Presentation outline

Presentation outline • Diverse functions of Tropical forests • Calculation of total economic value • Direct use value • Indirect use value • Carbon credit • Conclusion • Biases in CV

Valuation of Forest resources Tropical forests serve diverse functions: Home land of indigenous people Habitat for extensive fauna and flora (biodiversity) – inherent and medicinal value Supply hardwood timber Supply other products (fruit, nuts, latex, rattan, meat, honey, resins) Provide recreation (ecotourism) Protect watersheds – regulate flow Fix and Store Carbon Microclimate function

Valuation contd • These are economic functions because they contribute to human welfare either directly or indirectly. • How should the total economic value of a tropical forest be determined? • The issue is important because decisions about the use of tropical forest land are made all too often with an imperfect understanding of the total function of the forest. Even when they are broadly understood, only some of the functions enter into the economic calculus that determines the land use.

Valuation contd • In particular, the direct use values (for timber or agriculture) dominates decisions about land use, and the wider environmental values are neglected. Calculating total economic value • One approach to making decisions about the use of tropical forests is the cost-benefit approach. Under this, decisions to develop a tropical forest must demonstrate that the net benefits from development exceed the net benefits from conservation. Development is taken to mean a use that is inconsistent with keeping the forest close to its natural state.

Valuation contd • Conservation could have two dimensions: preservation, which would be formally equivalent to outright nonuse of the resource, and sustainable conservation, which would allow limited uses of the forest that are consistent with retaining the natural forest.

Direct use value in Tropical forest Direct use value may be classified broadly as timber and non timber uses. Non timber products include fruits, nuts, rattan, latex, resins, honey and wild meat. Timber is often regarded as a major product however, natural management regimes have been regarded as producing losses unless: - biological growth rate are high - stumpage price are high - Management is effective and at minimum cost - Discount rate is low (Leisle, 1987)

Direct use value in Tropical forest • Typically the Discount rate used to appraise projects in developing countries are 10% and above. Financial profitability of forest management systems in Indonesia, by discount rate for 1986 is given in the following table (NPV in 1986 US $ per hectare)

TPI – selective cutting CHR – complete harvesting and regeneration INTD Intensive Dipterocarpus system PULP plantations of fast growing species for pulp SAW10 Sawn timber plantation at ten-year rotation SAW20 Sawn timber plantation at twenty-year rotation

Products other than timber: In Indonesia, Exports of non timber forest products rose from $ 17 million in 1973 (comprising 12% of the forest product earning) to $154 million in 1985 which rose to $ 238 million in 1987. • Timber and non timber revenue from 1 hectare area in Peru is given in following table (in terms of US$/ha):

Products other than timber: • Several dangers are, however, inherent in extrapolating from a one hectare plot to an entire forest. First, market for non timber products are very unlikely to be that large. As production of non timber products expands, their prices is likely to fall. Second, the Peruvian case considers a plot of land located near to markets, whereas, most tropical forest areas are located far from the market.

Products other than timber: • In Costa Rica, Ecuador, The Philippines, and Thailand tourism ranks among the top five industries and brings in more foreign exchange than export of timber and timber products. • In Tunisia, for example, Lake Ichkeul – a visitor survey in 1988 showed that, on a single day, 1500 persons visited the park, and only 200 of them were from overseas. Tunisians were also prepared to travel long distance to visit the park: 60% of the visitors had come from Tunis, and 4% had traveled more than 350 kilometers.

Indirect use value • Tropical forests have many ecological functions. Valuation procedures tend to focus on either damage done or cost of replacement. Thus removing a tropical forest that protects a watershed can result in soil erosion and downstream sedimentation and increased floods.

Valuation for carbon credit • Typically forests contain 20-100 times more carbon per unit area than agriculture land. The estimates of deforestation in the early 1980s suggested that some 11.1 million hectares of tropical forest were being lost each year. Of this 7.3 million hectares were being cleared directly for agriculture, usually by burning, and a further 3.8 million hectares were being cleared for a combination of agriculture and firewood. Selective logging was taking place on another 4.4 million hectares.

Carbon emissions due to deforestation in 1980 resulted 1.8 gigatons (1 billion metric tons = 1 gigaton) comparing this with releases of fossil fuel carbon, which equaled 5.3 gigatons in 1984, around half remains in the atmosphere hence tropical forests contribute about 25% of the carbon dioxide emissions. • More recent estimate suggest that rates of deforestation have increased and the amount of carbon release could be some 2-3 gigatons each year.

In line with the valuation of damage avoided, tropical forest should be credited with the value of global warming damage avoided by its conservation. Estimates of global warming suggest that the damage done, mainly the rising level of the sea, could equal $13 per ton of carbon (in 1989 dollars, Nordhaus, 1991). • On average, deforestation of 1 hectare of land contributes 100 tons of carbon to the atmosphere. At some $13 per ton, deforestation causes damage at a rate of $1,300 per hectare.

Carbon contd • If hypothetically, afforestation programme were designed to take up say 3 of 3.6 gigatons net accretion of carbon, 470 million hectares of new plantations would be needed, or around 10% of the current area of forest in the world. • Myers (1990) suggests that a working mean sequester rate of 10 tons of carbon per hectare a year is appropriate for tropical forests, making the required hecterage of afforestation around 300 million hectares. At 10 tons per hectare per a year, the annual carbon credit would be $130 per hectare.

Valuation contd • Non use value of unique natural assets, mid 1980s US$ per adult Asset Value Animal species Bald eagle 11 Grizzly Bear 15 Bighorn sheep 7 Whooping crane 1 Blue whale 8 Bottlenose dolphin 6 Source: Clark (1980)

Valuation Contd • Efforts to estimate existence value are based on CV studies, which uses a questionnaire on Willingness to pay. The animal values cluster in $5-$8 range while American national symbol: the grizzly bear and the bald eagle in the $10-$15 range. • Global interest in deforestation , a figure of $8 per adult a year seems very conservative. Allowing only for the valuations of the richest nations of the world (400 million adults in Australasia, North America and Western Europe) the valuation would be $3.2 billion a year.

Conclusion: • Total economic value comprises use values, option values, and existence values. • Direct use values include timber and nontimber products and ecotourism. Indirect use values include the ecological functions of tropical forests, their watershed protection and mineral cycling functions. Existence value relates to the intrinsic value of the forest unrelated to its use, since all these values are given by people, the total economic value approach is totally anthropomorphic.

It is important in many developing countries, too, and as real income per capita increases, so does the incipient demand for recreation. • Contingent valuation techniques have been widely used to obtain measures of both WTA and WTP. Typically, they should diverse only slightly as long as the ratio of WTP to WTA to income is small. In practice, WTA estimates have often been much higher than WTP estimates. Ratios of 2-5 are not uncommon.

Biases in CV • Strategic bias relates to the incentive to under value a public good if provided to one person, is provided to all. Individuals, it is assumed, understate their preference in the hope that the price charged for the good will be related to their stated maximum willingness to pay. The provision of the good depends on the aggregate willingness to pay that exceeds the cost of provision. This is the classic free ride problem. • Design bias relates to issues in the design of the willingness to pay questionnaire. Starting point bias when the initial bid is suggested by the interviewer, which biases the respondent’s answers.

Modern analysts discuss hypothetical bias in content, criterion and construct validity. Content validity – relates to asking right questions in an appropriate manner and can be assessed only as a matter of the expert judgment. Criterion validity – relates the hypothetical value to some real value, or market price. Construct validity is the extent to which different measures of WTP agree with one another, none of which is close to the criterion validity.

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Presentation outline