IC VALUE :ASURING ECONOM

BRIEF REPORTS

Measuring Economic Value of Biological Diversity: Concepts, Theories and Methods MARIUS LAZDINIS Dc~par.tinent of' For-estr:): Sozif11cr.11 IIlii~ois U~~ivci .si /y Cnr~borrd(~le, IL 62901-4411, USA

'Onc basic wcakncss it1 a conservation systcni bascd wholly on ccvnornic motivcs is tha t riiost mcrnbcrs of tlic larld corntnr~tiity have no ccononiic valuc' (Lcopold 1966).

Conservation of biological diversity recently has became a fashionable term, however still, not many understand the real concepts behind this term. State forest management institutions in the Baltic States claim to be concernetl with conservation of biological diversity and forest scientists try to assess forest ecosystems in order to indicate abundance of biolog- ical diversity and needs for its maintenance and res- toration. However, in order to be successful, wc should not rely solely on the political commitments and sci- entific recommendations. The "real life" link among practical forestry operations and scientific knowledge tilust be found in order to successfully transfer exist- ing information on biological diversity into the prnc- tical field of forestry, and enforce consideration of biological diversity while making tlecisions on forest management activities. Thc link must allow forestry organisations function according to profit maximisa- tion principles, however, making conservation of bio- logical diversity inherent to this process. Identifying economic value of biological diversity and incorporat- ing it into everyday economic calculations could serve as such connection. Therefore, this paper attempts to shortly examine the value of biological diversity and concepts of existence and intrinsic values, indicates several approaches to tlieasure economic value of bi- ological diversity, and outlines ~ n a j o r pros and cons of contingent valuation method.

Non-Use Value and Biological Diversity Biological diversity is central to the productivity

and sustainability of the earth's ecosystems. Organ- isms, biological structures, and processes arc means by which physical elements of the ecosysteln are trans-

formed into the goods ant1 services upon which hu- mankind depends (Costanza, 1997; Howe, 1979). The importance of biological diversity - reasons for pre- serving, promoting, and managing for a rich variety of life forms - can be provided in a for111 of interrelat- ed utilitarian and ecological categories, as well as sorne aesthetic and ethical arguments:

Important products from non-timber species; The utility of indicator species; Retaining alternative resources for an uncertain

future - economic change, climatic change; Importance to ecosystem productivity and sta-

bility - sustaining productivity, diversity and stabili- ty;

Aesthetic and ethical considerations - anthro- pocentric values, biocentric values (Barnes and oth- ers, 1998; Burton and others, 1992; Christensen, 1996; Gowdy 1997).

Environmental theory and valuation methods fa- cilitate identification of situations in which the valuc of the environmental iniprovelnent is relatively high and situations in which the value of the environmen- tal improvement is relatively low (Blomquist and Wliite- head, 1995). For many biologists, the total value of biological diversity is infinite; it is essential to the sustainability of life on Earth including human lifc. On the other hand, to most economists, even to most environmental economists, biological diversity is just another commodity, subject to trade-offs and substi- tution, just as any other market good (Gowdy, 1997). Due to so different approaches to the issue and com- plicity of factors included, the concept of the tnargin- al value of biological diversity, when talking about ecosystems, is problematic (Gowdy, 1997). Removing one species will affect all the other in the system. On the other hand, the fact that precise marginal values

\ U l C TORESBRX M E A S U R I N G ELUIUUMI~ VALUE OF BlOLOG ?$In /.../ . M lAZDlNlS

catitlot be placed on biological diversity docs not mean that substitution and trade-offs are not relevant to pi~blie policy regarding biological diversity protec- tion. I f policy choices are restricted to market trade- offs, higlier-order aspects of biological diversity val- ue will be missed (Gowdy, 1997).

Types of values can be divided into rational val- ues involving standards for truth; moral values - stand- ards for conduct; aesthetic values - standards for appreciation; economic values - standards for choice atnong goods and services; and spiritual values - standards for meaning (More, Averill, and Stevens, 1996). Well-socialized individual will have acquired the dominant values of the culture and will tend to judge situations, events, goods and services, aesthetic ob- jects and tlie like in a way consistent with the values of tlie culture. However, these values may intersect in multiple ways (More, Averill, and Stevens, 1996).

