Ecosystem Services from Forests: Valuation and Policy issues

1. Ecosystem Services from Forests: Valuation and Policy issues Kanchan Chopra Formerly Director and Professor Institute of Economic Growth Delhi Visiting Professor TERI University

2. Ecosystem Services: the issues • The concept of ecosystem services is now firmly placed in policy contexts in India • Questions that are raised : • What are ecosystem services? • How are these to be valued? Can a single value be placed on them? • How is this value to be made part of policy? • What institutional and constitutional changes are required for this to happen?

3. Natural Capital (embodied in ecosystems) leads to a flow of services • Extension of the Concept of Capital to Natural Capital took place in the last two decades or so • Traditionally, economists recognized only Human made capital • The extension to include natural capital occurred when, simultaneously, ecosystems were becoming part of the social science vocabulary • Capital also results in a flow of services: ecosystem services (defined to include goods)

4. Freshwater Systems Agricultural Lands Coastal Zones Forest Lands Arid Lands & Grasslands Biodiversity underlies the goods and services provided by ecosystems that are crucial for human survival and well-being. Provisioning: Goods produced or provided by ecosystems Regulating: Benefits obtained from regulation of ecosystem processes Cultural: Non-material benefits obtained from ecosystems Supporting: Services that maintain the conditions for life on earth and Biodiversity Ecosystem goods and services have significant economic value, even if some of these goods and most of the services are not traded by the market and carry no price tags to alert society to changes in their supply or in the condition of the ecosystems that generate them

5. Trading ecosystem services across land use categories in forests:ecologists’ classification • Dense Natural Forest • Dense Lopped forest • Open Tree Savanna • Grassland • Single Species Plantation • Strip and Roadside Forests • Coffee/Tree/ Rubber Plantation

6. Land Use and Ecosystem Services

7. Why value ecosystem services • Market driven economies often promote ecosystem services with high market value to the detriment of other services that are less obvious but equally important. e.g. timber production to the detriment of hydrological services • Unsustainable use of one service (e.g. water) can cause the entire ecosystem to degrade and the loss of other important ecosystem services. Once the ecosystems are heavily degraded. Restoration is very costly, takes long time and is impossible in some cases. • Economic valuation of ecosystem services is an additional argument – it cannot replace other motives for protecting nature.

8. Economic Valuation of ecosystem services • Only anthropocentric values are estimated • Stated Preference Methods and Revealed Preference Methods • Revealed Preference: linked to market based valuation • Replacement Cost: Value of Watershed protection to provide ppppure drinking water approximated by cost oft water purification plant down stream • Avoided cost: Value of soil conservation service equal to avoided cost of downstream dredging

9. Valuation Methods: ctd. • Enhanced Income: e.g. from fisheries due to improved water quality • Travel cost: value of biodiversity in a national park partly captured by what tourists spend to visit it • Hedonic pricing: value of coastal view from increased value of houses facing coast STATED PREFERENCES: Contingent valuation: what people say they will pay

10. From individual services to forest land: What is Net Present Value of Services from a Forest? • NPV, as in the case of physical capital, refers to “the discounted sum of values of eco-system goods and services from a forest over a period of time net of costs incurred “ Note that: • it includes services and goods accruing to all the stakeholders associated with it • All values should be NET of any costs associated with them in fetching, collecting or enjoying them (Concept of Opportunity value) • Difference between two periods’ NPV (NPV1-NPV0) is the depletion cost of the resource

11. Supreme Court Committee (2006) Estimating NPV per hectare of forest land : Steps • Estimate NPV per hectare of land with Forest Cover not forest department owned land • Consider products and services for which there are available studies and secondary sources of data and information e.g. Timber, Carbon sequestration, Eco-tourism, NTFP, Fuelwood, Fodder, Watershed services • NPV estimated by forest circles; discount rate of 5% for a time period of 20 years (based on current work on parameters for planning at IEG) • Do not value biodiversity (except to a very limited extent through eco-tourism); Protected Areas are thereby excluded from the area for which NPV per hectare has been estimated

12. Why biodiversity not valued ? and effect on choice of policy instruments? • Services such as biodiversity support life on earth: biodiversity hot spots and protected areas need to be inviolable. How do we ensure it? Law? Or joint management or both? • A mix of policy instruments is indicated • Putting a value implies accepting the equivalent of the “ polluter pays” principle and accepting “pay and convert principle unconditionally.

