UNDERSTANDING ECONOMIC VALUES OF ECOSYSTEM

SERVICES IN SUSTAINABLE DEVELOPMENT

PROF. DR. MOHD SHAHWAHID HAJI OTHMAN

FACULY OF ECONOMICS AND MANAGEMENT,

UNIVERSITI PUTRA MALAYSIA

WATER MALAYSIA CONFERENCE 2015- OPENING CEREMONY

22ND – 24TH APRIL 2015

CONTENT

• MILLENIUM DEVELOPMENT GOALS (MDGs) &

SUSTAINABLE DEVELOPMENT GOALS (SDGs)

• ECOSYSTEM GOODS AND SERVICES

• REASONS TO VALUE ECOSYSTEM GOODS AND SERVICES

• VALUATION METHODS: DEFINITION & TYPES

• APPLYING VALUATION TO ECONOMIC INSTRUMENTS AND PES

SUSTAINABLE DEVELOPMENT

• DEVELOPMENT DECISIONS INTEGRATING • ECONOMIC,

• SOCIAL AND

• ENVIRONMENTAL PRINCIPLES.

• MUST BRING BENEFITS TO • SOCIETY

• ENSURE FAIRNESS

• INTER-GENERATIONAL EQUITY

• NO ADVERSE ECOLOGICAL IMPACTS.

INTERNATIONALLY guided by

• MDGs and SDGs

MILLENNIUM DEVELOPMENT GOALS (MDGs)

FOLLOWING THE MILLENNIUM SUMMIT OF THE UNITED NATIONS IN 2000, THE UN MILLENNIUM DECLARED

EIGHT INTERNATIONAL DEVELOPMENT GOALS TO BE ACHIEVED BY 2015

• TO HELP ACHIEVE THE FOLLOWING MILLENNIUM DEVELOPMENT GOALS BY 2015:

• TO ERADICATE EXTREME POVERTY AND HUNGER

• TO ACHIEVE UNIVERSAL PRIMARY EDUCATION

• TO PROMOTE GENDER EQUALITY AND EMPOWER WOMEN

• TO REDUCE CHILD MORTALITY

• TO IMPROVE MATERNAL HEALTH

• TO COMBAT HIV/AIDS, MALARIA, AND OTHER DISEASES

• TO ENSURE ENVIRONMENTAL SUSTAINABILITY[1]

• TO DEVELOP A GLOBAL PARTNERSHIP FOR DEVELOPMENT[2]

SUSTAINABLE DEVELOPMENT GOALS (SDGs)

• THE UN CONFERENCE ON SUSTAINABLE DEVELOPMENT WAS HELD IN

RIO FROM JUNE 20 – 22 2012 [RIO +20]

• THE RIO+20 ADOPTED AN OUTCOME DOCUMENT,

“THE FUTURE WE WANT” MANDATING:

• TO DEVELOP A SET OF SDGs FOR INTEGRATION INTO THE UN DEVELOPMENT AGENDA POST

2015.

• "THE UN IS WORKING WITH GOVERNMENTS, CIVIL SOCIETY AND OTHER PARTNERS TO SHAPE

AN AMBITIOUS SUSTAINABLE DEVELOPMENT FRAMEWORK TO MEET THE NEEDS OF BOTH

PEOPLE AND PLANET, PROVIDING ECONOMIC TRANSFORMATION AND OPPORTUNITY TO LIFT

PEOPLE OUT OF POVERTY, ADVANCING SOCIAL JUSTICE AND PROTECTING THE

ENVIRONMENT.”

SUSTAINABLE DEVELOPMENT GOALS (SDG)

• THESE SDGS STRIVE AND REAFFIRM

• FOR A JUST, EQUITABLE WITH INCLUSIVE ECONOMIC GROWTH, SOCIAL DEVELOPMENT AND ENVIRONMENTAL PROTECTION

• THE PRINCIPLES OF COMMON BUT DIFFERENTIATED RESPONSIBILITIES

• POVERTY ERADICATION,

• CHANGING UNSUSTAINABLE AND PROMOTING SUSTAINABLE PATTERNS OF CONSUMPTION AND PRODUCTION

• PROTECTING AND MANAGING THE NATURAL RESOURCE BASE FOR ECONOMIC AND SOCIAL DEVELOPMENT ARE THE OVERARCHING OBJECTIVES & REQUIREMENTS FOR SD