Two categories of non-market economic values have been identified in the literature sources - use values (including option value as a form of possible future use (Krutilla, 1967), applying to the benefits a resource produces for those who actually use it, and non-use values (Krutilla, 1967), concerning benefits received by those who do not use it. The distinction between use and non-use values is not well defined and lnay not always be clear (More, Averill, and Ste- vens, 1996; More, 1996). There has not been also a n accepted set of definitions for non-use benefits (Smith, 1987). Use values might include recreation, aesthetic appreciation, and spiritual values. Non-use benefits have been subdivided into existence value (the value people receive fro111 simply knowing a resource exists), altruism (the value derived from having other contem- poraries use a resource) and bequest value (preserv- ing a resource for future generations) (More, Averill, and Stevens, 1996). In order to avoid confitsion in defining use and non-use values, More (1996) distin- guishes between on-site benefits (those a person re- ceives from being in close physical proximity to a re- source) and off-site benefits.

It is clear both fro111 tlie above theoretical con- siderations and overall scientific evidence about the nature of biological diversity, that economists need to broaden their concept of value beyond that deter- tilined by market exchange. Several categories of non- market value have been identified for forests: use value, option value, altruisni, bequest value, existence value and intrinsic value (More, Averill, and Stevens, 1996). Conservation of biological diversity in forests and tnaintenance of certain elements of forest ecosystems, supporting biological diversity, usually is carried out as a consequence of existence and intrinsic values. The concepts of existence and intrinsic values will be

reviewed in the following sectioti of the paper. Prob- lems involved in distinction of these values will also be shortly described.

E.vistence i n d Intrirrsic Vilrres The non-participatory benefit type, which appears

to be least understood and to offer the highest order of measurement difficulty is the existence Ixnefit (Bcn- nett, 1984). Formal definitions of existence value re- quire: (a) a specified djst inctio~i between what corre- sponds to tlie use (or in situ consumption) of a re- source as an argument contributing to an individual's utility and sotile measure of the existence (or state of availability) of the resource as a separate contributor to utility; and (b) the assumption that the level of availability of the resource constrains the level of in situ use that can be selected at all prices for that use (Smith, 1987). As stated in several sources, Krutilla (1967) was tlie first one to describe existence values indicating, that:

'IVlren !lie existerrce of a gr.nntl sccriic ~rgorrdci. or- a rrrriq~re oririji.clgi/e ecosj~stent is involve(1, i!s prees- er.va!ioir oncl corrtiriued availabilit)~ are a sigizificarit ~ ) n / . t of the r.ccrl iriconie of rrrnriy iridiviclrrnls'.

Since then debates on existence and intrinsic values were ranging from opinions that growing ac- ceptance of and reliance on existence values is mis- guided (Rosentlial and Nelson, 1992), existence val- ues of the environment are antliropocentric by defini- tion (Blotnquist and Wliitehcad, 1995) and that their role in policy information and analysis should be ques- tioned (More, Averill, and Stevens, 1996), to state- ments, that non-use value is well-defined and repre- sents nothing more than the value individuals place on a particularly pure form of public good (Kopp, 1992). Larson (1993) argues, that 'pure' existence values may not be as pervasive as is currently believed; if and when they do exist, they may not be large; and, they may be i~iimune to detection by any means, whether conversational or behavioural.

Non-market values arise because natural resoure- es play important roles in furthering human goals. This goal perspective contrasts with intrinsic value - the idea that natural objects have valuc as ends in themselves regardless of their relationship to man. Because of the lack of precise definitions, elements of intrinsic value are often mixed with existence value, creating confilsion in the literature (More, Averill, and Stevens, 1996). These resource values need to be examined on a logi- cal as well as an empirical basis (More, Averill, and Stevens, 1996). Attfield (1998) argues, that intrinsic value and existence values do not overlap at all and that intrinsic value cannot be accomn~odated for any other purposes within the category of existence-value.

