| European
Tropical Forest Research Network |
This issue of ETFRN News presents examples of how in different countries and contexts, experiments are taking place with the development of innovative financing mechanisms aimed at the valuation of single or multiple ecological services. The introductory article below focuses on the relation between economic valuation and financing mechanisms. Other articles dealing with this relation are those by Bruno Locatelli and Guillaume Lescuyer in Section IV, and by Virginia Reyes and co-authors in Section VI.
By Pita Verweij
Several decades of intensive research on tropical forest ecosystems have generated a wealth of information about their values and functions. Economic valuation of forests has contributed to this knowledge, through assignment of qualitative and quantitative values to its goods and services. Besides producing goods for human consumption corresponding to direct use values, forests fulfil a range of regulation functions. Forest ecosystems play a key role in the regulation of climate, nutrient and energy flows, hydrological cycles, erosion and sedimentation processes, and natural hazard mitigation. Indirect use values of forests are closely related to these regulation functions and also include value for recreation. A special category of use value is option value, which is related to potential future uses. Examples of non-use values of tropical forests are the existence value or ‘intrinsic' value of occurring species, the information value of biodiversity to scientists, aesthetic and socio-cultural values. For the realisation of values outside the direct use category, markets are mostly absent or poorly developed.
Accounting
for non-market values
Although among scientists and politicians there is increasing awareness that
the overall value of forests to mankind is mostly underestimated, this knowledge
has hardly led to sustainable use and conservation of tropical forests. Sustainable
forest uses have in most cases been insufficiently attractive from the economic
point of view. Commercial timber exploitation, oil palm plantations, and livestock
production are held responsible for the continuously high rate of deforestation.
The financial profitability of alternative uses should therefore increase.
A common assumption is that if non-market values of forests (indirect and
non-use values) would be adequately accounted for and captured into financing
mechanisms, this could promote sustainable forest management. The question
however is, to what extent economic valuation can actually be used as a basis
for the development of operational financing mechanisms. How can theory be
put into practice?
Market
prices of forest goods and services
Several monetary valuation methods such as cost-benefit analysis are based
on market prices and related proxy variables. These methods are therefore
appropriate to evaluate direct use values of those forest resources that are
traded on existing markets. For timber and fish for example, (local) markets
are often well developed. When direct use values are not realised, this is
frequently related to open access resources or poorly defined property or
use rights. In those situations, timber and non-timber forest products are
often exploited at rates that are ecologically unsustainable, leading to the
rapid decrease of the resource base and its corresponding value.
Limitations
of cost-benefit analyses
For cost-benefit analyses based on market prices, an important limitation
is that most environmental goods are not traded in markets, so their economic
value is not revealed in market prices. Another type of criticism on both
methodology and outcomes refers to a variety of market imperfections. Environmental
costs are hardly internalised in the establishment of market prices. Adverse
government subsidies that promote unsustainable land use practices tend to
distort markets and the same holds true for trade barriers. A lack of information
can also contribute to the inadequate functioning of markets, resulting in
markets that lag behind the possibility of profitable and sustainable production
of goods and services.
Furthermore, outcomes of cost-benefit analyses are very much dependent on choices regarding the time horizon and applied interest rate. How can the costs of current carbon sink projects be compared with their benefits that will extend over centuries? Future interest rates cannot be assumed to remain fixed. Newell & Pizer (2000) showed that including the effect of interest rate uncertainty could raise valuation outcomes by as much as 95% relative to conventional discounting at a constant rate.
Contingent
valuation
For the assessment of indirect values, non-use values and option values, different
types of valuation methods are required. The contingent valuation method is
frequently used to assess people's willingness to pay for the conservation
of nature areas, or alternatively, the willingness to accept negative impacts
on the natural resources. Contingent valuation is the method most commonly
used to elicit quantitative information on aesthetic, ethical and spiritual
benefits, but the method as such is rather controversial. Because validation
of willingness to pay is hardly possible in terms of real payments, the subjectivity
of these inventories is criticised, as is the case for its strong dependency
on contextual factors.
Innovative
financing mechanisms
The realisation of non-market values related to forest environmental services
requires new financing mechanisms that are additional to the more traditional
market mechanisms based on direct use values.
Innovative forest financing mechanisms represent new ways and institutional
set-ups to transfer financial resources from actors who are willing to pay
for the generation and maintenance of ecological services to local actors
willing to accept payment, in exchange for sustainable forest management or
for refraining from the use of forest resources. A complicating factor is
that the costs of maintaining forest environmental services are generally
borne by few, while the benefits accrue to a wide variety of stakeholders
at different levels. If properly set-up, innovative financing mechanisms have
the potential to increase the monetary value of forests, thus providing sustainable
forest management alternatives to local communities.
Valuation
and land use decisions
A challenge for the future will be to link objectives of biodiversity conservation
and local development to the generation of additional ecological services.
The land use systems involved are key elements in achieving this. Those forest
management systems that are able to fulfil a range of functions, and thus
generate a variety of benefits, are expected to be financially more competitive
in the long run. Existing sustainable management alternatives should form
an important starting point. In the evaluation of alternative uses and decision
options, economic valuation provides policy makers with a useful tool by comparing
and measuring the various benefits from alternative (forest) uses.
Participation
and financing mechanisms
The actual land users are expected to base land use decisions on criteria
of tangible financial benefits rather than on promising valuation outcomes
(which might be related to potential economic benefits in the future). Accordingly,
development of practical financing mechanisms is considered crucial. Financing
mechanisms are often set-up in a top-down fashion. But the success of their
implementation will depend on the choices of local actors to adopt sustainable
forest management systems or to contribute to conservation. Therefore, participation
of local communities in the development of effective financing mechanisms
should be ensured. Incentives for sustainable forest management and conservation
can only be effective if property rights are well defined and if land users
are entitled to receive benefits arising from the ecological services they
maintain.
Local actors should not only receive economic benefits in return for their contribution to the preservation of ecological services, but their socio-cultural values and dependency on the natural resource base of forests for subsistence should also be taken into account. The forest values as perceived by local communities, government institutions, NGOs, private companies, and the global community should be addressed in the institutional set-up of proper financing mechanisms. In this context, valuation has an important role to play in facilitating sound investments into nature's capital.
Reference:
Newell, R.G. & W.A. Pizer, 2000. Discounting the distant future: how much
do uncertainty rates increase valuations? Resources for the Future Discussion
Paper 00-45. Resources for the Future, Washington, DC.
Dr. Pita
A. Verweij
Copernicus Institute, University of Utrecht
Padualaan 14, 3584 CH Utrecht, The Netherlands
Tel: +31-30-2537605, Fax: +31-30-2537601
E-mail: p.a.verweij@chem.uu.nl