SDGs HAS 17 SPECIFIC GOALS

OF INTERESTS TO THIS CONFERENCE INCLUDE:

• GOAL 6. ENSURE AVAILABILITY AND SUSTAINABLE MANAGEMENT OF WATER AND SANITATION FOR ALL

• GOAL 12. ENSURE SUSTAINABLE CONSUMPTION AND PRODUCTION PATTERNS

• GOAL 13. TAKE URGENT ACTION TO COMBAT CLIMATE CHANGE AND ITS IMPACTS

• GOAL 14. CONSERVE AND SUSTAINABLY USE THE OCEANS, SEAS AND MARINE RESOURCES FOR SUSTAINABLE DEVELOPMENT

• GOAL 15. PROTECT, RESTORE AND PROMOTE SUSTAINABLE USE OF TERRESTRIAL ECOSYSTEMS, SUSTAINABLY MANAGE FORESTS, COMBAT DESERTIFICATION, AND HALT AND REVERSE LAND DEGRADATION AND HALT BIODIVERSITY LOSS

• GOAL 17. STRENGTHEN THE MEANS OF IMPLEMENTATION AND REVITALIZE THE GLOBAL PARTNERSHIP FOR SUSTAINABLE DEVELOPMENT

Economic valuation in environmental and ecological assessment -Increasing importance of estimating indirect use and non-use values using innovative economic valuation methods

Economic valuation as Key sustainability development indicators

Sustainable Development Faces

Economic / Market-based instruments to internalize environmental and ecological externalities and in financing conservation

Challenge 2 Getting acceptance by decision makers and industry

Challenge 3 Raising public appreciation of the environment. Integrate multi-stakeholder involvement and participation.

Challenge 1 Internalization of environmental impacts & other externalities into planning, designing and implementing development projects.

Functions & Services Rendered by the Environment

Functions & Services Forfeited from the Environment

Valuation of the Changes in Functions & Services of the Environment

Environmental amelioration

Environmental degradation

CAPTURING VALUE OF THE ENVIRONMENT

Participation and Support from Multiple Stakeholders and the General Public

Federal & State Governments Set Environmental Friendly Policies, Regulations & Enactments

Local Governments Implement Market-based Instruments

Figure 2: Mechanism To Capture The Value Of The Environment

ECOSYSTEMS PRODUCTS AND SERVICESSOURCE: ADAPTED FROM SIMPSON (2001)

FUNCTIONS/SERVICES

HYDROLOGICAL SERVICES

• PURIFICATION OF WATER

• CAPTURE, STORAGE AND RELEASE OF SURFACE AND GROUNDWATER

• MITIGATION OF FLOODS AND DROUGHTS

BIODIVERSITY

• MAINTENANCE OF BIODIVERSITY (PLANTS AND ANIMALS)

CLIMATE

• PARTIAL STABILIZATION OF CLIMATE THROUGHCARBON SEQUESTRATION

• MODERATION OF TEMPERATURE EXTREMES AND THE FORCE OF WINDS AND WAVES

PRODUCTS

FoodFuel wood Non-timber forest products Fisheries products Marine productsWetlands productsMedicinal and biomedical products Forage and agricultural productsWater ReedsBuilding material

Direct valuesOutputs & services that can be consumed or

processed directly eg. Waterfall recreation and

nutrient water bottled etc.

Indirect valuesEcological services, such as flood control,

regulation of water flows and supplies, nutrient

retention, climate regulation, etc.

Option valuesPremium placed on maintaining resources and

landscapes for future possible direct and indirect

uses, some of which may not be known now.

Existence valuesIntrinsic value of resources and landscapes,

irrespective of its use such as cultural, aesthetic,

bequest significance, etc.

USE VALUES

NON-USE

VALUES

TAXONOMY OF ECONOMIC VALUES

WHY VALUE?

• UNDERSTAND HOW MUCH AN ECOSYSTEM CONTRIBUTES TO ECONOMICACTIVITY OR SOCIETY.

