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Estimating Values for Australia's Native Forests

Environmental Economics Research Paper No.4
This report was prepared by consultants
Francis Grey Consulting Economist At Large and Associates for the Department of the Environment, Sport and Territories.

Commonwealth of Australia, 1996
ISBN 0 642 24863 X

3. Appraising the Values of the Forest: the theory as practised

This section reviews thirteen recent reports on forests for their views on the appraisal of forest values. Each report was reviewed in order to gain an understanding of the value assessment problems in the forest sector. The reports were examined on the basis of four criteria:

Section 3.5 identifies the 'best practice' in assessment frameworks among the reports which were reviewed in this study.

3.1. Problems in the identification of externalities.

A representative example, of the values identified, is listed below. These values were derived from the Resource Assessment Commission (RAC) study. This study, amongst those examined, was the most comprehensive and thorough in its treatment of the issues. The weaknesses in its study were repeated, and magnified, in other studies.

Report No 2 - The Resource Assessment Commission Inquiry into Forest and Timber.

Conservation; wilderness; recreation; Financial values such as wood, tourism and water supply, oils, seeds, tannins, medicinal plants, sandalwood, bark products, fishing, hunting, wild foods, infrastructure corridors; Information via education, research; intrinsic values like aesthetic (different from visual), heritage, spiritual, biocentric, wilderness, lifestyle; Utilitarian values; 'pristinity'; landscape; scenic quality, public sensitivity, industry value by implication; existence values, option values, vicarious use values, bequest values, ecological sustainability, ethical values.

The main weaknesses in assessing the manner in which values had been surveyed were that:

Confusion over the type and source of 'values' will undermine the efforts to assess all values. It is therefore necessary to have an agreed list of all values, comprehensively and systematically ordered, in order to achieve the goal of optimising benefits to the community.

Diagram 1 and Table 1 below provide a comprehensive listing of all values derived from the native forest. The twentynine uses identified each provide seven different types of value which give their total worth. For example, use D 11 (craft industries) provides D 11.1 (direct use value), D 11.2 (option value), D 11.3 (quasi-option value), D 11.4 (existence value - sometimes known as industry value), D 11.5 (intrinsic value), D 11.6 (combination value) and D 11.7 (bequest value). Each of these seven components combines to give the total value provided by craft industries. In turn, the 'use' known as 'craft industries' can be combined with a package of other uses that will generate the total economic value of the forest.

While within a particular use, different components can be combined to provide a total value for that use - this does not imply that the relationships between each component are necessarily positive. They may in fact be inverse for a range of values. Similarly, the relationships between different uses can be positive, negative or zero - even though total economic value is additive of the components.

In this report, each use has been ascribed a unique positioning (from D 1 to D 29) which is used in Table 1 and Diagram 1, and wherever these values are referenced in the text.

Diagram No 1. Comprehensive Typology of all Values derived from the Native Forest.

Total Economic Value

Use values Non-use values
1. Direct Use values 2. Ecological Services value 3. Option value. 4 Existence values 7.Bequest values
D1-D12. FINANCIALVALUES

D1. Fishing~

D2. Tourism

D3. Mining and mineral processing

D4. Water production

D5. Residential

D6. Biological prospecting

D7. Agriculture

D8. Forestry

D9. Horticulture

D10. Conservation/ Wilderness Use

D11. Craft industries

D12. Other industries

D13. TRADITIONAL USE VALUES

D14-D15 Unallocated

D16-D18 INFORMATION VALUES (incorporating 'scientific' values)

D16. General information

D17. Value of biodiversity information

D18. Value of mineral resource information.

D19. RECREATIONAL VALUES

General recreation

Wilderness

Visiting

Viewing

Walking

Camping

Bushwalking

Fishing

Observation

Yachting/sailing

D20. VISUAL AMENITY VALUE

D21. AMBIENCE VALUE

D22. CULTURAL VALUE

D23. HERITAGE VALUE

D24. SOCIAL VALUE

D25. DAMAGE PREVENTION VALUE

Flood control

Pest control

Microclimate regulation etc

D26. UNALLOCATED VALUE

D27 ECOLOGICAL FUNCTION VALUES Some likely variables:

(These are suggestive variables only.)

River flows Biodiversity

Soil Marine & river bed vegetation in forest areas

Air quality

River & marine water quality

Wetlands in forest areas

Key geophysical forms

Groundwater Biogeochemical cycling

Microclimate effects

D28 ENVIRONMENTAL QUALITY

D29 DISTURBANCE QUALITY

D*.2 OPTION VALUE

D*.3 QUASI-OPTION VALUE

D*.4 EXISTENCE VALUE (anthropocentric) This also includes Industry value.

