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

Stefán Gíslason,MSc Environmental Management & Policy

HÍ: Nature based Tourism27 February 2003

“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.

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

From Rio to Reykjavík

A couple of facts

Iceland: Number of municipalities: 105

Number of inhabitants: 288.201

Status of implementation

Number of municipalities working with LA21

Never:83

Some activities:

39

32%

68%

Feb. 2002

Status of implementation

Number of inihabitants involved

26.892

259.383

Never 9%

91%

Some activities

Feb. 2002

What is the value of Nature?

How to evaluate it?» Methods for monetary evaluation

» Foreign cases

» Suggestions for use in Iceland

Contents

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?

Direct Use

Value

•Income from tourists

•Grassing•Lake catch•Liechens (Cetraria islandica)

• Etc.

Indirect Use

Value

• The value for tourists (“consumers’ surplus”)

•Flood prevention

•Climate impact

•Etc.

Option Value

Direct and indirect use value in the future, (e.g.

through Ecosytem

Services and biodiversity)

Bequest Value

Value of the area for future

generations

Existence Value

Value from knowledge

of continued existence

Total Economic Value (TEV)

Use Values + Non Use Values

Vicarious Value

Value in the form of welfare

created by indirect use, such as via

books, films, etc.

Conventional Market

Approach

Surrogate Market

Approach

Questionnarires (Surveys)

(Assessing the Willingness to pay or accept)

Experiments(A small-scale

experimnet conducted)

Methods for monetary evaluation

Direct Valuation Approach Indirect Valuation Approach

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

Conventional Market

Approach

Surrogate Market

Approach

Questionnarires (Surveys)

(Assessing the Willingness to pay or accept)

Experiments(A small-scale

experimnet conducted)

Methods for monetary evaluation

Direct Valuation Approach Indirect Valuation Approach

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)

Contingent Valuation Method (CVM)

“The only means available for valuing Non-use values”

Contingent Ranking Method (CRM)

Makes it possible to compare to real market goods (rarely used)

Appropriate for evaluation of the values of highlands

Conventional Market

Approach

Surrogate Market

Approach

Questionnarires (Surveys)

(Assessing the Willingness to pay or accept)

Experiments(A small-scale

experimnet conducted)

Methods for monetary evaluation

Direct Valuation Approach Indirect Valuation Approach

Averting Behaviour Technique

Looking at changes in

expenditures on goods,

substituting or complenting

the environmental

resource

Travel Cost Method

Looking at direct expenditures of

visitors, such as:

•transport

•fuel

•time?

Hedonic Property Pricing

How do changes affect the property

market in the area?

Hedonic Wage - Risk Estimate

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”

Household Production Functions (HPF) Hedonic Pricing

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”

Conventional Market

Approach

Surrogate Market

Approach

Questionnarires (Surveys)

(Assessing the Willingness to pay or accept)

Experiments(A small-scale

experimnet conducted)

Methods for monetary evaluation

Direct Valuation Approach Indirect Valuation Approach

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.

Dose-Response Technique

“Aims to establish a relationship between

environmental damage (Response) and some cause of the damage

such as pollution (Dose)”

Replacement Cost Approach

“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.

Opportunity Cost Approach

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.

Applicable in the highlands

Not applicable in the highlands

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

ReferencesAustralian 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