• FOR EXAMPLE, THE TRADE OFFS OF FOREST WATERSHED PROTECTION ARE TIMBERREVENUE LOSSES VERSUS QUALITY WATER SUPPLY REGULATION

• ASSESS THE BENEFITS AND COSTS OF AN INTERVENTION THAT ALTERS THE

ECOSYSTEM (CONSERVATION INVESTMENT AND DEVELOPMENT PROJECT,

REGULATION OR INCENTIVE) AND MAKE ECOSYSTEM GOODS AND SERVICES

COMPARABLE WITH OTHER INVESTMENTS

• HOW ARE COSTS AND BENEFITS OF A CHANGE IN ECOSYSTEM DISTRIBUTED?

• HOW TO MAKE CONSERVATION FINANCIALLY SUSTAINABLE?

Cost-

Based

Methods

Revealed

Preference

Methods

Stated

Preference

Methods

Market Price

MethodProductivity

Approach

Surrogate

Market

Approaches

Market

PricesEffect on

ProductionTravel

Costs

Hedonic

Pricing

Replacement

Costs

Cost of

providing

substitute

services

Cost of

Illnesses

Damage Cost

Avoided

Contingent

Valuation

Choice

Modeling

RECREATIONAL & ECO-TOURISM SERVICES

• INITIAL VALUATIONS USING THE TRAVEL COST METHOD

• EARLIEST APPLICATION OF DICHOTOMOUS CHOICE CVM (NIK MUSTAPHA 1993)

• OUTDOOR RECREATIONAL SERVICES AT TAMAN TASEKPERDANA.

• COMPREHENSIVE STUDY ON 20 FRAS [WILLIS ET AL. (1998)]

• WTP RANGE:RM0.67-3.74/VISIT.

• ECO-TOURISM ATTRACTION OF ELEPHANTS AT

KGECC [MOHD SHAHWAHID ET AL. (2007)]

• RM 4.29/VISIT FOR ELEPHANT RIDES, FEEDING, BATHING & PHOTOGRAPHING

• RM44.83 FOR WILD ELEPHANT SAFARI TRIP.

LOCAL COMMUNITY DEPENDENCE ON NON-TIMBER FOREST PRODUCTS

(NTFPS)

• OWN CONSUMPTION

• FOR SALES

• TASEK BERA ECOSYSTEM BY SEMELAI COMMUNITY: RM2,105/HHOLD/YR [MOHD SHAHWAHID

(1992)]

• SOUTH EAST PAHANG PEAT SWAMP FOREST (SEPPSF): RM1,832/HHOLD/YR [MOHD SHAHWAHID AND

AWANG NOOR (2005) ]

ECONOMIC VALUES OF ECOLOGICAL PRODUCTS

VARIOUS STOCK AND FLOW VALUES

• TIMBER STAND:• HILL FOREST : RM4,200 TO RM27,000/HA• PEAT SWAMP FOREST: RM1,722 -2,946 /HA• MANGROVE FOREST: RM2,449-9,086/HA

• PETAI STAND OPTIONS :NPV • RM1,179/HA (WITH TIMBER STAND)• RM42,461/HA (WITH DURIAN STAND)

• GAHARU (AQUILARIA SP):

• RATTANS:• RM30/HA IN VIRGIN FORESTS• RM16/HA IN LOGGED FORESTS

• BAMBOOS• RM5.64/HA IN LOGGED OVER FORESTS • RM399.18/HA IN VIRGIN FORESTS

• HONEY BEES

MEDICINAL PLANTS

• SOURCE OF IMPORTANT DRUGS

• VALUE DERIVED IN TERMS OF

• POTENTIAL EARNINGS, COSTS OF PROSPECTING, RESEARCH AND

DEVELOPMENT, AND CULTURAL PRACTICES.

• RM24-RM386/HA/YR (KUMARI 1995).