D*.5 INTRINSIC VALUE Otherwise described as RIGHTS OF OTHER SPECIES including the TASK OF STEWARDSHIP (including intrinsic value).

D*.6 COMBINATION VALUE

D*.7
SUSTAINABILITY BOUNDING.

As discussed in the text (B2), certain values, if chosen by society, will place 'bounds' or 'limits' on the actions of other values. The most obvious of these is the constraint to utilise the environment in an ecologically sustainable manner. Other values such as D22. Cultural values, D23 Heritage values, D*.5 Rights of other species (ban on whale hunting for instance) also place limits on other values. The bounds are normally applied to the direct use values, in particular the financial values. This idea of bounding human actions is extensively discussed by Pearce and Turner (Natural Capital:1990) and Bishop (Safe Minimum Standards:1978) (see Pearce and Turner, 1990 for an introduction:314). See also Grey, 1993, Grey and Marlow, 1992 and Grey and Marlow, 1991 for further discussion.

# D1 to D29 match section numbers in the text of Section D.

Each use labelled D1 to D29 has 7 different types of value that could be generated. D*.1 is equivalent to direct use value. The * is replaced by a number from 1 to 29 signifying the particular use that is under consideration. Thus D1.1 signifies fishing use and the financial value gained. D1.2. indicates the option value associated with fishing use and so on. Values D*.2 to D*.7 are marked. Thus D29.7 is the bequest value derived from a particular level of environmental disturbance.

Source: Severely modified Young (1991:23)

~ Existence of the forest may boost riverine and marine fish production.

Table 1 Definitions of values

Value Name. Definition.
D1-D12. Financial values Equivalent to the net present value of any commercial operations that sell items produced by the natural processes of the forest.
D13. Traditional Use values Value derived from gaining a traditional, indigenous lifestyle from the natural processes of the forest.
D14-D15. Unallocated.
D16. General information value. The forest provides information that is of value to society at large. (This section is about information in general, not including biodiversity or mineral information.) An example of the information value of forests is the use of Tasmanian Huon pine in global climate change research (Quantum program, ABC TV, 1993)). This section largely incorporates the 'scientific' values which are the characteristics human society attributes to objects possessing great 'informational' value. The remaining values (or scientific values) derived from the characteristics of objects fit under the categories of cultural and heritage values. 'Scientific' values is used as a reference to all knowledge systems, including, but not limited to 'western science'.
D17. Value of biodiversity information Information about biodiversity is a subset of information in general. This information has been singled out has having particular significance to society at large and hence has been separated out.
D18. Value of mineral resource information Similarly information about mineral resources has been singled out as important and hence has been given a category of its own.
D19. Recreational value This is the value that recreational use of the native forest provides to the society.
D20. Visual amenity value The visual beauty of the native forest is a significant ambient value that is viewed directly or often on film or television. It is intended to include such terms as 'aesthetic' and 'landscape' for example.
D21. Ambience value Ambience is the general category that covers the ambience (experiential) that native forests provide to users. Visual amenity is part of this category, but because of its significance it has been given its own separate listing.
D22. Cultural value The native forest provides a source of cultural value to the present population either through indigenous culture or through links with traditions such as 'The Man from Snowy River'. In this sense the native forest helps to give present Australians a sense of who they are.
D23. Heritage value Heritage values represent the historical significance of the forest in Aboriginal and European histories and sense of perspective. The native forest is important because it may represent something about Australia's past.
D24. Social value The native forest provides a social ambience to the residents who live there, that may well be different from that which the same people would experience if their town was located in a different environment. Here the gain or loss of value is the net difference these people would feel between their present location and some alternative location.
D25. Damage prevention value The native forests are of direct use to society to the extent that they contribute to or mitigate the impact of natural phenomena on the human community and its activities.
D26. Unallocated in this analysis.
D27-D29. Ecological services value The very physical existence of the native forest environment provides services to humanity labelled by this report as 'values'. The following three items are meant to comprehensively cover these services. These three items are intended to describe physical characteristics of the object called 'environment' that are valued of themselves. This comprehensive listing is only a first iteration. The breakdown of ecological functions offered in Diagram 1, could be replaced perhaps by the ecological attributes offered by the Australian Heritage Commission approach (AHC-CALM, 1992: Vol 1. pg9). Providing a testable measure of the ecological functioning of native forests is obviously the task of the relevant scientists and not the province of economics, though economic analysis suggests that the development of such a measure is absolutely necessary. The examples offered are only to stimulate the technically qualified to take the process further, or create a better method.
D27. Ecological function value Ecological functioning provides many services that underpin the existence of humanity and the condition of the planet generally. It is of value to our society that these services are provided and hence we have referred to this service as 'ecological function value. The NFPS has instituted ecological sustainability as a minimum standard beneath which ecological functioning should not fall. The ecological system of the native forest consists of many components that have been listed in Diagram 1.
D28. Environmental quality value The environment may be valued also, because it is of a certain level of physical quality. This quality may be closely related to the functional condition or it may be only partially related. The physical quality of an environment is of itself a direct service which society may choose to value.
D29 Disturbance quality The environment may also be of greater value because it is undisturbed. An environment can be used in an ecologically sustainable manner, with good environmental quality, whilst being very disturbed by human activity. The level of disturbance of an environment may make a significant contribution to the physical services it provides.