M E A S U R I N G ECONOMIC VALUE OF BIOLOGICAL DIVERS17

The whole range of problems attempting to indi- cate existence and intrinsic values in cost-benefit anal- ysis are faced. One of Inore serious objections to both existence and intrinsic values is tliat they are essen- tially static concepts of value - they value tlie world the way the world is now (More, Averill, and Stevens, 1996). This is especially true of intrinsic value. If eve- rything living (and perhaps non-living things as well) has value and a ~ n o r a l worth of its own, then i t 111ust be wrong to allow such things to go out of existence (More, Averill, and Stevens, 1996). But this allows no room for a concept of competition, either in a biolog- ical or an econo~n ic sense, or for growth, change or development. There also may be little room for crea- tivity. To create is also to destroy (More, Averill, and Stevens, 1996). If existence and intrinsic valucs actu- ally function to preserve the status quo, this raises a fi~rtlier open question regarding equity: whom do these concepts serve (More, Averill, and Stevens 1996)?

Another major critique of existence values states that it can be construed as a form of use (More, Averill, and Stevens, 1996). The key point is tliat all these values are human use values and reflect hunian ben- efits and costs regardless of where those benefits and costs are applied. People who value the continued existence of ecosystems would be unlikely to value them if most or all of the species interacting in those ecosystems became degencrate, ceased to lead lives in which the generic capacities of their kind were able to develop, and ceased to embody prospects of any revival of flourishing lives or prospects of lives of positive quality in the future (Attfield, 1998).

As can be indicated fro111 above paragraphs, exist- ence and intrinsic values are difficult to define ant1 in- volve the whole range of uncertainties in receiving monetary expressions. Measuring existence and intrin- sic values of biological diversity and forest ecosystem elements, supporting biological diversity, can be a com- plex process, where many variables must be considered. Tlie following section reviews some attempts macle to capture econonlic value of biological diversity.

Cal>luring ecortotrric rlalire of Biologicnl dieer.si[)l McInerney (1976) has suggested the classifica-

tion, which highlights four distinct types of econom- ic decision problem that society faces in the optimal intertemporal use of its resource stocks, and therefore provided a basis for tlie introductory treatnient of natural resource econo~n ics . The article states that using resources in the current we are taking away tlie opportunity to use those resources by f i~ture genera- tions. The third class, according to Mclnerney, in- cludes forests - destructible, renewable stock resourc- es. Ho\vever, Mclnerney in his calculations concen-

trated only on market values of natural resources. Costanza and others (1997) attempted to calculate the total value of ecosystem services (forest included). The study was not based on accurate numbers, due to the lack of monetary valuations of natural ecosysten~s, liowever, the results received, as indicated in the source, were close to those of previous two similar studies. The s t i ~ d y referred to ecosystem goods and services together as ecosystem services. Tlie article has provided supply and demand curves, showing tlie definitions of cost, net rent and consumer surplus for some essential ecosystem services. The curve can be applied in calculating monctary values of biological diversity and forcst ecosystem elements supporting biological diversity.

Pearce and Moran (1994) expressed total economic value of environmental resource in equation:

TEV = UV + NUV = (DUV + IUV + OV) + (XV + BV);

where TEV - total economic value of environniental resource; UV - use value; N U V - lion-use value; DUV - direct use values (e.g., fishing, timber extraction); IUV - indirect use values (e.g., forest's functiori in protect- ing tlie watershed); OV - optional values (individual's willingness to pay to safeguard an asset for tlie op- tion of using it at a future date - like an insurance value); BV - bequest value (benefit from the knowl- edge that others might benefit from a resource in fu- ture); XV - existence or 'passive' use value (existence of any particular asset).

The same author also raises a question 'is total econo~u ic value really total '? The negative reply has several reasons, the nlain of which are that econoniists still have not captured all values, and that there are some underlying functions o f ecological sys tems which are prior to the ecological functions that wide- ly discussed (Pearce and Moran, 1994).