• RM40.21/HA/YR (AWANG NOOR ET AL. 2000)

CARBON STORAGE AND SEQUESTRATION

RM500 million in 1989 (Vincent et al. 1993) NPV:RM583.33 million above ground and RM99million below ground in NSPSF) (Woon et al. 1999)Carbon savings from RIL is 90-94 CT/ha at RM8.5-9/CT in Sabah hill forest (Awang Mohdar 1999)

Forest Function

Forest Reserve/

Conservation area

Project type/ issues of studies (object valued)

Value Estimated

Unit Value

Year of assessm

ent

Source

Ecological and local use

Tasek Bera Wetland

Plant diversity and its utilization by local communities

RM50-8,142 Mean: 275/household

US$/ household /yr

1990 Mohd Shahwahid (1995)

Biod conservation

Fraser’s Hill Forest

Bird Watching (CVM)

WTP: RM22.48 – RM66.60/person

RM/ person

2004 Puan et al. (2004)

Conservation

South East Pahang Peat Swamp Forest

Social benefit RM199-402 million

RM million

1999 Woon et al., 1999

Nature Park

Taman Negara Forest

Nonuse value (CVM)

WTP : RM12.32/household

RM/household

2000 Norlida Hanim (2000)

Wetlands, Paya Indah, Kuala Langat

Nonuse value (CVM)

WTP: RM28-31/year/ household

RM/household

2003 Jamal and Shahariah (2003)

Habitat for Wildlife

Maran forests Habitat function losses using • replacement

cost • change in

productivity • contingent

valuation

RM22,850/household affected

RM/household affected

2007 Mohd Shahwahid et al (2007)

VALUING WILDLIFE HABITAT FUNCTIONWHAT WOULD BE THE LOSSES IF THE WILDLIFE HABITAT FUNCTIONS ARE

JEOPARDIZED?

• PRESENT VALUES OF REDUCED PRODUCTIVITIES FROM THOSE STUNTED GROWTH OF CROPS NOT DESTROYED.

• PRESENT VALUES OF FOREGONE REVENUES FROM THOSE CROPS DESTROYED THAT REQUIRE REPLACEMENT

• REPLACEMENT COST OF THOSE DESTROYED CROPS

• PRESENT VALUES OF FOREGONE REVENUES FROM CROPS DESTROYED THAT DO NOT REQUIRE REPLACEMENT

• FOREGONE EARNINGS DURING HUMAN WILDLIFE CONFLICTS

• PROPERTY LOSSES

• HEALTH RELATED AND MORTALITY

• LOSS FROM TRANQUALITY AND TRAUMA

PV LOSS OF RM22,850 /AFFECTED HOUSEHOLD

(MOHD SHAHWAHID ET AL 2007).

CATCHMENT & HYDROLOGICAL FUNCTIONS OF FOREST

Project type/ issues of studies (object valued)

Forest Reserve/ Conservation area

Value Estimated Year of assessment

Source

Protection value of forest for water production

Hulu Langat FR, Selangor Lowland –Hill Forest

NPV : RM16.78million under protective forest and RM11.79million under RIL (at 10% discount rate)

1996 Mohd. Shahwahid et. al (1999)

Total watershed protection

Ulu Muda FR, Kedah Hill Forest

NPV: RM128.8million (10% discount rate)

2002 Mohd. Rusli (2002)

Water supply (CVM) Forest conservation for water supply (CVM)

Jengai FR, Terengganu Lowland – Hill Forest

WTP: RM9-12/month WTP: RM16-51/year

2002 Awang Noor et al. (2002)

Hydrological value North Selangor Peat Swamp Forest (Raja Musa and Tg Karang FRs)

NPV: RM109.56million (8% discount rate)

1999 Woon and Mohd. Parid (1999)

Hydrological value North Selangor Peat Swamp Forest (Raja Musa and Tg Karang FRs)

RM319-999/ha of forest (8% discount rate)

1995 Kumari (1997)

Cost saving of water treatment by Public Works Department

North Selangor Peat Swamp Forest (Raja Musa and Tg Karang FRs)

RM0.48million 1995 Kumari (1997)

Domestic water supplies

North Selangor Peat Swamp Forest (Raja Musa and Tg Karang FRs)

RM30/ha of forest (8% discount rate)

1995 Kumari (1997)

Irrigation water supply

Muda Irrigation Scheme

RM0.01/m3 2008 Mohd Shahwahid (2008)

Raw water supply to treated water plants

Raw water abstraction by Malacca treated water plant from Muar River

RM0.12/m3 2008 Mohd Shahwahid (2008)

CATCHMENT AND HYDROLOGICAL FUNCTIONS

OF FOREST

Soil conservation and protection role. Undisturbed forestsedimentation : 0.67m3/ha/yrNPV of water services: RM59,020/haReduced impact loggingsedimentation: 27.3m3/ha/yrNPV of timber and water services: RM41,445/ha

