The Economic Importance of Nature. Agriculture, natural resources and societal change

HÍ: Nature based Tourism27 February 2003 The Economic Importance of Nature.Agriculture, natural resources and societal change Stefán Gíslason,MSc Environmental Management & Policy “If you don’t know the value of a 700 years old tree, then ask how much it would cost to make a new one”Amory Lovins, Hunter Lovins, Paul Hawken(Úr: Natural Capitalism: The Next Industrial Revolution)

Prologus on Local Agenda 21 • Local Agenda 21 is a plan for sustainable development of individual communities in the 21st century, with three basic demensions, i.e. an ecological, an economic and a social one. • According to Chapter 28 of Agenda 21, adopted by 179 nations at the 1992 Rio conference on environment and development, all local authorities should create a Local Agenda 21 plan in co-operation with the local citizens.

From Rio to Reykjavík 1992 The Rio Summit 1996 “most local authorities in each country should have…” 1996-1997 Nordic Project / Egilsstadir Conference March 1998 Contract of ME and NALA Oct 1998 Launch of the 18 months project - 31 municipalities, 109,000 inhabitants Jan 2001 A new 5 years contract = Extension of national co-ordination to the end of 2005

A couple of facts • Iceland: • Number of municipalities: 105 • Number of inhabitants: 288.201

Status of implementation Feb. 2002

Contents • What is the value of Nature? • How to evaluate it? • Methods for monetary evaluation • Foreign cases • Suggestions for use in Iceland

What is the value of Nature? The value of an environmental asset is not simply equal to the income or revenue originated from it But other values tend to be “forgotten” in any economic valuation, partly because they are not that easily calculated These values, however, have to be taken into account in decision making in line with sustainable development But what kind of values are we referring to? And how can we assess them?

Use Values Non Use Values Direct Use Value Indirect Use Value Option Value Vicarious Value Bequest Value Existence Value Value in the form of welfare created by indirect use, such as via books, films, etc. Value of the area for future generations Value from knowledge of continued existence Direct and indirect use value in the future, (e.g. through Ecosytem Services and biodiversity) • The value for tourists (“consumers’ surplus”) • Flood prevention • Climate impact • Etc. • Income from tourists • Grassing • Lake catch • Liechens (Cetraria islandica) • Etc. Total Economic Value (TEV) +

Direct Valuation Approach Indirect Valuation Approach Experiments(A small-scale experimnet conducted) Questionnarires (Surveys)(Assessing the Willingness to pay or accept) Surrogate Market Approach Conventional Market Approach Methods for monetary evaluation

Experiments(A small-scale experimnet conducted, (part of the area)) • Examples: • Recreation site:The same type of recreation site created to find out about the number of visitors and their willingness to pay an entrance fee • Improved water quality in a city:Water quality standards and property taxes raised in some cities and not in others to “see how many people found it worthwhile to move into cities with improved water qualities and higher taxes” Not easily applied to the Icelandic highlands

Contingent Ranking Method (CRM) Contingent Valuation Method (CVM) Makes it possible to compare to real market goods (rarely used) “The only means available for valuing Non-use values” • Questionnaires (surveys)(Assessing peoples’ willingness to pay or to accept)People are asked directly how they would rank certain values (goods) or • how much money they are willing to pay for a certain change or to prevent such a change (WTP)) and/or • how much money they are willing to accept to forego a change or tolerate a change (WTA) Appropriate for evaluation of the values of highlands

Household Production Functions (HPF) Hedonic Pricing Averting Behaviour Technique Travel Cost Method Hedonic Property Pricing Hedonic Wage - Risk Estimate Looking at changes in expenditures on goods, substituting or complenting the environmental resource • Looking at direct expenditures of visitors, such as: • transport • fuel • time? How do changes affect the property market in the area? Looking at the effects of risks on salaries(e.g. divers, helicopter pilots) Possibly applicable in the highlands Surrogate Market Approach “Looking at markets for private goods and services which are related to the environmental commodities of concern”

Travel Cost Method • Example: • Monteverde Cloud Rainforest (Costa Rica)Began with the “collection of address information of domestic visitors” to the reserve. Visitors were “then zoned according to their canton (state) of origin and an average visitation rate for each zone calculated”, (no.of visits/no.of inhabitants). “Next, zonal average visit cost” was estimated, “based on a standard cost per kilometre, () out of pocket costs, a fraction of fixed costs (ie wear and tear) and a value of travel time”. A minimum estimate of the expenditures of foreign tourists was added. Finnally a certain growth rate was used as a proxy to increasing visitor value due to higher demand in line with increasing rarity of rainforests. The result was $1.250 per hectare, or roughly 12-fold the maximum current price of land outside the reserve. Tobias, D & R. Mendelsohn, 1991

Hedonic Pricing • Scope of usage (v/Property Pricing): • USAWidely used for evaluation of air pollution, noice, national parks, etc. • Example: What is the value of silence?Comparison has been made of the price of two identical houses close to a railway and further away in order to assess the monetary value of “silence”

Dose-Response Technique Replacement Cost Approach Opportunity Cost Approach “Aims to establish a relationship between environmental damage (Response) and some cause of the damage such as pollution (Dose)” “Looks at the cost of replacing or restoring a damaged asset to its original state and uses this cost as a measure of the benefit of restoration”. The ‘Shadow Project Approach’ argues that this cost is the minimum valuation of the damage done. Indirect evaluation. “The benefits of the activity causing environmental degradation are estimated to set a bencmark for what the environmental benefits would have to be” for the activity not to be worthwile. Notapplicable in the highlands Applicable in the highlands Conventional Market Approach Used to value environmental ‘damage’, where the damage is reflected in measurable “changes in the quantity or price of marketed inputs or outputs”.Based on market prices. Can be based on ‘shadow prices’ if the market price does not reflect the rarity of the commodity, or on an estimated price if no market is present.

Summary and conclusions • The economic value of an environmental asset is not simply equal to the income or revenue originated from it in the foreseeable future • Several known methods can be used for monetary evaluation of these values, but none of these is simple to use • The monetary value of nature has to be taken into account in decision making processes, not only the part of the values that are reflected in the economic balance sheet • No evaluation is absolutely correct,but any valuation is better than no valuation at all

References Australian Department of the Environment:Techniques to Value Environmental Resources: an Introductory Handbook,http://www.ea.gov.au/pcd/economics/value/ Sigríður Ágústa Ásgrímsdóttir: Verðmætamat á náttúru, minjum og útivist á fyrirhuguðum virkjanasvæðum í Skagafirði. Háskóli Íslands, ritgerð til meistaraprófs í hagfræði, 1998. Stefán Gíslason: Landbúnaður, náttúruverðmæti og samfélagsþróun. Ráðunautafundur, Bændasamtök Íslands, Bændahöllinni, Reykjavík 2.-5. feb. 1999 Turner, R. Kerry; David Pearce og Ian Bateman. Environmental Economics. An Elementary Introduction. Harvester, Wheatsheaf. London, 1994 United Nations Environment Programme (UNEP):Economic Values and the Environment in the Developing World,http://www.unep.org/unep/products/eeu/ecoserie/ecos14/ecos14.htm

The Economic Importance of Nature. Agriculture, natural resources and societal change