A major issue in conservation of biological diver- sity is controversy between direct land use and pres- ervation for non-use values. Pearce ant1 Moran (1994) indicated the individual's and society's view on costs and benefits of land use conversion. The decision to converse land or use it sustainably from individual's perspective will be the right one if, benefits of sus- tainable use of tlie forests (B(SUB)) after distracting costs of tlie sustainable use option (C(SUB)) are great- e r than benefits of traditional development of the land for, e.g., agriculture or forestry, or industry (B(DEV)) after distracting costs of tlie development option (C(DEV)). Allowing for tirne and applying discount rate, above needs to be restated in terms of present values to be:

where PV(B) = 2 BI/(l + r)', or CB,/(I + s)', where r - interest rate, s - social time preference rate (similar equation is provided for costs).

It can be clearly indicated from the above equa- tion, tliat if the benefits of SUB appear in unmarketed fort11 - i.e. there is no obvious market for the111 - then

d e ac- the individual landowner has no incentive to t, k coutit of them. The problem is even tilore complicated considering tliat discounting call tilake tlie non-sustain- able use preferable to the sustaitiable use (Pearce and Moran, 1994). A private resourcc owtier would consid- er the discounted net income stream from tlie alterna- tive uses and select the use which would hold pros- pects for the highest present net value (Krutilla, 1967).

Pearce arid Moran (1994) also identified two sources of 'econoniic failure' - the inability of exist- ing markets to capture tlie 'true' value of natural re- sources:

Market failure - distortions due to the 'missing markets' in the external benefits generated by biolog- ical diversity conservation;

Intervention or government failure - distortions due to government action in intervening in the work- ing of the market placc.

Within liiarket failure local market failure and glo- bal market failure can be distinguished (Pearcc and Moran, 1994). Tlie fortiler relates to inability of mar- kets to capture some of tlie local, national benefits of biological diversity conservation (failure of markets to account for the external costs of biological diversity loss because of land conversion). The latter concept - global market failure - relates to tlie fact that bio- logical diversity conservatioli yields external benefits to people outside the boundaries of tlie riatioti faced with the developmentlco~iservatiou choice.

In order to receive monetary cstirnations of 11011-

market values for cost-benefit analysis of biological diversity conservation or sustainable management of forest ecosyste~ii elements supporting biological diver- sity, valuation techniques had to be developed. Next section reviews currently available econoluic valuation tilethods for non-market values and shortly identifics pros and cons of contingent valuatioli method.

Corrtirigerlt Val~ratiorr Metlrod Non-use values may be among the most signifi-

cant, and the tiiost difficult to estimate, of all non- liiarket values (Adamowicz, 1991). There are basically two broad approaches to economic valuation - direct and indirect (Pearce and Moran, 1994). In tlie direct approach, an attempt is ~ i iade to elicit preferences by

either experiments or questionnaires. Tlie indirect val- uatioli approach includes hetloliic price and wage tecli- niques, travel cost method, avertive beliaviour, and dose-response and replacement techniques (Pearce and Moran, 1994). Two types of questioning, that can be undcrtaken under direct estimation of economic value are elicit rankirigs and elicit values, which is more conimonly known as Contingent Valuation Method (Pearce and Moran, 1994). As indicated by several authors, the contingent valilation (CV) technique is currently tlie only available mechanism for tlie Ineas- ure~nent of non-use val i~es (Adamowicz, 199 1 ; Kopp, 1992). Use of CV method range froiii applications in protection of forests (Loomis, Lockwood, ant1 DcLa- cy, 1993) and management of protected areas (Dri~nl , 1997) to estimation of economical benefits of individ- ual species of forest ecosystems, such as wolf (Coilis 1ril)lrs) atid white-backed woodpecker (Derrdr.ocopos le~rcotos) (Fredman and Boman, 1996).

There are three basic parts to most CV survey instrunients - (1) a hypothetical description of the terms under which tlie good or service is to be offered is presented to tlie respondent; (2) tlie respondent is asked questions to determine how mucli lie would value a good or service if confronted with the oppor- tunity to obtain it under the specific terms and condi- tions (these questions take the form of asking liow much an individual is Willing-To-Pay (WTP) or Willing-To- Accept (WTA) for some change it1 provision); (3) re- sponse validity is tested (Pcarce arid Moran, 1994). Existence values estimated by CV reflect beliavioural intentions ~iiotivatcd by a rich set of preferences such as intrinsic worth and altruism.