Incremental Hydrological Function: RM17,575/ha. Mohd Shahwahid et al. 1999

ECONOMIC VALUES

OF GEO HAZARDS

Area Project type/ issues of studies

(object valued)

Value Estimated

Year of assessment

Source

Malaysia Trans boundary haze impacts

RM801.9 million

1997 Mohd Shahwahid and Jamal (1999)

Kota Tinggi, Johor

Flood during RM4.15bn 2006 Department of Urban and Rural Planning (2008a)

Acacia plantations and peat swamp forest in Peninsular Malaysia

Forest fires RM 618,578/year

2002-04 Department of Urban and Rural Planning (2008a)

Kampung Sungei Pusu, Gombak, Selangor

Hill slope housing development

RM7,305/ household/ year

2007/08 Department of Urban and Rural Planning (2008b)

ECONOMIC VALUES

OF GEO HAZARDS

RECENT INTEREST AMONGST INTERNATIONAL AND MALAYSIAN AGENCIES

• VALUING IMPACTS OF FLOODS, LANDSLIDES, FOREST FIRES AND TSUNAMIS:

DEPARTMENT OF URBAN AND RURAL PLANNING:

• PREPARATION OF SPATIAL PLANNING REPORTS TO IMPLEMENT THE NATIONAL INFRASTRUCTURAL PLAN

• VALUING FLOOD AND FOREST FIRES

• VALUING IMPACTS OF MANAGING ENVIRONMENTAL SENSITIVE AREAS (ESA)

• VALUES OF ESTABLISHING ECOLOGICAL CORRIDORS IN CENTRAL FOREST SPINE (CFS) PROJECT

DEPARTMENT OF ENVIRONMENT (DOE):

• ECONOMIC VALUATION OF IMPACTS OF NEW PROJECTS THAT FALL UNDER THE ‘PRESCRIBED PROJECTS’ IN THE ENVIRONMENTAL IMPACT ASSESSMENT (EIA)

OPPORTUNITY COST OF REDUCING SOIL PROTECTION FUNCTION OF FOREST CATCHMENT:

CASE OF CAMERON HIGHLANDS

On-site foregone productivities: RM40,024/ha/yr for newly opened farmland and RM36,712/ha/yr for old farmland.

off-site loss of soil erosion:cost of dredging, investment in filtration infrastructure, increase maintenance cost of HEP plant and tunnel, foregone HEP generation, and differential cost of purchasing electricity

RM77.3 million

ASSESSING DAMAGES OF NATURAL AND MAN-MADE

DISASTERS TO THE ECONOMY

Case of the Forest Fires in Indonesia and Transboundary Haze to South East Asia

Valuation of the Impact could influence action in the region

CS2: ECONOMIC COSTS OF FOREST FIRES IN INDONESIA TO

MALAYSIA.Type of Damage RM million Percentage Adjusted cost of illness 21.02 2.62 Productivity loss during the state of emergency 393.51 49.07 Decline in tourist arrivals 318.55 39.72 Flight cancellations 0.45 0.06 Decline in fish landings 40.58 5.00 Cost of fire fighting 25.00 3.12 Cloud seeding 2.08 0.26 Expenditure on masks 0.71 0.09 Total damage cost 801.90 100.00 Source: Mohd Shahwahid and Jamal 1999

ECONOMIC COSTS OF FOREST FIRES IN INDONESIA TO MALAYSIA.

•29% of nation’s annual expenditure on poverty alleviation. •3.34 times of annual expenditures on social programs •2.51 times of annual expenditures on infrastructural programs

Haze damage to Malaysia :RM802 mn (1997)or 0.3% of GDP

ECONOMIC INSTRUMENTS: CAPTURING THE ECONOMIC VALUES OF ECOSYSTEM SERVICES

• MEASURES THAT MAKE USE OF THE MARKET SYSTEM, AND ITS PRICE SIGNALS, TO CHANGE THE ECONOMIC INCENTIVES RECEIVED BY RESOURCE USERS.

• WHY EI IS NEEDED?

• INDIVIDUALS, OR FIRMS, HAVE AN INCENTIVE TO USE NATURAL RESOURCES EXCESSIVELY,

• BECAUSE THE MARKET HAS FAILED TO CAPTURE THEIR FULL ECONOMIC VALUE,

• EI INTRODUCED TO RECTIFY THE PROBLEM.