The above listed values D1 to D29 correspond to direct use or non use of the native forest. These are known as direct use values. The direct use, or non use, of the native f o rest produces value which economists have labelled direct use value. In addition to the direct use value, however, a further six types of value are produced. These are numbered D*.2 to D*.7 since direct use value is number D*.1. Thus with respect to the native forest, there are 29 identified uses (bearing in mind that numbers D14 & D15 have not yet been allocated ). For each use, or non use, there are seven different types of value produced. Each of these must be taken into account in the TEV calculus. Thus use number D27 produces values D27.1. for direct use value, D27.2 for option value, D27.3 for quasi-option value, D27.4 for existence value, D27.5 for intrinsic value, D27.6 for combination value and D27.7 for bequest value.

D*.2. Option value Every value listed here also has an 'option' value. That is, option value is dependent on the existence of another value, if it is to exist itself. A value provides services directly, and hence it is also sometimes worthwhile to pay for the option of keeping that value available for future use, hence option value. The worth of an option is the amount willingly exchanged in order to keep an option open. (see Pearce and Turner, 1990 for further information)
D*.3. Quasi-option value This is what people would be willing to pay in order to have further information, on which to base decisions about the native forest. (see Pearce and Turner, 1990 for further information)
D*.4.-D*.6. are existence values Existence value is the benefit we receive by knowing that the existence of other values is secure. (See Pearce and Turner, 1990) There is an existence value for industry as well. This has been termed an 'industry value'. It is a value in excess (negative or positive) of that due to net p resent value. (Source Tasman Institute, Moran et al, 1991)
D*.4. Existence value Each value listed in this table can create a benefit in the minds of those who know of the existence of that value, and are glad of its existence. Ecological function value is of use directly, while knowing that it does exist is an additional benefit.
D*.5. Rights of other species and the task of stewardship (including intrinsic value) It is a philosophical view that other species, ecosystems and the earth itself, are of intrinsic value. That is they would be valuable even if humanity did not exist. The object (native forests) has rights of its own, and this is valued by the subject (individuals with this philosophical view) and hence is an addition to the worth derived from the object for other instrumental/utilitarian reasons.
D*.6. Combination value

See note below

Humans derive a range of values from the native forest. In combination some values are worth more than the sum of their parts. For instance, a beautiful view, combined with a high level of other ambient values may be more valuable than the two values when separated. The native forest comprises many components which each give rise to the values listed in this table. When those components are combined to form the 'native forest', the combination is of value in itself. Similarly a set of antique chairs is less valuable sold separately, than as a group. Secondly, combination effects can occur when different values are received simultaneously.
D*.7. Bequest values To be able to bequeath the native forest to the future is a value that many members of the present generation would experience. The benefit derived from this is known as 'bequest value'.

It is of note that 'Hoehn and Randall have shown that independent estimation of the component parts [of Total economic value], followed by their summation, is not formally identical to TEV estimated by a sequential procedure in which, say, existence value is estimated first, then 'site' experience value, then activity related values at the site. This is because the consumer surplus for a bundle of goods is not the same as the sum of the consumer surpluses on individual goods. See Hoehn, J. P. and Randall, A., 'Too Many Proposals Pass the Benefit Cost Test', American Economic Review, 79, 1989, 544-551.' (OECD, 1992:59).

3.2.Identifyingsuggestedvaluation techniques.

Each report suggested, implicitly or explicitly, a range of valuation techniques for providing an 'objective' assessment of the values identified. Overall, the lack of comprehensive identification of values, common to all thirteen reports, subsequently inhibited the matching of valuation techniques to appropriate categories of value. This complicated the process of value assessment since it provided limited guidance about how various values should be measured.

On the positive side however, the Resource Assessment Commission (RAC, 1992) report did provide an assessment of each evaluation technique, which marks a very useful first step towards providing a listing of techniques relevant to the assessment of each value. The Organisation for Economic Co-operation and Development references (OECD, 1986; 1992) also made a worthwhile contribution towards evaluating techniques.

