 14 x 4 matrix
Rotation period
Based on weighted average rotation period for each unit of classification
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Departure from earlier
methodology
The methodology recognizes the fact that few classification units may have dominant ecosystem
services in terms of their economic value which may be very different from other classification units in
which some other ecosystem services may dominate. The methodology is thus designed to objectively
estimate the economic value of ecosystem services originating from different classification units by
appropriately considering the specific factors rather than using a blanket value across the country.
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Timber Bamboo
The value relates to
potential timber
production and not that of
standing timber.
Estimates based on
growing stock data from
FSI
Market price discounted
for getting an in-situ value
Estimates based on
biomass data from FSI
Cost-adjusted price of
bamboo
Fodder NWFPs
Problem: under-reporting
Based on livestock number
dependent on forests and
standard fodder
requirements
Cost-adjusted market price
Problem: under-reporting
Estimated from potential
production of 12 major
NTFPs based on forest
inventory data
Cost-adjusted market price
Fuelwood Bioprospecting
Problem: under-reporting
Estimates from FSI study
on fuelwood consumption
from forests
Adjusted for under-
reporting
Cost-adjusted market price
Based on GIST estimates
Estimated state-wise based
on total number of species
Estimated for FTGs based
on forest area in different
states
Carbon sequestration Carbon storage
Based on growing stock
figures from FSI
IPCC default factors
Social cost of carbon
estimates for India
Based on recent FSI study
on carbon stocks
Social cost of carbon
estimates for India
Pollination & Seed
DispersalSoil conservation
Only estimated for forests;
not for agricultural lands
Estimates based on
replacement cost of natural
forest regeneration
Adjusted for survival % in
plantations
Estimated based on
average soil weight per ha
Assuming it would take
100 years to erode soil
when forests are cleared
Estimation of N, P and K
in eroded soil
Replacement cost of
nutrients
Water recharge Water purification
Based on simple water
balance equation
Relationship based on
canopy cover and surface
run-off
Estimated based on
economic value of water
Based on Benefits Transfer
Estimates from 8 studies
across the globe adjusted
based on GDP per capita
Total Economic Value
Discount rate: 4%
TEV Scenarios
Complete
summation of
values of
ecosystem services
Relevant
summation of
values of
ecosystem services
considering trade-
offs
Forest Type Group
specific rotation
period
Scenario 1Scenario 2
(recommended)
A blanket rotation
period of 60 yearsScenario 3 Scenario 4
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
Add-on Factors
Hill talukas – 20% premium
Forested wetlands – 20% premium
Protected areas
10 times in National Parks and 5 times in
Sanctuaries
5 times in Eco-sensitive zones around National
Parks and 3 times around Sanctuaries
9/19/2014Introduction to Audit of Environment & Sustainable Development Issues
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