• =>PROMOTES A MORE EFFICIENT AND SUSTAINABLE USE OF NATURAL RESOURCES.

POTENTIAL ECONOMIC INSTRUMENTS FOR FOREST RESOURCES

Action Mechanism

Appropriating Local Values of Forestry Protection

• Visitor entrance fees.• Watershed fees.• Airport taxes.

Appropriating Global Values of Forestry Protection

• International donor contribution.• Carbon offsets.• Debt-for-nature swaps.• Bio prospecting.• Forest conservation trust.• Transferable development rights.

Forest Use by Timber Companies • Higher stumpage fees.• Environmental performance bonds.• Reforestation fund.• Fiscal measures in forestry.

Property Rights • Open access.• State ownership.• Private ownership.• Common property ownership.

POTENTIAL ECONOMIC INSTRUMENTS FOR MARINE RESOURCESAction MechanismProperty Rights and Fisheries • Quota based fisheries management.

• Landing tax.• Input restriction.• Private fisheries: aqua culture.• Community management.

Increasing The Benefits from the Sustainable Use of Fisheries

• Responding to the international demand for fish.• Certified fisheries.• Promoting marine-tourism.• Processing the fish.

The Loss of Marine Bio diversity • Subsidising alternative fishing techniques.• Detection and fines for damage.• Effluent charges.• Fines and non-compliance fees. • Environmental liability.• Environmental bonds.

Appropriating Values of Marine area Protection

• Visitor entrance fees.• Watershed fees.• Airport taxes.• International donor contributions.• Debt-for-nature swaps• Bioprospecting• Marine conservation trust

EI FROM VALUATION OF DEEP SEA FISHING IN SAMOA

• EXCESSIVE PROFIT OBTAINED BY INVESTORS AND

RESOURCE PAYMENTS TO GOVERNMENT

< ECONOMIC RENT VALUED

• HENCE MORE LICENSES ISSUED ENCOURAGING

UNSUSTAINABLE PRODUCTION

• RECOMMEND ECONOMIC INSTRUMENTS - TAXES

AND FEES TO INCREASE THE RENT CAPTURE

PARTICULARLY TO LARGER DEEP SEA FISHING

ENTERPRISES

INCREASING THE ENTRANCE FEES TO THE BACH MA NATIONAL PARK

• RECOMMENDATION TO GOVERNMENT TAKEN UP BY DEPARTMENT OF TAXATION POLICIES TO RAISE THE FEE STRUCTURE.

• ON 15TH JANUARY 2008, THE MINISTRY OF FINANCE HAS APPROVED DECISION 03/2008/QD-BTC TO INCREASE ENTRANCE FEES FOR BACH MA NATIONAL PARK TO 20,000 VND FOR ADULT AND 10,000 VND FOR STUDENTS OR CHILDREN.

• PARKS ADMINISTRATION AND ACTIVITIES CAN KEEP 90% OF FEES AND ONLY 10% TO THE STATE BUDGET.

Protects Selangor’s Water SupplyProtects the highlands and unique habitatsPrevents flooding downstreamProtects the steep slopesProtects biodiversity resources, flora and fauna; and Has potential for nature-tourism and other economic opportunities

Why value forest in Selangor?

LOW PROTECTION TRADE-OFFS : FACILITATES APPROVAL OF TAMAN

WARISAN SELANGOR

Attributes from Forest Reserves designated in State Park

Values generated under IUCN Protect Areas Category I (Strict Protection)

Raw surface water production RM 21.3 million/year

Raw groundwater production RM0.95 million/year

Sedimentation reduction function*

No incremental cost when no logging is allowed

Eco-tourism RM1.7 million/year

Timber Harvesting** No timber harvesting is permitted

Quarrying (Granite)*

No quarrying activity can be permitted

Total RM23.95million / year

Applying ecosystem valuation to payment for ecosystem service: simple in theory

Benefits to producers

Costs to offsite populations

Conventional resource use:

no conservation

Conservation with payment

for service

Payment

Conservation without

payment

Minimum payment willing to receive to change damaging behaviour to ecosystem

Maximum paymentwilling to pay to reduceenvironmental damage

Source: Adapted from World Bank 2002