Valuing natural capital for development decisions

DFID in its conceptual frameworks of Sustainable Livelihoods Approaches (SLAs) defines five types of asset: human capital, social capital (the ability to draw on support through membership of social groups), natural capital, physical capital, and financial capital for achieving poverty elimination. But most services provided by the natural environment (natural capital) to human society are not captured by GDP or other conventional macro-economic indicators, because, they are not directly traded in markets.  Provisioning services (food, fibre and water) and a few cultural services (such as recreation and tourism) are somehow calculated but value of regulating services (water and climate regulation) is not calculated yet, although research on regulating services is developing rapidly.

Forests store carbon, provide timber and other valuable products and shelter for species and people. Wetlands purify water and offer protection against floods. The list of benefits provided by nature is vast.  According to Millennium Ecosystem Assessment (MA) 2005, yet species are still being lost and nearly two thirds of ecosystem services have been degraded in just fifty years. Our natural capital is being run down without us even knowing its real worth. The cost of these losses is felt on the ground but can go unnoticed at national and international level because the true value of natural capital is missing from decisions, indicators, accounting systems and prices in the market.  ‘Ecosystem services’ – the benefits we derive from nature – are a useful concept to make these benefits more explicit. They form a key building block of the new approach we urgently need to manage natural resources.

Taking tropical forests as an example, the marketplace currently ignores a whole series of ecosystem services they provide (e.g. regulation of  local  and  regional climate and freshwater flows, carbon storage, preservation of soil cover, provision of habitat for plants and animals,  downstream  flood  protection).  Without prices, these services go unmeasured in conventional accounting procedures such as the universal System of Standard National Accounts (SNA). Making the value of our natural capital visible to economies and society creates an evidence base for conservation.

Over the period 1949-1981 China logged some 75 million hectares, 92% of which were natural rather than plantation forests, to satisfy demand for timber for construction and other uses. The ensuing rapid deforestation resulted in the loss of ecosystem services, notably watershed protection and soil conservation. In 1997, severe droughts caused the Yellow River to dry up for 267 days, affecting industrial, agricultural and residential water users in northern China. The following year, devastating flash flooding occurred in the Yangtze and other major river basins, resulting in the loss of 4,150 lives, displacement of millions of people, and economic damages estimated at 248 billion Yuan (approximately US$ 30 billion). China’s government determined that deforestation and farming on steep slopes caused these tragic events. In 1998, the government banned logging under the Natural Forest Conservation Program (NFCP). Timber harvests fell from 32 million m3 in 1997 to 12 million m3 in 2003, reflected in a 20-30% increase in timber prices at the Beijing wood market over the period 1998-2003.

The forest ecosystem services lost due to deforestation in China over the entire period 1950-98 were estimated to be worth as much as US$ 12 billion per year, including climate regulation, timber and fuel supply, agriculture productivity, water regulation, nutrient cycling, soil conservation and flood prevention. About 64% of this loss can be attributed to the supply of timber to the construction and materials sector. The value of forest ecosystem services lost due to timber production may be expressed in terms of the market price of timber. This suggests that the ‘true’ marginal cost of timber production in China may have been almost three times greater than the prevailing market price, far more than the modest price increase that resulted from the logging ban. Note that the logging ban resulted in increased imports of timber to China from other countries, suggesting that the environmental costs of timber consumption may have been shifted at least in part to non-Chinese forests (TEEB 2010).

In 2005, Department of forest resource and survey (DFRS) of Nepalhad carried out a Study on “Contribution of Forestry Sector to Gross Domestic Product (GDP) in Nepal”.  However, the study could not cover all the aspects of forestry sector while estimating the contribution. Some of the findings of that study are presented here.