CV estimates are not random values; they can be intertially valid and reliable, however, they can be unreliable as well (Blomquist and Whitehead, 1995). Several authors expressed a concern witli reliability of CV applications in measuring non-use values (Adamo- wicz ,1991; Blomquist and Wliitchead 1995; Smith, 1987). Smith (1987) stated, that before tlie relationship between measures of use and non-use values can be established, it will be necessary to define how indi- viduals perceive tlie specific terms of availability of the resources involved as well as liow these percep- tions arc influenced by uncertainty.

Reliability issues of CV estiliiates for envirotimen- tal policy analysis (Blomquist and Whitehead, 1995) indicated several areas of concern in CV method ap- plications:

Internal validity - a common result is that will- ingness to pay increases witli income, which is cvi- dence of internal validity;

Information effects - without consensus, and in terms of contingent market design, additional inforrnn-

G ECONOMIC VALUE

tion presented to respondents in some form may be nec- essary in order to improve the validity of responses;

Familiarity - in gcneral, respondents who are more fan~i l iar with tlie resource allocation change un- der consideratiori are more likely to behave rationally in contingent markets;

Calibration - since existence values lead to no observable behaviour and have not been ~ n e a s i ~ r e d without CV, it is difficult to ascertain their extcrnal validity.

Tlie sanie authors conclutle that despite the con- flicting evidence, i t might be tliat existence valucs do provide inforniation about the preferences of non-us- ers, but at times, the correlation betwccn true willing- ness to pay, or revealed behaviour, and stated willing- ness to pay, or behavioural intentions, is not perfect (Blomquist ant1 Whitehead, 1995).

Gowdy (1997) adds onto the doubts on applica- tion of CV method in ~neasuring lion-use values, indi- cating that many economists fail to recognise the lim- itations of basing valucs entirely on the preferences of isolated individuals acting as consumers at a spe- cific point in time. At the same time Larson (1993) suggests that it should bc recognised tliat i t is possi- ble in principle to gct substantially the sanlc estimate of existence value fi-om observing behaviour as from asking questions, in many if not all situations.

An attempt to deny several m:tjor CV method cri- tique areas was made by Kopp (1992). Ilowever, it can be concluded, as indicated by Blomquist and White- head (1995), that CV estimates are neither always per- fectly reliable nor always pcrfcctly useless. Tlie same holds for the political process in which expression of values for environmental goods is neithcr always per- fectly reliablc nor always perfectly uselcss. Dccision- nlakers should dismiss neither source of information, but should use both contingent market estiniatcs of existence values and demands expressed tlirough the political process. Given thc altcrr~ative, inforli~ation provided by contingent valuation can be uscd (Blomquist and Whitehead, 1995). Whether or not the decision-makers choose to include these particular values in tlie analysis is thc decision matle outside the simplistic world of cost-benefit analysis. The impor- tant point is that slioulcl these decision-makers desire information on these values, econonlics is perfectly capable of supplying tlicm (Kopp, 1992).

Conclusions

Within this paper tlie concepts and measuring mcclianisms for economic value of biological diversi- ty were shortly reviewed. It is evident tliat conserva- tion of biological tliversity is essential in maintaining

sustainable and balanced forest ecosystcms. biologi- cal diversity vnlucs range from market to intrinsic benefits, liowcver, the clcar distinction between exist- ence ancl intrinsic values is missing. The attcmpts to calci~late value of natural ecosyste~ns indicated tliat non-use valucs, usually not included into market price, niake-up a big share of total economic value of envi- ronmental resources. Economic benefits from con- served areas tend to be limited on a local scale, in- crease at a national level and can be substantial on a global scale. On the other hand, costs, in terms of foregone developtnent benefits, tend to be locally sig- nificant and nationally and globally moderate. Contin- gent vaiuation ~ncthod, despite several uncertainties, remains the only tool measuring existence and intrin- sic values of biological diversity.

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