In general, the reports provided only limited advice on the means by which different types of values should be evaluated. Moreover, with the exception of the RAC and the OECD reports, the techniques put forward were generally insufficient to measure the full range of values derived from the forest. For example, the reports would discuss techniques for measuring the scientific values of the forest, with out discussing other measures that evaluate the 'worth' of the non-scientific values identified in Table 1 and Diagram 1.

A second issue worthy of further discussion in each report was the role of uncertainty in complicating the assessment of values. Whilst some discussion of uncertainty was entered into by four reports (RAC, 1992; ESD, 1992; AHC, 1992 and OECD, 1986), the issue was not raised sufficiently to provide guidance on how valuation techniques were to account for uncertainty. What is required is a more explicit discussion on the means by which 'uncertainty' should be handled in valuation processes.

The following table lists the valuation techniques that were identified. While there will be some debate about whether these are all 'techniques' or 'management strategies', it is clear that the implementation of these processes leads to the de facto valuation of forests. For the purposes of this report, we have described them all as valuation techniques. Some of the techniques identified below were implicit in the various reports rather than explicitly described.

Table 2. Valuation techniques.

Valuation Technique. Relevant Reports.
1. Regulation by arbitrary decision. NFPS
2. Regulation by identifying proxy variables for key values. NFPS, RAC
3. Regulation with 'rule of thumb' measures; eg. sustainability as a management criterion. Most reports
4. Ecologically sustainable management: so commonly used as a rule of thumb that it warrants a category of its own NFPS, RAC, ESD etc.
5. Conservation reserves: This technique implicitly values enclosed areas. NFPS
6. Community participation facilitates the expression of public preferences in decision making processes. RAC, ESD, OECD, NZ Resource Management Act
7. Participatory Rural Appraisal: a subset of community participation. IIED, IDS
8. Interest group roundtable. RAC, ESD, OECD
9. Community discussion panel: a group of informed local people ('imaginative extroverts': OECD). RAC, OECD, ESD
10. Public hearings. OECD, RAC, ESD
11. Visual management systems RAC
12. Balanced panels of experts NFPS, RAC
13. Referendums OECD
14. Focus groups & other techniques from marketing & advertising. RAC
15. Ranking of options OECD, AHC

The following techniques did not appear in any particular report, but were the result of conversations with various experts in different disciplines. This more multidisciplinary discussion revealed the following four measures as being worthy of further investigation.

17. Use of video/audio techniques to capture relevant values of the forest. Based on use of pictures and film in advertising. Visual techniques enables the visualisation of values which may otherwise have to be described in a written form. In this sense, the decision making process is no longer dependent on third parties to value at least the visual aspects of the area Suggested by experts from other disciplines.
18. Comparative survey techniques: for ascertaining public responses to subjective values by comparing similar sites, to determine the direction and scale of public feeling. Valuation Technique. Relevant Reports. Ditto
19. Benchmark survey: asking the public to compare sites against a well known set of 'benchmark' sites. Ditto
20. Psychological research may provide some useful techniques which have not yet been tried before in this area. For example, Art Therapy is a psychological technique where patients are asked to draw pictures. This technique, among others, may have something to offer valuation methodologies. Ditto

The OECD (1992:10) provided the following categories for the more familiar measurement techniques:

21. Identification of surrogate markets (revealed preference approach) For example hedonic pricing seeks to elicit values by comparing property prices. OECD, RAC
22. Market 'creation' via questionnaire based techniques. eg. Contingent Valuation Method (CVM). OECD, RAC
23. Dose response data linked to valuation: eg. Preventive expenditures, Replacement costs, costs of restoration OECD
24. Public preference identification: 'Identification of public (social) preferences as revealed in social norms, rules, regulations and legislation' etc. OECD, (OECD, 1992:11)
25. Hypothetical/Indirect Approach to valuation: 'Individuals are asked to respond to hypothetical market situations, but their responses are only indirectly related to valuing the environmental good in question.' (OECD, 1992:11) OECD

Further to this are the techniques used to assess financial values. These fall into two major categories in the reports reviewed in this study. The techniques are well known, and hence are only identified for the sake of completeness.

26. Financial cost benefit evaluation of projects to ascertain the net present value of the investment. Implicit in all reports, though often not well practised.
27. Economic modelling/cost benefit analysis to ascertain the broader financial impacts of the project on the 'economy' and on other alternative financial values (projects). RAC, OECD, World Bank

As we can see, the range of techniques identified was broad. They appear to have the capacity to address the measurement of all the values identified in Table 1/Diagram 1. However it is apparent from reading the various reports that some techniques are not fully accepted or understood. This lack of an agreed set of techniques, at the very least, complicates the process of valuation.

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