1. Value Added of Forests as a Source of Soil Erosion Protection

Soil loss rate in the terai forest watersheds is in average 7.8 tons/ha per year and in an unmanaged grazing land of terai in average is 36.8 ton/ha/year . Hence, a hectare of forest land of terai in average controls 29 tons/ha per year of soil loss if it is maintained. Similarly, soil loss rate in the watersheds of forests in the hills in average is 27 tons/ha per year of soil loss and in an unmanaged grazing land soil loss in average is 45 tons/ha per year. Hence, a hectare of forest land in the hills in average controls 18 ton/ha per year of soil loss if it is maintained. A loss of 1 ton of soil means loss of 15kg of organic matter, 0.76kg of Nitrogen, 1kg of Phosphorus and 2kg of Potassium. The calculated economic price of organic matter is estimated at Rs. 5/kg. Similarly economic price of Nitrogen, Phosphorus and Potassium is estimated at Rs. 25/kg. Hence, total annual economic value of soil erosion control of the forest land in terai is estimated at.Rs.4200.0 per hectare and Rs.2600.0 per hectare in the hills. Thus, the total value added of soil erosion control by forest in Nepal is estimated at NRs.29400.688 million.

2. Value Added of Forests as a Source of Carbon Sequestration

The associated economic value of carbon absorption in Nepal is estimated at Rs.0.27/Kg. (The international traded value of carbon emission reduction is US $ 6.9 per cubic meter of carbon) which is used to estimate Value Added of sequestrated carbon per hectare of forest. Based on the Value and forest area the total value added of carbon sequestration in Nepal is estimated at NRs.71274.34 million.

3. Value Added of Forests as a Source of Oxygen Release

The studies on the measurements of oxygen release from trees reveal that a hectare of forest in average releases about 25000 liters of oxygen annually. The associated economic value of oxygen release in Nepal is estimated at Rs.0.04/liter. Hence, annual economic value of oxygen release per hectare of forest is estimated at NRs.1000.0.

Among the multiple services provided by tropical forests, the pollination service supplied to agriculture has a particular status as it is generated even by small patches of natural forest in human-dominated agricultural landscapes and it can be locally important. Based on ecological experiments in Costa Rica, Ricketts et al. (2004) found that the presence of forest-based wild pollinators increased coffee yields by20% and  improved  its quality  for  farms  located close to the  forest  (less than one km). The economic value of this service was estimated at around US$ 395 per hectare of  forest per year , or 7% of  farm income. This value is of the same order of magnitude as those of cattle and sugar cane production, the major competing land uses in the area – without taking into account the other important services provided by forests such as carbon sequestration (TEEB 2010).

The economic value of natural capital (biodiversity and ecosystem services) is a function of demand-side factors or underlying drivers of change (e.g., population growth and urbanization, economic growth, changing politics, preferences and environmental policy, developments in information and technology), as well as supply-side constraints (e.g., climate change, increasing scarcity of natural resources and/or declining quality of ecosystem services) (TEEB 2010).

Valuation can help reveal the relative importance of different ecosystem services, especially those not traded in conventional markets. ‘Direct use values’ – associated with services like the production of raw materials - are most relevant to people who live in or near the ecosystem yet even these values are rarely considered fully, particularly if they have no market price. It is even rarer for indirect use values associated with regulating services to be taken into account. However, many studies indicate significant and in some cases substantial ecosystem service values, as compared  to  local  incomes or  to  the economic benefits from competing  land uses.  In particular, there is increasing evidence that regulating services often add up to the biggest share of total economic value.

Existing price signals only reflect – at best –the share of total value that relates to provisioning services like food, fuel or water and their prices may be distorted.  Even these  services  often  bypass markets  where  carried  out  as  part  of  community management of  shared  resources.  The values of other ecosystem services are generally not reflected in markets apart from a few exceptions (such as tourism). This  is mainly explained by  the  fact  that many ecosystem  services  are  ‘public  goods’ or  ‘common goods’: they are often open access in character and non-rival  in  their  consumption. This systematic under-valuation of ecosystem services and failure to capture the values is one of the main causes underlying today’s biodiversity crisis or loss of ecosystem services (TEEB 2010).

Public policies therefore have an essential role to play  in ensuring  that  the main  types of benefits are  identified and  taken  into account  in decisions to avoid grossly underestimating the overall value of conserving or sustainably using biodiversity and ecosystem  services,  and  to  recognize  their  particular importance  to  the  poor  who  most  depend  upon them. Public  policies  need  to make markets work better, by integrating ecosystem service values where possible  into  price  signals,  and  to  put  adequate institutions, regulations and financing in place. Valuing ecosystem services and comparing the benefits associated with conservation of natural areas with the benefits from conversion can provide useful information for setting priorities in a variety of contexts, such as development decisions in urban areas and conservation planning at the national or local scale.

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