13. For ecosystem services included:Market or non-market value of the service • Services accruing from forest ecosystems may have market or non-market value • Examples: timber market watershed services: non market • Both add to welfare and need to be estimated • Methodology and Data inputs needed to allow for complete valuation

14. Cost Estimation • All costs incurred by extractors or users: • Forest department, collectors, contractors etc • Issues relate to splitting of joint costs • Also to opportunity costs versus non market costs

15. Methodological Details in estimation for ecosystem goods and services • Should it be market/ Non-Market value of output? • How should cost of service be estimated? • Can sustainability of flow of services over time-period be assured? • What rate of discount and over what time period? • Can we assume simple additivity of values of services? • Distribution of amount collected among stakeholders at local, state and national levels

16. Evolution of Policy on Forests, forest land and its diversion in India: CA,CAMPA and others • Conversion of land : FCA (1980); Compensatory Afforestation • Recognition of forest as an ecosystem provide services of all the above types to stakeholders at all levels • NPV of forest land diverted to be collected from parties to constitute CAMPA placed in a centralized fund • Supreme Court Expert Committee on NPV recommended, among other things three levels of funds for distribution of NPV

17. Division of Compensation among stakeholders • The Committee opined that one condition linked to the diversion of forest land for non-forest purposes is as follows: • that NPV as compensation be paid to existing stakeholders for the loss of their rights to the services that this forest earlier provided to them, and towards the fundamental eco-system values, services that forests provide. • It is therefore imperative to ensure a division of the total NPV among the stakeholders concerned.

18. Division of Compensation among stakeholders • The Committee noted: •  the three tier system of governance viz. the Central, State and local level institutions (Panchayati Raj Institutions) in the country at present and, • the methodology of which can be used to separate out the loss to the three kinds of stakeholders was outlined • It recommended that a Special Purpose vehicle with three funds: Local Forest Funds, State Forest Funds and National Forest funds be created for the NPV

19. Some Relevant Points for Public Policy This methodology recommends use of two kinds of policy instruments: • Legal regulation for biodiversity hotspots: following the precautionary principle • An Economic price based instrument such as NPV for land with forest cover • Levels of charge to vary in accordance with predetermined parameters: biophysical, legal, ecological and social. • So do resposibilities for maintaining forest cover

20. Situation on CAMPA in 2012 • State Campa Funds created vide SC Order of July 10, 2009 • Rs. 1000 crores per year for 5 years from 2009 for the State CAMPAs ( from the NPV and protected areas fund) • Total corpus of the National CAMPA on January 25, 2012 is Rs. 25,000 crores. • No amount or provision for transfers to Local Forest Funds: local stakeholders not compensated

21. Finance Commissions: Thirteenth Finance Commission • In India’s federal structure, tax devolution and grant making formulae are determined by the Finance Commissions and Planning Commission • One of mandates of the Thirteenth Finance commission was to suggest means of protecting ecology and environment through special measures. • It mandates grants in aid to incentivise forest conservation, and environment • Amount is small (Rs. 5000 crores) but financial position of states will be improved: and mandate can be carried forward.

22. Recent developments: ESAs in the Western Ghats • Inviolate Areas or ESAs to be protected by law with limits on nature of development • Application to the WGs: Madhavgadgil Committee and HLWG (Kasturirangan committee) to review its application Contentious issues: • Delineation of the western ghats • Nature of development in ESAs and non-ESAs • Incentivising green growth in the non-ESA Western Ghats

23. Policy for development in forest areas: non-ESAs and ESAs • Forest rich states are not wilderness areas: they are habitats of people • Are forest states suffering from development disabilities? Special funds Planning Commission study • States negotiate ‘debt for nature’ swaps;debts are swapped for new initiatives to conserve natural resources: a part retained by state governments and a part to local trust funds • Payment for ecosystem services and funds for ESAs by 14th Finance Commission

24. The way ahead • The need now is for the process initiated to be taken ahead in two ways: • firstly by the Fourteenth Finance Commission to take this initiative forward and cover areas and issues not already taken into account by the Thirteenth Commission • secondly by ensuring that the grants-in aid further devolve to local bodies wherever the issues fall in their domain as per the 73rd and 74th Amendments.

25. The way ahead: the third level of governance • The Indian federal polity allows for three levels of governance: the Centre, the State and the local. The Punchhi Commission on Centre-State Relations (2010) asked for a separate fiscal domain for local bodies to be put in place in a time-bound manner. • The National Commission to Review the Working of the Constitution (2002) had also recommended that “the 11th and 12th Schedules should be restructured to create a separate fiscal domain for panchayats and municipal bodies. Accordingly, Articles 243H and 243X should be amended to make it mandatory for the State legislatures to make laws devolving power to the panchayats and municipalities”.

26. Other policy initiatives • From international level and national follow up • Green Accounting Committee: to introduce aspects of UNSEEA into System of National Income Accounting • Experimental ecosystem Accounting in limited ways • Initiatives at project level: to strengthen EIAs etc. • Need for more focussed research on critical ecosystems of an interdisciplinary nature